================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 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
incorporation or organization) Identification No.)
1823 Eastchester Dr., High Point, North Carolina 27261-2686
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to the filing requirements for at
least the past 90 days.
YES [X] NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO
Indicate by check mark whether the registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act).
YES NO [X]
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the latest practical date:
Common shares outstanding at October 30, 2005: 11,558,709
Par Value: $.05
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INDEX TO FORM 10-Q
For the period ended October 30, 2005
Part I - Financial Statements. Page
- ------------------------------ ----
Item 1. Unaudited Interim Consolidated Financial Statements:
- -------------------------------------------------------------
Consolidated Statements of Net Loss--Three and Six Months Ended
October 30, 2005 and October 31, 2004 I-1
Consolidated Balance Sheets--October 30, 2005, October 31, 2004
and May 1, 2005 I-2
Consolidated Statements of Cash Flows--Six Months
Ended October 30, 2005 and October 31, 2004 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Cautionary Statement Concerning Forward-Looking Information I-19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations I-20
-----------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk I-32
- -------------------------------------------------------------------
Item 4. Controls and Procedures I-32
- --------------------------------
Part II - Other Information
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders II-1
- ---------------------------------------------------------------
Item 5. Other Information II-1
- -----------------------------
Item 6. Exhibits II-2
- --------------------
Signatures II-3
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF NET LOSS
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 30, 2005 AND OCTOBER 31, 2004
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
----------------------------------------------------
Amounts Percent of Sales
-------------------- --------------------
October October October October
30, 31, %Over 30, 31,
2005 2004 (Under) 2005 2004
--------- -------- -------- -------- ---------
Net sales $ 67,006 75,406 (11.1)% 100.0 % 100.0 %
Cost of sales 61,455 65,839 (6.7)% 91.7 % 87.3 %
--------- -------- -------- -------- ---------
Gross profit 5,551 9,567 (42.0)% 8.3 % 12.7 %
Selling, general and
administrative expenses 6,526 8,838 (26.2)% 9.7 % 11.7 %
Goodwill impairment 0 5,126 (100.0)% 0.0 % 6.8 %
Restructuring expense 4,412 1,292 241.5 % 6.6 % 1.7 %
--------- -------- -------- -------- ---------
Loss from operations (5,387) (5,689) 5.3 % (8.0)% (7.5) %
Interest expense 942 937 0.5 % 1.4 % 1.2 %
Interest income (19) (29) (34.5)% (0.0)% (0.0) %
Other expense 214 173 23.7 % 0.3 % 0.2 %
--------- -------- -------- -------- ---------
Loss before income taxes (6,524) (6,770) (3.6)% (9.7)% (9.0) %
Income taxes * (2,372) (2,577) (8.0)% 36.4 % 38.1 %
--------- -------- ------- -------- ---------
Net loss $ (4,152) (4,193) (1.0)% (6.2)% (5.6) %
========= ======== ======== -------- ---------
Net loss per share, basic $ (0.36) (0.36) 0.0 %
Net loss per share, diluted $ (0.36) (0.36) 0.0 %
Average shares outstanding, basic 11,559 11,549 0.1 %
Average shares outstanding, diluted 11,559 11,549 0.1 %
SIX MONTHS ENDED
----------------------------------------------------
Amounts Percent of Sales
-------------------- --------------------
October October October October
30, 31, %Over 30, 31,
2005 2004 (Under) 2005 2004
--------- -------- -------- -------- ---------
Net sales $ 129,348 143,255 (9.7)% 100.0 % 100.0 %
Cost of sales 117,240 125,013 (6.2)% 90.6 % 87.3 %
--------- -------- -------- -------- ---------
Gross profit 12,108 18,242 (33.6)% 9.4 % 12.7 %
Selling, general and
administrative expenses 16,382 18,118 (9.6)% 12.7 % 12.6 %
Goodwill impairment 0 5,126 (100.0)% 0.0 % 3.6 %
Restructuring expense 6,238 1,154 440.6 % 4.8 % 0.8 %
--------- -------- -------- -------- ---------
Loss from operations (10,512) (6,156) 70.8 % (8.1)% (4.3) %
Interest expense 1,892 1,877 0.8 % 1.5 % 1.3 %
Interest income (35) (56) (37.5)% (0.0)% (0.0) %
Other expense 347 387 (10.3)% 0.3 % 0.3 %
--------- -------- -------- -------- ---------
Loss before income taxes (12,716) (8,364) 52.0 % (9.8)% (5.8) %
Income taxes * (4,623) (3,119) 48.2 % 36.4 % 37.3 %
--------- -------- ------- -------- ---------
Net loss $ (8,093) (5,245) 54.3 % (6.3)% (3.7) %
========= ======== ======== -------- ---------
Net loss per share, basic $ (0.70) (0.45) 55.6 %
Net loss per share, diluted $ (0.70) (0.45) 55.6 %
Average shares outstanding, basic 11,555 11,548 0.1 %
Average shares outstanding, diluted 11,555 11,548 0.1 %
*Percent of sales column for income taxes is calculated as a % of loss before
income taxes.
See accompanying notes to consolidated
financial statements.
I-1
CULP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 30, 2005, OCTOBER 31, 2004, AND MAY 1, 2005
UNAUDITED
(Amounts in Thousands)
Amounts Increase
---------------------------- (Decrease)
October 30, October 31, ------------------------ * May 1,
2005 2004 Dollars Percent 2005
--------------- ----------- ----------- ---------- -----------
Current assets:
Cash and cash equivalents $ 12,883 16,505 (3,622) (21.9) % 5,107
Accounts receivable 26,919 26,590 329 1.2 % 28,824
Inventories 43,449 48,528 (5,079) (10.5) % 50,499
Deferred income taxes 7,054 4,980 2,074 41.6 % 7,054
Other current assets 1,846 3,100 (1,254) (40.5) % 2,691
--------------- ----------- ----------- ---------- -----------
Total current
assets 92,151 99,703 (7,552) (7.6) % 94,175
Property, plant & equipment,
net 54,212 76,062 (21,850) (28.7) % 66,032
Goodwill 4,114 4,114 0 0.0 % 4,114
Deferred income taxes 14,541 834 13,707 100.0 % 10,086
Other assets 1,521 1,327 194 14.6 % 1,716
--------------- ----------- ----------- ---------- -----------
Total assets $ 166,539 182,040 (15,501) (8.5) % 176,123
=============== =========== =========== ========== ===========
Current
liabilities:
Current maturities of long-
term debt $ 8,346 594 7,752 1,305.1 % 8,110
Accounts payable 16,613 15,192 1,421 9.4 % 22,852
Accrued expenses 10,669 11,962 (1,293) (10.8) % 9,556
Accrued restructuring costs 5,486 5,458 28 0.5 % 5,850
Income taxes payable 1,023 0 1,023 100.0 % 1,544
--------------- ----------- ----------- ---------- -----------
Total current
liabilities 42,137 33,206 8,931 26.9 % 47,912
Long-term debt, less current
maturities 46,584 50,569 (3,985) (7.9) % 42,440
--------------- ----------- ----------- ---------- -----------
Total liabilities 88,721 83,775 4,946 5.9 % 90,352
Shareholders' equity 77,818 98,265 (20,447) (20.8) % 85,771
--------------- ----------- ----------- ---------- -----------
Total liabilities and
shareholders' equity $ 166,539 182,040 (15,501) (8.5) % 176,123
=============== =========== =========== ========== ===========
Shares outstanding 11,559 11,550 9 0.1 % 11,551
=============== =========== =========== ========== ===========
* Derived from audited
financial statements.
See accompanying notes to consolidated financial
statements.
I-2
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 30, 2005 AND OCTOBER 31, 2004
UNAUDITED
(Amounts in Thousands)
SIX MONTHS ENDED
------------------------
Amounts
------------------------
October 30, October 31,
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $ (8,093) (5,245)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 9,836 6,900
Amortization of other assets 51 70
Stock-based compensation 104 104
Goodwill impairment 0 5,126
Deferred income taxes (4,455) (696)
Restructuring expense 6,238 1,154
Changes in assets and liabilities:
Accounts receivable 1,905 4,129
Inventories 7,050 517
Other current assets 845 (1,466)
Other assets 149 153
Accounts payable (5,623) 1,228
Accrued expenses 1,113 (1,066)
Accrued restructuring (3,510) (440)
Income taxes payable (521) (1,850)
----------- -----------
Net cash provided by operating activities 5,089 8,618
----------- -----------
Cash flows from investing activities:
Capital expenditures (4,875) (5,556)
Proceeds from the sale of buildings and equipment 3,950 0
----------- -----------
Net cash used in investing activities (925) (5,556)
----------- -----------
Cash flows from financing activities:
Payments on vendor-financed capital expenditures (799) (1,273)
Proceeds from issuance of long-term debt 4,380 133
Proceeds from common stock issued 31 15
----------- -----------
Net cash provided by (used in) financing
activities 3,612 (1,125)
----------- -----------
Increase in cash and cash equivalents 7,776 1,937
Cash and cash equivalents at beginning of period 5,107 14,568
----------- -----------
Cash and cash equivalents at end of period $ 12,883 16,505
=========== ===========
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(Dollars in thousands, except share data)
Capital Accumulated
Common Stock Contributed Other Total
----------------------------- in Excess Unearned Retained Comprehensive Shareholders'
Shares Amount of Par Value Compensation Earnings Income Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, May 2, 2004 11,546,634 $ 578 39,943 (349) 63,219 - $ 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 - $ 85,771
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss (8,093) (8,093)
Gain on cash flow hedge 5 5
Stock-based compensation 104 104
Common stock issued in connection
with stock option plans 7,950 1 30 31
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, October 30, 2005 11,558,709 $ 580 39,994 (35) 37,274 5 $ 77,818
=================================================================================================================================
See accompanying notes to consolidated financial statements.
I-4
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc.
and subsidiaries (the "company") include all adjustments, which are, in the
opinion of management, necessary for fair presentation of the results of
operations and financial position. All of these adjustments are of a normal
recurring nature except as disclosed in notes 10 and 13 to the consolidated
financial statements. Results of operations for interim periods may not be
indicative of future results. The unaudited consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements, which are included in the company's annual report on Form 10-K filed
with the Securities and Exchange Commission on July 12, 2005 for the fiscal year
ended May 1, 2005.
The company's six months ended October 30, 2005 and October 31, 2004
represent 26 week periods.
