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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 29, 2006
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
1823 Eastchester 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one);
Large accelerated filer Accelerated filer X Non-accelerated filer
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 January 29, 2006: 11,566,209
Par Value: $.05
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INDEX TO FORM 10-Q
For the period ended January 29, 2006
Part I - Financial Statements. Page
- ------------------------------ ------
Item 1. Unaudited Interim Consolidated Financial Statements:
- -------------------------------------------------------------
Consolidated Statements of Loss--Three and Nine Months Ended
January 29, 2006 and January 30, 2005 I-1
Consolidated Balance Sheets--January 29, 2006, January 30, 2005 and
May 1, 2005 I-2
Consolidated Statements of Cash Flows--Nine Months Ended
January 29, 2006 and January 30, 2005 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-33
- --------------------------------
Part II - Other Information
- ---------------------------
Item 5. Other Information II-1
- --------------------------
Item 6. Exhibits II-1
- -----------------
Signatures II-2
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 29, 2006 AND JANUARY 30, 2005
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
------------------------------------------------------------
Amounts Percent of Net Sales
------------------------ ------------------------
January 29, January 30, % Over January 29, January 30,
2006 2005 (Under) 2006 2005
----------- ----------- --------- ----------- -----------
Net sales $ 61,035 69,060 (11.6)% 100.0 % 100.0 %
Cost of sales 56,858 66,493 (14.5)% 93.2 % 96.3 %
----------- ----------- --------- ----------- -----------
Gross profit 4,177 2,567 62.7 % 6.8 % 3.7 %
Selling, general and
administrative expenses 6,098 8,191 (25.6)% 10.0 % 11.9 %
Restructuring expense 343 1,135 (69.8)% 0.6 % 1.6 %
----------- ----------- --------- ----------- -----------
Loss from operations (2,264) (6,759) 66.5 % (3.7)% (9.8)%
Interest expense 1,063 912 16.6 % 1.7 % 1.3 %
Interest income (43) (42) 2.4 % (0.1)% (0.1)%
Other expense 135 49 175.5 % 0.2 % 0.1 %
----------- ----------- --------- ----------- -----------
Loss before income taxes (3,419) (7,678) 55.5 % (5.6)% (11.1)%
Income taxes * (1,250) (2,801) (55.4)% 36.6 % 36.5 %
----------- ----------- --------- ----------- -----------
Net loss $ (2,169) (4,877) 55.5 % (3.6)% (7.1)%
=========== =========== ========= ----------- -----------
Net loss per share, basic $ (0.19) (0.42) 54.8 %
Net loss per share, diluted $ (0.19) (0.42) 54.8 %
Average shares outstanding,
basic 11,562 11,550 0.1 %
Average shares outstanding,
diluted 11,562 11,550 0.1 %
NINE MONTHS ENDED
------------------------------------------------------------
Amounts Percent of Net Sales
------------------------ ------------------------
January 29, January 30, % Over January 29, January 30,
2006 2005 (Under) 2006 2005
----------- ----------- --------- ----------- -----------
Net sales $ 190,383 212,315 (10.3)% 100.0 % 100.0 %
Cost of sales 174,098 191,506 (9.1)% 91.4 % 90.2 %
----------- ----------- --------- ----------- -----------
Gross profit 16,285 20,809 (21.7)% 8.6 % 9.8 %
Selling, general and
administrative expenses 22,480 26,309 (14.6)% 11.8 % 12.4 %
Goodwill impairment 0 5,126 (100.0)% 0.0 % 2.4 %
Restructuring expense 6,581 2,289 187.5 % 3.5 % 1.1 %
----------- ----------- --------- ----------- -----------
Loss from operations (12,776) (12,915) 1.1 % (6.7)% (6.1)%
Interest expense 2,955 2,789 6.0 % 1.6 % 1.3 %
Interest income (78) (98) (20.4)% (0.0)% (0.0)%
Other expense 481 436 10.3 % 0.3 % 0.2 %
----------- ----------- --------- ----------- -----------
Loss before income taxes (16,134) (16,042) 0.6 % (8.5)% (7.6)%
Income taxes * (5,873) (5,920) (0.8)% 36.4 % 36.9 %
----------- ----------- --------- ----------- -----------
Net loss $ (10,261) (10,122) (1.4)% (5.4)% (4.8)%
=========== =========== ========= ----------- -----------
Net loss per share, basic $ (0.89) (0.88) (1.1)%
Net loss per share, diluted $ (0.89) (0.88) (1.1)%
Average shares outstanding,
basic 11,557 11,549 0.1 %
Average shares outstanding,
diluted 11,557 11,549 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
JANUARY 29, 2006, JANUARY 30, 2005, AND MAY 1, 2005
UNAUDITED
(Amounts in Thousands)
Amounts Increase
