UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 1, 2005
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
1823 Eastchester Drive., High Point, North Carolina 27265
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
Common Stock, par value $.05/ Share New York Stock Exchange
Rights for Purchase of Series A Participating
Preferred Shares New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days. YES__X__ NO___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES__X__ NO___
As of May 1, 2005, 11,550,759 shares of common stock were outstanding. As
of October 31, 2004, the aggregate market value of the voting stock held by
non-affiliates of the registrant on that date was $ 51,748,272 based on the
closing sales price of such stock as quoted on the New York Stock Exchange
(NYSE), assuming, for purposes of this report, that all executive officers and
directors of the registrant are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the company's Proxy Statement to be filed pursuant to Regulation 14A
of the Securities and Exchange Commission in connection with its Annual Meeting
of Shareholders to be held on September 27, 2005 are incorporated by reference
into Part III.
CULP, INC.
FORM 10-K REPORT
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
1. Business
Overview..............................................................4
Segments..............................................................5
Overview of Industry and Markets......................................6
Overview of Bedding Furniture Industry................................7
Overview of Residential Furniture Industry............................8
Overview of Commercial Furniture Industry.............................9
Products..............................................................9
Manufacturing........................................................11
Product Design and Styling...........................................11
Distribution.........................................................11
Sources and Availability of Raw Materials............................12
Seasonality..........................................................12
Competition..........................................................12
Environmental and Other Regulations..................................13
Employees............................................................14
Customers and Sales..................................................14
Net Sales by Geographic Area.........................................15
Backlog..............................................................15
2. Properties...............................................................16
3. Legal Proceedings........................................................17
4. Submission of Matters to a Vote of Security Holders......................17
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters.................................................................17
6. Selected Financial Data..................................................18
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations...........................................................19
7A. Quantitative and Qualitative Disclosures About Market Risk...............34
8. Consolidated Financial Statements and Supplementary Data.................35
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..............................................................63
9A. Controls and Procedures..................................................63
9B. Other Information........................................................63
PART III
10. Directors and Executive Officers of the Registrant.......................64
11. Executive Compensation...................................................64
12. Security Ownership of Certain Beneficial Owners and Management...........64
13. Certain Relationships and Related Transactions...........................64
14. Principal Accountant Fees and Services...................................64
PART IV
15. Exhibits, Financial Statement Schedules..................................65
Documents filed as part of this report...................................65
Exhibits.................................................................65
Financial Statement Schedules............................................68
Signatures ..............................................................69
Exhibit Index............................................................70
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Parts I and II of this report contain statements that may be deemed
"forward-looking statements" within the meaning of the federal securities laws,
including the Private Securities Litigation Reform Act of 1995 (Section 27A of
the Securities Act of 1933 and Section 27A of the Securities and Exchange Act of
1934). Such statements are inherently subject to risks and uncertainties.
Further, forward-looking statements are intended to speak only as of the date on
which they are made. Forward-looking statements are statements that include
projections, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often but not always
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives, and include but are not limited to
statements about expectations for the company's future operations or success,
sales, gross profit margins, operating income, SG&A or other expenses, and
earnings, as well as any statements regarding future economic or industry trends
or future developments. Factors that could influence the matters discussed in
such statements include, but are not limited to, the following:
o Decreases in economic indicators such as the level of housing starts and
sales of existing homes, consumer confidence, trends in disposable income,
and general economic conditions, could have a negative effect on the
company's business and prospects;
o Increases in interest rates, particularly home mortgage rates, and
increases in consumer debt or the general rate of inflation, could affect
the company adversely;
o 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;
o Economic and political instability in international areas could affect the
company's operations or sources of goods in those areas, as well as demand
for the company's products in international markets;
o Changes in consumer tastes or preferences toward products not produced by
the company could erode demand for the company's products;
o Growth in competition from imported fabrics could increase overall
competition, especially price competition, for the company's products;
o Unanticipated delays or costs in executing restructuring actions could
cause the cumulative effect of restructuring actions to fail to meet the
objectives set forth by management; and
o Other factors discussed elsewhere in this report or in the company's other
filings with the Securities and Exchange Commission.
3
PART I
ITEM 1. BUSINESS
Overview
Culp, Inc., which we sometimes refer to as the company, manufactures and markets
mattress fabrics (known as mattress ticking and used for covering mattresses and
box springs) and upholstery fabrics primarily for use in production of
upholstered furniture (residential and commercial). The company's executive
offices are located in High Point, North Carolina. The company was organized as
a North Carolina corporation in 1972 and made its initial public offering in
1983. Since 1997, the company has been listed on the New York Stock Exchange and
traded under the symbol "CFI."
Management believes that Culp is one of the two largest producers of mattress
fabrics in North America, as measured by total sales, and one of the three
largest marketers of upholstery fabrics for furniture in North America, again
measured by total sales. The company's fabrics are used primarily in the
production of bedding products and residential and commercial upholstered
furniture, including sofas, recliners, chairs, loveseats, 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 "good" and
"better" priced categories of furniture and bedding.
The company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to April 30. The fiscal year ended May 1, 2005 included 52 weeks versus
53 weeks for fiscal 2004. The company's operating segments are mattress fabrics
and upholstery fabrics, with related divisions organized within those segments.
In mattress fabrics, Culp Home Fashions markets a broad array of fabrics used by
bedding manufacturers. In upholstery fabrics, Culp Decorative Fabrics markets
jacquard fabrics for residential and commercial furniture and yarn for use
primarily by the company, with some outside sales. Culp Velvets/Prints markets
velvet, printed fabrics and microdenier suedes used primarily for residential
furniture.
Culp markets its products worldwide. Total net sales were $286.5 million in
fiscal 2005. International sales accounted for 11% of net sales for both fiscal
2005 and fiscal 2004.
Culp has nine (9) active manufacturing facilities, with a combined total of
approximately 2.0 million square feet, which are located in North Carolina (6),
South Carolina (1), Quebec, Canada (1) and Shanghai, China (1). The company's
distribution system is designed to offer customers fast, responsive delivery.
Products are shipped directly to customers from the company's manufacturing and
distribution facilities.
Culp maintains an Internet website at www.culpinc.com. The company will make
this annual report, in addition to its other annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
these reports, available free of charge on its Internet site as soon as
reasonably practicable after such material is electronically filed with, or
furnished to, the Securities and Exchange Commission. Information included on
the company's website is not incorporated by reference into this annual report.
4
Segments
The company's operating segments are mattress fabrics and upholstery fabrics,
with related divisions organized within those segments. The division within
mattress fabrics is Culp Home Fashions. The divisions within upholstery fabrics
are Culp Decorative Fabrics (CDF) (including the company's yarn manufacturing
facilities and the operations located in China) and Culp Velvets/Prints (CVP).
The following table sets forth certain information for each of the company's
segments/divisions.
Culp's Segments/Divisions
-------------------------
FISCAL 2005
NET SALES
SEGMENT DIVISION (in millions) PRODUCT LINES
------- -------- ------------- -------------
Mattress Fabrics Culp Home Fashions $ 105.4 Woven jacquards
Knitted Ticking
Upholstery Fabrics Culp Decorative Fabrics(1) $ 102.2 Woven jacquards
Culp Velvets/Prints $ 78.9 Prints
-------- Woven velvets
$ 181.1 Tufted velvets
-------- Suede and other
sourced fabrics
(1) Includes the company's yarn manufacturing operations and the operations
located in China
Culp Home Fashions. Culp Home Fashions markets mattress ticking to bedding
manufacturers. These fabrics encompass woven jacquard ticking, printed ticking
and knitted ticking. Culp Home Fashions' manufacturing facilities are located in
Stokesdale, North Carolina and St. Jerome, Quebec, Canada. During fiscal 2005,
the company began taking significant steps to further enhance its competitive
position by consolidating all of its mattress fabrics manufacturing into the
Stokesdale and St. Jerome facilities. This $7.0 million capital project involves
the relocation of ticking looms from an upholstery fabric plant to existing
ticking facilities in the U.S. and Canada and the purchase of new weaving
machines that are faster and more efficient than the equipment being replaced.
Culp Decorative Fabrics. Culp Decorative Fabrics manufactures and markets
jacquard woven fabrics used primarily for residential and commercial furniture.
For a description of the characteristics of these fabrics, see "Products" below.
Culp Decorative Fabrics' manufacturing facilities are located in Burlington and
Graham, North Carolina.
Culp Decorative Fabrics is vertically integrated, complementing its weaving
capabilities with the ability to extrude, dye and texturize yarn. Culp
Decorative Fabrics includes the company's yarn facilities, where the company
manufactures pre-dyed spun yarns, open-end spun and chenille yarns. The company
operates yarn manufacturing facilities in Shelby, Lincolnton and Graham, North
Carolina. The production is used primarily internally. External yarn sales
totaled approximately $3.0 million, representing approximately 1.0% of the
company's consolidated sales for fiscal 2005, and are directed primarily to the
upholstery fabric market.
5
During fiscal 2005, the company carried out a restructuring plan, within this
division, designed to reduce costs, increase asset utilization and improve
profitability. The company consolidated the operations from its Pageland, South
Carolina facility into the Graham, North Carolina facility, which resulted in
the closure of the Pageland operation. Additionally, the company consolidated
its yarn operations by integrating the Cherryville, North Carolina plant into
the Shelby facility (note additional discussion of restructuring activity in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations").
An important element in the company's offshore business is its China operations,
which includes a manufacturing facility located in Shanghai, China. The
company's strategy for China is to link the company's strong customer
relationships, design expertise and production technology with low-cost fabric
manufacturers in China in order to deliver enhanced value to its customers
throughout the world.
Culp Velvets/Prints. Culp Velvets/Prints manufactures and markets printed and
velvet fabrics. These include prints on jacquard and flock base fabrics, woven
velvets and tufted velvets. For a description of the characteristics of these
fabrics, see "Products" below. These fabrics, which are manufactured at
Burlington, North Carolina and Anderson, South Carolina, typically offer
manufacturers richly colored patterns and textured surfaces.
At the end of fiscal 2005, management made the decision to consolidate its two
velvets fabrics manufacturing operations into the Anderson, South Carolina
facility in order to reduce costs and improve profitability (note additional
discussion of restructuring activity in "Management's Discussion and Analysis of
Financial Condition and Results of Operations").
With the company's offshore sourcing efforts, Culp Velvets/Prints is
experiencing higher sales of upholstery fabric products produced outside of the
company's U.S. manufacturing plants. These sales include microdenier suedes and
other sourced products designed to meet changing consumer preferences.
Overview of Industry and Markets
Culp markets products worldwide primarily to manufacturers that operate in three
principal markets. The mattress fabrics segment supplies the bedding industry.
This market includes mattress sets. The upholstery fabrics segment supplies the
residential and commercial furniture industry. The residential furniture market
includes upholstered furniture sold to consumers for household use. Products
include sofas, sleep sofas, chairs, recliners and sectionals. The commercial
furniture and fabrics market includes upholstered office seating and modular
office systems sold primarily for use in offices and other institutional
settings, and commercial textile wall covering. Specialty markets supplied by
the company primarily includes recreational vehicle seating. Sales to specialty
markets did not constitute a material part of the company's revenues in fiscal
2005 or 2004. The principal markets into which the company sells products are
described below.
6
Overview of Bedding Industry
The bedding industry experienced significant growth in sales in calendar 2004,
which has resulted from a strong housing market, as well as higher average
selling prices of mattresses. According to the International Sleep Products
Association (ISPA), the U. S. wholesale bedding industry accounted for an
estimated $5.6 billion in sales in 2004, an 11.3% increase over 2003. The
industry is comprised of over 700 manufacturers, but the largest four
manufacturers accounted for more than 57% of the total wholesale shipments in
2004. The bedding industry has averaged approximately 6.0% annual growth over
the past twenty years, with only one year experiencing a decline in sales
volume. It has proven to be a stable and mature industry, and has grown despite
several economic downturns over the past twenty years. This stability and
resistance to economic downturns is due in part to replacement purchases.
A critical point to make is that, unlike the upholstery fabrics industry, which
has faced intense competition from imports, the bedding industry has faced
limited competition from imports. The primary reasons for this fact include 1)
the short lead times demanded by mattress retailers, 2) the limited inventories
carried by retailers, 3) the customized nature of each retailer's product lines,
4) the high shipping cost, and 5) the relatively low direct labor content in
mattresses and 6) strong brand recognition.
The company believes that several important demographic factors are helping to
support the bedding industry. In particular, the growth of the aging and
affluent segment of the population has a significant impact on the bedding
industry. The increasing size of homes and increase in the number of second
homes also play major roles in the demand for bedding in the United States.
These trends have not only driven total unit increases, they have also been a
factor in the size and average selling prices of mattresses being sold in the
United States. According to ISPA, while wholesale sales of bedding increased
11.3% in 2004, the number of units sold increased only 3.7%.
While a majority of bedding sales is traditional innerspring bedding, several
specialty bedding producers have recorded significant sales gains in recent
years. The two largest specialty bedding producers, which produce mattresses
that do not use inner spring construction, together grew wholesale shipments by
51.4% in 2004. The specialty bedding segment has provided new growth
opportunities for bedding producers and those companies that supply components,
including fabric, to them.
A key trend in the bedding industry has been the transition to selling
"one-sided" mattresses versus "two-sided" mattresses, which had been the
industry norm for many years. All of the four largest bedding manufacturers and
most others have converted their product lines to the sale of "one-sided"
mattresses. Since a "one-sided" mattress uses approximately 30% less mattress
ticking, the company believes that the overall industry demand for mattress
ticking has been significantly affected by this transition within the bedding
industry.
Another product trend impacting this industry is the current trend among
mattress manufacturers toward using common SKU's and less expensive fabric for
the borders, which is the ticking that goes on the side of the mattresses and
box springs.
A product trend within mattress ticking is the increasing popularity of knitted
mattress tickings, as opposed to woven and printed tickings. Knitted ticking is
currently being used primarily on premium mattresses. The company believes
knitted ticking market share will continue to grow for the foreseeable future as
these products are now being placed on mattresses at mid-range retail price
points. The company sources and markets a line of these products.
7
One additional product trend impacting the bedding industry is the focus on
producing flame-resistant material that is designed to meet the State of
California's new open flame mattress flammability standard and other
flammability standards currently under consideration. The company is continuing
to monitor these standards and the various methods that mattress manufacturers
and ticking makers can use to meet flammability standards.
Overview of Residential Furniture Industry
The residential furniture industry is a mature industry, with long-term growth
rates generally close to the overall growth rate of the U.S. economy. According
to the American Home Furnishings Alliance (AHFA), a trade association, the U.S.
residential furniture industry has grown over the last 20 years from $12.4
billion in residential furniture wholesale shipments in 1984 to $24.6 billion in
2004. However, during the last four years the residential furniture industry has
been impacted by the general economic slowdown, as well as a structural shift to
offshore sourcing, primarily from China, which has led to deflation in retail
furniture prices.
The upholstered furniture sector has been outperforming the wood sector in
recent years. According to the AHFA, upholstered furniture has grown from 40.0%
of total residential furniture wholesale shipments in 1997 to 49.0% in 2004. It
has appeared in recent years that the upholstered furniture segment is less
vulnerable to economic downturns and more responsive to economic recoveries than
the wood sector. The company believes that consumers are more willing to
postpone wooden casegoods purchases in deference to upholstered products, which
receive a higher priority. Furthermore, upholstered products have a shorter
average life, as they are more prone to everyday wear as well as changes in
design trends and home fashion. This phenomenon is apparent from recent
residential furniture industry trends. For example, in 2003, while total
industry shipments were slightly down, the upholstery segment was flat and wood
shipments were down by 4.4%. In 2004, the upholstery segment grew 10.4% and wood
shipments grew by 4.2%.
There are several key issues facing the residential furniture industry:
o The sourcing of components and fully assembled furniture from overseas
continues to play a major role in the residential furniture industry, with
sales of imported furniture growing at a much faster rate than the overall
industry. According to Furniture/Today, imports of residential furniture
into the U.S. grew 15% to $18.4 billion in 2004. By far, the largest source
for these imports continues to be China, which accounted for approximately
47% of total U.S. imports in 2004, up from approximately 41% in 2002. In
past years, a large majority of furniture imports from China were wooden
"casegoods," but there has been significant recent growth in imports of
upholstered furniture components, including upholstery fabric and
"cut-and-sewn kits" for furniture covers. This trend has been especially
strong for leather furniture, and it now extends to other coverings,
including microdenier suedes and the more traditional types of fabrics
manufactured by the company. Fabrics entering the U.S. from China and other
low labor cost countries are resulting in increased price competition in
the upholstery fabric and upholstered furniture markets. In addition,
competition in the U.S. domestic market has increased further following the
January 1, 2005 expiration of the quotas imposed under the Uruguay Round
Agreement on Textiles and Clothing on textile and apparel products coming
into the U.S.
o Leather upholstered furniture has been gaining market share over the last
ten years. This trend has increased over the last three to four years in
large part because selling prices of leather furniture have been declining
significantly over this time period.
8
o The residential furniture industry has been consolidating at the
manufacturing level for several years. The result of this trend is fewer,
but larger, customers for upholstery fabric manufacturers. The company
believes that this consolidation favors larger upholstery fabric
manufacturers capable of supplying a range of product choices at the
volumes required by major furniture manufacturers on a timely basis.
o In recent years, several of the nation's larger furniture manufacturers
have opened retail outlets of their own. As top retailers shift floor space
to private label imports, manufacturers are focused on distributing their
own products. In addition, furniture marketing by "lifestyle" retailers has
increased, which has increased the number of retail outlets for residential
furniture but has also increased the reliance on private brands or private
labels.
o The company believes that demographic trends support the outlook for
continued long-term growth in the U.S. residential furniture. In
particular, "baby boomers" (people born between 1946 to 1964) are reaching
their highest earning power and are the most likely group to upgrade their
home decor. In addition, many of these individuals are purchasing vacation
and second homes, as evidenced by the increasing number of such homes in
the U.S. Additionally, the children of the "baby boomers" are entering
their college years and are expected to drive the next wave of household
formation in the U.S. According to the U.S. Census Bureau, the home
ownership rate is currently at an all-time high in excess of 69%, and the
average size of homes in the U.S. continues to increase, further driving
purchases of furniture.
Overview of Commercial Furniture Industry
The market for commercial furniture - furniture used in offices and other
institutional settings - grew approximately 5.1% from 2003 to 2004, reversing a
significant decline that had occurred over the three prior years. According to
the Business and Institutional Furniture Manufacturer's Association (BIFMA), a
trade association, the commercial furniture market in the U.S. totaled
approximately $8.9 billion in 2004 in wholesale shipments by manufacturers.
Although higher than 2003, this total still represents a significant decrease
from the industry's peak of $13.3 billion in 2000. From 1990 to 2000, the
commercial furniture industry grew at a compound annual growth rate of 5.3%. The
commercial furniture industry is largely affected by economic trends. The
commercial furniture industry declined significantly from 2001 through 2003,
reflecting economic trends affecting businesses, which are the ultimate
customers in this industry.
Products
As described above, the company's products include mattress fabrics and
upholstery fabrics, which are the company's identified operating segments.
Mattress Fabrics Segment
The company manufactures and markets mattress fabrics for sale to bedding
manufacturers. Mattress fabrics segment sales constituted 37% of consolidated
sales in fiscal 2005, up from 33% in fiscal 2004. The company has emphasized
fabrics and patterns that have broad appeal at prices generally ranging from
$1.75 to $5.00 per yard.
9
Upholstery Fabrics Segment
The company derives the majority of its revenues from the sale of upholstery
fabrics, primarily to the residential and commercial (contract) furniture
markets. Upholstery fabrics segment sales totaled 63% of consolidated sales for
fiscal 2005, down from 67% in fiscal 2004. The company has emphasized fabrics
and patterns that have broad appeal at "good" and "better" prices, generally
ranging from $3.00 per yard to $8.00 per yard.
The following table indicates the product lines within each segment and
division, and a brief description of their characteristics and identification of
their principal end-use market.
Culp Fabric Categories By Segment and Division
----------------------------------------------
Mattress Fabrics Characteristics Principal Markets
- ---------------- --------------- -----------------
Culp Home Fashions:
Woven jacquards Florals and other intricate designs. Woven on complex Bedding
looms using a variety of synthetic and natural yarns.
Prints Variety of designs produced economically by screen Bedding
printing onto a variety of base fabrics, including
jacquards, knits, poly/cotton sheeting and non-wovens.
Knitted Ticking Floral and other intricate designs produced on Bedding
special-width circular machines utilizing a variety of
synthetic and natural yarns. Knitted ticking has
inherent stretching properties and spongy softness,
and conforms well with layered foam packages.