================================================================================
2. Stock-Based Compensation
Compensation costs related to employee stock option plans are recognized
utilizing the intrinsic value-based method prescribed by APB No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. The company has
adopted the disclosure requirements of SFAS No. 123, Accounting for Stock- Based
Compensation, as amended by SFAS No. 148. Accordingly, compensation cost is
recorded over the vesting period of the options based upon the difference in
option price and fair market price at the date of grant, if any.
The following table illustrates the effect on net loss and net loss per
share if the company had applied the fair value recognition provisions of SFAS
No. 123, as amended by SFAS No. 148, for the three months ended October 30, 2005
and October 31, 2004.
(dollars in thousands, except per share data) October 30, 2005 October 31, 2004
- --------------------------------------------------------------------------------------------------------------
Net loss, as reported $ (4,152) $ (4,193)
Add: Total stock-based employee compensation expense
included in net income, net of tax 33 32
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax (136) (155)
- --------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (4,255) $ (4,316)
- --------------------------------------------------------------------------------------------------------------
Net loss per share:
Basic - as reported $ (0.36) $ (0.36)
Basic - pro forma (0.37) (0.37)
Diluted - as reported (0.36) (0.36)
Diluted - pro forma (0.37) (0.37)
- --------------------------------------------------------------------------------------------------------------
The following table illustrates the effect on net loss and net loss per share if
the company had applied the fair value recognition provisions of SFAS No. 123,
as amended by SFAS No. 148, for the six months ended October 30, 2005 and
October 31, 2004.
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in thousands, except per share data) October 31, 2005 October 31, 2004
- --------------------------------------------------------------------------------------------------------------
Net loss, as reported $ (8,093) $ (5,245)
Add: Total stock-based employee compensation expense
included in net income, net of tax 66 67
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax (243) (277)
- --------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (8,270) $ (5,455)
- --------------------------------------------------------------------------------------------------------------
Net loss per share:
Basic - as reported $ (0.70) $ (0.45)
Basic - pro forma (0.72) (0.47)
Diluted - as reported (0.70) (0.45)
Diluted - pro forma (0.72) (0.47)
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
3. Accounts Receivable
A summary of accounts receivable follows:
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 May 1, 2005
- --------------------------------------------------------------------------------------------------------------
Customers $ 28,726 $ 30,803
Allowance for doubtful accounts (1,124) (1,142)
Reserve for returns and allowances (683) (837)
- --------------------------------------------------------------------------------------------------------------
$ 26,919 $ 28,824
- --------------------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
Six months ended
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 October 31, 2004
- --------------------------------------------------------------------------------------------------------------
Beginning balance $ (1,142) $ (1,442)
Adjustment of bad debt expense 12 282
Net write-offs 6 41
- --------------------------------------------------------------------------------------------------------------
Ending balance $ (1,124) $ (1,119)
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
I-6
4. Inventories
Inventories are carried at the lower of cost or market. Cost is determined
using the FIFO (first-in, first-out) method.
A summary of inventories follows:
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 May 1, 2005
- --------------------------------------------------------------------------------------------------------------
Raw materials $ 18,210 $ 23,204
Work-in-process 2,458 3,000
Finished goods 22,781 24,295
- --------------------------------------------------------------------------------------------------------------
$ 43,449 $ 50,499
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
5. Accounts Payable
- --------------------------------------------------------------------------------------------------------------
A summary of accounts payable follows:
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 May 1, 2005
- --------------------------------------------------------------------------------------------------------------
Accounts payable-trade $ 14,064 $ 19,688
Accounts payable-capital expenditures 2,549 3,164
- --------------------------------------------------------------------------------------------------------------
$ 16,613 $ 22,852
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
6. Accrued Expenses
A summary of accrued expenses follows:
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 May 1, 2005
- --------------------------------------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 5,254 $ 5,483
Interest 448 448
Accrued rebates 2,470 1,444
Other 2,497 2,181
- --------------------------------------------------------------------------------------------------------------
$ 10,669 $ 9,556
- --------------------------------------------------------------------------------------------------------------
==============================================================================================================
I-7
7. Long-Term Debt
A summary of long-term debt follows:
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 May 1, 2005
- --------------------------------------------------------------------------------------------------------------
Unsecured senior term notes $ 49,975 $ 49,975
Real estate loan 4,340 0
Canadian government loan 615 575
- --------------------------------------------------------------------------------------------------------------
54,930 50,550
Less current maturities (8,346) (8,110)
- --------------------------------------------------------------------------------------------------------------
$ 46,584 $ 42,440
- --------------------------------------------------------------------------------------------------------------
The company's unsecured senior term notes have a fixed interest rate of
7.76% (payable semi-annually in March and September) and are payable over an
average remaining term of four years beginning March 2006 through March 2010.
The company's Canadian government loan is non-interest bearing with its final
payment due during the company's third quarter of fiscal 2006.
In October 2005, the company entered into an agreement with its bank
(Wachovia) to provide for a term loan in the amount of $4.3 million secured by a
lien on the Company's headquarters office located in High Point, NC. This term
loan bears interest at the one-month London Interbank Offered Rate plus an
adjustable margin based on the company's debt/EBITDA ratio, as defined in the
agreement and is payable in varying monthly installments through October 2010.
In August of 2005, the company amended its agreement with its bank
(Wachovia) to provide for a revolving loan commitment of $8.0 million, including
letters of credit up to $5.5 million. Borrowings under the credit facility bears
interest at the London Interbank Offered Rate plus an adjustable margin based on
the company's debt/EBITDA ratio, as defined in the agreement. As of October 30,
2005, there were $2.6 million in outstanding letters of credit and no borrowings
outstanding under the agreement. The amended agreement also requires the company
to maintain collected deposit balances of $7.5 million with its bank (Wachovia)
from the period October 31, 2005 to March 15, 2006, which is the due date for
the first principal payment ($7.5 million) on the company's unsecured senior
term notes, and maintain certain other financial covenants, as defined in the
agreement. The amended credit facility expires on August 31, 2006.
On December 7, 2005, the company entered into a Seventh Amendment to this
credit agreement. This amendment requires the company to maintain collected
deposit balances of at least $3.0 million after March 15, 2006. Additionally,
this amendment reduces the minimum EBITDA covenant for the third and fourth
quarters of fiscal 2006.
The company's loan agreements require that the company maintain compliance
with certain financial covenants. At October 30, 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 - $8,346,000; 2007 - $7,742,000; 2008 - $20,051,000; 2009
- - $7,764,000; and 2010 - $11,027,000.
I-8
8. Interest Rate Hedging
In connection with the company's real estate loan with its bank (Wachovia),
the company was required to have an agreement to hedge the interest rate risk
exposure on the real estate loan. The Company entered into a $2,170,000 notional
principal interest rate swap, which represents 50% of the principal amount of
the real estate loan, that effectively converted the floating rate LIBOR based
payments to fixed payments at 4.99% plus the spread calculated under the real
estate loan agreement. This agreement expires October 2010.
The company accounts for the interest rate swap as a cash flow hedge
whereby the fair value of this contract is reflected in other assets in the
accompanying consolidated balance sheets with the offset recorded as accumulated
other comprehensive income. The fair value of the interest rate swap at October
30, 2005 was $5,000, as determined by quoted market prices.
9. Cash Flow Information
Payments for interest and income taxes follow:
Six months ended
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 October 31, 2004
- --------------------------------------------------------------------------------------------------------------
Interest $ 1,954 $ 1,989
Income taxes 515 831
==============================================================================================================
The non-cash portion of capital expenditures representing vendor financing
totaled $1,699,000 and $5,000 for the six months ended October 30, 2005 and
October 31, 2004, respectively.
==============================================================================================================
10. Restructuring and Related Charges
A summary of accrued restructuring costs follows:
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 May 1, 2005
- --------------------------------------------------------------------------------------------------------------
September 2005 Upholstery Fabrics $ 510 $ 0
August 2005 Upholstery Fabrics 433 0
April 2005 Upholstery Fabrics 1,323 1,944
October 2004 Upholstery Fabrics 145 309
Fiscal 2003 Culp Decorative Fabrics 3,070 3,587
Fiscal 2001 Culp Decorative Fabrics 5 10
- --------------------------------------------------------------------------------------------------------------
$ 5,486 $ 5,850
- --------------------------------------------------------------------------------------------------------------
I-9
September 2005 Upholstery Fabrics
On September 27, 2005 the company's board of directors approved a strategic
alliance with Synthetics Finishing, a division of TSG Incorporated, to provide
finishing services to the company for its domestically produced decorative
upholstery fabrics and collaborate with the company on research and product
development activities. As a result, the company will close its finishing plant
in Burlington, NC, thereby reducing the number of associates by approximately
100 people. This transition is expected to be completed in February 2006.
During the second quarter of fiscal 2006, total restructuring and related
charges incurred were $613,000 of which $510,000 related to termination benefits
and $103,000 related to accelerated depreciation. Of the total charge, $510,000
was recorded in restructuring expense and $103,000 was recorded in cost of sales
in the 2006 Consolidated Statements of Loss.
The balance of $510,000 in accrued restructuring costs represents the
employee termination benefits incurred. The company expects these restructuring
activities to result in additional charges of approximately $147,000 in the
third quarter of fiscal 2006. The $147,000 in charges consist of accelerated
depreciation.
August 2005 Upholstery Fabrics
In August 2005, the company's board of directors approved a restructuring
plan within the upholstery fabrics segment designed to reduce the company's U.S.
yarn manufacturing operations. The company sold its polypropylene yarn extrusion
equipment (with a book value of $2.3 million) located in Graham, NC to American
Fibers and Yarns Company, the company's supplier for polypropylene yarn, for
$1.1 million payable in cash. Pursuant to terms of the sale agreement, the
company has a long-term supply contract with American Fibers and Yarns Company
to continue to provide the company with polypropylene yarn at prices tied to a
published index.
The company's board of directors also approved further reductions in the
company's yarn operations by closing the company's facility in Shelby, NC and
consolidating the chenille yarn operations into the Lincolnton, NC facility. The
company will outsource the open-end yarns previously produced at the Shelby, NC
facility. As a result, the company will have one yarn plant in Lincolnton, NC
for producing chenille and wrap-spun yarns and a small texturizing yarn
operation in Graham, NC. Overall, these actions will reduce the number of
associates by approximately 100 people.