--------------------------- (Decrease)
January 29, January 30, ------------------------ * May 1,
2006 2005 Dollars Percent 2005
--------------- ----------- ----------- ---------- -----------
Current assets:
Cash and cash equivalents $ 12,870 13,020 (150) (1.2) % 5,107
Accounts receivable 28,485 26,681 1,804 6.8 % 28,824
Inventories 42,099 46,649 (4,550) (9.8) % 50,499
Deferred income taxes 7,054 4,910 2,144 43.7 % 7,054
Other current assets 1,649 1,088 561 51.6 % 2,691
--------------- ----------- ----------- ---------- -----------
Total current assets 92,157 92,348 (191) (0.2) % 94,175
Property, plant and equipment, net 52,562 71,024 (18,462) (26.0) % 66,032
Goodwill 4,114 4,114 0 0.0 % 4,114
Deferred income taxes 15,731 7,115 8,616 121.1 % 10,086
Other assets 1,775 1,330 445 33.5 % 1,716
--------------- ----------- ----------- ---------- -----------
Total assets $ 166,339 175,931 (9,592) (5.5) % 176,123
=============== =========== =========== ========== ===========
Current liabilities:
Current maturities of long-
term debt $ 8,049 584 7,465 1,278.3 % 8,110
Accounts payable 20,669 15,580 5,089 32.7 % 22,852
Accrued expenses 9,751 9,568 183 1.9 % 9,556
Accrued restructuring costs 4,299 5,093 (794) (15.6) % 5,850
Income taxes payable 635 1,690 (1,055) (62.4) % 1,544
--------------- ----------- ----------- ---------- -----------
Total current liabilities 43,403 32,515 10,888 33.5 % 47,912
Long-term debt, less current
maturities 47,229 49,975 (2,746) (5.5) % 42,440
--------------- ----------- ----------- ---------- -----------
Total liabilities 90,632 82,490 8,142 9.9 % 90,352
Shareholders' equity 75,707 93,441 (17,734) (19.0) % 85,771
--------------- ----------- ----------- ---------- -----------
Total liabilities and
shareholders'equity $ 166,339 175,931 (9,592) (5.5) % 176,123
=============== =========== =========== ========== ===========
Shares outstanding 11,566 11,550 16 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 NINE MONTHS ENDED JANUARY 29, 2006 AND JANUARY 30, 2005
UNAUDITED
(Amounts in Thousands)
NINE MONTHS ENDED
---------------------------------
Amounts
---------------------------------
January 29, January 30,
2006 2005
--------------- ---------------
Cash flows from operating activities:
Net loss $ (10,261) (10,122)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 12,275 14,505
Amortization of other assets 70 100
Stock-based compensation 139 157
Goodwill impairment 0 5,126
Deferred income taxes (5,645) (6,907)
Restructuring expense 6,581 2,289
Changes in assets and liabilities:
Accounts receivable 339 4,038
Inventories 8,400 2,396
Other current assets 1,042 546
Other assets (129) 120
Accounts payable (1,695) 1,659
Accrued expenses 195 (3,460)
Accrued restructuring (5,075) (1,733)
Income taxes payable (909) (160)
--------------- ---------------
Net cash provided
by operating activities 5,327 8,554
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (5,428) (8,216)
Proceeds from the sale of buildings and equipment 3,950 0
--------------- ---------------
Net cash used in
investing activities (1,478) (8,216)
--------------- ---------------
Cash flows from financing activities:
Payments on vendor-financed capital expenditures (871) (1,430)
Payments on long-term debt (292) (471)
Proceeds from issuance of long-term debt 5,020 0
Proceeds from common stock issued 57 15
--------------- ---------------
Net cash provided by
(used in) financing activities 3,914 (1,886)
--------------- ---------------
Increase (decrease) in cash and cash equivalents 7,763 (1,548)
Cash and cash equivalents at beginning of period 5,107 14,568
--------------- ---------------
Cash and cash equivalents at end of period $ 12,870 13,020
=============== ===============
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(Amounts 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 (10,261) (10,261)
Gain on cash flow hedge 1 1
Stock-based compensation 139 139
Common stock issued in connection
with stock option plans 15,450 1 56 57
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, January 29, 2006 11,566,209 $ 580 40,020 0 35,106 1 $ 75,707
==================================================================================================================================
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 nine months ended January 29, 2006 and January 30, 2005
represent 39 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 January 29, 2006
and January 30, 2005.