Upholstery Fabrics
- ------------------
Culp
Decorative Fabrics:
Woven jacquards Elaborate, complex designs such as florals and Residential furniture
tapestries and tapestries in traditional, Commercial furniture
transitional and contemporary styles. Woven on
intricate looms using a wide variety of synthetic and
natural yarns.
Culp Velvet/ Prints:
Prints Sharp, intricate designs on flock or jacquard base Residential furniture
fabrics. Plush feel (flocks), deep colors (jacquards) Juvenile furniture
and excellent wearability. Produced by using heat and
pressure to transfer color from printed paper onto
base fabric.
Woven velvets Basic designs such as plaids in traditional and Residential furniture
contemporary styles with a plush feel. Woven with a
short-cut pile using various weaving methods and
synthetic yarns.
Tufted velvets Lower cost production process of velvets in which Residential furniture
synthetic yarns Residential furniture are punched into
a base polyester fabric for texture. Similar designs
as woven velvets.
Suede fabrics Fabrics woven or knitted using microdenier yarns, Residential furniture
which are piece dyed and finished, usually by sanding.
The fabrics are typically plain or with small jacquard
designs.
======================================================================================================
10
The company's products include all major types of coverings, except for leather,
that manufacturers use today for furniture and bedding. The company also markets
fabrics for certain specialty markets, but these do not currently represent a
material portion of the company's business. See "Overview of Industry."
Manufacturing
The company operates nine (9) manufacturing facilities for the production and
finishing of its mattress and upholstery fabrics. These plants encompass a total
of approximately 2.0 million square feet and include yarn extrusion, spinning,
dyeing and texturizing equipment, narrow and wide-width jacquard looms, woven
velvet looms, tufting machines, printing equipment, fabric finishing equipment
and various types of surface finishing equipment (such as washing, softening and
embossing).
The company's woven fabrics, which include jacquards and velvet, are made from
various types of synthetic and natural yarn, such as acrylic polypropylene,
polyester, rayon, or cotton. Yarn is woven into various fabrics on jacquard or
velvet weaving equipment. Once the weaving is completed, the fabric can be
printed or finished using a variety of processes. The company currently extrudes
and spins a portion of its own needs for yarn and purchases the remainder from
outside suppliers. Culp produces internally a substantial amount of its needs
for spun and chenille yarns.
Tufted velvet fabrics are produced by tufting machines, which insert yarn
through a woven base fabric, creating a loop pile surface material that is then
sheared to create a velvet surface. Tufted velvet fabrics are typically
lower-cost fabrics.
Product Design and Styling
Consumer tastes and preferences related to upholstered furniture and bedding
change over time. The use of new fabrics and designs remains an important
consideration for manufacturers to distinguish their products at retail and to
capitalize on changes in preferred colors, patterns and textures. Culp's success
is largely dependent on the company's ability to market fabrics with appealing
designs and patterns.
The process of developing new designs involves maintaining an awareness of broad
fashion and color trends both in the United States and internationally. The
upholstery fabric designs are introduced at major fabric trade conferences that
occur twice a year in the United States (January and July).
The mattress ticking designs are introduced, once annually, during the summer to
fall timeframe. Additionally, the company works closely with its customers,
throughout the year, on new line introductions.
Distribution
Mattress Fabrics Segment
Substantially all of the company's shipments of mattress ticking originate from
its manufacturing facilities in Stokesdale, North Carolina.
Upholstery Fabrics Segment
The majority of the company's products are shipped directly from its
manufacturing and distribution facilities. The "direct ship" program is
primarily utilized by large manufacturers. Generally, for small and medium-size
residential furniture manufacturers, inventory is maintained in the company's
distribution facilities.
11
Sources and Availability of Raw Materials
Raw materials account for more than half of the company's total production
costs. The company purchases various types of synthetic and natural yarns
(polypropylene, polyester, acrylic, rayon and cotton), synthetic staple fibers
(acrylic and rayon), and certain types of greige goods, polypropylene resins,
latex adhesives, dyes and chemicals from a variety of suppliers. The company
produces internally a significant portion of raw materials, such as chenille,
pile and other filling yarns, polypropylene yarns and printed heat-transfer
paper. As a result, a large portion of its raw materials are comprised of more
basic commodities such as rayon staple, polypropylene resin chips, polyester
warp yarns, and polyester woven substrates. The prices of such materials
fluctuate depending upon current supply and demand conditions and the general
rate of inflation. Many of the company's basic raw materials are petrochemical
products or are produced from such products; and therefore, the company's raw
material costs are sensitive to changes in petrochemical prices, as has been the
case with the recent increase in oil prices. Generally, the company has not had
significant difficulty in obtaining raw materials. During the fourth quarter of
fiscal 2005, Solutia, which was the company's supplier for acrylic fiber, exited
the acrylic fiber business. In response to this event, the company has
identified certain international suppliers as alternative sources for procuring
acrylic fiber. The transition to the alternative suppliers is proceeding as
planned.
Seasonality
Mattress Fabrics Segment
The ticking business and the bedding industry in general are slightly seasonal,
with sales being the highest in the company's first and fourth fiscal quarters.
Upholstery Fabrics Segment
The company's upholstery fabrics business is seasonal, with increased sales
during the company's 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 company's
first and third fiscal quarters for the holiday weeks of July 4th and Christmas.
Competition
Competition for the company's products is high and is based primarily on price,
design, quality, timing of delivery and service.
Mattress Fabrics Segment
The mattress ticking market is concentrated in a few relatively large suppliers.
The company believes its principal mattress ticking competitors are Bekaert
Textiles B.V., Blumenthal Print Works, Inc., Burlington Industries (now a part
of International Textile Group, ITG) and Tietex, Inc.
12
Upholstery Fabrics Segment
In spite of the trend toward consolidation in the upholstery fabric market, the
company competes against a large number of producers, ranging from a few large
manufacturers comparable in size to the company to small producers, and a
growing number of converters of fabrics. The company believes its principal
domestic upholstery fabric competitors are Joan Fabrics Corporation (including
its Mastercraft division), Richloom Fabrics, S.T.I. and Quaker Fabric
Corporation.
Until approximately four years ago, overseas producers had not historically been
a source of significant competition for the company. Recent trends, however,
have shown significant increased competition in U.S. markets by foreign
producers of upholstery fabric, furniture components and finished upholstery
furniture, as well as increased sales in the U.S. of leather furniture produced
overseas (which competes with upholstered furniture for market share). In
addition, as previously discussed, competition in the U.S. domestic market has
increased further following the January 1, 2005 expiration of the quotas imposed
under the Uruguay Round Agreement on Textiles and Clothing. Foreign
manufacturers often are able to produce upholstery fabric and other components
of furniture with significantly lower raw material and production costs
(especially labor) than those of the company and other U.S.-based manufacturers.
The company competes with lower cost foreign goods on the basis of design,
quality, reliability and speed of delivery. In addition, the company has
established an operation in China to facilitate the sourcing and finishing of
goods produced in Asia, and the company has other overseas sourcing efforts
underway as well.
Environmental and Other Regulations
The company is subject to various federal and state laws and regulations,
including the Occupational Safety and Health Act and federal and state
environmental laws, as well as similar laws governing its manufacturing facility
in Canada, which is sometimes referred to as the Rayonese facility. The company
periodically reviews its compliance with such laws and regulations in an attempt
to minimize the risk of violations.
The company's operations involve a variety of materials and processes that are
subject to environmental regulation. Under current law, environmental liability
can arise from previously owned properties, leased properties and properties
owned by third parties, as well as from properties currently owned and leased by
the company. Environmental liabilities can also be asserted by adjacent
landowners or other third parties in toxic tort litigation.
In addition, under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), and analogous state statutes,
liability can be imposed for the disposal of waste at sites targeted for cleanup
by federal and state regulatory authorities. Liability under CERCLA is strict as
well as joint and several.
The company periodically is involved in environmental claims or litigation and
requests for information from environmental regulators. Each of these matters is
carefully evaluated, and the company provides for environmental matters based on
information presently available. Based on this information, the company does not
believe that environmental matters will have a material adverse effect on either
the company's financial condition or results of operations. However, there can
be no assurance that the costs associated with environmental matters will not
increase in the future.
13
Employees
As of May 1, 2005, the company had approximately 1,900 employees, compared to
approximately 2,300 at the end of fiscal 2004. All of the hourly employees at
the Rayonese facility in Canada (approximately 12% of the company's workforce)
are represented by a local, unaffiliated union. The collective bargaining
agreement for the Rayonese hourly employees was renewed in 2005 and expires on
February 1, 2008. The company is not aware of any efforts to organize any more
of its employees and believes its relations with its employees are good.
Customers and Sales
Mattress Fabrics Segment
During fiscal 2005, 90% of mattress fabrics sales were concentrated among
approximately 80 customers. Major customers include the leading bedding
manufacturers: Sealy, Serta (National Bedding), and Simmons. The loss of one or
more of these customers would have a material adverse effect on the company.
Culp's mattress ticking customers also include many small and medium-size
bedding manufacturers.
In international markets outside North America, Culp sells mattress ticking
primarily to distributors that maintain inventories for resale to bedding
manufacturers.
Upholstery Fabrics Segment
For fiscal 2005, 90% of upholstery fabrics sales were concentrated among
approximately 160 customers. Major customers are leading manufacturers of
upholstered furniture, including Bassett, Furniture Brands International
(Broyhill, Thomasville, and Lane /Action), Best Home Furnishings, Klaussner
Furniture, Berkline, Benchcraft, Flexsteel and La-Z-Boy (La-Z-Boy Residential,
Bauhaus, England, and Clayton Marcus). Representative customers for the
company's fabrics for commercial furniture include HON Industries, Global
Upholstery and Steelcase. The company's two largest customers in this segment
are La-Z-Boy Incorporated and Furniture Brands International, Inc., the loss of
either of which would have a material adverse effect on the company. The
company's sales to La-Z-Boy accounted for approximately 15% of the company's
total sales in fiscal 2005. Patrick H. Norton, Chairman of La-Z-Boy, serves on
the company's board of directors.
In international markets, Culp sells upholstery fabrics to distributors that
maintain inventories for resale to furniture manufacturers. In addition, the
company has established an operation in China to facilitate the sourcing (and
finishing) of goods produced in Asia, and to provide fabrics to customers' "cut
and sewn" operations.
14
The following table sets forth the company's net sales by geographic area by
amount and percentage of total net sales for the three most recent fiscal years.
Net Sales by Geographic Area
----------------------------
(dollars in thousands)
Fiscal 2005 Fiscal 2004 Fiscal 2003
------------------ ------------------ ------------------
United States $ 254,249 88.7% $ 282,865 88.8% $ 299,768 88.3%
---------- ------- ---------- ------- ---------- -------
North America 22,503 7.9 26,740 8.4 30,375 8.9
(Excluding USA)
Far East and Asia 8,690 3.0 6,954 2.2 4,926 1.5
All other areas 1,056 0.4 1,557 0.6 4,577 1.3
---------- ------- ---------- ------- ---------- -------
Subtotal (International) 32,249 11.3 35,251 11.2 39,878 11.7
---------- ------- ---------- ------- ---------- -------
Total $ 286,498 100.0% $ 318,116 100.0% $ 339,646 100.0%
========== ======= ========== ======= ========== =======
For additional segment information, see note 16 in the consolidated financial
statements.
Backlog
Mattress Ticking Segment
The backlog for mattress ticking is not a reliable predictor of future shipments
because the majority of sales are on a just-in-time basis.
Upholstery Fabrics Segment
Because many of the company's upholstery fabric customers have an opportunity to
cancel orders, and because the company makes a significant portion of its
upholstery sales through in-stock positions, it is difficult to predict the
amount of backlog that is "firm." For this reason, the company has reported the
portion of the upholstery fabric backlog from customers (excluding orders to
replenish warehouses) with confirmed shipping dates within five weeks of the end
of the fiscal year. On May 1, 2005, the portion of the upholstery fabric backlog
with confirmed shipping dates prior to June 5, 2005 was $12.5 million, all of
which are expected to be filled early during fiscal year 2006, as compared to
$9.6 million as of the end of fiscal 2004 (for confirmed shipping dates prior to
June 6, 2004).
15
ITEM 2. PROPERTIES
The company's headquarters are located in High Point, North Carolina. As of the
end of fiscal 2005, the company owned or leased nine (9) active and one (1)
inactive manufacturing facility, a design center and two (2) regional
distribution facilities. On June 30, 2005, the company sold its design center
and distribution center, both located in Burlington, North Carolina. The
following is a list of the company's principal administrative, manufacturing and
distribution facilities. The manufacturing facilities and distribution centers
are organized by segment.
Approx.
Total Area Expiration
Location Principal Use (Sq. Ft.) of Lease (1)
- -------- ------------- --------- -------------
o Administrative and Design Facilities:
High Point, North Carolina Corporate headquarters 55,000 Owned
Burlington, North Carolina (2) Design center 30,000 Owned
o Mattress Fabrics:
Stokesdale, North Carolina Manufacturing and distribution 220,000 Owned
St. Jerome, Quebec, Canada Manufacturing 202,500 Owned
o Upholstery Fabrics:
Graham, North Carolina Manufacturing 341,000 Owned
Burlington, North Carolina Manufacturing 302,000 Owned
Shelby, North Carolina Manufacturing 101,000 Owned
Anderson, South Carolina Manufacturing 99,000 Owned
Lincolnton, North Carolina Manufacturing 78,000 Owned
Burlington, North Carolina (3) Manufacturing and distribution 275,000 2007
Burlington, North Carolina (2) Distribution and yarn warehouse 112,500 Owned
Tupelo, Mississippi Regional distribution 57,000 2018
Los Angeles, California Regional distribution 33,000 2007
Shanghai, China Manufacturing 65,000 2006
Shanghai, China Distribution and future growth 100,000 2008
Chattanooga, Tennessee Inactive 290,000 2008
- -------------------------------------------
(1) Includes all options to renew, except for inactive properties
(2) The company sold this facility on June 30, 2005.
(3) To be used as an inspection and distribution facility for fabrics imported
from offshore sources and for finished goods warehousing of domestically
produced upholstery fabrics.
The company believes that its facilities are in good condition, well maintained
and suitable and adequate for present utilization. Due to the restructuring
efforts in the upholstery fabrics segment, and the capital improvement project
in the mattress fabrics segment, determining an accurate measure of capacity in
either segment is difficult. Nonetheless, management has estimated that in the
mattress fabrics segment, the company has manufacturing capacity to produce
approximately 5% more products (measured in yards) than it manufactured in
fiscal 2005. In the upholstery fabrics segment, management has estimated that
the company has manufacturing capacity to produce approximately 38% more
products (measured in yards) than it sold during fiscal 2005. In addition, the
company has the ability to source additional mattress ticking and upholstery
fabrics from outside suppliers, further increasing its ultimate output of
finished goods.
16
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the company, or its subsidiaries, is a
party or of which any of their property is the subject that are required to be
disclosed under this item.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter ended May 1, 2005.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
Registrar and Transfer Agent
EQUISERVE TRUST COMPANY, N.A.
c/o Computershare Investor Services
Post Office Box 43023
Providence, Rhode Island 02940-3023
(800) 633-4236
(816) 843-4293 (Foreign shareholders)
www.computershare.com\equiserve
Stock Listing
Culp, Inc. common stock is traded on the New York Stock Exchange under the
symbol CFI. As of May 1, 2005, Culp, Inc. had approximately 1,700 shareholders
based on the number of holders of record and an estimate of individual
participants represented by security position listings.
Analyst Coverage
These analysts cover Culp, Inc.:
BB&T Capital Markets - Joel Havard
Morgan Keegan - Laura Champine, CFA
Raymond, James & Associates - Budd Bugatch, CFA
Sidoti & Company, LLC - Todd A. Schwartzman, CFA
Value Line - Craig Sirois
See Item 6, Selected Financial Data, for market and dividend information
regarding the company's common stock.
17
ITEM 6 - SELECTED FINANCIAL DATA
- --------------------------------
percent
fiscal fiscal fiscal fiscal fiscal change
(amounts in thousands, except per share amounts) 2005 2004 2003 2002 2001 2005/2004
- -------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) STATEMENT DATA
net sales $ 286,498 318,116 339,646 382,574 410,609 (9.9)%
cost of sales (6) 260,341 259,794 282,073 319,717 354,622 0.2
- -------------------------------------------------------------------------------------------------------------------------------
gross profit 26,157 58,322 57,573 62,857 55,987 (55.2)
S G & A expenses 35,357 41,019 40,040 48,059 50,366 (13.8)
goodwill impairment/amortization 5,126 0 0 1,395 1,395 100.0
restructuring (credit) expense and asset impairment (6) 10,372 (1,047) 12,981 10,368 5,625 (1,090.6)
- -------------------------------------------------------------------------------------------------------------------------------
income (loss) from operations (24,698) 18,350 4,552 3,035 (1,399) (234.6)
interest expense 3,713 5,528 6,636 7,907 9,114 (32.8)
interest income (134) (376) (596) (176) (46) (64.4)
early extinguishment of debt 0 1,672 0 0 0 (100.0)
other expense 517 750 805 1,444 1,941 (31.1)
- -------------------------------------------------------------------------------------------------------------------------------
income (loss) before income taxes (28,794) 10,776 (2,293) (6,140) (12,408) (367.2)
income taxes (10,942) 3,556 (1,557) (2,700) (4,097) N.M
- -------------------------------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of accounting change (17,852) 7,220 (736) (3,440) (8,311) (347.3)
cumulative effect of accounting change, net of income tax (7) 0 0 (24,151) 0 0 N.M
- -------------------------------------------------------------------------------------------------------------------------------
net income (loss) $ (17,852) 7,220 (24,887) (3,440) (8,311) 347.3
- -------------------------------------------------------------------------------------------------------------------------------
depreciation $ 18,884 13,642 13,990 17,274 19,391 38.4
cash dividends 0 0 0 0 1,177 -
- -------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 11,549 11,525 11,462 11,230 11,210 0.2
weighted average shares outstanding,
assuming dilution 11,549 11,777 11,462 11,230 11,210 (1.9)
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
basic income (loss) per share:
income (loss) before cumulative effect of
accounting change $ (1.55) 0.63 (0.06) (0.31) (0.74) N.M
cumulative effect of accounting change (7) 0 0 (2.11) 0 0 -
- -------------------------------------------------------------------------------------------------------------------------------
net income (loss) $ (1.55) 0.63 (2.17) (0.31) (0.74) 345.4
- -------------------------------------------------------------------------------------------------------------------------------
diluted income (loss) per share:
income (loss) before cumulative effect of
accounting change $ (1.55) 0.61 (0.06) (0.31) (0.74) N.M
cumulative effect of accounting change (7) 0 0 (2.11) 0 0 -
- -------------------------------------------------------------------------------------------------------------------------------
net income (loss) $ (1.55) 0.61 (2.17) (0.31) (0.74) 353.4
- -------------------------------------------------------------------------------------------------------------------------------
cash dividends $ 0.00 0.00 0.00 0.00 0.105 0.0
book value 7.43 8.95 8.33 10.52 10.85 (17.0)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
operating working capital (5) $ 56,471 64,441 61,937 76,938 90,475 (12.4)%
property, plant and equipment, net 66,032 77,770 84,962 89,772 112,322 (15.1)
total assets 176,123 193,816 218,153 287,713 289,580 (9.1)
capital expenditures 14,360 6,747 12,229 4,729 8,050 112.8
long-term debt (1) 50,550 51,030 76,500 108,484 111,656 (0.9)
shareholders' equity 85,771 103,391 95,765 119,065 121,802 (17.0)
capital employed (3) 136,321 154,421 172,265 227,549 233,458 (11.7)
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA
gross profit margin 9.1% 18.3% 17.0% 16.4% 13.6%
operating income (loss) margin (8.6) 5.8 1.3 0.8 (0.3)
net income (loss) margin before cumulative effect of
accounting change (6.2) 2.3 (0.2) (0.9) (2.0)
effective income tax rate 38.0% 33.0% 67.9% 44.0% 33.0%
long-term debt to total capital employed ratio (1) 37.1% 33.0% 44.4% 47.7% 47.8%
operating working capital turnover (5) 4.8 5.2 5.0 4.5 4.0
days sales in receivables 37 35 35 41 51
inventory turnover 5.2 5.3 5.3 5.4 5.3
- --------------------------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $ 9.10 12.28 17.89 10.74 7.25
low 4.20 5.05 3.75 2.12 1.63
close 4.70 8.61 5.00 9.30 4.95
P/E ratio (2)
high (4) N.M. 20.1 N.M. N.M. N.M.
low (4) N.M. 8.3 N.M. N.M. N.M.
daily average trading volume (shares) 21.1 55.9 92.3 24.9 16.2
- --------------------------------------------------------------------------------------------------------------------
(1) Long-term debt includes long- and short-term debt
(2) P/E ratios based on trailing 12-month net income (loss) per share
(3) Capital employed includes long-term debt and shareholders' equity
(4) N.M - Not meaningful
(5) Operating working capital for this calculation is accounts receivable,
inventories and accounts payable
(6) The company incurred restructuring and related charges in fiscal 2005,
2003, 2002 and 2001. See note 2 of the company's consolidated financial
statements
(7) See summary of significant accounting policies of the company's
consolidated financial statements
18
ITEM 7. 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 attached
thereto.