During the second quarter of fiscal 2006, total restructuring and related
charges incurred were $4.1 million of which $1.8 million related to write-downs
of a building and equipment, $1.2 million of accelerated depreciation related to
plant and equipment, $683,000 related to termination benefits, $331,000 for
inventory mark downs, $44,000 related to the dismantling, moving, and relocation
of equipment, and $14,000 related to lease termination costs. Of the total
charge, $2.5 million was recorded in restructuring expense and $1.6 million was
recorded in cost of sales in the 2006 Consolidated Statements of Loss.
- ------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ------------------------------------------------------------------------------------------------
Accrual established in fiscal 2006 $ 570 14 584
Paid in fiscal 2006 (151) 0 (151)
- ------------------------------------------------------------------------------------------------
Balance, October 30, 2005 $ 419 14 433
- ------------------------------------------------------------------------------------------------
As of October 30, 2005, there were no assets classified as held for sale.
I-10
April 2005 Upholstery Fabrics
During the second quarter of fiscal 2006, total restructuring charges
incurred were $807,000 of which approximately $347,000 related to lease
termination costs, $299,000 related to termination benefits, $148,000 related to
the dismantling, moving, and relocation of equipment, and $13,000 related to
write-downs of equipment. The $807,000 charge was recorded in restructuring
expense in the 2006 Consolidated Statements of Loss.
During the first six months of fiscal 2006, the total restructuring and
related charges incurred were $4.4 million of which approximately $3.5 million
related to accelerated depreciation associated with plant and equipment,
$395,000 related to lease termination costs, $310,000 related to the
dismantling, moving, and relocation of equipment, $158,000 related to
termination benefits, and $59,000 related to write-downs of equipment. Of the
total charge, $921,000 was recorded in restructuring expense; $495,000 related
to accelerated depreciation was recorded in cost of sales; and $3.0 million
related to accelerated deprecation was recorded in selling, general, and
administrative expenses in the 2006 Consolidated Statements of Loss.
The following summarizes the fiscal 2006 activity in the restructuring
accrual (dollars in thousands):
- ------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ------------------------------------------------------------------------------------------------
Balance, May 1, 2005 $ 1,897 47 1,944
Additions in fiscal 2006 0 369 369
Adjustments in fiscal 2006 158 0 158
Paid in fiscal 2006 (1,112) (36) (1,148)
- ------------------------------------------------------------------------------------------------
Balance, October 30, 2005 $ 943 380 1,323
- ------------------------------------------------------------------------------------------------
As of October 30, 2005, assets classified as held for sale consisted of
machinery and equipment with a value of $197,500 and are included in other
assets.
October 2004 Upholstery Fabrics
During the second quarter of fiscal 2006, the total restructuring and
related charges incurred were $638,000 of which $346,000 related to write-downs
of equipment, $204,000 related to dismantling, moving, and relocation of
equipment, and $88,000 related to termination benefits. Of the total charge,
$570,000 charge was recorded in restructuring expense and $68,000 was recorded
in cost of sales in the 2006 Consolidated Statements of Loss.
During the first six months of fiscal 2006, the total restructuring and
related charges incurred were $2.4 million of which approximately $1.2 million
related to the dismantling, moving, and relocation of equipment, $1.1 million
related to write-downs of equipment, and $88,000 related to termination
benefits. Of the total charge, $2.3 million charge was recorded in restructuring
expense and $68,000 in cost of sales in the 2006 Consolidated Statements of
Loss.
I-11
The following summarizes the fiscal 2006 activity in the restructuring
accrual (dollars in thousands):
- ------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ------------------------------------------------------------------------------------------------
Balance, May 1, 2005 $ 309 0 309
Adjustments in fiscal 2006 45 0 45
Paid in fiscal 2006 (209) 0 (209)
- ------------------------------------------------------------------------------------------------
Balance, October 30, 2005 $ 145 0 145
- ------------------------------------------------------------------------------------------------
As of October 30, 2005, there were no assets classified as held for sale.
Fiscal 2003 Culp Decorative Fabrics Restructuring
During the second quarter of fiscal 2006, as a result of management's
continual evaluation of the restructuring accrual, the reserve was decreased by
approximately $53,000 to reflect current estimates of employee termination
benefits and lease termination costs. During the first six months of fiscal
2006, as a result of management's continual evaluation of the restructuring
accrual, the reserve was decreased by approximately $99,000 to reflect current
estimates of employee termination benefits and lease termination costs.
The following summarizes the fiscal 2006 activity in the restructuring
accrual (dollars in thousands):
- ------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ------------------------------------------------------------------------------------------------
Balance, May 1, 2005 $ 200 3,387 3,587
Adjustments in fiscal 2006 (66) (33) (99)
Paid in fiscal 2006 (22) (396) (418)
- ------------------------------------------------------------------------------------------------
Balance, October 30, 2005 $ 112 2,958 3,070
- ------------------------------------------------------------------------------------------------
As of October 30, 2005, there were no assets classified as held for sale.
Fiscal 2001 Culp Decorative Fabrics Restructuring
During the second quarter of fiscal 2006, as a result of management's
continual evaluation of the restructuring accrual, the reserve was increased by
approximately $59,000 to reflect current estimates of future health care claims.
During the first six months of fiscal 2006, as a result of management's
continual evaluation of the restructuring accrual, the reserve was increased by
approximately $79,000 to reflect current estimates of future health care claims.
I-12
The following summarizes the fiscal 2006 activity in the restructuring
accrual (dollars in thousands):
- ------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ------------------------------------------------------------------------------------------------
Balance, May 1, 2005 $ 10 0 10
Adjustments in fiscal 2006 79 0 79
Paid in fiscal 2006 (84) 0 (84)
- ------------------------------------------------------------------------------------------------
Balance, October 30, 2005 $ 5 0 5
- ------------------------------------------------------------------------------------------------
================================================================================================
As of October 30, 2005, there were no assets classified as held for sale.
11. Net Loss per Share
Basic net loss per share is computed using the weighted-average number of
shares outstanding during the period. Diluted income per share uses the
weighted-average number of shares outstanding during the period plus the
dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted net loss
per share follows:
Three months ended
- --------------------------------------------------------------------------------------------------------
(amounts in thousands) October 30, 2005 October 31, 2004
- --------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,559 11,549
Effect of dilutive stock options 0 0
- --------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,559 11,549
Options to purchase 506,125 shares and 409,750 shares of common stock were
not included in the computation of diluted loss per share for the three months
ended October 30, 2005 and October 31, 2004 respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
Options to purchase 48,209 and 172,956 shares of common stock were not
included in the computation of diluted net loss per share for the three months
ended October 30, 2005 and October 31, 2004, respectively because the company
incurred a net loss for the period.
Six months ended
- --------------------------------------------------------------------------------------------------------
(amounts in thousands) October 30, 2005 October 31, 2004
- --------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,555 11,548
Effect of dilutive stock options 0 0
- --------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,555 11,548
Options to purchase 510,750 shares and 423,438 shares of common stock were
not included in the computation of diluted loss per share for the six months
ended October 30, 2005 and October 31, 2004, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
I-13
Options to purchase 42,171 shares and 176,621 shares of common stock were
not included in the computation of diluted net loss per share for the six months
ended October 30, 2005 and October 31, 2004 respectively, because the company
incurred a net loss for the period.
================================================================================
12. Segment Information
The company's operations are classified into two segments: mattress fabrics
and upholstery fabrics. The mattress fabrics segment principally manufactures
and sells fabrics to bedding manufacturers. The upholstery fabrics segment
principally manufactures and sells fabrics to residential and commercial
(contract) furniture manufacturers.
Financial information for the company's operating segments follow:
Three months ended
- -----------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 October 31, 2004
- -----------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 23,990 $ 26,886
Upholstery Fabrics 43,016 48,520
- -----------------------------------------------------------------------------------------------
$ 67,006 $ 75,406
- -----------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 3,302 $ 4,461
Upholstery Fabrics 4,000 6,230
Restructuring related charges (1,751) (1) (1,124) (3)
- -----------------------------------------------------------------------------------------------
$ 5,551 $ 9,567
- -----------------------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 1,666 $ 2,676
Upholstery Fabrics (69) 216
Unallocated corporate expenses (821) (1,039)
Goodwill impairment 0 (5,126) (5)
Restructuring and related charges (6,163) (2) (2,416) (4)
- -----------------------------------------------------------------------------------------------
$ (5,387) $ (5,689)
- -----------------------------------------------------------------------------------------------
(1) The $1.8 million represents restructuring related charges of $1.3 million
of accelerated depreciation associated with the closing of the company's
facility in Shelby, NC and consolidating the chenille yarn operations into
the Lincolnton, NC facility, $331,000 for inventory markdowns, $104,000 for
accelerated depreciation associated with the closing of the company's
finishing facility located in Burlington, NC, and $65,000 for termination
benefit expenses. These charges are included in the cost of sales line item
in the Consolidated Statements of Net Loss and are related to the
Upholstery Fabrics segment.
(2) The $6.2 million represents restructuring and related charges of $2.1
million for write-downs of buildings and equipment, $1.6 million for
accrued termination benefits, $1.3 million of accelerated depreciation
associated with the closing of the company's facility in Shelby, NC and
consolidating the chenille yarn operations into the Lincolnton, NC
facility, $395,000 for asset movement costs, $331,000 for inventory
markdowns, $328,000 for lease termination costs, and $104,000 for
accelerated depreciation associated with the closing of the company's
finishing facility located in Burlington, NC. Of the total charge, $4.4
million was recorded in restructuring expense line item and $1.8 million
was included in the cost of sales line item in the Consolidated Statements
of Net Loss. These charges are primarily related to the Upholstery Fabrics
segment.
I-14
(3) The $1.1 million represents restructuring related charges of $910,000 and
$215,000 for inventory markdowns and accelerated depreciation associated
with the closing of the company's facility in Pageland, SC and
consolidating those operations into the Graham, NC facility. These charges
are included in the cost of sales line item in the Consolidated Statements
of Net Loss and are related to the Upholstery Fabrics segment.
(4) The $2.4 million represents restructuring and related charges of $1.0
million for accrued termination benefits, $910,000 for inventory markdowns,
$278,000 for write-downs of buildings and equipment, and $215,000 for
accelerated depreciation associated with the closing of the company's
facility in Pageland, SC and consolidating those operations into the
Graham, NC facility. Of the total charge, $1.3 million was recorded in the
restructuring expense line item and $1.1 million was included in the cost
of sales line item in the Consolidated Statements of Net Loss. These
charges relate to the Upholstery Fabrics segment.