(dollars in thousands, except per share data) January 29, 2006 January 30, 2005
- -------------------------------------------------------------------------------------------------
Net loss, as reported $ (2,169) $ (4,877)
Add: Total stock-based employee compensation expense
included in net loss, net of tax 22 33
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax (112) (117)
- -------------------------------------------------------------------------------------------------
Pro forma net loss $ (2,259) $ (4,961)
- -------------------------------------------------------------------------------------------------
Net loss per share:
Basic - as reported $ (0.19) $ (0.42)
Basic - pro forma (0.20) (0.43)
Diluted - as reported (0.19) (0.42)
Diluted - pro forma (0.20) (0.43)
- -------------------------------------------------------------------------------------------------
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 nine months ended January 29, 2006 and
January 30, 2005.
I-5
(dollars in thousands, except per share data) January 29, 2006 January 30, 2005
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Net loss, as reported $ (10,261) $ (10,122)
Add: Total stock-based employee compensation expense
included in net loss, net of tax 88 100
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax (355) (394)
- -------------------------------------------------------------------------------------------------
Pro forma net loss $ (10,528) $ (10,416)
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Net loss per share:
Basic - as reported $ (0.89) $ (0.88)
Basic - pro forma (0.91) (0.90)
Diluted - as reported (0.89) (0.88)
Diluted - pro forma (0.91) (0.90)
- -------------------------------------------------------------------------------------------------
=================================================================================================
3. Accounts Receivable
A summary of accounts receivable follows:
- -------------------------------------------------------------------------------------------------
(dollars in thousands) January 29, 2006 May 1, 2005
- -------------------------------------------------------------------------------------------------
Customers $ 30,320 $ 30,803
Allowance for doubtful accounts (977) (1,142)
Reserve for returns and allowances (858) (837)
- -------------------------------------------------------------------------------------------------
$ 28,485 $ 28,824
- -------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
Nine months ended
- -------------------------------------------------------------------------------------------------
(dollars in thousands) January 29, 2006 January 30, 2005
- -------------------------------------------------------------------------------------------------
Beginning balance $ (1,142) $ (1,442)
Adjustment of bad debt expense 129 434
Net write-offs 36 45
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$ (977) $ (963)
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=================================================================================================
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) January 29, 2006 May 1, 2005
- -------------------------------------------------------------------------------------------------
Raw materials $ 16,469 $ 23,204
Work-in-process 2,788 3,000
Finished goods 22,842 24,295
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$ 42,099 $ 50,499
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=================================================================================================
5. Accounts Payable
- -------------------------------------------------------------------------------------------------
A summary of accounts payable follows:
- -------------------------------------------------------------------------------------------------
(dollars in thousands) January 29, 2006 May 1, 2005
- -------------------------------------------------------------------------------------------------
Accounts payable-trade $ 17,992 $ 19,688
Accounts payable-capital expenditures 2,677 3,164
- -------------------------------------------------------------------------------------------------
$ 20,669 $ 22,852
- -------------------------------------------------------------------------------------------------
=================================================================================================
6. Accrued Expenses
A summary of accrued expenses follows:
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
(dollars in thousands) January 29, 2006 May 1, 2005
- -------------------------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 5,327 $ 5,483
Interest 1,417 448
Accrued rebates 979 1,444
Other 2,028 2,181
- -------------------------------------------------------------------------------------------------
$ 9,751 $ 9,556
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=================================================================================================
I-7
7. Long-Term Debt
A summary of long-term debt follows:
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
(dollars in thousands) January 29, 2006 May 1, 2005
- -------------------------------------------------------------------------------------------------
Unsecured senior term notes $ 49,975 $ 49,975
Real estate loan 4,293 0
Canadian government loans 1,010 575
- -------------------------------------------------------------------------------------------------
55,278 50,550
Less current maturities (8,049) (8,110)
- -------------------------------------------------------------------------------------------------
$ 47,229 $ 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.