Overview
The company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to April 30. The year ended May 1, 2005 included 52 weeks versus 53
weeks for the same period of fiscal 2004. The company's operating segments are
mattress fabrics and upholstery fabrics, with related divisions organized within
those segments. In mattress fabrics, Culp Home Fashions markets a broad array of
fabrics used by bedding manufacturers. In upholstery fabrics, Culp Decorative
Fabrics markets jacquard woven fabrics for residential and commercial furniture
and yarn for use primarily by the company, with some outside sales. Culp
Velvets/Prints markets velvet, printed fabrics and microdenier suedes used
primarily for residential furniture.
Effective May 3, 2004, the company began allocating selling, general and
administrative expenses to its operating segments and began evaluating the
operating performance of its segments based upon income (loss) from operations
before restructuring and related charges or credits and certain unallocated
corporate expenses. Previously, the company evaluated operating segment
performance based upon gross profit. Operating income (loss) and gross profit
for prior periods by segment is presented for comparative purposes. Unallocated
corporate expenses represent primarily compensation and benefits for certain
executive officers and all costs related to being a public company. Segment
assets include assets used in the operation of each segment and consist of
accounts receivable, inventories, and property, plant and equipment. The company
no longer allocates goodwill to its operating segments for the purposes of
evaluating operating performance.
The company's net sales for fiscal 2005 decreased 9.9%, with sales decreasing
substantially in the upholstery fabrics segment and remaining essentially flat
in the mattress fabrics segment when compared to fiscal 2004. The company
reported a net loss of $17.9 million, or $1.55 per share diluted, which included
restructuring and related charges of $18.1 million and $5.1 million of goodwill
impairment related to the upholstery fabrics segment. The overall sales decline
was attributable to continued softness in the company's domestically produced
upholstery fabrics business, resulting primarily from the current consumer
preference for leather and suede furniture and the growing competition from
imported fabrics and cut and sewn kits, primarily from China. In addition to the
restructuring and related charges and goodwill impairment that lowered operating
income in fiscal 2005, the company's financial performance was further impacted
by higher raw material costs, the underutilization of the company's U.S.
manufacturing capacity and manufacturing variances related to the restructuring
actions in the upholstery fabrics segment, and industry wide pricing pressure in
the mattress fabrics segment.
The company is taking aggressive steps to address the challenges facing both of
its segments. During fiscal 2005, the company initiated two major restructuring
initiatives in the upholstery fabrics segment, both of which are designed to
bring U.S. manufacturing capacity in line with demand, reduce costs, increase
asset utilization and improve profits. In addition, the company has identified
opportunities to reduce cost in its mattress fabrics segment by consolidating
mattress ticking operations.
In an effort to offset the loss in sales of U.S. produced upholstery fabric
products, the company is working on several initiatives to source and market
upholstery fabric produced internationally, primarily from Asia. These measures
are part of the company's continuing efforts to meet demand from consumers for
certain types of fabrics, as well as serve the growing segment of the company's
customer base that is establishing or expanding production in international
areas. As a result of the company's offshore efforts, including its China
platform, the company is experiencing higher sales of upholstery fabrics
products produced outside the company's U.S. manufacturing plants, a trend that
is expected to continue.
19
Results of Operations
The following table sets forth certain items in the company's consolidated
statements of income (loss) as a percentage of net sales.
2005 2004 2003
------- ------- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.9 81.7 83.0
------- ------- -------
Gross profit 9.1 18.3 17.0
Selling, general and administrative expenses 12.3 12.9 11.8
Goodwill impairment 1.8 0.0 0.0
Restructuring (credit) expense and asset impairments 3.6 (0.3) 3.8
------- ------- -------
Income (loss) from operations (8.6) 5.8 1.3
Interest expense, net 1.3 1.6 1.8
Early extinguishment of debt 0.0 0.5 0.0
Other expense 0.2 0.2 0.2
------- ------- -------
Income (loss) before income taxes (10.1) 3.4 (0.7)
Income taxes * 38.0 33.0 67.9
------- ------- -------
Income (loss) before cumulative effect
of accounting change (6.2)% 2.3% (0.2)%
======= ======= =======
* Calculated as a percent of income (loss) before income taxes
The following tables set forth the company's sales, gross profit and operating
income (loss) by segment/division for the fiscal years ended May 1, 2005, May 2,
2004 and April 27, 2003.
20
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT/DIVISION
FOR THE TWELVE MONTHS ENDED MAY 1, 2005 AND MAY 2, 2004
(Amounts in thousands)
TWELVE MONTHS ENDED
--------------------------------------------------------------------------
Amounts Percent of Total Sales
---------------------------- ----------------------------
May 1, May 2, % Over May 1, May 2,
Net Sales by Segment 2005 2004 (Under) 2005 2004
- --------------------------------------------------- ------------- ------------ ------------ --------------- ------------
Mattress Fabrics
Culp Home Fashions $ 105,432 106,322 (0.8)% 36.8 % 33.4 %
------------- ------------ ------------ --------------- ------------
Upholstery Fabrics
Culp Decorative Fabrics 102,185 124,272 (17.8)% 35.7 % 39.1 %
Culp Velvets/Prints 78,881 87,522 (9.9)% 27.5 % 27.5 %
------------- ------------ ------------ --------------- ------------
181,066 211,794 (14.5)% 63.2 % 66.6 %
------------- ------------ ------------ --------------- ------------
Net Sales $ 286,498 318,116 (9.9)% 100.0 % 100.0 %
============= ============ ============ =============== ============
Gross Profit by Segment Gross Profit Margin
- --------------------------------------------------- ----------------------------
Mattress Fabrics $ 16,819 23,376 (28.1)% 16.0 % 22.0 %
Upholstery Fabrics 16,899 34,946 (51.6)% 9.3 % 16.5 %
Restructuring related charges (7,561)(1) 0 (100.0)% (4.2)% 0.0 %
------------- ------------ ------------ --------------- ------------
Gross Profit $ 26,157 58,322 (55.2)% 9.1 % 18.3 %
============= ============ ============ =============== ============
Operating Income (loss) by Segment Operating Income (Loss) Margin
- --------------------------------------------------- ----------------------------
Mattress Fabrics $ 9,389 14,986 (37.3)% 8.9 % 14.1 %
Upholstery Fabrics (6,435) 6,836 (194.1)% (3.6)% 3.2 %
Unallocated corporate expenses (4,480) (4,519) (0.9)% (1.6)% (1.4)%
Goodwill impairment (5,126) 0 (100.0)% (1.8)% 0.0 %
Restructuring and related charges and credits (18,046)(1) 1,047 (3) (1,823.6)% (10.0)% 0.5 %
------------- ------------ ------------ --------------- ------------
Operating income (loss) $ (24,698) 18,350 (234.6)% (8.6)% 5.8 %
============= ============ ============ =============== ============
Depreciation by Segment
- ---------------------------------------------------
Mattress Fabrics $ 3,635 (2) 3,753 (3.1)%
Upholstery Fabrics 9,227 (2) 9,889 (6.7)%
------------- ------------ ------------
Total Depreciation $ 12,862 13,642 (5.7)%
============= ============ ============
(1) The $7.6 million represents restructuring related charges of $6.0 million
for accelerated depreciation and $1.6 million for inventory write-downs.
The $18.0 million represents $7.7 million in related charges for
accelerated depreciation and inventory markdowns, $5.6 million related to
write-downs of buildings and equipment, $2.5 million related to asset
movement costs, and $2.2 million related to employee termination costs.
(2) Excludes accelerated depreciation of approximately $6.0 million associated
with plant and equipment.
(3) The $1.0 million restructuring credit represents adjustment of accrued
employee benefit and other plant closing costs related to the shutdown of
the Chattanooga and Lumberton operations.
21
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME BY SEGMENT/DIVISION
FOR THE TWELVE MONTHS ENDED MAY 2, 2004 AND APRIL 27, 2003
(Amounts in thousands)
TWELVE MONTHS ENDED
-------------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- -------------------------
May 2, April 27, % Over May 2, April 27,
Net Sales by Segment 2004 2003 (Under) 2004 2003
- --------------------------------------------------------- ----------- ------------ ----------- ------------ -----------
Mattress Fabrics
Culp Home Fashions $ 106,322 99,550 6.8 % 33.4 % 29.3 %
----------- ------------ ----------- ------------ -----------
Upholstery Fabrics
Culp Decorative Fabrics 124,272 144,047 (13.7)% 39.1 % 42.4 %
Culp Velvets/Prints 87,522 96,049 (8.9)% 27.5 % 28.3 %
----------- ------------ ----------- ------------ -----------
211,794 240,096 (11.8)% 66.6 % 70.7 %
----------- ------------ ----------- ------------ -----------
Net Sales $ 318,116 339,646 (6.3)% 100.0 % 100.0 %
=========== ============ =========== ============ ===========
Gross Profit by Segment Gross Profit Margin
- --------------------------------------------------------- -------------------------
Mattress Fabrics $ 23,376 22,835 2.4 % 22.0 % 22.9 %
Upholstery Fabrics 34,946 37,656 (7.2)% 16.5 % 15.7 %
Restructuring related charges 0 (2,918)(2) (100.0)% 0.0 % (1.2)%
----------- ------------ ----------- ------------ -----------
Gross Profit $ 58,322 57,573 1.3 % 18.3 % 17.0 %
=========== ============ =========== ============ ===========
Operating Income by Segment Operating Income Margin
- --------------------------------------------------------- -------------------------
Mattress Fabrics $ 14,986 15,117 (0.9)% 14.1 % 15.2 %
Upholstery Fabrics 6,836 8,395 (18.6)% 3.2 % 3.5 %
Unallocated corporate expenses (4,519) (3,061) 47.6 % (1.4)% (0.9)%
Restructuring and related charges and credits 1,047 (1) (15,899)(2) (106.6)% 0.5 % (6.6)%
----------- ------------ ----------- ------------ -----------
Operating income $ 18,350 4,552 303.1 % 5.8 % 1.3 %
=========== ============ =========== ============ ===========
Depreciation by Segment
- ---------------------------------------------------------
Mattress Fabrics $ 3,753 2,679 40.1 %
Upholstery Fabrics 9,889 11,311 (12.6)%
----------- ------------ -----------
Total Depreciation $ 13,642 13,990 (2.5)%
=========== ============ ===========
(1) The $1.0 million restructuring credit represents adjustment of accrued
employee benefit and other plant closing costs related to the shutdown of
the Chattanooga and Lumberton operations.
(2) The $2.9 million represents restructuring related charges of $1.7 million
for asset movement costs and $1.2 million for inventory write-downs,
related to CDF.
The $15.9 million represents $12.1 million of restructuring expenses
related to CDF for lease termination expenses and personnel costs, $1.7
million of restructuring related charges for asset movement costs regarding
CDF, $1.2 million of restructuring related charges for inventory
write-downs regarding CDF, $1.3 million of restructuring expenses related
to write-downs of equipment in connection with the exit from the wet
printed flock business by CVP, offset by a restructuring credit of $354,000
for over accrued employee benefit and plant security costs.
22
2005 compared with 2004
The company's net sales for fiscal 2005 decreased 9.9% to $286.5 million; and
the company reported a net loss of $17.9 million, or $1.55 per share diluted,
versus net income of $7.2 million, or $0.61 per share diluted, in fiscal 2004.
Restructuring and related charges of $18.1 million and goodwill impairment of
$5.1 million were included in the net loss for fiscal 2005. In addition,
restructuring credits of $ 1.0 million and an early extinguishment of debt
charge of $ 1.7 million were included in net income for fiscal 2004.
During fiscal 2005, the company began two major restructuring initiatives. A
detailed explanation of each plan is presented in the "Restructuring and Related
Charges and Goodwill Impairment" sections below. The total charges incurred for
both restructuring initiatives were $23.2 million, of which $5.1 million related
to goodwill impairment. Of the total charges, $10.4 million was recorded in
restructuring expense, $5.1 million was recorded in goodwill impairment, and
$113,000 was recorded in selling, general and administrative expenses in the
2005 Consolidated Statement of Income (loss); and $7.6 million was recorded in
cost of sales in the 2005 Consolidated Statement of Income (loss).
Restructuring and Related Charges and Goodwill Impairment
October 2004-Upholstery Fabrics: In October 2004, management and the board of
directors approved a restructuring plan within the upholstery fabrics segment
aimed at reducing costs, increasing asset utilization and improving
profitability. Due to continued pressure on demand in this segment, management
decided to adjust the company's cost structure and bring U.S. manufacturing
capacity in line with demand. The restructuring plan principally involved
consolidation of the company's decorative fabrics weaving operations by closing
Culp's facility in Pageland, South Carolina, and consolidating those operations
into the Graham, North Carolina facility. Additionally, the company consolidated
its yarn operations by integrating the production of the Cherryville, North
Carolina plant into the company's Shelby, North Carolina facility. Another
element of the restructuring plan was a substantial reduction in certain raw
material and finished goods stock keeping units, or SKUs, to reduce
manufacturing complexities and lower costs, with the ongoing objective of
identifying and eliminating products that were not generating acceptable volumes
of margins. Finally, the company made reductions in selling, general, and
administrative expenses. Overall, these restructuring actions reduced the number
of associates by approximately 250 people, representing approximately 14 percent
of Culp's upholstery fabrics segment employees.
During fiscal 2005, the total restructuring and related charges incurred for
this restructuring initiative were $16.3 million, of which approximately $6.8
million related to accelerated depreciation associated with the plant and
equipment disposed of, either by sale or by abandonment, and inventory
mark-downs, $5.1 million of goodwill impairment, which represented all of the
remaining goodwill associated with the upholstery fabrics segment, $2.4 million
related to the dismantling, moving, and relocation of equipment to other company
facilities, $1.3 million related to write-downs of buildings and equipment, and
$722,000 related to employee termination costs. From this restructuring
initiative, the company expects to realize annual savings of approximately $9.5
million, of which approximately $4.0 million will be in fixed manufacturing
costs, an estimated $2.0 million in variable manufacturing costs, and
approximately $3.5 million in selling, general and administrative costs.
April 2005-Upholstery Fabrics: In April 2005, management and the board of
directors approved a restructuring plan within the upholstery fabrics segment
designed to reduce costs, increase asset utilization, and improve profitability.
The restructuring plan includes consolidation of the company's velvet fabrics
manufacturing operations, additional fixed manufacturing cost reductions in the
decorative fabrics operation, and significant reductions in selling, general,
and administrative expenses within the upholstery fabrics segment. Another
element of the restructuring plan will be a substantial reduction in raw
material and finished goods stock keeping units or SKUs, to simplify
manufacturing processes, increase productivity and reduce inventories. The
company is in the process of relocating velvet production equipment from the
manufacturing facility in Burlington, North Carolina, to its other velvet plant
in Anderson, South Carolina, resulting in significant reduction of fixed
manufacturing costs. The Burlington facility will then be utilized as an
inspection and distribution facility for fabrics imported from offshore sources
and for finished goods warehousing of domestically produced upholstery fabrics.
The company has also combined its sales, design, and customer service activities
for Culp Decorative Fabrics and Culp Velvets/Prints, the two divisions within
the upholstery fabrics segment, and has closed its stand-alone design center,
also in Burlington. As a result, on June 30, 2005 the company sold two
buildings, both located in Burlington, consisting of approximately 140,000
square feet. Once fully implemented, these initiatives will significantly reduce
the company's selling, general, and administrative expenses. Overall, this
restructuring action will reduce the number of employees by 225 people,
representing approximately 17 percent of those in Culp's domestic upholstery
fabrics segment. The implementation of this restructuring initiative began in
early May, 2005 and is on schedule to be completed by August, 2005.
23
During fiscal 2005, the total restructuring and related charges incurred for
this restructuring initiative were $7.1 million, of which approximately $4.3
million related to write-downs of building and equipment, $1.9 million related
to employee termination costs, $874,000 related to accelerated depreciation
associated with the plant and equipment scheduled to be disposed of, either by
sale or by abandonment, and inventory mark-downs, and $47,000 related to lease
termination costs. As a result of this restructuring initiative, the company
expects to achieve annual savings of $11 million, of which approximately $6
million will come from lower selling, general and administrative costs and $5
million will come from lower fixed manufacturing costs.
Mattress Fabrics Segment
Net Sales -- For fiscal 2005, the mattress fabrics segment reported sales of
$105.4 million compared with $106.3 million for fiscal 2004. Mattress fabrics
sales represented approximately 37% of total sales for fiscal 2005, up from 33%
in fiscal 2004. Mattress ticking yards sold during fiscal 2005 were 45.0 million
compared with 43.0 million yards sold last fiscal year, an increase of 4.5%.
This increase in yards sold is noteworthy because it occurred as the bedding
industry completed the transition to selling predominantly one-sided mattresses,
which utilize about one-third less mattress ticking. This transition at retail
began in mid to late calendar year 2002 and affected sales on a comparable basis
through early calendar 2005. The average selling price for mattress ticking was
$2.33 per yard compared to $2.45 per yard last fiscal year, a decrease of 5.0%.
The mattress fabrics segment has faced a challenging pricing environment this
fiscal year. This has been due in part to the way customers buy ticking. There
is a current trend among mattress manufacturers toward using common SKU's and
less expensive fabric for borders, which is the ticking that goes on the side of
mattresses and box springs. In addition, mattress manufacturers are currently
incurring higher costs for other mattress components, such as steel, as well as
costs associated with flame retardant requirements. As a result of these
increased costs, mattress manufacturers are placing additional pressure on
mattress ticking prices, and in some instances manufacturers are moving to lower
priced ticking.
Operating income -- For fiscal 2005, the mattress fabrics segment reported
operating income of $9.4 million, or 8.9% of sales, compared with $15.0 million,
or 14.1% of sales, for fiscal 2004. During fiscal 2005, operating income was
affected by industry wide pricing pressure, as well as higher raw material costs
due primarily to the increased cost of petroleum based products. In addition to
these pressures, operating income was affected by lower margins on closeout
sales and manufacturing variances related to the relocation of mattress ticking
looms.
24
The company is taking aggressive steps to address the challenges facing its
business in this segment. First, the company has identified opportunities to
reduce operating costs by consolidating mattress ticking operations. This $7.0
million capital project involves relocation of ticking looms from an upholstery
fabric plant to existing ticking facilities in the U.S. and Canada and the
purchase of new weaving machines that are faster and more efficient than the
equipment they will replace. This transition is well underway and is expected to
be completed as planned by August 2005. More importantly, this transition is
expected to generate $4.5 million in annual savings. Second, to partially offset
higher material costs, the company implemented a price increase of approximately
three percent in this segment during the fourth quarter of this fiscal year.
Lastly, the company is placing more design emphasis on new products with higher
margins. Management believes the steps being taken will help this segment
improve operating margins.
Segment Assets-- Segment assets consist of accounts receivable, inventory and
property, plant and equipment. As of May 1, 2005, accounts receivable and
inventory totaled $25.0 million, compared to $24.6 million at the end of fiscal
2004. Also as of May 1, 2005, property, plant and equipment totaled $26.7
million, compared to $23.1 million at the end of fiscal 2004. Included in
property, plant and equipment are assets located in the U.S. totaling $12.2
million and $9.8 million at May 1, 2005 and May 2, 2004, respectively.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for fiscal 2005 decreased $30.7 million, or
14.5%, to $181.1 million from $211.8 million in fiscal 2004. Upholstery fabric
yards sold during fiscal 2005 were 42.4 million versus 49.6 million in fiscal
2004, a decline of 14.5%. Average selling price was $4.19 per yard for fiscal
2005 compared with $4.20 per yard in fiscal 2004.
The lower sales dollars and yards reflect continued soft demand industry wide
for U.S. produced fabrics, as the result of the current consumer preference for
leather and suede furniture and the growing competition from imported fabrics
and cut and sewn kits, primarily from China. This paradigm shift in the industry
is having a significant impact on the company's product mix, leading to
significantly lower sales of domestically produced fabrics and rapidly growing
sales of offshore manufactured and sourced products. Given these factors, it is
difficult for management to predict demand for upholstery fabric manufactured in
the U.S. or the extent to which the trend toward lower demand will continue.