(5) The $5.1 million represents a goodwill impairment charge related to the
Culp Decorative Fabrics division within the Upholstery Fabrics segment.
Six months ended
- -----------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 October 31, 2004
- -----------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 46,905 $ 52,839
Upholstery Fabrics 82,443 90,416
- -----------------------------------------------------------------------------------------------
$ 129,348 $ 143,255
- -----------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 6,397 $ 9,255
Upholstery Fabrics 7,957 10,186
Restructuring related charges (2,246) (6) (1,199) (8)
- -----------------------------------------------------------------------------------------------
$ 12,108 $ 18,242
- -----------------------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 3,024 $ 5,575
Upholstery Fabrics (448) (2,403)
Unallocated corporate expenses (1,582) (1,849)
Goodwill impairment 0 (5,126) (5)
Restructuring and related charges (11,506) (7) (2,353) (9)
- -----------------------------------------------------------------------------------------------
$ (10,512) $ (6,156)
- -----------------------------------------------------------------------------------------------
(6) The $2.3 million represents restructuring related charges of $1.3 million
of accelerated depreciation associated with the closing of the company's
facility in Shelby, NC and consolidating the chenille yarn operations into
the Lincolnton, NC facility, $495,000 for accelerated depreciation on
equipment associated with the consolidation of the Burlington, NC and
Anderson, SC manufacturing facilities within the CVP division, $331,000 for
inventory markdowns, $104,000 for accelerated depreciation associated with
the closing of the company's finishing facility located in Burlington, NC,
and $65,000 for termination benefit expenses. These charges are included in
the cost of sales line item of the Consolidated Statements of Net Loss and
are related to the Upholstery Fabrics segment.
(7) The $11.5 million represents restructuring and related charges of $3.5
million for accelerated depreciation associated with the design and
distribution centers sold in June of 2005 and equipment associated with the
consolidation of the Burlington, NC and Anderson, SC manufacturing
facilities within the CVP division, $2.9 million for write-downs of
buildings and equipment, $1.6 million for asset movement costs, $1.5
million for termination benefits, $1.3 million for accelerated depreciation
associated with the closing of the company's facility in Shelby, NC and
consolidating the Chenille yarn operations into the Lincolnton, NC
facility, $378,000 for lease termination costs, $331,000 for inventory
markdowns, $104,000 for accelerated depreciation associated with the
closing of the company's finishing facility located in Burlington, NC. Of
the total charge, $6.2 million was recorded in the restructuring expense
line item, $3.0 million was included in the selling, general, and
administrative expenses line item, and $2.3 million was included in the
cost of sales line item of the Consolidated Statements of Net Loss. These
charges primarily related to the Upholstery Fabrics segment.
I-15
(8) The $1.2 million represents restructuring related charges of $910,000 and
$215,000 for inventory markdowns and accelerated depreciation associated
with the closing of the company's facility in Pageland, SC and
consolidating those operations into the Graham, NC facility, and $75,000
for equipment dismantling charges related to the closing of the Lumberton,
NC manufacturing facility. These charges are included in the cost of sales
line item of the Consolidated Statements of Net Loss and are related to the
Upholstery Fabrics segment.
(9) The $2.4 million represents restructuring and related charges of $910,000
for inventory markdowns, $876,000 for accrued termination benefits,
$278,000 for write-downs of buildings and equipment, $215,000 for
accelerated depreciation associated with the closing of the company's
facility in Pageland, SC and consolidating those operations into the
Graham, NC facility, and $75,000 for equipment dismantling charges related
to the closing of the Lumberton, NC manufacturing facility. Of the total
charge, $1.2 million was recorded in the restructuring expense line item
and $1.2 million was recorded in the cost of sales line item of the
Consolidated Statements of Net Loss. These charges are related to the
Upholstery Fabrics segment.
Balance sheet information for the company's operating segments follow:
- -----------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 May 1, 2005
- -----------------------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics
Current assets $ 21,869 $ 24,951
Property, plant and equipment (10) 27,020 26,658
- -----------------------------------------------------------------------------------------------
Total mattress fabrics assets 48,889 51,609
- -----------------------------------------------------------------------------------------------
Upholstery Fabrics
- -----------------------------------------------------------------------------------------------
Current assets 48,499 54,372
Property, plant and equipment (11) 27,124 39,273
- -----------------------------------------------------------------------------------------------
Total upholstery fabrics assets 75,623 93,645
- -----------------------------------------------------------------------------------------------
Total segment assets 124,512 145,254
Non-segment assets:
Cash and cash equivalents 12,883 5,107
Deferred income taxes 21,595 17,140
Other current assets 1,846 2,691
Property, plant & equipment 68 101
Goodwill 4,114 4,114
Other assets 1,521 1,716
- -----------------------------------------------------------------------------------------------
Total assets $ 166,539 $ 176,123
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
I-16
Three months ended
- -----------------------------------------------------------------------------------------------
(dollars in thousands) October 30, 2005 October 31, 2004
- -----------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 546 $ 300
Upholstery Fabrics 833 240
Unallocated corporate 0 468
- -----------------------------------------------------------------------------------------------
$ 1,379 $ 1,008
- -----------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 893 $ 915
Upholstery Fabrics 1,417 2,408
- -----------------------------------------------------------------------------------------------
Total segment depreciation expense 2,310 3,323
Accelerated depreciation 1,355 215
- -----------------------------------------------------------------------------------------------
$ 3,665 $ 3,538
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Six months ended
(dollars in thousands) October 30, 2005 October 31, 2004
- -----------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 3,416 $ 730
Upholstery Fabrics 2,007 477
Unallocated corporate 0 4,343 (12)
- -----------------------------------------------------------------------------------------------
$ 5,423 $ 5,550
- -----------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 1,749 $ 1,831
Upholstery Fabrics 3,216 4,854
- -----------------------------------------------------------------------------------------------
Total segment depreciation expense 4,965 6,685
Accelerated depreciation 4,871 215
- -----------------------------------------------------------------------------------------------
$ 9,836 $ 6,900
- -----------------------------------------------------------------------------------------------
(10) Included in property, plant, and equipment are assets located in the U.S.
totaling $13.4 million and $12.2 million at October 30, 2005 and May 1,
2005, respectively.
(11) Included in property, plant, and equipment are assets located in the U.S.
totaling $22.4 million and $36.2 million at October 30, 2005 and May 1,
2005, respectively. Included in this U.S. property, plant, and equipment
are various other corporate allocations totaling $4.1 million at October
30, 2005. At May 1, 2005 allocations totaled $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.
(12) Unallocated corporate capital expenditures for fiscal 2005 primarily
represent capital spending for the new corporate office building.
================================================================================
13. Goodwill Impairment
Due to the continued pressure on demand in the upholstery fabrics segment,
operating profits and cash flows were lower than expected for the second quarter
and year to date for fiscal 2005. As a result, management determined that the
goodwill associated with the segment should be tested for impairment in
accordance with the provisions of FAS 142, Goodwill and Other Intangible Assets.
An independent business valuation specialist was engaged to assist the company
in the determination of the fair market value of the upholstery fabrics segment.
I-17
The fair value as 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, related to the goodwill associated with the
upholstery fabrics segment. After the goodwill impairment charge, the company's
remaining goodwill of $4.1 million relates to the mattress fabrics segment.
================================================================================
14. Subsequent Events
In November 2005, the company entered into an agreement with the Canadian
government to provide for a term loan in the amount of $680,000. The proceeds
are to partially finance capital expenditures at the company's Rayonese facility
located in Quebec, Canada. The loan is non-interest bearing and is payable in 48
equal monthly installments commencing December 1, 2009.
================================================================================
15. Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No.151, "Inventory Costs, an
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 No. 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 March 2005, the FASB issued Interpretation No.47, "Accounting for
Conditional Asset Retirement Obligations," (FIN 47). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS
No.143,"Accounting for Asset Retirement Obligations," refers to a legal
obligation to perform an asset retirement activity in which the timing and (or)
method of settlement are conditional on a future event that may or may not be
within the control of an entity. FIN 47 is effective no later than the end of
fiscal years ending after December 15, 2005, and will be effective for the
company on April 30, 2006. The company does not expect there to be any material
effect on its consolidated financial statements upon adoption of the new
standard.
================================================================================
I-18
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report and the exhibits attached hereto 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 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 and home furnishings 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.
I-19
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following analysis of financial condition and results of operations should
be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
Overview
Culp, 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 furniture manufacturing
(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 bedding and furniture.
The company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to April 30. The year-to-date period for fiscal 2006 and 2005 included
26 weeks. The company's operating segments are mattress fabrics and upholstery
fabrics. In mattress fabrics, the company markets a broad array of fabrics used
by bedding manufacturers. In upholstery fabrics, the company markets jacquard
woven fabrics for residential and commercial furniture and velvet printed
fabrics and microdenier suedes used primarily for residential furniture.
The following tables set forth the company's net sales, gross profit, selling,
general and administrative expenses and operating income (loss) by segment for
the three and six months ended October 30, 2005 and October 31, 2004.