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 credit 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 January 29,
2006, there were $3.7 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.
On March 8, 2006, the company entered into an Eighth Amendment to the
Amended and Restated Credit Agreement, which amends the credit agreement between
the company and its bank (Wachovia). The principal terms of the Eighth Amendment
raised the company's capital expenditures limit to $6.5 million for the year
ending April 30, 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. This loan is non-interest bearing and is payable in
48 equal monthly installments commencing December 1, 2009. In addition to the
term loan entered into in November 2005, the company has an existing
non-interest bearing term loan with the Canadian government with its final
payment due in fiscal 2007. At January 29, 2006, the balance of the term loan
entered into in November 2005 and the existing term loan was $695,000 and
$315,000, respectively.
I-8
The company was in compliance with all financial covenants in its loan
agreements as of January 29, 2006.
The principal payment requirements of long-term debt during the next five
years as of January 29, 2006 are: Year 1 - $8,049,000; Year 2 - $7,744,000; Year
3 - $20,054,000; Year 4 - $7,846,000; Year 5 - $11,140,000; and thereafter -
$445,000.
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 January
29, 2006 was $1,000, as determined by quoted market prices.
9. Cash Flow Information
Payments for interest and income taxes follow:
Nine months ended
- -------------------------------------------------------------------------------------------------
(dollars in thousands) January 29, 2006 January 30, 2005
- -------------------------------------------------------------------------------------------------
Interest $ 2,048 $ 1,995
Income taxes 892 1,125
=================================================================================================
The non-cash portion of capital expenditures representing vendor financing
totaled $1,699,000 and $29,000 for the nine months ended January 29, 2006 and
January 30, 2005, respectively.
=================================================================================================
10. Restructuring and Related Charges
A summary of accrued restructuring costs follows:
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
(dollars in thousands) January 29, 2006 May 1, 2005
- -------------------------------------------------------------------------------------------------
September 2005 Upholstery Fabrics $ 503 $ 0
August 2005 Upholstery Fabrics 209 0
April 2005 Upholstery Fabrics 840 1,944
October 2004 Upholstery Fabrics 134 309
Fiscal 2003 Culp Decorative Fabrics 2,583 3,587
Fiscal 2001 Culp Decorative Fabrics 30 10
- -------------------------------------------------------------------------------------------------
$ 4,299 $ 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 April
2006.
During the third quarter of fiscal 2006, total restructuring and related
charges incurred were $405,000 of which $261,000 related to asset movement
costs, $141,000 related to accelerated depreciation, and $3,000 related to lease
termination costs. Of the total charge, $264,000 was recorded in restructuring
expense and $141,000 was recorded in cost of sales in the 2006 Consolidated
Statements of Loss.