The company has undertaken several initiatives to source and market upholstery
fabrics produced internationally, primarily in Asia. These measures are part of
the company's continuing efforts to meet consumer preferences for certain types
of fabrics, as well as to serve the growing segment of the company's customer
base that is establishing or expanding furniture production in international
areas. As a result of the company's production and offshore sourcing efforts,
including the China platform, the company is experiencing higher sales of
upholstery fabric products produced outside of the company's U.S. manufacturing
plants for fiscal 2005. For fiscal 2005, these sales increased 100.0% over the
prior year and accounted for approximately $31.3 million or 17.3% of upholstery
fabric sales in fiscal 2005. Fabric produced offshore of $15.6 million accounted
for approximately 7.4% of upholstery fabric sales for fiscal 2004. The growth in
offshore produced fabrics is a trend that is expected to continue.
25
A major component of the company's offshore business is its China operation,
which began manufacturing operations during the fourth quarter of fiscal 2004.
This initiative involves a strategy to link the company's existing customer
relationships, design expertise and production technology with low-cost fabric
manufacturing in China, while continuing to maintain high quality standards. The
company is currently leasing two facilities in the Shanghai region of China,
where fabrics sourced in Asia are inspected and tested to assure compliance with
the company's quality standards before shipment to its customers. In most cases,
additional value-added finishing steps are applied to the fabrics in China
before shipment. The company's offshore business represents a significant growth
opportunity in an increasing global furniture and fabrics market place. The
company's U.S. customers have continued to move an increasing amount of their
fabric purchases, including cut and sewn kits, to China, and the company is in
position to meet their fabric needs.
Operating income (loss) -- Operating loss for fiscal 2005 was $6.4 million or
3.6% of sales, compared with operating income of $6.8 million, or 3.2% of sales,
for fiscal 2004. This significant decrease in segment operating income as
compared to last year was primarily due to further underutilization of the
company's U.S. manufacturing capacity and manufacturing variances related to
restructuring activities. Additionally, the upholstery fabrics segment has been
experiencing higher raw material costs due mainly to the increase in cost of
petroleum based products.
During the fourth quarter of fiscal 2005, Solutia, which was the company's
supplier for acrylic fiber, exited the acrylic fiber business. In response to
this event, the company identified certain international suppliers as
alternative sources for procuring acrylic fiber. However, in transitioning away
from using Solutia, the company incurred higher fiber costs and increased
inventory levels. To partially offset higher raw material prices, the company
implemented a price increase of approximately three to four percent on
domestically produced upholstery fabrics.
As previously discussed, the company is currently implementing aggressive
restructuring initiatives to address the significant decline in operating profit
in this segment. The restructuring initiatives are moving ahead as planned and
management believes that the steps taken will improve operating efficiency and
will result in higher asset utilization. However, management will continue to
closely monitor trends in demand for upholstery fabrics produced by its domestic
mills. If sales in the upholstery fabrics segment of U.S.-produced goods
continue to decline and the segment is not able to produce acceptable levels of
operating profit, the company will take additional actions to adjust its cost
structure and capacity to match demand from its customers. The company could
experience additional write-downs of its property, plant and equipment in this
business if further restructuring actions or consolidations of assets take
place.
Segment Assets -- Segment assets consist of accounts receivable, inventory and
property, plant and equipment. As of May 1, 2005, accounts receivable and
inventory totaled $54.4 million, compared to $55.1 million at the end of fiscal
2004. Also as of May 1, 2005, property, plant and equipment totaled $39.3
million, compared to $54.6 million at the end of fiscal 2004. Included in
property, plant and equipment are assets located in the U.S. totaling $36.2
million and $51.5 million for May 1, 2005 and May 2, 2004, respectively. The
total of $36.2 million includes allocations of $5.3 million for the distribution
facility and design center, both of which were sold in June 2005, and various
other corporate allocations totaling $4.2 million.
Other Corporate Expenses
Selling, General and Administrative Expenses -- SG&A expenses of $35.4 million
for fiscal 2005 decreased $5.7 million, or 13.8%, from fiscal 2004. As a percent
of net sales, SG&A expenses decreased to 12.3% from 12.9% in fiscal 2004, due
mostly to lower incentive compensation expense and significant cost reductions,
mainly in the sales and marketing expense areas. The 13.8% spending decrease was
achieved despite significantly higher professional fees, which included
significant expenses incurred to comply with the requirements of the
Sarbanes-Oxley Act of 2002.
26
Interest Expense (Income) -- Interest expense for fiscal 2005 declined to $3.7
million from $5.5 million in fiscal 2004 due to lower borrowings outstanding.
Interest income decreased to $134,000 from $376,000 in fiscal 2004 due to lower
invested balances in fiscal 2005.
Income Taxes -- The effective tax rate (taxes as a percentage of pretax income
(loss)) for fiscal 2005 was 38.0% compared with 33.0% for fiscal 2004.
As of May 1, 2005, the company has net deferred income tax assets of $17.1
million, an increase of $12.0 million over net deferred income tax assets of
$5.1 million recorded at the fiscal year ended May 2, 2004. This increase
results primarily from the federal and state tax benefits recorded for the loss
from U.S. operations for fiscal 2005 (see note 9 in the Notes to Consolidated
Financial Statements).
2004 Compared with 2003
The company's net sales for fiscal 2004 decreased 6.3% to $318.1 million; and
the company reported net income of $7.2 million, or $0.61 per share diluted,
versus a net loss before cumulative effect of accounting change of $736,000, or
$0.06 per share diluted, in fiscal 2003. Including the cumulative effect of
accounting change, the company reported a loss of $2.17 per share diluted for
fiscal 2003. Restructuring credits of $1.0 million and an early extinguishment
of debt charge of $1.7 million were included in net income for fiscal 2004. In
addition, restructuring and related charges and credits of $15.9 million were
included in net loss for fiscal 2003.
The company reported substantial improvement in its consolidated balance sheet
by reducing long-term debt by $25.5 million during fiscal 2004, and ended the
year with $14.6 million in cash and cash equivalents.
Mattress Fabrics Segment
Net Sales -- Mattress ticking sales for fiscal 2004 increased $6.8 million, or
6.8%, to $106.3 million from $99.6 million in fiscal 2003, due principally to
overall improved industry demand and continued gains with key customers. The
6.8% fiscal year sales gain in this segment was especially noteworthy because it
occurred during the bedding industry's transition to selling predominantly
one-sided mattresses, which utilize approximately 30% less mattress ticking.
Mattress ticking yards sold during fiscal 2004 were 43.0 million compared with
39.9 million yards in the previous year, an increase of 7.8%. The average
selling price was $2.45 per yard for fiscal 2004, compared to $2.48 per yard in
fiscal 2003. This slight reduction in average selling price was due primarily to
greater participation in cash discount terms.
Operating income -- Operating income for fiscal 2004 was $15.0 million or 14.1%
of net sales, compared with operating income of $15.1 million or 15.2% of net
sales for fiscal 2003. This decrease in segment operating income compared to
last year was primarily due lower average selling prices offset by improved
operating efficiencies.
27
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for fiscal 2004 decreased $28.3 million, or
11.8%, to $211.8 million from $240.1 million in fiscal 2003, primarily
reflecting a decline in sales in the Culp Decorative Fabrics division related to
consumer preference for leather and competition from imported fabrics, including
cut and sewn kits, primarily from China.
Upholstery fabric yards sold during fiscal 2004 were 49.6 million versus 57.7
million in fiscal 2003, a decline of 14.0%. Average selling price was $4.20 per
yard for fiscal 2004 compared with $4.04 per yard in fiscal 2003, an increase of
4.0%, due primarily to higher average selling prices in the Culp Decorative
Fabrics division.
Operating income -- Operating income for fiscal 2004 was $6.8 million or 3.2% of
net sales, compared with operating income of $8.4 million or 3.5% of net sales.
This significant decrease in operating income as compared to fiscal 2003 was
primarily due to a decline in sales in the Culp Decorative Fabrics division
related to consumer preference for leather and competition from imported
fabrics, including cut and sewn kits, primarily from China.
The company substantially increased its offshore sourcing of fabrics in fiscal
2004, increasing the proportion of upholstery fabrics from offshore to 7.4%
compared to 4.1% in fiscal 2003. A major component of this offshore sourcing
effort is the company's China operation, which was announced in March 2003 and
began operations during the fourth quarter of fiscal 2004. As expected, the
company experienced moderate operating losses in its China operations in fiscal
2004.
Other Corporate Expenses
Selling, General and Administrative Expenses -- SG&A expenses were $41.0 million
for fiscal 2004 and increased $1.0 million, or 2.4%, from fiscal 2003. As a
percent of net sales, SG&A expenses increased to 12.9% from 11.8% in fiscal
2003. This increase over the prior year was due primarily to higher professional
fees coupled with lower sales. Additionally, SG&A expenses in fiscal 2003
included a credit to bad debt expense in the amount of $571,000 due to a
significant decrease in past due receivable balances.
Restructuring (Credit) Expense -- The fiscal 2004 $1.0 million restructuring
credit resulted from the adjustment of accrued employee benefit and other plant
closing costs related to the shutdown of the company's Chattanooga and Lumberton
operations. The fiscal 2003 $13.0 million restructuring expense represents $12.1
million of restructuring expenses related to CDF for lease termination expenses
and personnel costs, $1.3 million of restructuring expenses related to
write-downs of equipment in connection with the wet printed flock business by
CVP, offset by a restructuring credit of $354,000 for over accrued employee
benefit and plat security costs.
Interest Expense -- Interest expense for fiscal 2004 declined to $5.5 million
from $6.6 million due to significantly lower borrowings outstanding.
Interest Income -- Interest income for fiscal 2004 decreased to $376,000 from
$596,000 due to lower interest rates earned in fiscal 2004 and lower invested
balances.
Early Extinguishment of Debt -- The $1.7 million charge incurred in fiscal 2004
represents premium and fees paid to reduce the $75 million term loan balance.
28
Other Expense -- Other expense for fiscal 2004 totaled $750,000, compared with
$805,000 in fiscal 2003. The decrease was principally due to lower debt issue
amortization expenses.
Income Taxes -- The effective tax rate (taxes as a percentage of pretax income
(loss)) for fiscal 2004 was 33.0% compared with 67.9% for fiscal 2003. The
higher rate for the prior period reflects the increased tax benefits related to
the company's loss in the U.S. resulting from the restructuring charges recorded
in the second quarter of fiscal 2003.
Handling Costs
The company records warehousing costs in Selling, General & Administrative
expenses. These costs were $4.4 million, $4.6 million and $4.9 million in fiscal
2005, fiscal 2004 and fiscal 2003, respectively. Warehousing costs include the
operating expenses of the company's various finished goods distribution centers,
such as personnel costs, utilities, building rent and material handling
equipment lease expense. Had these costs been included in cost of sales, gross
profit would have been $21.8 million, or 7.6% in fiscal 2005, $53.7 million, or
16.8% in fiscal 2004 and $52.7 million, or 15.5% in fiscal 2003.
Liquidity and Capital Resources
The company's sources of liquidity include cash and cash equivalents, cash flow
from operations and amounts available under its revolving credit line. These
sources have been adequate for day-to-day operations and capital expenditures.
The company believes its sources of liquidity continue to be adequate to meet
its current needs. Cash and cash equivalents as of May 1, 2005 decreased to $5.1
million from $14.6 million at the end of fiscal 2004, primarily reflecting cash
flow from operations of $4.0 million, capital expenditures and payments on
vendor financed capital expenditures of $13.0 million, and payments on long-term
debt of $480,000.
Working Capital
Accounts receivable as of May 1, 2005 decreased 6.2% from May 2, 2004,
principally due to lower sales volume. The accounts payable balance as of May 1,
2005 increased 49.1% from May 2, 2004, primarily due to increased inventory
purchases and capital expenditures related to the mattress fabrics capital
project. Days sales outstanding totaled 35 days at May 1, 2005 and May 2, 2004.
Inventories at the end of the fiscal year increased 3.0% from a year ago.
Inventory turns for the year were 5.2 versus 5.3 for the year-earlier period.
Operating working capital (comprised of accounts receivable and inventories,
less trade accounts payable) was $56.5 million at May 1, 2005 down from $64.4
million at May 2, 2004.
Financing Arrangements
The company's long-term debt of $50.6 million is unsecured and is comprised of
$50.0 million in outstanding senior notes, with a fixed interest rate of 7.76%
(payable semi-annually in March and September), and a $575,000, non-interest
bearing term loan with the Canadian government. Additionally, the company has a
$10.0 million revolving credit line with a bank. Borrowings under the credit
facility generally bear interest at the London Interbank Offered Rate plus an
adjustable margin based on the company's debt/EBITDA ratio, as defined by the
agreement. As of May 1, 2005, there was $1.4 million in outstanding letters of
credit in support of inventory purchases and no borrowings outstanding under the
agreement. The current bank agreement expires in August 2005. The first
scheduled principal payment on the $50.0 million senior notes is due March 2006
in the amount of $7.5 million. The final payment on the Canadian government loan
is due during the Company's third quarter of fiscal 2006. The company was in
compliance with all financial covenants in its loan agreements as of May 1,
2005.
29
In February 2005, the company amended its bank agreement with its lender to
change the Interest and Leases Coverage Ratio such that at the end of each
Fiscal Quarter beginning with the third Fiscal Quarter of Fiscal Year 2005, the
Interest and Leases Coverage Ratio shall not be less than 1.25 to 1.0.
In December 2004, the company amended its bank agreement with its lender to
provide for, among other things, a reduced revolving loan commitment of $10.0
million from an existing commitment of $15.0 million, including new letters of
credits up to $2.5 million
Commitments
The following table summarizes the company's contractual payment obligations and
commitments (in thousands):
2006 2007 2008 2009 2010 Thereafter Total
--------- --------- --------- --------- -------- ---------- ---------
Capital expenditure
Commitments $ 2,848 $ - $ - $ - $ - $ - $ 2,848
Accounts payable -
capital expenditures 1,198 983 983 - - - 3,164
Operating leases(1) 3,894 2,926 1,661 395 104 6 8,986
Long-term debt 8,110 7,535 7,535 19,835 7,535 - 50,550
---------------------------------------------------------------------------------------------------
Total $ 16,050 $ 11,444 $ 10,179 $ 20,230 $ 7,639 $ 6 $ 65,548
---------------------------------------------------------------------------------------------------
Note: Payment Obligations by Fiscal Year Ending April
(1) Includes accrued restructuring expenses for the company's inactive
Chattanooga manufacturing facility of $869 for fiscal 2006, 2007, and
2008, respectively.
Capital Expenditures
Capital spending for fiscal 2005 was $14.4 million, including $1.5 million that
is the non-cash portion of capital expenditures representing vendor financing.
Also included in the $14.4 million was approximately $6.1 million in capital
spending for the purchase of a building that serves as the company's new
corporate offices and as new space for the company's showrooms. The company
expects the annual operating costs of the new building to be significantly lower
than the lease and related costs associated with the facilities that have been
replaced by this new building. Also included in the $14.4 million was $4.5
million in capital spending related to the mattress fabrics capital project.
Depreciation for fiscal 2005 was $18.9 million, of which approximately $6.0
million was related to accelerated depreciation associated with plant and
equipment that has been disposed of or is scheduled to be disposed of, either by
sale or abandonment, over the next three months. The company's capital budget
for fiscal 2006 is $4.5 million, including approximately $2.0 million budgeted
for the non-cash portion of expenditures representing vendor financing, which
relates to the mattress fabrics capital project.
Inflation
The cost of certain of the company's raw materials, principally fibers from
petroleum derivatives, and utility/energy costs, increased during fiscal 2005 as
oil and other energy prices increased and had an impact on the company's
financial results, although these increases have moderated in recent months.
These increases, however, are often not directly related to general economic
inflation, which has not been a material factor in the company's recent
financial results. Any significant increase in general economic inflation could
have a material adverse impact on the company, however, because competitive
conditions have limited the company's ability to pass significant operating cost
increases on to its customers.
30
Critical Accounting Policies
U.S. generally accepted accounting principles require the company to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Some of these estimates require
difficult, subjective and/or complex judgments about matters that are inherently
uncertain, and as a result actual results could differ significantly from those
estimates. Due to the estimation processes involved, management considers the
following summarized accounting policies and their application to be critical to
understanding the company's business operations, financial condition and results
of operations.
Accounts Receivable - Allowance for Doubtful Accounts. Substantially all of the
company's accounts receivable are due from residential and commercial furniture
and bedding manufacturers. Ownership of these manufacturers is increasingly
concentrated and certain bedding manufacturers have a high degree of leverage.
As of May 1, 2005, accounts receivable from furniture manufacturers totaled
approximately $18.2 million, and from bedding manufacturers approximately $10.6
million. Additionally, as of May 1, 2005, the aggregate accounts receivable
balance of the company's ten largest customers was $10.9 million, or 35.4% of
trade accounts receivable.
The company continuously performs credit evaluations of its customers,
considering numerous inputs including customers' financial position, past
payment history, cash flows and management capability; historical loss
experience; and economic conditions and prospects. Once evaluated, each customer
is assigned a credit grade. Credit grades are adjusted as warranted. Significant
management judgment and estimates must be used in connection with establishing
the reserve for allowance for doubtful accounts. While management believes that
adequate allowances for doubtful accounts have been provided in the consolidated
financial statements, it is possible that the company could experience
additional unexpected credit losses.
Inventory Valuation. The company operates as a "make-to-order" and
"make-to-stock" business. Although management closely monitors demand in each
product area to decide which patterns and styles to hold in inventory, the
increasing availability of low cost imports and the gradual shifts in consumer
preferences expose the company to write-downs of inventory.
Management continually examines inventory to determine if there are indicators
that the carrying value exceeds its net realizable value. Experience has shown
that the most significant indicator of the need for inventory write-downs is the
age of the inventory. As a result, the company provides inventory valuation
write-downs based upon set percentages for inventory aging categories, generally
using six, nine, twelve and fifteen month categories. While management believes
that adequate write-downs for excess and obsolete inventory have been made in
the consolidated financial statements, significant unanticipated changes in
demand or changes in consumer tastes and preferences could result in additional
excess and obsolete inventory in the future.
Long-lived Assets. The company follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes an impairment accounting model for long-lived assets to be held and
used, disposed of by sale, or disposed of by abandonment or other means.
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Unforeseen events and
changes in circumstances and market conditions could negatively affect the value
of assets and result in an impairment charge.
31
In fiscal 2005, the company prepared impairment evaluations on its Culp
Decorative Fabrics and Culp Velvets Prints divisions due to continued adverse
business results requiring further restructuring of both businesses. The
company's assessment indicated that the net undiscounted future operating cash
flows of these businesses were sufficient to recover the carrying amount of the
long-lived assets to be held and used.
The determination of future operating cash flows involves considerable
estimation and judgment about future market conditions, future sales and
profitability, and future asset utilization. Although the company believes it
has based the impairment testing on reasonable estimates and assumptions, the
use of different estimates and assumptions, or a decision to dispose of
substantial portions of these assets, could result in materially different
results.
Goodwill. As of April 29, 2002, Culp adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." For the initial application of SFAS No. 142, an independent
business valuation specialist was engaged to assist the company in the
determination of the fair market value of Culp Decorative Fabrics, one of the
company's two divisions within the upholstery fabric segment, because of the
significance of the goodwill associated with the division and due to its
operating performance. As a result of the adoption of SFAS No. 142, during the
first quarter of fiscal 2003, the company recorded a non-operating, non-cash
goodwill impairment charge of $37.6 million ($24.2 million net of taxes of $13.4
million), or $2.11 per share diluted, related to the goodwill associated with
the Culp Decorative Fabrics division.
In October 2004, due to lower than expected operating profits and cash flow for
the second quarter and year-to-date for fiscal 2005 in the Upholstery Fabrics
segment, management determined that the remaining goodwill associated with this
segment should be tested for impairment. An independent business valuation
specialist was once again engaged to assist the company in the valuation. As a
result of this valuation, the company recorded in its second quarter of fiscal
2005 a goodwill impairment charge of $5.1 million ($3.2 million net of taxes),
or $0.28 per share diluted.
As of May 1, 2005, the company's remaining $4.1 million of goodwill relates to
the Culp Home Fashions division.
The determination of fair value involves considerable estimation and judgment.
In particular, determining the fair value of a business unit involves, among
other things, developing forecasts of future cash flows and appropriate discount
rates. Although the company believes it has based the impairment testing on
reasonable estimates and assumptions, the use of different estimates and
assumptions could result in materially different results.
Restructuring Charges. In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS 146, a liability for a cost associated with an exit or disposal
activity shall be recognized and measured initially at its fair value in the
period in which the liability is incurred, except for certain employee
termination benefits that qualify under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
The upholstery fabric industry continues to be under significant pressure from a
variety of external forces, such as the current consumer preference for leather
and suede furniture and the growing competition from imported fabrics and cut
and sewn kits, primarily from China. In an effort to reduce operating expenses
and scale U.S. productive capacity in line with demand, the company has
undertaken restructuring initiatives during the past several years. These
restructuring initiatives have resulted in restructuring charges related to the
remaining lease costs of the closed facilities, the write-down of property,
plant and equipment, workforce reduction and elimination of facilities.