I-20
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT/DIVISION
FOR THE THREE MONTHS ENDED OCTOBER 30, 2005 AND OCTOBER 31, 2004
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------
Amounts Percent of Total Sales
--------------------- ----------------------
October 30, October31, % Over October 30, October 31,
Net Sales by Segment 2005 2004 (Under) 2005 2004
- ------------------------------------- ---------- -------- -------- --------- --------
Mattress Fabrics $ 23,990 26,886 (10.8)% 35.8 % 35.7 %
Upholstery Fabrics 43,016 48,520 (11.3)% 64.2 % 64.3 %
---------- -------- -------- --------- --------
Net Sales $ 67,006 75,406 (11.1)% 100.0 % 100.0 %
========== ======== ======== ========= ========
Gross Profit by Segment Gross Profit Margin
- ------------------------------------- ----------------------
Mattress Fabrics $ 3,302 4,461 (26.0)% 13.8 % 16.6 %
Upholstery Fabrics 4,000 6,230 (35.8)% 9.3 % 12.8 %
---------- -------- -------- --------- --------
Subtotal 7,302 10,691 (31.7)% 10.9 % 14.2 %
Restructuring related charges (1,751)(1) (1,124)(2) (55.8)% (2.6)% (1.5)%
---------- -------- -------- --------- --------
Gross Profit $ 5,551 9,567 (42.0)% 8.3 % 12.7 %
========== ======== ======== ========= ========
Sales, General and Administrative
expenses by Segment Percent of Sales
- ------------------------------------- ----------------------
Mattress Fabrics $ 1,636 1,784 (8.3)% 6.8 % 6.6 %
Upholstery Fabrics 4,069 6,016 (32.4)% 9.5 % 12.4 %
Unallocated Corporate expenses 821 1,038 (20.9)% 1.2 % 1.4 %
---------- -------- -------- --------- --------
Selling, General and
Administrative expenses $ 6,526 8,838 (26.2)% 9.7 % 11.7 %
========== ======== ======= ========= ========
Operating Income
Operating Income (loss) by Segment (Loss) Margin
- ------------------------------------- ----------------------
Mattress Fabrics $ 1,666 2,676 (37.7)% 6.9 % 10.0 %
Upholstery Fabrics (69) 216 (131.9)% (0.2)% 0.4 %
Unallocated corporate expenses (821) (1,039) 21.0 % (1.2)% (1.4)%
---------- -------- -------- --------- --------
Subtotal 776 1,853 (58.1)% 1.2 % 2.5 %
Goodwill impairment 0 (5,126)(3)(100.0)% 0.0 % (6.8)%
Restructuring and related charges (6,163)(1) (2,416)(2)(155.1)% (9.2)% (3.2)%
---------- -------- -------- --------- --------
Operating loss $ (5,387) (5,689) 5.3 % (8.0)% (7.5)%
========== ======== ======== ========= ========
Depreciation by Segment
- -------------------------------------
Mattress Fabrics $ 893 915 (2.4)%
Upholstery Fabrics 1,417 2,408 (41.2)%
---------- -------- --------
Subtotal 2,310 3,323 (30.5)%
Accelerated Depreciation 1,355 215 530.2 %
---------- -------- --------
Total Depreciation $ 3,665 3,538 3.6 %
========== ======== ========
(1) The $1.8 million represents restructuring related charges of $1.3 million
of accelerated depreciation associated with the closing of the company's
facility in Shelby, NC and consolidating the chenille yarn operations into
the Lincolnton, NC facility, $331,000 for inventory markdowns, $104,000 for
accelerated depreciation associated with the closing of the company's
finishing facility located in Burlington, NC, and $65,000 for termination
benefit expenses. The $6.2 million represents restructuring and related
charges of $2.1 million for write-downs of buildings and equipment, $1.6
million for accrued termination benefits, $1.3 million of accelerated
depreciation associated with the closing of the company's facility in
Shelby, NC and consolidating the chenille yarn operations into the
Lincolnton, NC facility, $395,000 for asset movement costs, $331,000 for
inventory markdowns, $328,000 for lease termination costs, and $104,000 for
accelerated depreciation associated with the closing of the company's
finishing facility located in Burlington, NC.
(2) The $1.1 million represents restructuring related charges of $910,000 and
$215,000 for inventory markdowns and accelerated deprecation associated
with the closing of the company's facility in Pageland, SC and
consolidating those operations into the Graham, NC facility. The $2.4
million represents restructuring and related charges of $1.0 million for
accrued termination benefits, $910,000 for inventory markdowns, $278,000
for write-downs of buildings and equipment, and $215,000 for accelerated
depreciation associated with the closing of the company's facility in
Pageland, SC and consolidating those operations into the Graham, NC
facility.
(3) The $5.1 million represents a goodwill impairment charge related to the
Culp Decorative Fabrics division within the upholstery fabrics segment.
I-21
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT/DIVISION
FOR THE SIX MONTHS ENDED OCTOBER 30, 2005 AND OCTOBER 31, 2004
(Amounts in thousands)
SIX MONTHS ENDED (UNAUDITED)
----------------------------------------------------------
Amounts Percent of Total Sales
--------------------- ----------------------
October 30, October31, % Over October 30, October 31,
Net Sales by Segment 2005 2004 (Under) 2005 2004
- ----------------------------------------- -------- --------- --------- --------
Mattress Fabrics $ 46,905 52,839 (11.2)% 36.3 % 36.9 %
Upholstery Fabrics 82,443 90,416 (8.8)% 63.7 % 63.1 %
-------- -------- --------- --------- --------
Net Sales $129,348 143,255 (9.7)% 100.0 % 100.0 %
======== ======== ========= ========= ========
Gross Profit by Segment Gross Profit Margin
- ------------------------------- ----------------------
Mattress Fabrics $ 6,397 9,255 (30.9)% 13.6 % 17.5 %
Upholstery Fabrics 7,957 10,186 (21.9)% 9.7 % 11.3 %
-------- -------- --------- --------- --------
Subtotal 14,354 19,441 (26.2)% 11.1 % 13.6 %
Restructuring related charges (2,246)(1) (1,199)(4) (87.3)% (1.7)% (0.8)%
-------- -------- --------- --------- --------
Gross Profit $ 12,108 18,242 (33.6)% 9.4 % 12.7 %
======== ======== ========= ========= ========
Sales, General and Percent
Administrative expenses by of
Segment Sales
- ------------------------------- ----------------------
Mattress Fabrics $ 3,373 3,679 (8.3)% 7.2 % 7.0 %
Upholstery Fabrics 8,404 12,589 (33.2)% 10.2 % 13.9 %
Unallocated Corporate expenses 1,583 1,850 (14.4)% 1.2 % 1.3 %
-------- -------- -------- --------- --------
Subtotal 13,360 18,118 (26.3)% 10.3 % 12.6 %
Restructuring related charges 3,022 (2) 0 100.0 % 2.3 % 0.0 %
-------- -------- --------- --------- --------
Selling, General and
Administrative expenses $ 16,382 18,118 (9.6)% 12.7 % 12.6 %
======== ======== ======== ========= ========
Operating Income (loss) by Operating Income
Segment (Loss) Margin
- ------------------------------- ----------------------
Mattress Fabrics $ 3,024 5,575 (45.8)% 6.4 % 10.6 %
Upholstery Fabrics (448) (2,403) 81.4 % (0.5)% (2.7)%
Unallocated corporate expenses (1,582) (1,849) 14.4 % (1.2)% (1.3)%
-------- -------- --------- --------- --------
Subtotal 994 1,323 (24.9)% 0.8 % 0.9 %
Goodwill impairment 0 (5,126)(5) (100.0)% 0.0 % (3.6)%
Restructuring and related
charges (11,506)(3) (2,353)(4) (389.0)% (8.9)% (1.6)%
-------- -------- --------- --------- --------
Operating loss $(10,512) (6,156) (70.8)% (8.1)% (4.3)%
======== ======== ========= ========= ========
Depreciation by Segment
- -------------------------------
Mattress Fabrics $ 1,749 1,831 (4.5)%
Upholstery Fabrics 3,216 4,854 (33.7)%
-------- -------- ---------
Subtotal 4,965 6,685 (25.7)%
Accelerated Depreciation 4,871 215 2,165.6 %
-------- -------- ---------
Total Depreciation $ 9,836 6,900 42.6 %
======== ======== =========
(1) The $2.3 million represents restructuring related charges of $1.3 million
of accelerated depreciation associated with the closing of the company's
facility in Shelby, NC and consolidating the chenille yarn operations into
the Lincolnton, NC facility, $495,000 for accelerated depreciation on
equipment associated with the consolidation of the Burlington, NC and
Anderson, SC manufacturing facilities within the CVP division, $331,000 for
inventory markdowns, $104,000 for accelerated depreciation associated with
the closing of the company's finishing facility located in Burlington, NC,
and $65,000 for termination benefit expenses.
(2) The $3.0 million represents accelerated depreciation associated with the
design and distribution centers sold in June of 2005.
(3) The $11.5 million represents restructuring and related charges of $3.5
million for accelerated depreciation associated with the design and
distribution centers sold in June of 2005 and equipment associated with the
consolidation of the Burlington, NC and Anderson, SC manufacturing
facilities within the CVP division, $2.9 million for write-downs of
buildings and equipment, $1.6 million for asset movement costs, $1.5
million for termination benefits, $1.3 million for accelerated depreciation
associated with the closing of the company's facility in Shelby, NC and
consolidating the chenille yarn operations into the Lincolnton, NC
facility, $378,000 for lease termination costs, $331,000 for inventory
markdowns, $104,000 for accelerated depreciation associated with the
closing of the company's finishing facility located in Burlington, NC.
(4) The $1.2 million represents restructuring related charges of $910,000 and
$215,000 for inventory markdowns and accelerated depreciation associated
with the closing of the company's facility in Pageland, SC and
consolidating those operations into the Graham, NC facility, $75,000 for
equipment dismantling charges related to the closing of the Lumberton, NC
manufacturing facility. The $2.4 million represents restructuring and
related charges of $910,000 for inventory markdowns, $876,000 for accrued
termination benefits, $278,000 for write-downs of buildings and equipment,
$215,000 for accelerated depreciation associated with the closing of the
company's facility in Pageland, SC and consolidating those operations into
the Graham, NC facility, and $75,000 for equipment dismantling charges
related to the closing of the Lumberton, NC manufacturing facility.
(5) The $5.1 million represents a goodwill impairment charge related to the
Culp Decorative Fabrics division within the upholstery fabrics segment.
I-22
Three and Six Months ended October 30, 2005 compared with Three and Six Months
ended October 31, 2004
For the second quarter of fiscal 2006, net sales decreased 11.1% to $67.0
million compared to $75.4 million for the second quarter of fiscal 2005. The
company reported a net loss of $4.2 million, or $0.36 per share diluted, in the
second quarter of fiscal 2006, which included restructuring and related pre-tax
charges of $6.2 million. The company reported a net loss of $4.2 million, or
$0.36 per share diluted, in the second quarter of fiscal 2005, which included
restructuring and related pre-tax charges of $2.4 million and $5.1 million in
goodwill impairment.
The financial results for the second quarter were affected by a shortage of
polyurethane foam used in furniture and bedding and surcharges for raw
materials, both of which are related to disruptions from the hurricane activity
on the Gulf Coast. In response, the company implemented surcharges to its
customers in both operating segments in October 2005. However, these surcharges
did not offset the increased costs. These factors are expected to continue over
the next quarter but to a diminishing extent.