32
Severance and related charges are accrued at the date the restructuring was
approved by the board of directors based on an estimate of amounts that will be
paid to affected employees, in accordance with SFAS 112. Under SFAS 144, asset
impairment charges related to the consolidation or closure of manufacturing
facilities are based on an estimate of expected sales prices for the real estate
and equipment. Other exit costs, which principally consist of charges for lease
termination and losses from termination of existing contracts, equipment
relocation costs and inventory markdowns that are related to the restructuring
are accounted for in accordance with SFAS 146.
The company reassesses the individual accrual requirements at the end of each
reporting period. If circumstances change, causing current estimates to differ
from original estimates, adjustments are recorded in the period of change.
Restructuring charges, and adjustments of those charges, are summarized in note
2 to the consolidated financial statements.
Income Taxes. The company is required to estimate its actual current tax
exposure and to assess temporary differences resulting from differing treatment
of items for tax and accounting purposes. At May 1, 2005, the company had
deferred tax assets of $25,249,000 (all of which are related to U.S. operations)
and deferred tax liabilities of $8,109,000, resulting in net deferred tax assets
of $17,140,000. The U.S. deferred tax liabilities total $5,709,000 (all of which
reverse in the carry forward period), resulting in net U.S. deferred tax assets
of $19,540,000. No valuation allowance has been recorded to reduce the company's
deferred tax assets. Management has concluded that it is more likely than not
that the company will be able to realize the benefit of the deferred tax assets.
In making the judgment about the realization of the deferred tax assets,
management has considered both negative and positive evidence, and concluded
that sufficient positive evidence exists to overcome the cumulative losses
experienced in recent years. Specifically, management considered the following,
among other factors: nature of the company's products; history of positive
earnings in the mattress fabrics segment; capital projects in progress to
further enhance the company's globally competitive cost structure in the
mattress fabrics segment; recent significant restructuring actions in the
domestic upholstery fabrics business to adjust the domestic cost structure and
bring U.S. manufacturing capacity in line with demand; and development of
offshore manufacturing and sourcing programs to meet changing demands of
upholstery fabric customers in the U.S. Management's analysis of taxable income
also included the following considerations: none of the company's net operating
loss carryforwards has previously expired unused; the U.S. federal carryforward
period is 20 years; and the company's current losses principally expire in 17-20
years, fiscal 2022 through 2025.
Considerable judgment is involved in this process as ultimate realization of
benefits is dependent on the generation of income from future operations.
Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs, and amendment
of ARB No. 43, Chapter 4," which clarifies the types of costs that should be
expensed rather than capitalized as inventory. This statement also clarifies the
circumstances under which fixed overhead costs associated with operating
facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005 and the company will adopt this standard in fiscal 2007. Management has
not determined the impact, if any, that this statement will have on our
consolidated financial position or results of operations.
33
SFAS No. 123 (Revised 2004),"Share-Based Payment," issued in December 2004, is a
revision of FASB Statement 123, "Accounting for Stock-Based Compensation" and
supercedes APB Opinion No.25, "Accounting for Stock Issued to Employees," and
its related implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123 (Revised 2004) requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). That cost will be recognized over the period during
which an employee is required to provide service in exchange for the award. The
provisions of SFAS No.123 (Revised 2004) are effective for fiscal years
beginning after June 15, 2005 and the company will adopt this standard in fiscal
2007. Management has not determined the impact, if any, that this statement will
have on our consolidated financial position or results of operations.
In December 2004, the FASB issued Staff Position FAS 109-1, which provides
guidance on the application of SFAS No. 109, Accounting for Income Taxes, to the
provision within the American Jobs Creation Act of 2004 that provides a tax
deduction for qualified production activities. FAS 109-1 has not had, nor is it
expected to have, a material impact on our financial reporting or disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The company is exposed to market risk from changes in foreign currency exchange
rates. The company's market risk sensitive instruments are not entered into for
trading purposes. The company's exposure to floating debt interest rate risk was
eliminated in the fourth quarter of fiscal 2003 after its remaining industrial
revenue bonds were paid.
The company's exposure to fluctuations in foreign currency exchange rates is due
primarily to a foreign subsidiary domiciled in Canada and firmly committed and
anticipated purchases of certain machinery, equipment and raw materials in
foreign currencies. The company's Canadian subsidiary uses the United States
dollar as its functional currency. The company generally does not use financial
derivative instruments to hedge foreign currency exchange rate risks associated
with the Canadian subsidiary. However, the company generally enters into foreign
exchange forward and option contracts as a hedge against its exposure to
currency fluctuations on firmly committed and anticipated purchases of certain
machinery, equipment and raw materials. The amount of Canadian-denominated sales
and manufacturing costs is not material to the company's consolidated results of
operations; therefore, a 10% change in the exchange rate at May 1, 2005 would
not have a significant impact on the company's results of operations or
financial position. Additionally, as the company utilizes foreign currency
instruments for hedging anticipated and firmly committed transactions, a loss in
fair value for those instruments is generally offset by increases in the value
of the underlying exposure.
The company does have exposure to fluctuations in currency rates if China allows
their currency to float since it has been essentially fixed in relation to the
U.S. dollar. Currently, the risk cannot be hedged. The amount of sales and
manufacturing costs denominated in Chinese currency is not material to the
company's consolidated results of operations; therefore, a 10% change in the
exchange rate at May 1, 2005 would not have a significant impact on the
company's results of operations or financial position.
34
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Management's Report on Internal Control over Financial Reporting
To the Shareholders of
Culp, Inc.
High Point, North Carolina
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of management, including the
principal executive officer and principal financial officers, the Company
conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the Company's evaluation under that framework, management concluded
that the Company's internal control over financial reporting was effective as of
May 1, 2005. Management's assessment of the effectiveness of internal control
over financial reporting as of May 1, 2005 has been audited by KPMG LLP, the
Company's independent registered public accounting firm, as stated in their
reports which are included herein.
Robert G. Culp, III Franklin N. Saxon Kenneth R. Bowling
Chairman and Chief Executive President and Vice President, Finance and
Officer (principal executive Chief Operating Officer Treasurer
officer) (principal financial officer) (principal accounting officer)
June 28, 2005 June 28, 2005 June 28, 2005
35
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Culp, Inc.:
We have audited the accompanying consolidated balance sheets of Culp, Inc. and
subsidiaries (the Company) as of May 1, 2005 and May 2, 2004, and the related
consolidated statements of income (loss), shareholders' equity, and cash flows
for each of the years in the three-year period ended May 1, 2005. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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
subsidiaries as of May 1, 2005 and May 2, 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 1, 2005, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, in 2004, the
Company changed its method of accounting for inventories from the lower of
last-in, first-out (LIFO) cost or market to the lower of first-in, first-out
(FIFO) cost or market. As discussed in Note 1 to the consolidated financial
statements, in 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of May 1, 2005, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated June 28, 2005 expressed an unqualified opinion on management's assessment
of, and the effective operation of, internal control over financial reporting.
(signed) KPMG LLP
Greensboro, North Carolina
June 28, 2005
36
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
The Board of Directors and Shareholders
Culp, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Culp,
Inc. and subsidiaries (the Company) maintained effective internal control over
financial reporting as of May 1, 2005, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of May 1, 2005, is fairly stated,
in all material respects, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of May
1, 2005, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Culp, Inc. and subsidiaries as of May 1, 2005 and May 2, 2004, and the related
consolidated statements of income (loss), shareholders' equity, and cash flows
for each of the years in the three-year period ended May 1, 2005, and our report
dated June 28, 2005 expressed an unqualified opinion on those consolidated
financial statements.
(signed) KPMG LLP
Greensboro, North Carolina
June 28, 2005
37
CONSOLIDATED BALANCE SHEETS
May 1, 2005 and May 2, 2004 (dollars in thousands) 2005 2004
- --------------------------------------------------------------------------------------------
ASSETS
current
assets:
cash and cash equivalents $ 5,107 14,568
accounts receivable 28,824 30,719
inventories 50,499 49,045
deferred income taxes 7,054 9,256
other current assets 2,691 1,722
- --------------------------------------------------------------------------------------------
total current assets 94,175 105,310
property, plant & equipment, net 66,032 77,770
goodwill 4,114 9,240
deferred income taxes 10,086 0
other assets 1,716 1,496
- --------------------------------------------------------------------------------------------
total assets $ 176,123 193,816
- --------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt $ 8,110 528
accounts payable 22,852 15,323
accrued expenses 9,556 13,116
accrued restructuring costs 5,850 4,968
income taxes payable 1,544 1,850
- --------------------------------------------------------------------------------------------
total current liabilities 47,912 35,785
long-term debt, less current maturities 42,440 50,502
deferred income taxes 0 4,138
- --------------------------------------------------------------------------------------------
total liabilities 90,352 90,425
- --------------------------------------------------------------------------------------------
commitments and contingencies (note 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 11,550,759 at
May 1, 2005 and 11,546,634 at May 2, 2004 579 578
capital contributed in excess of par value 39,964 39,943
unearned compensation (139) (349)
retained earnings 45,367 63,219
- --------------------------------------------------------------------------------------------
total shareholders' equity 85,771 103,391
- --------------------------------------------------------------------------------------------
$ 176,123 193,816
- --------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
38
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended May 1, 2005, May 2, 2004 and April 27, 2003
(dollars in thousands, except per share data) 2005 2004 2003
- --------------------------------------------------------------------------------------------------------
net sales $ 286,498 318,116 339,646
cost of sales 260,341 259,794 282,073
- --------------------------------------------------------------------------------------------------------
gross profit 26,157 58,322 57,573
selling, general and administrative expenses 35,357 41,019 40,040
goodwill impairment 5,126 0 0
restructuring expense (credit) and asset impairments 10,372 (1,047) 12,981
- --------------------------------------------------------------------------------------------------------
income (loss) from operations (24,698) 18,350 4,552
interest expense 3,713 5,528 6,636
interest income (134) (376) (596)
early extinguishment of debt 0 1,672 0
other expense 517 750 805
- --------------------------------------------------------------------------------------------------------
income (loss) before income taxes (28,794) 10,776 (2,293)
income taxes (10,942) 3,556 (1,557)
- --------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of accounting change (17,852) 7,220 (736)
cumulative effect of accounting change 0 0 (24,151)
- --------------------------------------------------------------------------------------------------------
net income (loss) $ (17,852) 7,220 (24,887)
- --------------------------------------------------------------------------------------------------------
basic income (loss) per share:
- --------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of accounting change $ (1.55) 0.63 (0.06)
cumulative effect of accounting change 0.00 0.00 (2.11)
- --------------------------------------------------------------------------------------------------------
net income (loss) $ (1.55) 0.63 (2.17)
- --------------------------------------------------------------------------------------------------------
diluted income (loss) per share:
- --------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of accounting change $ (1.55) 0.61 (0.06)
cumulative effect of accounting change 0.00 0.00 (2.11)
- --------------------------------------------------------------------------------------------------------
net income (loss) $ (1.55) 0.61 (2.17)
- --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
39
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
capital accumulated
common common contributed other total
For the years ended May 1, 2005, stock stock in excess of unearned retained comprehensive shareholders'
May 2, 2004 and April 27, 2003 shares amount par value compensation earnings income equity
- -----------------------------------------------------------------------------------------------------------------------------
balance, April 28, 2002 11,319,584 $ 566 38,375 (769) 80,886 7 119,065
net loss (24,887) (24,887)
net loss on cash flow hedges (7) (7)
stock-based compensation 210 210
common stock issued in connection
with stock option plans 195,875 10 1,374 1,384
- -----------------------------------------------------------------------------------------------------------------------------
balance, April 27, 2003 11,515,459 576 39,749 (559) 55,999 0 95,765
net income 7,220 7,220
stock-based compensation 210 210
common stock issued in connection
with stock option plans 31,175 2 194 196
- -----------------------------------------------------------------------------------------------------------------------------
balance, May 2, 2004 11,546,634 578 39,943 (349) 63,219 0 103,391
net loss (17,852) (17,852)
stock-based compensation 210 210
common stock issued in connection
with stock option plans 4,125 1 21 22
- -----------------------------------------------------------------------------------------------------------------------------
balance, May 1, 2005 11,550,759 $ 579 39,964 (139) 45,367 0 85,771
- -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
40
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended May 1, 2005, May 2, 2004, and April 27, 2003
(dollars in thousands) 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
cash flows from operating activities:
net income (loss) $ (17,852) 7,220 (24,887)
adjustments to reconcile net income (loss) to net cash
provided by operating activities:
cumulative effect of accounting change 0 0 24,151
depreciation 18,884 13,642 13,990
amortization of other assets 130 173 457
stock-based compensation 210 210 210
goodwill impairment 5,126 0 0
deferred income taxes (12,022) 3,334 (2,507)
restructuring expense (credit) 10,372 (1,047) 12,981
changes in assets and liabilities:
accounts receivable 1,895 1,540 11,107
inventories (1,454) 507 8,347
other current assets (969) 1,482 763
other assets 67 607 366
accounts payable 6,251 (951) (8,558)
accrued expenses (3,560) (955) (2,126)
accrued restructuring (2,800) (1,911) (3,514)
income taxes payable (306) 1,501 349
- ---------------------------------------------------------------------------------------------------------------------
net cash provided by operating activities 3,972 25,352 31,129
- ---------------------------------------------------------------------------------------------------------------------
cash flows from investing activities:
capital expenditures (11,448) (5,976) (6,830)
purchases of short-term investments 0 (17,282) (10,043)
proceeds from the sale of short-term investments 0 27,325 0
- ---------------------------------------------------------------------------------------------------------------------
net cash (used in) provided by investing activities (11,448) 4,067 (16,873)
- ---------------------------------------------------------------------------------------------------------------------
cash flows from financing activities:
payments on vendor-financed capital expenditures (1,527) (3,932) (1,294)
payments on long-term debt (480) (25,470) (31,984)
proceeds from common stock issued 22 196 1,384
- ---------------------------------------------------------------------------------------------------------------------
net cash used in financing activities (1,985) (29,206) (31,894)
- ---------------------------------------------------------------------------------------------------------------------
increase (decrease) in cash and cash equivalents (9,461) 213 (17,638)
cash and cash equivalents at beginning of year 14,568 14,355 31,993
- ---------------------------------------------------------------------------------------------------------------------
cash and cash equivalents at end of year $ 5,107 14,568 14,355
- ---------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
41
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 subsidiaries, which are wholly-owned.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Description of Business - The company manufactures and markets upholstery
fabrics and mattress fabrics ("ticking") primarily for the furniture and
bedding industries, with the majority of its business conducted in North
America.
Fiscal Year - The company's fiscal year is the 52 or 53 week period ending
on the Sunday closest to April 30. Fiscal 2005, 2004, and 2003 included 52,
53, and 52 weeks, respectively.
Cash and Cash Equivalents - Cash and cash equivalents include demand
deposit and money market accounts. For purposes of the consolidated
statements of cash flows, the company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents.
Accounts Receivable - Substantially all of the company's accounts
receivable are due from manufacturers in the furniture and bedding
industries. The company grants credit to customers, a substantial number of
which are located in North America and generally does not require
collateral. Management continuously performs credit evaluations of its
customers, considering numerous inputs including financial position, past
payment history, cash flows, management ability, historical loss experience
and economic conditions and prospects. While management believes that
adequate allowances for doubtful accounts have been provided in the
consolidated financial statements, it is possible that the company could
experience additional unexpected credit losses. The company does not have
any off- balance sheet credit exposure related to its customers.
Inventories - Prior to the fourth quarter of fiscal 2004, principally all
inventories were valued at the lower of last-in, first-out (LIFO) cost or
market. During the fourth quarter of fiscal 2004, the company changed its
method of accounting for inventories to the lower of first-in, first-out
(FIFO) cost or market. The change in accounting principle was made to
provide a better matching of revenue and expenses. Additionally, the change
will enable the financial reporting to parallel the way management assesses
the financial and operational performance of the company's segments. The
fiscal 2003 consolidated financial statements, including interim periods,
have not been restated as the effect of the change was immaterial.
Management continually examines inventory to determine if there are
indicators that the carrying value exceeds its net realizable value.
Experience has shown that the most significant indicator of the need for
inventory write-downs is the age of the inventory. As a result, the company
provides inventory valuation write-downs based upon set percentages for
inventory aging categories, generally using six, nine and twelve month
categories. While management believes that adequate write-downs for
inventory obsolescence have been made in the consolidated financial
statements, consumer tastes and preferences will continue to change and the
company could experience additional inventory write-downs in the future.
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 (loss).
Management reviews long-lived assets, which consist principally of
property, plant and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recovered. Recoverability of long-lived assets to be held and used is
measured by a comparison of the carrying amount of the asset to future net
undiscounted cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the excess of the carrying amount over
the fair value of the asset. Assets to be disposed of by sale are reported
at the lower of the carrying value or fair value less cost to sell when the
company has committed to a disposal plan.
42
Interest costs of $212,000, $50,000 and $74,000 incurred during the years
ended May 1, 2005, May 2, 2004, and April 27, 2003, respectively, for the
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 and Chinese subsidiaries. Translation
losses for the Canadian subsidiary of $158,000, $153,000 and $60,000 are
included in the other expense line item in the Consolidated Statements of
Income (Loss) for the fiscal years ended May 1, 2005, May 2, 2004, and
April 27, 2003, respectively.
Goodwill - The company adopted SFAS 142, Goodwill and Other Intangible
Assets, effective April 29, 2002. SFAS No. 142 requires that goodwill no
longer be amortized and that goodwill be tested for impairment by comparing
each reporting unit's carrying value to its fair value. SFAS No. 142
requires that any goodwill impairment loss recognized as a result of
initial application be reported as a change in accounting principle, and
that the loss per share effects of the accounting change be separately
disclosed. As required by the standard, the company ceased recording
goodwill amortization for fiscal 2003.
For the initial application of SFAS No. 142, an independent business
valuation specialist was engaged to assist the company in the determination
of the fair market value of Culp Decorative Fabrics (CDF), one of the
company's two divisions within the upholstery segment, because of the
significance of the goodwill associated with the division and due to its
operating performance for fiscal 2002 and 2001. The fair value of the CDF
division, determined using several different methods, including comparable
companies, comparable transactions and discounted cash flow analysis, was
less than the carrying value. Accordingly, the company recorded a goodwill
impairment charge of $37.6 million ($24.2 million net of taxes of $13.4
million), or $2.11 per share diluted, related to the goodwill associated
with the CDF division. After the initial application of SFAS No. 142, the
company's remaining goodwill related to the following divisions: Culp
Decorative Fabrics - $5.1 million and Culp Home Fashions - $4.1 million.
Due to continued adverse business conditions the Culp Decorative Fabrics
division within the upholstery fabrics segment experienced operating
profits and cash flows in the second quarter of 2005 significantly lower
than expected. As a result, management determined that the goodwill
associated with the segment should be tested for impairment in accordance
with the provisions of SFAS No. 142. An independent business valuation
specialist was engaged to assist the company in the determination of the
fair market value of the upholstery fabrics segment. The fair value of CDF,
determined using several different methods, including comparable companies,
comparable transactions, and discounted cash flow analysis, was less than
the carrying value. Accordingly the company recorded a goodwill impairment
charge of $5.1 million ($3.2 million net of taxes of $1.9 million), or
$0.28 per share diluted in the second quarter of fiscal 2005, related to
the goodwill associated with the upholstery fabrics segment. After this
goodwill impairment charge, the company's remaining goodwill of $4.1
million relates to the mattress fabrics segment.
The company updated its goodwill impairment test as of May 1, 2005 for its
mattress fabrics segment. This updated impairment test, which was prepared
by the company, did not indicate any impairment of goodwill. The
determination of fair value involves considerable estimation and judgment.
In particular, determining the fair value of a business unit involves,
among other things, developing forecasts of future cash flows and
appropriate discount rates. Although the company believes it has based the
impairment testing on reasonable estimates and assumptions, the use of
different estimates and assumptions could result in materially different
results.
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred taxes are recognized for 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 (loss) in the period that includes the enactment date.
43
No provision is made for income taxes which may be payable if undistributed
income of the company's foreign subsidiaries were to be paid as dividends
to the company, since the company intends that such earnings will continue
to be invested. The company has determined that no amounts will be remitted
under the foreign earnings repatriation provision of the American Jobs
Creation Act of 2004. At May 1, 2005, the amount of such undistributed
income was $36.1 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 upon shipment, when title and
risk of loss pass to the customer. Provision is made currently for
estimated product returns, claims and allowances. Management considers
historical claims and return experience, among other things, when
establishing the allowance for returns and allowances. While management
believes that adequate allowance has been established for returns and
allowances, it is possible that the company could experience levels higher
than provided for in the consolidated financial statements.
Shipping and Handling Costs - Revenue received for shipping and handling
costs, which is immaterial for all periods presented, is included in net
sales. Shipping costs, principally freight, that comprise payments to
third-party shippers are classified as cost of sales. Handling costs, which
consist principally of finished goods warehousing costs in the company's
various distribution facilities, were $4.4 million, $4.6 million and $4.9
million in 2005, 2004 and 2003, respectively, and are included in selling,
general and administrative expenses.
Stock-Based Compensation - Compensation costs related to employee stock
option plans are recognized utilizing the intrinsic value-based method
prescribed by APB No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. The company has adopted the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148. Accordingly, compensation cost is recorded over
the vesting period of the options based upon the difference in option price
and fair market price at the date of grant, if any. The company's
stock-based compensation plans are described more fully in note 12 to the
consolidated financial statements.
The following table illustrates the effect on net income (loss) and income
(loss) per share if the company had applied the fair value recognition
provisions of SFAS No. 123 for the past three fiscal years:
(dollars in thousands, except per share data) 2005 2004 2003
- -------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ (17,852) 7,220 (24,887)
Add: Total stock-based employee compensation
expense included in net income (loss), net of tax 132 141 67
Deduct: Total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of tax 506 456 225
- -------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ (18,226) 6,905 (25,045)
- -------------------------------------------------------------------------------------------------------
Income (loss) per share:
Basic - as reported $ (1.55) 0.63 (2.17)
Basic - pro forma (1.58) 0.60 (2.19)
Diluted - as reported $ (1.55) 0.61 (2.17)
Diluted - pro forma (1.58) 0.59 (2.19)
- -------------------------------------------------------------------------------------------------------
Fair Value of Financial Instruments - The carrying amount of cash and cash
equivalents, accounts receivable, other current assets, accounts payable
and accrued expenses approximates fair value because of the short maturity
of these financial instruments.
44
The fair value of the company's long-term debt is estimated by discounting
the future cash flows at rates currently offered to the company for similar
debt instruments of comparable maturities. At May 1, 2005, the carrying
value of the company's long-term debt is $50.6 million and the fair value
is $49.7 million. At May 1, 2004, the carrying value of the company's
long-term debt was $51.0 million and the fair value was $53.7 million.
Use of Estimates - The preparation of financial statements in conformity
with U.S. 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.
Reclassifications - Certain items in the 2004 consolidated financial
statements have been reclassified to conform with current year
presentation.
2. RESTRUCTURING AND ASSET IMPAIRMENT
A summary of accrued restructuring follows:
- -------------------------------------------------------------------------------------
(dollars in thousands) May 1, 2005 May 2, 2004
- -------------------------------------------------------------------------------------
April 2005 Upholstery Fabrics $ 1,944 $ 0
October 2004 Upholstery Fabrics 309 0
Fiscal 2003 Culp Decorative Fabrics 3,587 4,834
Fiscal 2002 Wet Printed Flock 0 100
Fiscal 2001 Culp Decorative Fabrics 10 34
- -------------------------------------------------------------------------------------
$ 5,850 $ 4,968
- -------------------------------------------------------------------------------------
April 2005 Upholstery Fabrics
In April 2005, management and the company's board of directors approved a
restructuring plan within the upholstery fabrics segment designed to reduce
costs, increase asset utilization, and improve profitability. The
restructuring plan includes consolidation of the company's velvet fabrics
manufacturing operations, additional fixed manufacturing cost reductions in
the decorative fabrics operation, and significant reductions in selling,
general, and administrative expenses within the upholstery fabrics segment.
Another element of the restructuring plan will be a substantial reduction
in raw material and finished goods stock keeping units or SKUs, to simplify
manufacturing processes, increase productivity and reduce inventories. The
company will be relocating velvet production equipment from the
manufacturing facility in Burlington, North Carolina, to its other velvet
plant in Anderson, South Carolina, resulting in significant reduction of
fixed manufacturing costs. The Burlington facility will then be utilized as
an inspection and distribution facility for fabrics imported from offshore
sources and for finished goods warehousing of domestically produced
upholstery fabrics. The company also will combine its sales, design, and
customer service activities for Culp Decorative Fabrics and Culp
Velvets/Prints, the two divisions within the upholstery fabrics segment. As
a result, on June 30, 2005, the company sold two buildings in Burlington
consisting of approximately 140,000 square feet for proceeds of $2,850,000.
These initiatives will significantly reduce the company's selling, general,
and administrative expenses. Overall, these restructuring actions will
reduce the number of associates by 225 people, representing approximately
17 percent of Culp's domestic upholstery fabrics segment employees.
During fiscal 2005, the total restructuring and related charges incurred
were $7.1 million, of which approximately $4.3 million related to
write-downs of building and equipment, $1.9 million related to employee
termination costs, $874,000 related to accelerated depreciation associated
with the plant and equipment scheduled to be disposed of, either by sale or
by abandonment, and inventory mark-downs, and $47,000 related to lease
termination costs. Of the total charge, $6.2 million was recorded in
restructuring expense in the 2005 Consolidated Statement of Income(Loss);
$761,000 related to accelerated depreciation and inventory mark-downs was
recorded in cost of sales in the 2005 Consolidated Statement of
Income(Loss); and $113,000 related to accelerated depreciation was recorded
in selling, general, and administrative expenses in the 2005 Consolidated
Statement of Income (Loss).
45
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
----------------------------------------------------------------------------------------------------
Employee Lease Termination
Termination and Other Exit
Benefits Costs Total
----------------------------------------------------------------------------------------------------
Accrual established in fiscal 2005 $ 1,897 47 1,944
Paid in fiscal 2005 0 0 0
----------------------------------------------------------------------------------------------------
Balance May 1, 2005 $ 1,897 47 1,944
----------------------------------------------------------------------------------------------------
As of May 1, 2005, assets classified as held for sale consisted of
machinery and equipment with a value of $198,000 and are included in other
assets.
The company expects these restructuring activities to result in charges of
approximately $4.5 million in fiscal 2006. The $4.5 million in charges are
expected to consist of accelerated depreciation of $3.5 million, $500,000
in dismantling, moving, and relocation of equipment to other company
facilities, and $500,000 in contract termination costs.
October 2004 Upholstery Fabrics
In October 2004, management and the company's board of directors approved a
restructuring plan within the upholstery fabrics segment aimed at reducing
costs, increasing asset utilization and improving profitability. Due to
continued pressure on demand in this segment, management decided to further
adjust the company's cost structure and bring U.S. manufacturing capacity
in line with current and expected demand. The restructuring plan
principally involved consolidation of the company's decorative fabrics
weaving operations by closing Culp's facility in Pageland, South Carolina,
and consolidating those operations into the Graham, North Carolina
facility. Additionally, the company consolidated its yarn operations by
integrating the production of the Cherryville, North Carolina plant into
the company's Shelby, North Carolina facility. Another element of the
restructuring plan was a substantial reduction in certain raw material and
finished goods stock keeping units, or SKUs, to reduce manufacturing
complexities and lower costs, with the ongoing objective of identifying and
eliminating products that are not generating acceptable volumes of margins.
Finally, the company made reductions in selling, general, and
administrative expenses. Overall, these restructuring actions reduced the
number of associates by approximately 250 people, representing
approximately 14 percent of Culp's upholstery fabrics segment employees.
During fiscal 2005, the total restructuring and related charges incurred
were $16.3 million, of which approximately $6.8 million related to
accelerated depreciation associated with the plant and equipment scheduled
to be disposed of, either by sale or by abandonment, and inventory
mark-downs, $5.1 million of goodwill impairment, which represents all of
the remaining goodwill associated with the upholstery fabrics segment, $2.4
million related to the dismantling, moving, and relocation of equipment to
other company facilities, $1.3 million related to write-downs of buildings
and equipment, and $722,000 related to employee termination costs. Of the
total charge, $4.4 million was recorded in restructuring expense the 2005
Consolidated Statement of Income(Loss); and $6.8 million related to
accelerated depreciation and inventory mark-downs was recorded in cost of
sales in the 2005 Consolidated Statement of Income(Loss).
46
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
-------------------------------------------------------------------------------------------------
Employee Lease Termination
Termination and Other Exit
Benefits Costs Total
-------------------------------------------------------------------------------------------------
Accrual established in fiscal 2005 $ 1,305 0 1,305
Adjustments in fiscal 2005 (583) 0 (583)
Paid in fiscal 2005 (413) 0 (413)
-------------------------------------------------------------------------------------------------
Balance May 1, 2005 $ 309 0 309
-------------------------------------------------------------------------------------------------
As of May 1, 2005, assets classified as held for sale consisted of
machinery and equipment with a value of $165,000 and are included in other
assets.
The company expects these restructuring activities to result in charges of
approximately $700,000 in fiscal 2006. The $700,000 in charges are expected
to consist of dismantling, moving, and relocation of equipment to other
company facilities.
Fiscal 2003 CDF Restructuring
In August 2002, management and the company's board of directors approved a
restructuring plan within the Culp Decorative Fabrics division aimed at
lowering manufacturing costs, simplifying the dobby fabric upholstery line,
increasing asset utilization and enhancing the division's manufacturing
competitiveness. The restructuring plan principally involved (1)
consolidation of the division's weaving, finishing, yarn making and
distribution operations by closing the facility in Chattanooga, Tennessee
and integrating these functions into other plants, (2) a significant
reduction in the number of stock keeping units (SKUs) offered in the dobby
product line and (3) a net reduction in workforce of approximately 300
positions. During fiscal 2003, the total restructuring and related charges
incurred were $15.0 million, of which approximately $4.1 million
represented non-cash items, including $2.8 million in impairment of
property, plant and equipment and $1.3 million in inventory write-downs. Of
the total charge, $12.0 million was recorded in restructuring expense in
the 2003 Consolidated Statement of Income (Loss); and $1.3 million, related
to inventory write-downs, and $1.7 million, related to equipment moving and
relocation expense, were recorded in cost of sales in the 2003 Consolidated
Statement of Income (Loss).
During fiscal 2004, as a result of management's continual evaluation of the
restructuring accrual, the reserve was increased $178,000 to reflect
current estimates of future health care claims and decreased $684,000 to
reflect current estimates of remaining lease expenses and other exit costs.
Additionally, the company recorded a restructuring charge of $8,000
representing a non-cash impairment of equipment.
During fiscal 2005, the accrual was reduced $214,000 in employee
termination benefits to reflect the current estimates of future health care
claims and reduced $169,000 in lease termination and other exit costs to
reflect current estimates of sub-lease income.
47
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
---------------------------------------------------------------------------------------------
Employee Lease Termination
Termination and Other Exit
Benefits Costs Total
---------------------------------------------------------------------------------------------
Accrual established in fiscal 2003 $ 1,972 7,194 9,166
Paid in fiscal 2003 (1,228) (949) (2,177)
---------------------------------------------------------------------------------------------
Balance April 27, 2003 744 6,245 6,989
Adjustments in fiscal 2004 178 (684) (506)
Paid in fiscal 2004 (422) (1,227) (1,649)
---------------------------------------------------------------------------------------------
Balance May 2, 2004 500 4,334 4,834
Adjustments in fiscal 2005 (214) (169) (383)
Paid in fiscal 2005 (86) (778) (864)
---------------------------------------------------------------------------------------------
Balance May 1, 2005 $ 200 3,387 3,587
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
As of May 1, 2005 and May 2, 2004 there were no assets classified as held
for sale related to the 2003 CDF restructuring.
Wet Printed Flock Restucturing
In April 2002, management and the company's board of directors approved a
plan to exit the wet printed flock upholstery fabric business. The exit
plan involved closing a printing facility and flocking operation within the
Culp Velvets/Prints division, reduction in related selling and
administrative expenses and termination of 86 employees. The total charge
for the exit plan was $9.7 million, of which approximately $8.2 million
represented non-cash items, including $7.6 million in impairment of
property, plant and equipment and $619,000 in inventory write-downs.
During fiscal 2003, an additional restructuring expense of $1.3 million was
recorded for the non-cash write-down of assets to reflect the deterioration
in market value experienced since April 2002. Due to management's continual
evaluation of the restructuring accrual, the reserve was reduced $313,000
to reflect current estimates of future health care claims. Additionally,
the reserve was reduced $42,000 to reflect current estimates of future
security expenses and other costs.
During fiscal 2004, due to management's continual evaluation of the
restructuring accrual, the reserve was reduced $101,000 to reflect current
estimates of employee termination benefits and future health care claims
and reduced $277,000 to reflect current estimates of other exit costs. The
company also recognized a restructuring credit of $171,000 related to the
sale of assets classified as held for sale in connection with the
restructuring.
During the first quarter fiscal 2005, assets held for sale consisting of
land and a building valued at $180,000 in the other assets line of the May
2, 2004 Consolidated Balance Sheet were sold, resulting in a restructuring
credit of $54,000. An additional restructuring credit of $84,000 was
recognized relating to the write-off of the remaining reserve balance,
which consisted of building exit costs.
48
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
-------------------------------------------------------------------------------------------------------
Employee Lease Termination
Termination and Other Exit
Benefits Costs Total
-------------------------------------------------------------------------------------------------------
Balance April 28, 2002 $ 837 605 1,442
Adjustments in fiscal 2003 (313) (42) (355)
Paid in fiscal 2003 (428) (116) (544)
-------------------------------------------------------------------------------------------------------
Balance April 27, 2003 96 447 543
Adjustments in fiscal 2004 (101) (277) (378)
Paid in fiscal 2004 5 (70) (65)
-------------------------------------------------------------------------------------------------------
Balance May 2, 2004 0 100 100
Adjustments in fiscal 2005 0 (84) (84)
Paid in fiscal 2005 0 (16) (16)
-------------------------------------------------------------------------------------------------------
Balance May 1, 2005 $ 0 0 0
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
Fiscal 2001 CDF Restructuring
During fiscal 2001, management and the company's board of directors
approved a restructuring plan in its upholstery fabric segment which
involved (1) the consolidation of certain fabric manufacturing capacity
within the Culp Decorative Fabrics (CDF) division, (2) closing one of the
company's four yarn manufacturing plants, (3) an extensive reduction in
selling, general and administrative expenses including the termination of
110 employees and (4) a comprehensive SKU reduction initiative related to
finished goods and raw materials in CDF. The 2001 charge from the
restructuring and related costs was $7.4 million, approximately $3.4
million of which represented non-cash items, including $2.5 million in
impairment of property, plant and equipment and $874,000 in inventory
write-downs. The 2002 charge from restructuring and related expenses was
$2.5 million, approximately $160,000 of which represented the non-cash
impairment of property, plant and equipment.
During fiscal 2003, as a result of management's continual evaluation of the
restructuring accrual, the reserve was reduced $275,000 to reflect current
estimates of future health care claims and increased $276,000 to reflect
current estimates of remaining lease expenses, property taxes, insurance
and other exit costs.
During fiscal 2004, as a result of management's continual evaluation of the
restructuring accrual, the reserve was increased $33,000 to reflect current
estimates of future health care claims and reduced $32,000 to reflect
current estimates of other exit costs.
During fiscal 2005, the reserve was reduced $12,000 to reflect current
estimates of future health care claims.
49
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
-------------------------------------------------------------------------------------------
Employee Lease Termination
Termination and Other Exit
Benefits Costs Total
-------------------------------------------------------------------------------------------
Balance April 28, 2002 $ 512 491 1,003
Adjustments in fiscal 2003 (275) 276 1
Paid in fiscal 2003 (202) (591) (793)
-------------------------------------------------------------------------------------------
Balance April 27, 2003 35 176 211
Adjustments in fiscal 2004 33 (32) 1
Paid in fiscal 2004 (34) (144) (178)
-------------------------------------------------------------------------------------------
Balance May 2, 2004 34 0 34
Adjustments in fiscal 2005 (12) 0 (12)
Paid in fiscal 2005 (12) 0 (12)
-------------------------------------------------------------------------------------------
Balance May 1, 2005 $ 10 0 10
-------------------------------------------------------------------------------------------
As of May 1, 2005 and May 2, 2004, there were no assets classified as held
for sale related to the fiscal 2001 CDF restructuring.
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
May 1, May 2,
(dollars in thousands) 2005 2004
- -------------------------------------------------------------------------------------------------
customers $ 30,803 33,064
allowance for doubtful accounts (1,142) (1,442)
reserve for returns and allowances and discounts (837) (903)
- -------------------------------------------------------------------------------------------------
$ 28,824 30,719
- -------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2005 2004 2003
- -------------------------------------------------------------------------------------------------
beginning balance (1,442) (1,558) (2,465)
provision for bad debt 272 (139) 570
net write-offs 28 255 337
- -------------------------------------------------------------------------------------------------
ending balance (1,142) (1,442) (1,558)
- --------------------------------------------------------------------------------------------------
4. INVENTORIES
A summary of inventories follows:
May 1, May 2,
(dollars in thousands) 2005 2004
- -------------------------------------------------------------------------------------------------
raw materials $ 23,204 21,015
work-in-process 3,000 2,489
finished goods 24,295 25,541
- -------------------------------------------------------------------------------------------------
$ 50,499 49,045
- -------------------------------------------------------------------------------------------------
50
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
depreciable lives May 1, May 2,
(dollars in thousands) (in years) 2005 2004
-------------------------------------------------------------------------------------------------
land and improvements 10 $ 2,779 2,319
buildings and improvements 7-40 30,798 32,849
leasehold improvements 7-10 1,954 1,265
machinery and equipment 3-12 134,179 168,078
office furniture and equipment 3-10 8,463 9,849
capital projects in progress 4,880 3,690
-------------------------------------------------------------------------------------------------
183,053 218,050
accumulated depreciation and amortization (117,021) (140,280)
-------------------------------------------------------------------------------------------------
$ 66,032 77,770
-------------------------------------------------------------------------------------------------
The company incurred total capital expenditures of $14,360,000 $6,747,000
and $12,229,000 in fiscal years 2005, 2004 and 2003, respectively. The
non-cash portion of these capital expenditures representing vendor
financing totaled $1,523,000, $331,000 and $5,366,000 in fiscal years 2005,
2004 and 2003, respectively.
6. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands) 2005 2004 2003
-------------------------------------------------------------------------------------------------
beginning balance $ 9,240 9,240 9,240
impairment charge (5,126) 0 0
-------------------------------------------------------------------------------------------------
ending balance $ 4,114 9,240 9,240
-------------------------------------------------------------------------------------------------
7. ACCOUNTS PAYABLE
A summary of accounts payable follows:
May 1, May 2,
(dollars in thousands) 2005 2004
-------------------------------------------------------------------------------------------------
accounts payable - trade $ 19,688 13,438
accounts payable - capital expenditures 3,164 1,885
-------------------------------------------------------------------------------------------------
$ 22,852 15,323
-------------------------------------------------------------------------------------------------
8. ACCRUED EXPENSES
A summary of accrued expenses follows:
May 1, May 2,
(dollars in thousands) 2005 2004
-------------------------------------------------------------------------------------------------
compensation, commissions and related benefits $ 5,483 8,040
interest 448 459
accrued rebates 1,444 2,258
other 2,181 2,359
-------------------------------------------------------------------------------------------------
$ 9,556 13,116
-------------------------------------------------------------------------------------------------
51
9. INCOME TAXES
Total income taxes (benefits) were allocated as follows:
(dollars in thousands) 2005 2004 2003
-------------------------------------------------------------------------------------------------
income (loss) from continuing operations $ (10,942) 3,556 (1,557)
cumulative effect of accounting change 0 0 (13,429)
shareholders' equity, related to
the tax benefit arising from the
exercise of stock options (4) (60) (402)
-------------------------------------------------------------------------------------------------
$ (10,946) 3,496 (15,388)
-------------------------------------------------------------------------------------------------
Income tax expense (benefit) attributable to income (loss) from continuing
operations consists of:
(dollars in thousands) 2005 2004 2003
-------------------------------------------------------------------------------------------------
current
federal $ 0 0 350
state 0 0 25
foreign 1,080 222 575
-------------------------------------------------------------------------------------------------
1,080 222 950
-------------------------------------------------------------------------------------------------
deferred
federal (10,852) 3,144 (2,298)
state (1,000) 520 (300)
foreign (170) (330) 91
-------------------------------------------------------------------------------------------------
(12,022) 3,334 (2,507)
-------------------------------------------------------------------------------------------------
$ (10,942) 3,556 (1,557)
-------------------------------------------------------------------------------------------------
Income before income taxes related to the company's foreign operations for
the years ended May 1, 2005, May 2, 2004, and April 27, 2003 was
$5,900,000, $2,700,000 and $2,300,000, respectively.