For the first six months of fiscal 2006, net sales decreased 9.7% to $129.3
million compared to $143.3 million for the first six months of fiscal 2005. The
company reported a net loss of $8.1 million, or $0.70 per share diluted, for the
first six months of fiscal 2006, which included restructuring and related
pre-tax charges of $11.5 million. The company reported a net loss of $5.2
million, or $0.45 per share diluted, for the same period last year, which
included restructuring and related pre-tax charges of $2.4 million and $5.1
million in goodwill impairment.
Restructuring and Related Charges
During the second quarter of fiscal 2006, total restructuring and related
charges incurred were $6.2 million, of which approximately $2.1 million related
to write-downs of buildings and equipment, $1.6 million for accrued termination
benefits, $1.3 million for accelerated depreciation associated with the
company's yarn facility in Shelby, NC, and consolidating the chenille yarn
operations into the Lincolnton, NC, facility, $395,000 for dismantling, moving,
and relocation of equipment, $331,000 for inventory markdowns, $328,000 for
lease termination costs, and $104,000 for accelerated depreciation associated
with the closing of the company's finishing facility located in Burlington, NC.
Of the total charge, $4.4 million was recorded in the restructuring expense line
item and $1.8 million was recorded in the cost of sales line item in the 2006
Consolidated Statements of Loss. For the first six months of fiscal 2006, total
restructuring and related charges incurred were $11.5 million, of which
approximately $3.5 million related to accelerated depreciation associated with
the design and distribution centers sold in June 2005, and equipment associated
with the consolidation of the Burlington, NC, and Anderson, SC, velvet
manufacturing facilities, $2.9 million for write-downs of buildings and
equipment, $1.6 million for dismantling, moving, and relocation of equipment,
$1.5 million for termination benefits, $1.3 million for accelerated deprecation
associated with the closing of the company's facility in Shelby, NC, and
consolidating the chenille yarn operations into the Lincolnton, NC, facility,
$378,000 for lease termination costs, $331,000 for inventory markdowns, and
$104,000 for accelerated depreciation associated with the closing of the
company's finishing facility located in Burlington, NC. Of the total charge,
$6.2 million was recorded in the restructuring expense line item, $3.0 million
in the selling, general, and administrative expense line item, and $2.3 million
in the cost of sales line item in the 2006 Consolidated Statements of Loss.
These charges relate to the Upholstery Fabrics segment.
I-23
Mattress Fabrics Segment
Net Sales -- Mattress fabric sales (known as mattress ticking) for the second
quarter of fiscal 2006 decreased 10.8% to $24.0 million compared to $26.9
million for the second quarter of fiscal 2005. Mattress ticking yards sold
during the second quarter of fiscal 2006 were 11.1 million compared to 11.3
million yards in the second quarter of last year, a decline of 2.3%.The average
selling price was $2.16 per yard for the second quarter of fiscal 2006, compared
to $2.35 per yard in the second quarter of fiscal 2005, a decrease of 8.1%,
primarily related to prices for the damask product line. This pricing trend
reflects the ongoing shift mattress manufacturers are making to less expensive
common border ticking, which is the fabric that goes on the side of mattresses
and box springs. Sales in this segment were also affected by the industry-wide
shortage of polyurethane foam used by mattress manufacturers. For the first six
months, net sales decreased 11.2% to $46.9 million compared to $52.8 million for
the first six months of fiscal 2005. For the first six months of fiscal 2006,
the average selling price for mattress fabrics was $2.22 per yard compared to
$2.37 per yard in the same period last year.
Operating income -- For the second quarter of fiscal 2006, the mattress fabrics
segment reported operating income of $1.7 million, or 6.9% of net sales,
compared to $2.7 million, or 10.0% of net sales, for the second quarter of
fiscal 2005. Operating income in this segment was affected by a customs
assessment totaling $375,000, which reduced operating margin for the second
quarter by approximately 160 basis points. Additionally, these results reflect
higher raw material prices that were not offset by the company's customer
surcharges, and manufacturing variances related to the start-up of the capital
project. Operating income for the first six months of fiscal 2006 was $3.0
million, or 6.4% of net sales, compared with operating income of $5.6 million,
or 10.6% of net sales, for the first six months of fiscal 2005. These results
were primarily affected by soft consumer demand industry-wide in the first
quarter of 2006, costs related to manufacturing variances related to the
start-up of the company's capital project, lower average selling prices
principally related to the damask product line, higher raw material prices that
were not offset by the company's customer surcharges, and a customs assessment
totaling $375,000.
The $7.0 million capital project (announced in October 2004), which was designed
to improve the company's globally competitive cost structure, achieved final
implementation during the second quarter. During the first quarter, the company
completed its building expansion and weaving machine installation at the
Stokesdale, NC plant, as well as the installation and full operation of the new
weaving machines at the Quebec, Canada, facility. Production at the Stokesdale
facility began to ramp up significantly during the second quarter. These actions
resulted in higher operational income margins in second quarter 2006 as compared
to the first quarter of fiscal 2006, despite the pressure from mattress industry
foam shortage and customs assessments.
Segment assets -- Segment assets consist of accounts receivable, inventory, and
property, plant, and equipment. As of October 30, 2005, accounts receivable and
inventory totaled $21.9 million compared to $25.0 million at May 1, 2005. Also
as of October 30, 2005, property, plant and equipment totaled $27.0 million
compared to $26.7 million at May 1, 2005. Included in property, plant, and
equipment are assets located in the U.S. totaling $13.4 million and $12.2
million at October 30, 2005 and May 1, 2005, respectively.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for the second quarter of fiscal 2006
decreased 11.3% to $43.0 million compared with $48.5 million in the second
quarter of fiscal 2005. Upholstery fabric yards sold during the second quarter
of fiscal 2006 were 10.4 million compared to 11.5 million in the second quarter
of fiscal 2005, a decline of 9.5%. The average selling price was $4.13 per yard
for the second quarter of fiscal 2006 compared with $4.23 for the second quarter
of fiscal 2005, a decrease of 2.6%. Sales of upholstery fabrics reflect
continued soft demand industry-wide for U.S. produced fabrics and consumer
preference for leather and suede furniture and other imported fabrics, including
cut and sewn kits. However, the lower sales of U.S. produced fabrics were
partially offset by sales of Culp's offshore produced fabrics. The shortage of
polyurethane foam used by furniture manufacturers also affected sales for the
quarter. For the first six months, net sales decreased 8.8% to $82.4 million
compared with $90.4 million for the first six months of fiscal 2006. For the
first six months of fiscal 2006, the average selling price for upholstery
fabrics was $4.22 per yard compared to $4.25 per yard in the same period last
year.
I-24
Operating income (loss) - Operating loss for the second quarter of fiscal 2006
was $69,000 or 0.2% of net sales compared with operating income of $216,000 or
0.4% of net sales for the second quarter of fiscal 2005. These results reflect
higher raw material prices that were not offset by the company's customer
surcharges. Operating loss for the first six months of fiscal 2006 was $448,000
or 0.5% of net sales, compared with an operating loss of $2.4 million, or 2.7%
of net sales, for the first six months of fiscal 2005. This improvement is
primarily due to the company's aggressive actions to substantially reduce U.S.
manufacturing costs and capacity and selling, general, and administrative costs
for the first six months of fiscal 2006. During the second quarter, the company
consolidated two velvet manufacturing operations, consolidated the finished
goods distribution and design centers, closed two yarn manufacturing plants and
announced a strategic alliance to outsource its decorative fabrics finishing
services. Additionally, the company combined its sales, design, and customer
service activities for Culp Decorative Fabrics and Culp Velvets/Prints, the two
divisions within the upholstery fabrics segment, resulting in a more unified
approach to service its customers. With the changes that have been made since
the beginning of fiscal 2006, the company has reduced selling, general, and
administrative expenses for the upholstery fabrics segment by 33.2% for the
first six months of fiscal 2006 compared with the first six months of fiscal
2005.
Non-U.S. Produced Sales - Sales of upholstery fabrics produced outside the U.S.
manufacturing operations, including fabrics produced at our China facility, were
up 79.4% in the second quarter of fiscal 2006 over the second quarter of fiscal
2005 and accounted for approximately 29% of upholstery fabric sales in the
second quarter of 2006. Fabric produced offshore accounted for approximately 14%
of upholstery fabric sales for the second quarter of fiscal 2005. For the first
six months of fiscal 2006, these sales increased approximately 94.0% over the
first six months of fiscal 2005 and accounted for approximately 29% of
upholstery fabric sales. Fabric produced offshore accounted for approximately
14% of upholstery fabric sales for the first six months of fiscal 2005. The
growth in offshore produced fabrics is a trend that is expected to continue.
Management believes that the development of its China platform represents a
continuing opportunity for the company. As the company's U.S. customers have
continued to move an increasing amount of their fabric purchases to Asia, the
company has moved with them and responded with an operation designed to meet
their needs. A key component of this platform is the fabric finishing and
inspection facility located near Shanghai. The company's strategy is to control
the value-added finishing and inspection process, thereby assuring customers
that the company's fabrics will meet or exceed U.S. quality standards.
U.S. Produced Sales -- Management has continued to take very aggressive actions
over the past year to bring U.S. manufacturing costs and capacity in line with
current demand trends. On September 27, 2005, the company's board of directors
approved a strategic alliance with Synthetics Finishing, a division of TSG
Incorporated, to provide finishing services to the company for its domestically
produced decorative upholstery fabrics and collaborate with the company on
research and product development activities. As a result, the company will close
its finishing plant in Burlington, NC, thereby reducing the number of associates
by approximately 100 people. Once this outsourcing initiative for finishing
services is complete, which is expected by February 2006, the company will have
three U.S. manufacturing facilities operating in the upholstery fabrics segment
- - one for velvet fabrics, one for decorative fabrics, and one for specialty
yarns. As a result of these consolidations and earlier restructuring activities,
the book value of the company's U.S based upholstery fabric fixed assets is
projected to be about $15 million by the end of the third quarter of fiscal 2006
compared with approximately $52 million at the end of fiscal 2004.
In August 2005, the company's board of directors approved a restructuring plan
within the upholstery fabrics segment designed to reduce the company's U.S. yarn
manufacturing operations. The company sold its polypropylene yarn extrusion
equipment (with a book value of $2.3 million) located in Graham, NC, to American
Fibers and Yarns Company, the company's supplier for polypropylene yarn, for
$1.1 million payable in cash. Pursuant to terms of the sale agreement, the
company has a long-term supply contract with American Fibers and Yarns Company
to continue to provide the company with polypropylene yarn at prices tied to a
published index.