The following schedule summarizes the principal differences between income
tax expense (benefit) at the federal income tax rate and the effective
income tax rate reflected in the consolidated financial statements:
2005 2004 2003
-------------------------------------------------------------------------------------------------
federal income tax rate (34.0)% 34.0% (35.0)%
state income taxes, net of federal
income tax benefit (4.8) 3.2 (7.8)
extraterritorial income or
foreign sales corporation benefit (0.0) (0.1) (2.3)
adjustment to estimated income tax accruals (0.0) (5.6) (19.6)
other 0.8 1.5 (3.2)
-------------------------------------------------------------------------------------------------
(38.0)% 33.0% (67.9)%
-------------------------------------------------------------------------------------------------
52
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities consist of the
following:
(dollars in thousands) 2005 2004
-------------------------------------------------------------------------------------------------
deferred tax assets:
accounts receivable $ 656 792
inventories 2,846 1,666
goodwill 6,939 6,244
compensation 1,064 1,027
liabilities and reserves 2,605 2,477
alternative minimum tax 1,320 1,320
net operating loss carryforwards 9,819 4,287
-------------------------------------------------------------------------------------------------
gross deferred tax assets 25,249 17,813
valuation allowance 0 0
-------------------------------------------------------------------------------------------------
total deferred tax assets 25,249 17,813
-------------------------------------------------------------------------------------------------
deferred tax liabilities:
property, plant and equipment, net (8,070) (11,817)
other (39) (878)
-------------------------------------------------------------------------------------------------
total deferred tax liabilities (8,109) (12,695)
-------------------------------------------------------------------------------------------------
$ 17,140 5,118
-------------------------------------------------------------------------------------------------
Federal and state net operating loss carryforwards with related tax
benefits of $9,819,000 at May 1, 2005 principally expire in 17-20 years,
fiscal 2022 through fiscal 2025. The company also has an alternative
minimum tax credit carryforward of approximately $1,320,000 for federal
income tax purposes that does not expire.
The realization of the company's deferred tax assets is dependent upon the
generation of future taxable income. The company assesses the need to
establish a valuation allowance against its deferred tax assets to the
extent the company no longer believes it is more likely than not that the
tax assets will be fully utilized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income
exclusive of reversing temporary differences and carryforwards, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future operations, management
believes it is more likely than not that the company will generate
sufficient taxable income to realize the existing deferred tax assets. The
amount of the deferred tax assets considered realizable, however, could be
reduced if estimates of future taxable income during the carryforward
period are reduced.
Income tax payments, net of income tax refunds, were $1,328,000 in 2005.
Income tax refunds, net of income tax payments, were $1,338,000 in 2004 and
$1,470,000 in 2003.
10. LONG-TERM DEBT
A summary of long-term debt follows:
May 1, May 2,
(dollars in thousands) 2005 2004
-------------------------------------------------------------------------------------------------
unsecured term notes $ 49,975 49,975
canadian government loan 575 1,055
-------------------------------------------------------------------------------------------------
50,550 51,030
current maturities (8,110) (528)
-------------------------------------------------------------------------------------------------
$ 42,440 50,502
-------------------------------------------------------------------------------------------------
53
The Company's long-term debt of $50.6 million is unsecured and is comprised
of $50.0 million in outstanding senior notes, with a fixed interest rate of
7.76% (payable semi-annually in March and September) and a $575,000
non-interest bearing term loan with the Canadian government. The unsecured
senior notes are payable over an average remaining term of 4 years
beginning March 2006 through March 2010. The final payment on the Canadian
government loan is due during the Company's third quarter of fiscal 2006.
During fiscal 2004, the company elected to make a $25.0 million prepayment
on the unsecured term notes. As a result of this prepayment, the company
incurred a consent fee and prepayment premium of $1.3 million, additional
debt issue cost amortization of $144,000 and approximately $202,000 in
other professional fees.
In December 2004, the company amended its agreement with its bank to
provide for a reduced revolving loan commitment of $10.0 million from an
existing commitment of $15.0 million, including letters of credit up to
$2.5 million. Borrowings under the facility generally carry interest at the
London Interbank Offered Rate plus an adjustable margin based upon the
company's debt/EBITDA ratio, as defined in the agreement. On February 18,
2005, the Interest and Leases Coverage ratio was amended such that at the
end of each fiscal quarter beginning with the third quarter of fiscal 2005,
the Interest and Leases Coverage Ratio shall not be less than 1.25 to 1.0.
As of May 1, 2005 there were $1.4 million in outstanding letters of credit
in support of inventory purchases and no borrowings outstanding under the
agreement. The current bank agreement expires in August 2005.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At May 1, 2005, the
company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five
fiscal years are: 2006 - $8,110,000; 2007 - $7,535,000; 2008 - $7,535,000;
2009- $19,835,000; and 2010 - $7,535,000.
Interest paid during 2005, 2004 and 2003 totaled $3,937,000, $5,882,000,
and $7,058,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
The company leases certain office, manufacturing and warehouse facilities
and equipment, primarily computers and vehicles, under noncancellable
operating leases. Lease terms related to real estate range from one to
twelve years with renewal options for additional periods ranging from two
to ten years. The leases generally require the company to pay real estate
taxes, maintenance, insurance and other expenses. Rental expense for
operating leases was $5,009,000 in 2005; $5,013,000 in 2004; and $5,673,000
in 2003. Future minimum rental commitments for noncancellable operating
leases are $3,894,000 in 2006; $2,926,000 in 2007; $1,661,000 in 2008;
$395,000 in 2009; and $104,000 in 2010. Management expects that in the
normal course of business, these leases will be renewed or replaced by
other operating leases.
The company is involved in 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 cash flows of the company.
The company has outstanding capital expenditure commitments of
approximately $2.8 million as of May 1, 2005.
12. STOCK OPTION PLANS
The company has a stock option plan under which options to purchase common
stock may be granted to officers, directors and key employees. At May 1,
2005, 556,450 shares of common stock were authorized for issuance under the
plan. Of this total, none remain available for grant. Options are generally
exercisable from one to five years after the date of grant and generally
expire five to ten years after the date of grant.
No compensation cost has been recognized for this stock option plan as
options were granted at an option price not less than fair market value at
the date of grant.
54
A summary of the status of the plan as of May 1, 2005, May 2, 2004 and
April 27, 2003 and changes during the years ended on those dates is
presented below:
2005 2004 2003
- ----------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 682,450 $ 7.65 775,500 $ 7.91 922,875 $ 7.73
Granted 0 0 0 0 0 0
Exercised (3,250) 3.44 (31,375) 4.35 (145,375) 6.74
Canceled/expired (122,750) 8.18 (61,875) 12.33 (2,000) 9.00
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 556,450 7.56 682,450 7.65 775,500 7.91
- ----------------------------------------------------------------------------------------------------------------------
Options exercisable at
year-end 499,950 $ 7.95 512,950 $ 8.88 475,250 $ 10.21
Weighted-average fair value of
options granted during the
year $ 0.00 $ 0.00 $ 0.00
- ----------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 5/1/05 Contractual Life Exercise Price at 5/1/05 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
$ 3.03 - $ 3.05 75,750 1.5 years $3.03 75,750 $3.03
$ 4.00 - $ 7.50 223,575 1.4 4.29 167,075 4.36
$ 7.63 - $ 7.63 98,000 3.4 7.63 98,000 7.63
$ 7.75 - $12.13 78,500 1.6 9.77 78,500 9.77
$ 13.34 - $20.94 80,625 2.2 18.63 80,625 18.63
- ----------------------------------------------------------------------------------------------------------------------
556,450 1.9 $7.56 499,950 $7.95
- ----------------------------------------------------------------------------------------------------------------------
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. As of May 1, 2005, there are no options outstanding under
the plan. No options were exercised during fiscal 2005 and 2004 and 50,500
options were exercised in 2003. As all outstanding options under this plan
have been fully vested, no compensation expense was recorded in fiscal
2005, 2004 and 2003.
During September 1997, the company's shareholders approved the 1997 option
plan which provides for the one-time grant to certain officers and 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 generally exercisable
on January 1, 2006. As of May 1, 2005, the 71,000 options outstanding under
the plan have exercise prices of $1.00 and a weighted-average remaining
contractual life of 1.7 years. There were no options exercised during
fiscal 2005, 2004 and 2003, respectively. Compensation expense recorded
under the plan was $210,000 for fiscal 2005, 2004, and 2003, respectively.
During September 2002, the company's shareholders approved the 2002 option
plan under which options to purchase up to 1,000,000 shares of common stock
may be granted to officers, directors and key employees. As of May 1, 2005,
1,000,000 shares of common stock remain authorized for issuance under the
plan. Of this total, 723,000 remain available for grant. Options are
generally exercisable from one to four years after the date of grant and
generally expire five to 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 the fair market value at
the date of grant.
55
A summary of the status of the plan as of May 1, 2005, May 2, 2004, and
April 27, 2003 and changes during the years ended on those dates is
presented below:
2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at beginning
of year 180,000 $ 10.25 93,250 $ 13.43 0 $ 0.00
Granted 128,750 7.14 88,750 6.99 93,250 13.43
Exercised (875) 6.61 0 0.00 0 0.00
Canceled/expired (31,750) 9.51 (2,000) 6.61 0 0.00
- ---------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 276,125 8.95 180,000 10.25 93,250 13.43
- ---------------------------------------------------------------------------------------------------------------------
Options exercisable at
year-end 85,250 $ 10.57 43,000 $ 11.62 11,250 $ 9.37
Weighted-average fair value of
options granted during the
year $ 4.26 $ 4.07 $ 7.29
- ---------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 5/1/05 Contractual Life Exercise Price at 5/1/05 Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
$ 6.61 - $ 6.61 64,625 3.1 years $ 6.61 15,500 $ 6.61
$ 7.13 - $ 7.27 118,750 4.6 7.14 11,250 7.27
$ 9.37 - $ 9.57 22,500 7.9 9.47 22,500 9.47
$13.99 - $13.99 70,250 2.1 13.99 36,000 13.99
- ---------------------------------------------------------------------------------------------------------------------
276,125 3.9 $ 8.95 85,250 $10.57
- ---------------------------------------------------------------------------------------------------------------------
Had compensation cost for the stock option plan with 556,450 options
outstanding at May 1, 2005 and the 1997 and 2002 stock-based compensation
plans been determined consistent with SFAS No. 123, the company's net
income (loss), basic income (loss) per share and diluted income (loss) per
share would have been changed to the pro forma amounts indicated below:
(in thousands, except per share data) 2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) As reported $ (17,852) 7,220 (24,887)
Pro forma (18,226) 6,905 (25,045)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) per As reported $ (1.55) 0.63 (2.17)
share, basic Pro forma (1.58) 0.60 (2.19)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) per As reported $ (1.55) 0.61 (2.17)
share, diluted Pro forma (1.58) 0.59 (2.19)
- ---------------------------------------------------------------------------------------------------------------------
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 2005, 2004 and 2003, respectively: dividend
yield of 0%, 0% and 0%; risk-free interest rates of 4.2%, 1.9%, and 4.2%;
expected volatility of 77%, 80%, and 78%; and expected life of 8.5 years.
13. DERIVATIVES
The company applies the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by
SFAS No. 137, SFAS No. 138 and SFAS No. 149, requires the company to
recognize all derivative instruments on the balance sheet at fair value.
These statements also establish new accounting rules for hedging
instruments, which depend on the nature of the hedge relationship. A fair
value hedge requires that the effective portion of the change in the fair
value of a derivative instrument be offset against the change in the fair
value of the underlying asset, liability, or firm commitment being hedged
through earnings. A cash flow hedge requires that the effective portion of
the change in the fair value of a derivative instrument be recognized in
56
Other Comprehensive Income ("OCI"), a component of Shareholders' Equity,
and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The ineffective portion of a
derivative instrument's change in fair value is immediately recognized in
earnings.
The company also uses foreign exchange option and forward contracts to
manage the exposure related to firm commitments to purchase fixed assets
denominated in the EURO. The company has chosen not to utilize hedge
accounting for these contracts, and accordingly changes in the fair value
of these contracts are recorded currently in earnings. The company had
outstanding foreign exchange option and forward contracts to purchase a
total of 564,000 EURO at May 2, 2004. The company did not have foreign
exchange option and forward contracts outstanding at May 1, 2005.
14. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average
number of shares outstanding during the period. Diluted net income per
share uses the weighted-average number of shares outstanding during the
period plus the dilutive effect of stock options calculated using the
treasury stock method. Weighted average shares used in the computation of
basic and diluted net income (loss) per share are as follows:
(in thousands) 2005 2004 2003
- ---------------------------------------------------------------------------------------------
Weighted-average common
shares outstanding, basic 11,549 11,525 11,462
Effect of dilutive stock options 0 252 0
- ---------------------------------------------------------------------------------------------
Weighted-average common
shares outstanding, diluted 11,549 11,777 11,462
- ---------------------------------------------------------------------------------------------
Options to purchase 495,969, 348,337 shares, and 413,844 shares of common
stock were not included in the computation of diluted net income (loss) per
share for fiscal 2005, 2004 and 2003, respectively, because the exercise
price of the options was greater than the average market price of the
common shares. Options to purchase 143,970 and 556,031 shares were not
included in the computation of diluted net income (loss) per share for
fiscal 2005 and 2003, respectively, because the company incurred a net loss
for these fiscal years.
15. 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 $1,461,000 in 2005;
$1,583,000 in 2004; and $1,799,000 in 2003.
In addition to the defined contribution plan, the company implemented a
nonqualified deferred compensation plan covering officers and certain other
associates in fiscal 2003. The plan provides for participant deferrals on a
pre-tax basis and non-elective contributions made by the company. Company
contributions to the plan were $62,000 for 2005, 2004 and 2003. The
company's nonqualified plan liability of $491,000 and $308,000 at May 1,
2005 and May 2, 2004, respectively, is included in accrued expenses in the
Consolidated Balance Sheets.
16. SEGMENT INFORMATION
The company's operations are classified into two business segments:
mattress fabrics and upholstery fabrics. The mattress fabrics segment
manufactures and sells fabrics to bedding manufacturers. The upholstery
fabrics segment manufactures and sells fabrics primarily to residential and
commercial (contract) furniture manufacturers. The upholstery fabrics
segment consists of two divisions: Culp Decorative Fabrics and Culp
Velvets/Prints. Since these divisions have similar products, manufacturing
processes, customers, methods of distribution and economic characteristics,
they are aggregated for segment reporting purposes.
57
International sales, of which 97%, 98% and 87% were denominated in U.S.
dollars in 2005, 2004 and 2003, respectively, accounted for 11%, 11%, and
12% of net sales in 2005, 2004 and 2003, respectively and are summarized by
geographic area as follows:
(dollars in thousands) 2005 2004 2003
- ---------------------------------------------------------------------------------------------
North America (excluding USA) $ 22,503 26,740 30,375
Far East and Asia 8,690 6,954 4,926
All other areas 1,056 1,557 4,577
- ---------------------------------------------------------------------------------------------
$ 32,249 35,251 39,878
- ---------------------------------------------------------------------------------------------
Company assets located outside North America are not material for any of
the three years presented.
Effective May 3, 2004, the Company began evaluating the operating
performance of its segments based upon income (loss) from operations before
restructuring and related charges or credits and certain unallocated
corporate expenses. Previously, the company evaluated operating segment
performance based upon gross profit. Operating income (loss) and gross
profit for prior periods by segment is presented for comparative purposes.
Unallocated corporate expenses represent primarily compensation and
benefits of certain executive officers and all costs related to being a
public company. Segment assets include assets used in the operation of each
segment and consist of accounts receivable, inventories, and property,
plant, and equipment. The company no longer allocates goodwill to its
operating segments for the purposes of evaluating operating performance.
Sales and gross profit for the company's operating segments are as follows:
(dollars in thousands) 2005 2004 2003
- ---------------------------------------------------------------------------------------------
Net sales:
Upholstery Fabrics $ 181,066 211,794 240,096
Mattress Ticking 105,432 106,322 99,550
- ---------------------------------------------------------------------------------------------
$ 286,498 318,116 339,646
- ---------------------------------------------------------------------------------------------
Gross profit:
Upholstery Fabrics $ 16,899 34,946 37,656
Mattress Ticking 16,819 23,376 22,835
- ---------------------------------------------------------------------------------------------
Total segment gross profit 33,718 58,322 60,491
Restructuring related charges (7,561)(1) 0 (2,918)
- ---------------------------------------------------------------------------------------------
$ 26,157 58,322 57,573
- ---------------------------------------------------------------------------------------------
Income (loss) from operations:
Upholstery Fabrics $ (6,435) 6,836 8,395
Mattress Ticking 9,389 14,986 15,117
- ---------------------------------------------------------------------------------------------
Total income from operations 2,954 21,822 23,512
Unallocated corporate expenses (4,480) (4,519) (3,061)
Goodwill impairment (5,126)(2) 0 0
Restructuring and related charges (18,046)(3) 1,047 (15,899)
- ---------------------------------------------------------------------------------------------
$ (24,698) 18,350 4,552
- ---------------------------------------------------------------------------------------------
(1) Restructuring related charges primarily represent accelerated
depreciation associated with the plant and equipment disposed of,
either by sale or abandonment and inventory markdowns; both are
included in the cost of sales line item in the Consolidated Statements
of Income (Loss). These charges primarily relate to the Upholstery
Fabrics segment.
(2) The goodwill impairment was the result of an evaluation of all the
remaining goodwill associated with the Upholstery Fabrics segment.
58
(3) Restructuring and related charges primarily represent $7.7 million in
related charges for accelerated depreciation and inventory markdowns,
$5.6 million related to write-downs of buildings and equipment, $2.5
million related to the dismantling, moving, and relocation of
equipment to other company facilities, and $2.2 million related to
employee termination costs (see note 2). Restructuring charges are
included in the restructuring expense line item in the Consolidated
Statements of Income (Loss). These charges primarily relate to the
Upholstery Fabrics segment.
One customer represented approximately 15%, 13%, and 14% of consolidated
net sales for 2005, 2004 and 2003, respectively. No other customer
accounted for 10% or more of consolidated net sales during those years.
Balance sheet information for the company's operating segments follow:
(dollars in thousands) 2005 2004 2003
- -------------------------------------------------------------------------------------------------------------
Segment assets
Mattress Fabrics
current assets $ 24,951 24,639 21,018
property, plant, and equipment 26,658 (4) 23,126 25,991
- -------------------------------------------------------------------------------------------------------------
Total mattress fabrics assets $ 51,609 47,765 47,009
- -------------------------------------------------------------------------------------------------------------
Upholstery Fabrics
current assets $ 54,372 55,125 60,793
property, plant, and equipment 39,273 (5) 54,644 58,971
- -------------------------------------------------------------------------------------------------------------
Total upholstery fabrics assets $ 93,645 109,769 119,764
- -------------------------------------------------------------------------------------------------------------
Total segment assets 145,254 157,534 166,773
Non-segment assets
cash and cash equivalents 5,107 14,568 14,355
short-term investments 0 0 10,043
deferred income taxes 17,140 9,256 12,303
other current assets 2,691 1,722 3,204
property, plant, and equipment 101 0 0
goodwill 4,114 9,240 9,240
other assets 1,716 1,496 2,235
- -------------------------------------------------------------------------------------------------------------
Total assets $ 176,123 193,816 218,153
- -------------------------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 6,321 913 4,456
Upholstery Fabrics 1,895 5,834 7,773
Unallocated corporate 6,144 (6) 0 0
- -------------------------------------------------------------------------------------------------------------
$ 14,360 6,747 12,229
- -------------------------------------------------------------------------------------------------------------
Depreciation expenses
Mattress Fabrics $ 3,635 3,753 2,679
Upholstery Fabrics 9,227 9,889 11,311
- -------------------------------------------------------------------------------------------------------------
Total segment depreciation expense 12,862 13,642 13,990
Accelerated depreciation - upholstery fabrics 6,022 0 0
- -------------------------------------------------------------------------------------------------------------
$ 18,884 13,642 13,990
- -------------------------------------------------------------------------------------------------------------
(4) Included in property, plant, and equipment are assets located in the
U.S. totaling $12.2 million, $9.8 million, and $9.8 million for 2005,
2004, and 2003, respectively.
59
(5) Included in property, plant, and equipment are assets located in the
U.S. totaling $36.2 million, $51.5 million, and $55.5 million for
2005, 2004, and 2003, respectively. Also, included in property, plant,
and equipment for 2005 are allocations totaling $5.3 million for the
distribution facility and design center that were sold in June 2005
and various other corporate allocations totaling $4.2 million.
(6) Unallocated corporate expenditures for fiscal 2005 primarily represent
capital spending for the new corporate office building.
17. RELATED PARTY TRANSACTIONS
A director of the company is also an officer and director of a major customer of
the company. The amount of net sales to this customer was approximately
$42,286,000 in 2005; $41,819,000 in 2004; and $47,593,000 in 2003. The amount
due from this customer at May 1, 2005 and May 2, 2004 was approximately
$3,659,000 and $4,768,000, respectively. Effective May 2, 2005, the company
modified a lease agreement with a related party to reduce their monthly base
rent from $45,375 to $15,000 and extend the expiration date from February 2006
to April 2007.