I-25
The company's board of directors also approved further reductions in the
company's yarn operations by closing the company's facility in Shelby, NC, and
consolidating the chenille yarn operations into the company's Lincolnton, NC,
facility. During the second quarter, the company outsourced the open-end yarns
previously produced at the Shelby, NC, facility. As a result, the company will
have one specialty yarn manufacturing plant in Lincolnton, NC, for producing
chenille and wrap-spun yarns and a small texturizing yarn operation in Graham,
NC. Overall, these actions will reduce the number of associates by approximately
100 people.
The company expects restructuring activities to result in charges of
approximately $147,000 in the third quarter of fiscal 2006. The $147,000 in
charges consist of accelerated depreciation.
While management believes it is important to produce some level of upholstery
fabric in the U.S. to support the company's customers' domestic fabric
requirements, management remains committed to take whatever additional steps
necessary to achieve profitable U.S. upholstery fabric operations. The company
could experience additional write-downs of its property, plant, and equipment in
this business if further restructuring actions become necessary.
Segment assets -- Segment assets consist of accounts receivable, inventory, and
property, plant, and equipment. As of October 30, 2005, accounts receivable and
inventory totaled $48.5 million compared to $54.4 million at May 1, 2005. As of
October 30, 2005, property, plant, and equipment totaled $27.1 million compared
to $39.3 million at May 1, 2005. Included in property, plant, and equipment are
assets located in the U.S. totaling $22.4 million and $36.2 million at October
30, 2005, and May 1, 2005, respectively. Included in property, plant, and
equipment are various other corporate allocations totaling $4.1 million at
October 30, 2005. At May 1, 2005, allocations totaled $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.
Other Expenses
Selling, General and Administrative Expenses -- SG&A expenses of $6.5 million
for the second quarter of fiscal 2006 decreased approximately $2.3 million, or
26.2%, from $8.8 million in the second quarter of fiscal 2005. This decrease is
primarily due to the significant cost reductions as part of the company's
restructuring initiatives in the upholstery fabrics segment. SG&A expenses of
$16.4 million for the first six months of fiscal 2006 decreased approximately
$1.7 million, or 9.6%, from $18.2 million the first six months of fiscal 2005.
Included in the $16.4 million was $3.0 million in accelerated depreciation
associated with the company's design and distribution centers sold in June 2005.
The 26.4% decrease to the remaining $13.4 million for the first six months of
fiscal 2006 from the $18.2 million in the first six months of fiscal 2005 was
primarily due to the significant cost reductions as part of the company's
restructuring initiatives in the upholstery fabrics segment.
Interest Expense (Income) -- Interest expense for the second quarter of 2006 was
$942,000 compared to $937,000 for the second quarter of fiscal 2005. Interest
income was $19,000 for the second quarter of 2006 compared to $29,000 for the
first quarter of fiscal 2005, reflecting lower invested balances during the
quarter.
Income Taxes -- The effective tax rate (taxes as a percentage of loss before
income taxes) for the second quarter of fiscal 2006 was 36.4% compared with
38.1% for the second quarter of fiscal 2005.
I-26
Liquidity and Capital Resources
Liquidity --The company's sources of liquidity include cash and cash
equivalents, cash flow from operations and amounts available under its revolving
credit line. These sources have been adequate for day-to-day operations and
capital expenditures. Cash and cash equivalents as of October 30, 2005,
increased to $12.9 million from $5.1 million as of May 1, 2005, primarily
reflecting cash flow from operations of $5.2 million and proceeds from the sale
of buildings and equipment as part of the company's restructuring activities of
$4.0 million, offset by capital expenditures and payments on vendor financed
capital expenditures of $5.7 million, and proceeds from the real estate loan
with its bank (Wachovia) of $4.3 million.
Working Capital -- Accounts receivable as of October 30, 2005, increased 1.2% in
comparison to October 31, 2004. Days sales outstanding totaled 37 days at
October 30, 2005, compared with 32 days compared to October 31, 2004.
Inventories at October 30, 2005, decreased 10.5% from October 31, 2004.
Inventory turns for the second quarter of fiscal 2006 were 5.0 versus 5.2 for
the second quarter of fiscal 2005. Operating working capital (comprised of
accounts receivable and inventories, less trade accounts payable) was $53.8
million at October 30, 2005, down from $59.9 million at October 31, 2004.
Financing Arrangements -- The company's long-term debt of $54.9 million is
comprised of unsecured senior term notes of $50.0 million, a term loan with its
bank (Wachovia) of $4.3 million that is secured by a lien on the company's
headquarters office located in High Point, NC, and an unsecured loan with the
Canadian government of $615,000. The company's unsecured senior term notes have
a fixed interest rate of 7.76% (payable semi-annually in March and September)
and are payable over an average remaining term of four years beginning March
2006 through March 2010. The company's Canadian government loan is non-interest
bearing with its final payment due during the company's third quarter of fiscal
2006.
In October 2005, the company entered into an agreement with its bank (Wachovia)
to provide for a term loan in the amount of $4.3 million. This term loan bears
interest at the one-month London Interbank Offered Rate plus an adjustable
margin based on the company's debt/EBITDA ratio, as defined in the agreement,
and is payable in varying monthly installments through October 2010.
In August 2005, the company amended its agreement with its bank (Wachovia) to
provide for a revolving loan commitment of $8.0 million, including letters of
credit up to $5.5 million. Borrowings under the credit facility bear interest at
the London Interbank Offered Rate plus an adjustable margin based on the
company's debt/EBITDA ratio, as defined in the agreement. As of October 30,
2005, there were $2.6 million in outstanding letters of credit and no borrowings
outstanding under the agreement. The amended agreement also requires the company
to maintain collected deposit balances of $7.5 million with its bank (Wachovia)
from the period October 31, 2005, to March 15, 2006, which is the due date for
the first principal payment ($7.5 million) on the company's unsecured senior
term notes and maintain certain other financial covenants, as defined in the
agreement. The amended credit facility expires on August 31, 2006.
On December 7, 2005, the company entered into a Seventh Amendment to this credit
agreement. This amendment requires the company to maintain collected deposit
balances of at least $3.0 million after March 15, 2006. Additionally, this
amendment reduces the minimum EBITDA covenant for the third and fourth quarters
of fiscal 2006.
In November 2005, the company entered into an agreement with the Canadian
government to provide for a term loan in the amount of $680,000. The proceeds
are to partially finance capital expenditures at the company's Rayonese facility
located in Quebec, Canada. The loan is non-interest bearing and is payable in 48
monthly and equal installments commencing December 1, 2009.
The company was in compliance with all financial covenants in its loan
agreements as of October 30, 2005.
I-27
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 $ 124 $ - $ - $ - $ - $ - $ 124
Accounts payable-
capital expenditures 549 1,000 1,000 - - - 2,549
Operating leases (1) 1,966 3,172 1,790 421 122 16 7,487
Long-term debt 8,346 7,742 20,051 7,764 11,027 - 54,930
-------------------------------------------------------------------------------------------------------------------
Total $10,985 $11,914 $22,841 $ 8,185 $ 11,149 $ 16 $65,090
-------------------------------------------------------------------------------------------------------------------
Note: Payment Obligations by Fiscal Year Ending April
(1) Includes accrued restructuring expenses for the company's inactive
Chattanooga manufacturing facility of $434 in 2006, and $869 in 2007 and
2008 and other leases of $78, $139, and $26 for fiscal years 2006, 2007,
and 2008, respectively.
Capital Expenditures -- Capital spending for the first six months of fiscal 2006
was $5.4 million, including $1.7 million that is the non-cash portion of capital
expenditures representing vendor financing. The company's revised capital budget
for fiscal 2006 is $6.3 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. Depreciation for the first six
months of fiscal 2006 was $9.8 million, of which approximately $4.9 million
related to accelerated depreciation of buildings and equipment. The company
expects that the availability of funds under the revolving credit line and cash
flow from operations will be sufficient to fund its planned capital needs. The
company estimates depreciation for fiscal year 2006 to be $14.8 million, which
includes $5.0 million in accelerated depreciation.
Liquidity Requirements -- As indicated earlier, the company's sources of
liquidity include cash and cash equivalents, cash flow from operations and
amounts available under its revolving credit line. The company believes its
sources of liquidity continue to be adequate to meet its current operating
needs. In addition, the company is taking further steps to improve its
liquidity, including ongoing efforts to reduce inventories and operating
expenses. However, the company's cash position could be adversely affected by
factors beyond its control, such as weakening industry demand, delays in receipt
of payment on accounts receivable and the availability of trade credit.
Critical Accounting Policies and Recent Accounting Developments
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 October 30, 2005, accounts receivable from furniture manufacturers totaled
approximately $18.4 million, and from bedding manufacturers approximately $8.5
million. Additionally, as of October 30, 2005, the aggregate accounts receivable
balance of the company's ten largest customers was $8.4 million, or 31.2% of
trade accounts receivable.
I-28
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. During the first six
months of fiscal 2006, no events or changes in circumstances occurred that would
require the company to test for impairment. Unforeseen events and changes in
circumstances and market conditions could negatively affect the value of assets
and result in an impairment charge.
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
bases its impairment testing as required by SFAS No. 144 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 October 30, 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. During the first
six months of fiscal 2006, no events or changes in circumstances occurred that
would require the company to test for impairment.
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)."
I-29
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.
While management believes it is important to produce some level of upholstery
fabric in the U.S. to support the company's customers' domestic fabric
requirements, management remains committed to take whatever additional steps
necessary to achieve profitable U.S. upholstery fabric operations. The company
could experience additional write-downs of its property, plant, and equipment in
this business if further restructuring actions become necessary.
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
10 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 relate to U.S. operations) and
U.S. deferred tax liabilities of $5,709,000 (all of which reverse in the
carryforward period), resulting in net U.S. deferred tax assets of $19,540,000.
Total deferred tax liabilities at May 1, 2005 were $8,109,000, resulting in
total net deferred tax assets of $17,140,000. As of October 30, 2005, the
company's net deferred tax assets total $21,595,000, an increase of $4,455,000
from the end of fiscal 2005, primarily reflecting the federal and state tax
benefits recorded for the loss from U.S. operations during the first six months
of fiscal 2006. 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 16-20
years, fiscal 2022 through 2026.