Rents paid to entities owned by certain shareholders and officers of the
company and their immediate families were approximately $622,000 in 2005,
$682,000 in 2004, and $708,000 in 2003.
18. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of net income (loss) and other
changes in equity, except those resulting from investments by shareholders
and distributions to shareholders not reflected in net income (loss).
A summary of comprehensive income (loss) follows:
(dollars in thousands) 2005 2004 2003
----------------------------------------------------------------------------------------------------
Net income (loss) $ (17,852) 7,220 (24,887)
Gain (loss) on foreign exchange options, net of taxes:
Net gains reclassified into earnings 0 0 (7)
----------------------------------------------------------------------------------------------------
$ (17,852) 7,220 (24,894)
----------------------------------------------------------------------------------------------------
60
19. RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151,"Inventory Costs, and
amendment of ARB No. 43, Chapter 4," which clarifies the types of costs
that should be expensed rather than capitalized as inventory. This
statement also clarifies the circumstances under which fixed overhead costs
associated with operating facilities involved in inventory processing
should be capitalized. The provisions of SFAS No. 151 are effective for
fiscal years beginning after June 15, 2005 and the company will adopt this
standard in fiscal 2007. Management has not determined the impact, if any,
that this statement will have on our consolidated financial position or
results of operations.
SFAS No. 123 (Revised 2004),"Share-Based Payment," issued in December 2004,
is a revision of FASB Statement 123, "Accounting for Stock-Based
Compensation" and supercedes APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and its related implementation guidance. The
Statement focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. SFAS
No. 123 (Revised 2004) requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award (with limited exceptions).
That cost will be recognized over the period during which an employee is
required to provide service in exchange for the award. The provisions of
SFAS No. 123 (Revised 2004) are effective for fiscal years beginning after
June 15, 2005 and the company will adopt this standard in fiscal 2007.
Management has not determined the impact, if any, that this statement will
have on our consolidated financial position or results of operations.
In December 2004, the FASB issued Staff Position FAS 109-1, which provides
guidance on the application of SFAS No. 109, Accounting for Income Taxes,
to the provision within the American Jobs Creation Act of 2004 that
provides a tax deduction for qualified production activities. FAS 109-1 has
not had, nor is it expected to have, a material impact on our financial
reporting or disclosures.
61
SELECTED QUARTERLY DATA
fiscal fiscal fiscal fiscal fiscal fiscal fiscal fiscal
2005 2005 2005 2005 2004 2004 2004 2004
(amounts in thousands, except per share 4th 3rd 2nd 1st 4th 3rd 2nd 1st
amounts) quarter quarter quarter quarter quarter quarter quarter quarter
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) STATEMENT DATA
net sales $ 74,183 69,060 75,406 67,849 85,148 76,561 82,731 73,676
cost of sales 68,835 66,493 65,839 59,174 69,510 62,093 65,993 62,198
- --------------------------------------------------------------------------------------------------------------------------------
gross profit 5,348 2,567 9,567 8,675 15,638 14,468 16,738 11,478
SG & A expenses 9,048 8,191 8,838 9,280 9,925 10,282 10,296 10,516
goodwill impairment 0 0 5,126 0 0 0 0 0
restructuring expense (credit) and
asset impairments 8,083 1,135 1,292 (138) (1,047) 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
income (loss) from operations (11,783) (6,759) (5,689) (467) 6,760 4,186 6,442 962
interest expense 924 912 937 940 988 1,534 1,509 1,497
interest income (36) (42) (29) (27) (20) (113) (121) (122)
early extinguishment of debt 0 0 0 0 0 1,672 0 0
other expense 81 49 173 214 220 229 62 239
- --------------------------------------------------------------------------------------------------------------------------------
income (loss) before income
taxes (12,752) (7,678) (6,770) (1,594) 5,572 864 4,992 (652)
income taxes (5,022) (2,801) (2,577) (542) 1,839 112 1,846 (241)
- --------------------------------------------------------------------------------------------------------------------------------
net income (loss) (7,730) (4,877) (4,193) (1,052) 3,733 752 3,146 (411)
- --------------------------------------------------------------------------------------------------------------------------------
depreciation 4,379 7,605 3,538 3,362 3,348 3,411 3,439 3,444
- --------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 11,550 11,550 11,549 11,547 11,531 11,529 11,524 11,515
weighted average shares outstanding,
assuming dilution 11,550 11,550 11,549 11,547 11,815 11,859 11,774 11,515
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
net income (loss) per share - basic $ (0.67) (0.42) (0.36) (0.09) 0.32 0.07 0.27 (0.04)
net income (loss) per share - diluted (0.67) (0.42) (0.36) (0.09) 0.32 0.06 0.27 (0.04)
book value 7.43 8.09 8.51 8.87 8.95 8.63 8.55 8.28
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
operating working capital (3) $ 56,471 57,750 59,926 61,468 64,441 62,492 61,262 54,854
property, plant and equipment, net 66,032 71,024 76,062 78,880 77,770 78,909 81,219 83,299
total assets 176,123 175,931 182,040 188,599 193,816 193,853 224,812 214,387
capital expenditures 6,033 2,776 1,008 4,543 2,377 1,103 1,427 1,840
long-term debt (1) 50,550 50,559 51,163 51,064 51,030 51,063 76,616 76,551
shareholders' equity 85,771 93,441 98,265 102,398 103,391 99,467 98,605 95,340
capital employed (2) 136,321 144,000 149,428 153,462 154,421 150,530 175,221 171,891
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA
gross profit margin 7.2% 3.7% 12.7% 12.8% 18.4% 18.9% 20.2% 15.6%
operating income (loss) margin (15.9) (9.8) (7.5) (0.7) 7.9 5.5 7.8 1.3
net income (loss) margin (10.4) (7.1) (5.6) (1.6) 4.4 1.0 3.8 (0.6)
effective income tax rate 39.4 36.5 38.1 34.0 33.0 13.0 37.0 37.0
long-term debt-to-total capital
employed ratio (1) 37.1 35.1 34.1 33.3 33.0 33.9 43.7 44.5
operating working capital turnover
(3) 4.8 4.9 4.9 5.1 5.2 5.3 5.3 5.1
days sales in receivables 35 32 32 30 33 31 34 32
inventory turnover 5.7 5.6 5.2 4.7 5.5 4.7 5.1 5.0
- --------------------------------------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $ 6.55 6.97 8.00 9.10 12.28 12.25 10.95 8.03
low 4.20 4.96 5.80 6.64 8.52 9.98 6.75 5.05
close 4.70 6.39 6.00 7.80 8.61 11.56 10.72 7.42
daily average trading volume (shares) 15.0 24.3 16.5 29.2 22.9 32.0 56.0 107.9
- --------------------------------------------------------------------------------------------------------------------------------
(1) Long-term debt includes long- and short-term debt
(2) Capital employed includes long-term debt and shareholders' equity
(3) Operating working capital for this calculation is accounts receivable,
inventories and accounts payable
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended May 1, 2005, there were no changes of accountants
and/or disagreements on any matters of accounting principles or practices or
financial statement disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the evaluation, the principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934, as
amended, is accumulated and communicated to the Company's management, including
its principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure and are effective to
provide reasonable assurance that such information is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission ("SEC") rules and forms.
Management's Report on Internal Control over Financial Reporting
In accordance with Section 404 of the Sarbanes-Oxley Act and SEC rules
thereunder, management has conducted an assessment of the Company's internal
control over financial reporting as of May 1, 2005. Management's report
regarding that assessment appears on page 35 of this report and is incorporated
herein by reference.
Changes in Internal Controls
There have been no changes in the Company's internal control over financial
reporting for the Company's fourth quarter ended May 1, 2005, that have
materially affected, or are reasonably likely to materially affect, the
company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On July 12, 2005, the company entered into an Amendment to Lease, effective
May 2, 2005, to amend the company's lease of an industrial facility from
Partnership 74 Associates, a partnership whose partners include Robert G. Culp,
III, Chief Executive Officer and a director of the company, Mr. Culp's brother,
his sister and his sister's children. The amendment extends the terms of the
lease for an additional two years from May 2, 2005 through April 29, 2007,
reduces the monthly base rent to $15,000 per month, and changes the repair and
maintenance provisions such that the company is now responsible for maintenance
of the roof and structural supports. The company believes that at the time the
lease amendment was entered into, the amended terms of the lease were no less
favorable to the company than could have been obtained in an arms-length
transaction with an unaffiliated person, and the company has received an
independent appraisal to this effect.
63
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers and directors of the company is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the caption "Nominees, Directors and
Executive Officers," which information is herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included in the company's
definitive Proxy Statement to be filed within 120 days after the end of the
company's fiscal year pursuant to Regulation 14A of the Securities and Exchange
Commission, under the caption "Executive Compensation," which information is
herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain beneficial owners
and management is included in the company's definitive Proxy Statement to be
filed within 120 days after the end of the company's fiscal year pursuant to
Regulation 14A of the Securities and Exchange Commission, under the caption
"Voting Securities," which information is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the subcaption "Certain Relationships
and Related Transactions," which information is herein incorporated by
reference.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to accountants fees and services is included in the
company's definitive Proxy Statement to be filed within 120 days after the end
of the company's fiscal year pursuant to Regulation 14A of the Securities and
Exchange Commission, under the caption "Fees Paid to Independent Registered
Public Accounting Firm," which information is herein incorporated by reference.
64
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Consolidated Financial Statements
The following consolidated financial statements of Culp, Inc.
and its subsidiaries are filed as part of this report.
Page of Annual
Report on
Item Form 10-K
- ---- ---------
Consolidated Balance Sheets - May 1, 2005 and..................... 38
May 2, 2004
Consolidated Statements of Income (Loss) -
for the years ended May 1, 2005
May 2, 2004, and April 27, 2003.................................. 39
Consolidated Statements of Shareholders' Equity -
for the years ended May 1, 2005,
May 2, 2004, and April 27, 2003.................................. 40
Consolidated Statements of Cash Flows -
for the years ended May 1, 2005,
May 2, 2004, and April 27, 2003.................................. 41
Notes to Consolidated Financial Statements........................ 42
Reports of Independent Registered Public Accounting Firm ......... 36
2. Financial Statement Schedules
All financial statement schedules are omitted because they are
not applicable, or not required, or because the required information is
included in the consolidated financial statements or notes thereto.
3. Exhibits
The following exhibits are attached at the end of this
report, or incorporated by reference herein. Management contracts,
compensatory plans, and arrangements are marked with an asterisk (*).
3(i) Articles of Incorporation of the company, as amended, were filed
as Exhibit 3(i) to the company's Form 10-Q for the quarter ended
July 28, 2002, filed September 11, 2002, and are incorporated
herein by reference.
3(ii) Restated and Amended Bylaws of the company, as amended June 12,
2001, were filed as Exhibit 3(ii) to the company's Form 10-Q for
the quarter ended July 29, 2001, filed September 12, 2001, and
are incorporated herein by reference.
10(a) Lease Agreement, dated January 19, 1990, with Phillips Interests,
Inc. was filed as Exhibit 10(g) to the company's Form 10-K for
the year ended April 29, 1990, filed on July 25, 1990, and is
incorporated herein by reference.
65
10(b) Management Incentive Plan of the company, dated August 1986 and
amended July 1989, filed as Exhibit 10(o) to the company's Form
10-K for the year ended May 3, 1992, filed on August 4, 1992, and
is incorporated herein by reference. (*)
10(c) Lease Agreement, dated September 6, 1988, with Partnership 74 was
filed as Exhibit 10(h) to the company's Form 10-K for the year
ended April 28, 1991, filed on July 25, 1991, and is incorporated
herein by reference.
10(d) First Amendment of Lease Agreement dated July 27, 1992 with
Partnership 74 Associates was filed as Exhibit 10(n) to the
company's Form 10-K for the year ended May 2, 1993, filed on July
29, 1993, and is incorporated herein by reference.
10(e) Second Amendment of Lease Agreement dated June 15, 1994 with
Partnership 74 Associates was filed as Exhibit 10(v) to the
company's Form 10-Q for the quarter ended October 29, 1995, filed
on December 12, 1995, and is incorporated herein by reference.
10(f) 1993 Stock Option Plan was filed as Exhibit 10(o) to the
company's Form 10-K for the year ended May 2, 1993, filed on July
29, 1993, and is incorporated herein by reference. (*)
10(g) Amendments to 1993 Stock Option Agreement dated September 26,
2000. This amendment was filed as Exhibit 10(rr) to the company's
Form 10-Q for the quarter ended October 29, 2000, and is
incorporated herein by reference. (*)
10(h) Form of Note Purchase Agreement (providing for the issuance by
Culp, Inc. of its $20 million 6.76% Series A Senior Notes due
3/15/08 and its $55 million 6.76% Series B Senior Notes due
3/15/10), each dated March 4, 1998, between Culp, Inc. and each
of the following:
1. Connecticut General Life Insurance Company;
2. The Mutual Life Insurance Company of New York;
3. United of Omaha Life Insurance Company;
4. Mutual of Omaha Insurance Company;
5. The Prudential Insurance Company of America;
6. Allstate Life Insurance Company;
7. Life Insurance Company of North America; and
8. CIGNA Property and Casualty Insurance Company
This agreement was filed as Exhibit 10(ll) to the company's Form
10-K for the year ended May 3, 1998, filed on July 31, 1998, and
is incorporated herein by reference.
10(i) First Amendment, dated January 31, 2002 to Note Purchase
Agreement (providing for the issuance by Culp, Inc. of its $20
million 6.76% Series A Senior Notes due 3/15/08 and its $55
million 6.76% Series B Senior Notes due 3/15/10), each dated
March 4, 1998, between Culp, Inc. and each of the following:
1. Connecticut General Life Insurance Company;
2. Life Insurance Company of North America;
3. ACE Property and Casualty;
4. J. Romeo & Co.;
5. United of Omaha Life Insurance Company;
6. Mutual of Omaha Insurance Company;
7. The Prudential Insurance of America; and
8. Allstate Life Insurance Company
This amendment was filed as Exhibit 10(a) to the company's Form
10-Q for the quarter ended January 27, 2002, and is incorporated
herein by reference.
66
10(j) Rights Agreement, dated as of October 8, 1999, between Culp, Inc.
and EquiServe Trust Company, N.A., as Rights Agent, including the
form of Articles of Amendment with respect to the Series A
Participating Preferred Stock included as Exhibit A to the Rights
Agreement, the forms of Rights Certificate included as Exhibit B
to the Rights Agreement, and the form of Summary of Rights
included as Exhibit C to the Rights Agreement. The Rights
Agreement was filed as Exhibit 99.1 to the company's Form 8-K
dated October 12, 1999, and is incorporated herein by reference.
10(k) Form of Change of Control and Noncompetition Agreement, each
dated December 11, 2001, by and between the company and each of
Robert G. Culp, III, Franklin N. Saxon, Kenneth M. Ludwig, was
filed as Exhibit 10hh to the company's Form 10-K for the year
ended April 28, 2002, filed on July 26, 2002, and is incorporated
herein by reference. (*)
10(l) 2002 Stock Option Plan was filed as Exhibit 10(a) to the
company's Form 10-Q for the quarter ended January 26, 2003, filed
on March 12, 2003, and is incorporated herein by reference.(*)
10(m) Amended and Restated Credit Agreement dated as of August 23, 2002
among Culp, Inc. and Wachovia Bank, National Association, as
Agent and as Bank, was filed as Exhibit 10(a) to the company's
Form10-Q for the quarter ended July 28, 2002, filed September 11,
2002, and is incorporated herein by reference.
10(n) First Amendment to Amended and Restated Credit Agreement dated as
of March 17, 2003 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as exhibit 10(p) to
the company's form 10-K for the year ended April 27, 2003, filed
on July 25, 2003, and is incorporated here by reference.
10(o) Second Amendment to Amended and Restated Credit Agreement dated
as of June 3, 2003 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank. was filed as exhibit 10(q) to
the company's form 10-K for the year ended April 27, 2003, filed
on July 25, 2003, and is incorporated here by reference.
10(p) Third Amendment to Amended and Restated Credit Agreement dated as
of August 23, 2004 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 10 to
the Current Report on Form 8-K dated August 26, 2004, and is
incorporated herein by reference.
10(q) Fourth Amendment to Amended and Restated Credit Agreement dated
as of December 7, 2004 among Culp, Inc. and Wachovia Bank,
National Association, as Agent and as Bank, was filed as Exhibit
10(b) to the company's form 10-Q for the quarter ended October
31, 2004, filed on December 9, 2004, and is incorporated here by
reference.
10(r) Fifth Amendment to Amended and Restated Credit Agreement dated as
of February 18, 2005 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 99(c) to
Current Report on form 8-K dated February 18, 2005, and is
incorporated herein by reference.
67
10(s) Severance Agreement and Waiver of Claims between Rodney A. Smith
and Culp, Inc. was filed as Exhibit 10.1 to Current Report on
form 8-K dated May 6, 2005, and is incorporated herein by
reference.
21 List of subsidiaries of the company
23(a) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on Form
S-8 (File Nos. 33-13310, 33-37027, 33-80206, 33-62843, 333-27519,
333-59512, 333-59514 and 333-101850), dated March 20, 1987,
September 18, 1990, June 13, 1994, September 22, 1995, May 21,
1997, April 25, 2001, April 25, 2001 and December 12, 2002.
24(a) Power of Attorney of Jean L.P. Brunel, dated June 29, 2005
24(b) Power of Attorney of Howard L. Dunn, dated June 24, 2005
24(c) Power of Attorney of H. Bruce English, dated June 24, 2005
24(d) Power of Attorney of Patrick B. Flavin, dated June 28, 2005
24(e) Power of Attorney of Kenneth R. Larson, dated June 28, 2005
24(f) Power of Attorney of Kenneth W. McAllister, dated June 28, 2005
24(g) Power of Attorney of Patrick H. Norton, dated June 28, 2005
31(a) Certification of Principal Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
31(b) Certification of Principal Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
b) Exhibits:
The exhibits to this Form 10-K are filed at the end of this Form 10-K
immediately preceded by an index. A list of the exhibits begins on page 65 under
the subheading "Exhibits Index."
c) Financial Statement Schedules:
See Item 15(a) (2)
68
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, CULP, INC. has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 12th day of July 2005.
CULP, INC.
By /s/ Robert G. Culp, III
-------------------
Robert G. Culp, III
Chairman and Chief Executive Officer
(principal executive officer)
By /s/ Franklin N. Saxon
-----------------
Franklin N. Saxon
President and Chief Operating
Officer (principal financial officer)
By /s/ Kenneth R. Bowling
------------------
Kenneth R. Bowling
Vice President and Treasurer
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 12th day of July 2005.
/s/ Robert G. Culp, III /s/ Patrick H. Norton *
------------------- -----------------
Robert G. Culp, III Patrick H. Norton
(Chairman of the (Director)
Board of Directors)
/s/ Franklin N. Saxon /s/ Jean L.P.. Brunel *
----------------- -----------------
Franklin N. Saxon Jean L.P. Brunel
(Director) (Director)
/s/ Howard L. Dunn, Jr.* /s/ H. Bruce English *
------------------- ------------------
Howard L. Dunn, Jr. H. Bruce English
(Director) (Director)
/s/ Patrick B. Flavin* /s/ Kenneth R. Larson *
----------------- -------------------
Patrick B. Flavin Kenneth R. Larson
(Director) (Director)
/s/ Kenneth W. McAllister*
---------------------
Kenneth W. McAllister
(Director)
* By Franklin N. Saxon, Attorney-in-Fact, pursuant to Powers of Attorney
filed with the Securities and Exchange Commission.
69
EXHIBITS INDEX
Exhibit Number Exhibit
- --------------
21 List of subsidiaries of the company
23(a) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on
Form S-8 (File Nos. 33-13310, 33-37027, 33-80206, 33-62843,
333-27519, 333-59512, 333-59514 and 333-101850), dated March
20, 1987, September 18, 1990, June 13, 1994, September 22,
1995, May 21, 1997, April 25, 2001, April 25, 2001 and
December 12, 2002.
24(a) Power of Attorney of Jean L.P. Brunel, dated June 29, 2005
24(b) Power of Attorney of Howard L. Dunn, dated June 24, 2005
24(c) Power of Attorney of H. Bruce English, dated June 24, 2005
24(d) Power of Attorney of Patrick B. Flavin, dated June 28, 2005
24(e) Power of Attorney of Kenneth R. Larson, dated June 28, 2005
24(f) Power of Attorney of Kenneth W. McAllister, dated June 28,
2005
24(g) Power of Attorney of Patrick H. Norton, dated June 28, 2005
31(a) Certification of Principal Executive Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31(b) Certification of Principal Financial Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
70