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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, an 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 No. 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 transaction 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). The 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 March 2005, the FASB issued Interpretation No.47, "Accounting for Conditional
Asset Retirement Obligations," (FIN 47). FIN 47 clarifies that the term
"conditional asset retirement obligation" as used in SFAS No. 143, "Accounting
for Asset Retirement Obligation," refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. FIN 47 is effective no later that the end of fiscal years ending after
December 15, 2005, and will be effective for the company on April 30, 2006. The
company does not expect there to be any material effect on the consolidated
financial statements upon adoption of the new standard.
Inflation
The cost of certain of the company's raw materials, principally fibers from
petroleum derivatives, and utility/energy costs, increased during the first six
months of fiscal 2006 as oil and energy prices increased and had an impact on
the company's financial results. 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
the company's raw material costs, utility/energy costs and general economic
inflation could have a material adverse impact on the company, because
competitive conditions have limited the company's ability to pass significant
operating cost increases on to its customers.
I-31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company's exposure to interest
rate risk consists of floating rate debt based on the London Interbank Offered
Rate plus an adjustable margin under the company's revolving credit agreement
and real estate term loan. As of October 30, 2005 there were $4.3 million in
borrowings outstanding under the real estate term loan and no borrowings
outstanding under the company's revolving credit agreement. The company's
unsecured senior term notes have a fixed interest rate of 7.76% and the Canadian
government loan is non-interest bearing. Additionally, approximately 91% of the
company's long-term debt is at a fixed rate. Thus, any foreseeable change in
interest rates would not be expected to have a material effect on the company.
The company's exposure to fluctuations in foreign currency exchange rates is due
primarily to 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 October 30, 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.
Also, the company has exposure to fluctuations in foreign currency exchange
rates with a foreign subsidiary domiciled in China. Currently, this 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 of October 30, 2005 would not have a
significant impact on the company's results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
The company conducted a review and evaluation of its disclosure controls and
procedures, under the supervision and with the participation of the company's
principal executive officer and principal financial officer as of October 30,
2005, and the principal executive officer and principal financial officer have
concluded that the company's disclosure controls and procedures are adequate and
effective. In addition, no change in the company's internal control over
financial reporting has occurred during, or subsequent to, the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
I-32
Part II - Other Information
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held in High Point, North
Carolina on September 27, 2005. Of the 11,551,509 shares of common stock
outstanding on the record date of July 28, 2005, 10,834,024 shares were present
in person or by proxy.
At the Annual Meeting, shareholders voted on:
o The election of three directors: Jean L.P. Brunel, Kenneth R.Larson, and
Franklin N. Saxon,
o Ratification of the appointment of KPMG LLP as the independent registered
public accounting firm of the company for the current fiscal year
A. PROPOSAL FOR ELECTION OF DIRECTORS:
Jean L.P. Brunel Kenneth R. Larson
---------------- -----------------
For 10,673,305 For 10,676,345
Abstain 160,719 Abstain 157,679
Franklin N. Saxon
-----------------
For 10,657,740
Abstain 176,284
B. PROPOSAL TO RATIFY THE ELECTION OF KPMG LLP AS THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM OF THE COMPANY FOR FISCAL YEAR 2006
For 10,776,604
Against 53,602
Abstain 3,818
Item 5. Other Information
On December 7, 2005, the company entered into a Seventh Amendment to Amended and
Restated Credit Agreement, which amends the credit agreement between the company
and its bank (Wachovia). The principal terms of the Seventh Amendment are to
require the company to maintain collected deposit balances of at least $3.0
million after March 15, 2006. Additionally, this amendment reduces the minimum
EBITDA covenant for the third and fourth quarters of fiscal 2006. A copy of this
amendment was filed as Exhibit 10(c) of this report.
II-1
Item 6. Exhibits
(a) The following exhibits are filed as part of this report.
3(i) Articles of Incorporation of the company, as amended, were filed as
Exhibit 3(i) to the company's Form 10-Q for the quarter ended July 28,
2002, filed September 11, 2002, and are incorporated herein by
reference.
3(ii) Restated and Amended Bylaws of the company, as amended June 12, 2001,
were filed as Exhibit 3(ii) to the company's Form 10-Q for the quarter
ended July 29, 2001, filed September 12, 2001, and are incorporated
herein by reference.
10(a) Sixth Amendment to Amended and Restated Credit Agreement dated as of
August 30, 2005 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, filed as Exhibit 99(c) to Current
Report on Form 8-K dated August 31, 2005, and incorporated herein by
reference.
10(b) Real Estate Loan dated as of October 25, 2005 among Culp, Inc. and
Wachovia Bank National Association, as Agent and as Bank, filed as
Exhibit 10(a) to the company's Current Report on Form 8-K dated
October 25, 2005, and incorporated herein by reference.
10(c) Seventh Amendment to Amended and Restated Credit Agreement dated
December 7, 2005 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CULP, INC.
(Registrant)
Date: December 9, 2005 By: /s/ Franklin N. Saxon
-----------------
Franklin N. Saxon
President
(Authorized to sign on behalf
of the registrant and also signing as
principal financial officer)
By: /s/ Kenneth R. Bowling
------------------
Kenneth R. Bowling
Vice President-Finance, Treasurer
(Authorized to sign on behalf
of the registrant and also signing as
principal accounting officer)
II-3
SEVENTH AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
THIS SEVENTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
("Seventh Amendment") is made as of the 7th day of December, 2005, by and
between CULP, INC., a North Carolina corporation (together with its successors
and permitted assigns, the "Borrower") and WACHOVIA BANK, NATIONAL ASSOCIATION
(formerly, Wachovia Bank, N.A.), a national banking association, as Agent and as
a Bank (together with its endorsees, successors and assigns, the "Bank").
BACKGROUND
----------
The Borrower and the Bank entered into an Amended and Restated
Credit Agreement, dated as of August 23, 2002, as amended by Second Amendment to
Amended and Restated Credit Agreement (the "Second Amendment"), dated as of June
3, 2003, by Third Amendment to Amended and Restated Credit Agreement (the "Third
Amendment"), dated as of August 23, 2004, by Fourth Amendment to Amended and
Restated Credit Agreement ("Fourth Amendment"), dated as of December 7, 2004, by
Fifth Amendment to Amended and Restated Credit Agreement ("Fifth Amendment")
dated as of February 18, 2005 and by a Sixth Amendment to Amended and Restated
Credit Agreement ("Sixth Amendment"), dated as of August 30, 2005 (it being
acknowledged by the parties hereto that the proposed First Amendment to Amended
and Restated Credit Agreement, which had been under discussion in March 2003,
was never executed by the parties and is of no force or effect; otherwise, such
agreement, as amended by the Second Amendment, Third Amendment, Fourth
Amendment, Fifth Amendment and Sixth Amendment, and as it may be further
amended, restated, supplemented and/or modified, shall be referred to herein as
the "Credit Agreement"). Terms used herein and not herein defined shall have the
meanings given to them in the Credit Agreement.
The Borrower has now requested additional amendments to the
provisions of the Credit Agreement, which the Bank is willing to accommodate
subject to the terms, provisions and conditions set forth in this Seventh
Amendment.
NOW, THEREFORE, in consideration of the premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank hereby agree as follows:
1. Amendments to Credit Agreement. The Credit Agreement is hereby
amended as follows:
(a) Section 5.26 of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"Section 5.26 Liquidity Requirement. The Borrower will maintain
with the Bank until the Principal Payment Date, collected deposit
balances of not less than $7,500,000 (none of which has been borrowed
hereunder), and after the Principal Payment Date, collected deposit
balances of not less than $3,000,000 (none of which has been borrowed
hereunder). As used herein, "Principal Payment Date" means that date
when annual principal payments under or with respect to the Borrower's
Series A Senior Note and/or Series B Senior Note issued pursuant to
those certain Note Purchase Agreements, dated March 4, 1998, executed
by Borrower, are first paid by Borrower.
(b) Section 5.27 of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
"Section 5.27. Minimum EBITDA. EBITDA, for the following Fiscal
Quarters of Fiscal Year 2006 shall equal or exceed the following
amounts:
Third Fiscal Quarter $ 7,344,000
Fourth Fiscal Quarter $10,000,000"
2. Further Assurances. The Borrower will execute such
confirmatory instruments, if any, with respect to the Credit Agreement and this
Seventh Amendment as the Bank may reasonably request.
3. Ratification by Borrower. The Borrower ratifies and confirms
all of its representations, warranties, covenants, liabilities and obligations
under the Credit Agreement (except as expressly modified by this Seventh
Amendment) and agrees that: (i) except as expressly modified by this Seventh
Amendment, the Credit Agreement continues in full force and effect as if set
forth specifically herein; and (ii) the Borrower has no right of setoff,
counterclaim or defense to payment of its obligations under the Credit
Agreement. The Borrower and the Bank agree that this Seventh Amendment shall not
be construed as an agreement to extinguish the Borrower's obligations under the
Credit Agreement or the Notes and shall not constitute a novation as to the
obligations of the Borrower under the Credit Agreement or the Notes. The Bank
hereby expressly reserves all rights and remedies it may have against all
parties who may be or may hereafter become secondarily liable for the repayment
of the obligations under the Credit Agreement or the Notes.
4. Amendments. This Seventh Amendment may not itself be amended,
changed, modified, altered, or terminated without in each instance the prior
written consent of the Bank. This Seventh Amendment shall be construed in
accordance with and governed by the laws of the State of North Carolina.
5. Counterparts. This Seventh Amendment may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which, taken together, shall constitute one and the same agreement.
6. Bank's Expenses. In accordance with Section 9.03 of the Credit
Agreement, Borrower hereby acknowledges and agrees to pay all reasonable
out-of-pocket expenses incurred by the Bank in connection with the preparation
of this Seventh Amendment, including without limitation reasonable attorneys'
fees.
[Signature Page Follows]
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IN WITNESS WHEREOF, this Seventh Amendment has been duly executed
under seal by Borrower and Bank as of the day and year first above written.
BORROWER:
CULP, INC. (SEAL)
By:/s/ Kenneth R. Bowling
Name: Kenneth R. Bowling
Title: Vice President-Finance, Treasurer
BANK:
WACHOVIA BANK, NATIONAL ASSOCIATION,
as Agent and as Bank (SEAL)
By:/s/ Mathew M. Rankin
Name: Mathew M. Rankin
Title: Vice President
-3-