During the nine month period of fiscal 2006, total restructuring and
related charges incurred were $1.0 million of which $510,000 related to
termination benefits, $261,000 related to asset movement costs, $245,000 related
to accelerated depreciation, and $3,000 related to lease termination costs. Of
the total charge, $774,000 was recorded in restructuring expense and $245,000
was recorded in cost of sales 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
- -------------------------------------------------------------------------------
Accrual established in fiscal 2006 $ 510 0 510
Additions in fiscal 2006 0 3 3
Paid in fiscal 2006 (7) (3) (10)
- -------------------------------------------------------------------------------
Balance, January 29, 2006 $ 503 0 503
- -------------------------------------------------------------------------------
As of January 29, 2006, there were no assets classified as held for sale.
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 reduced the number of associates
by approximately 100 people.
I-10
During the third quarter of fiscal 2006, total restructuring and related
charges incurred were $301,000 of which $199,000 related to termination
benefits, $44,000 related to operating costs associated with the closing of or
closed plant facilities, $36,000 related to asset movement costs, and $22,000
for inventory markdowns. Of the total charge, $7,000 was recorded in
restructuring expense, and $294,000 was recorded in cost of sales in the 2006
Consolidated Statements of Loss.
During the nine month period of fiscal 2006, total restructuring and
related charges incurred were $4.4 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, $919,000 related to termination
benefits, $353,000 for inventory markdowns, $82,000 related to asset movement
costs, $44,000 related to operating costs associated with the closing of or
closed plant facilities, and $11,000 related to lease termination costs. Of the
total charge, $2.8 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
Adjustments in fiscal 2006 9 (3) 6
Paid in fiscal 2006 (378) (3) (381)
- -------------------------------------------------------------------------------
Balance, January 29, 2006 $ 201 8 209
- -------------------------------------------------------------------------------
As of January 29, 2006, there were no assets classified as held for sale.
April 2005 Upholstery Fabrics
During the third quarter of fiscal 2006, total restructuring charges
incurred were $945,000 of which approximately $816,000 related to inventory
markdowns, $83,000 related to asset movement costs, and $45,000 related to lease
termination costs. Of the total charge, $78,000 was recorded in restructuring
expense and $867,000 was recorded in cost of sales in the 2006 Consolidated
Statements of Loss.
During the nine month period of fiscal 2006, the total restructuring and
related charges incurred were $5.4 million of which approximately $3.5 million
related to accelerated depreciation associated with plant and equipment,
$816,000 related to inventory markdowns, $440,000 related to lease termination
costs, $397,000 related to asset movement costs, $155,000 related to termination
benefits, and $57,000 related to write-downs of equipment. Of the total charge,
$1.0 million was recorded in restructuring expense; $1.4 million 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 0 406 406
Adjustments in fiscal 2006 147 0 147
Paid in fiscal 2006 (1,464) (193) (1,657)
- -------------------------------------------------------------------------------
Balance, January 29, 2006 $ 580 260 840
- -------------------------------------------------------------------------------
I-11
As of January 29, 2006, assets classified as held for sale consisted of
machinery and equipment with a value of $197,500 and are included in other
assets.
As a result of an internal analysis, the company commenced an initiative to
discontinue a number of lower volume products that do not fit the company's U.S.
upholstery fabrics operating model to produce more volume-oriented products. As
of January 29, 2006, the company recorded an inventory markdown charge of
$816,000 based on an analysis by management of lower volume products that are
expected to be discontinued in the fourth quarter of fiscal 2006. The ultimate
recovery of the carrying value of these products will be based on market
reaction and there could be further inventory markdown charges in the fourth
quarter of fiscal 2006, related to this initiative.
October 2004 Upholstery Fabrics
During the third quarter of fiscal 2006, the total restructuring and
related charges incurred were $70,000 of which $36,000 related to asset movement
costs, $31,000 related to termination benefits, and $3,000 related to lease
termination costs. The total charge of $70,000 was recorded in restructuring
expense in the 2006 Consolidated Statements of Loss.
During the nine month period of fiscal 2006, the total restructuring and
related charges incurred were $2.4 million of which approximately $1.2 million
related to asset movement costs, $1.1 million related to write-downs of
equipment, $119,000 related to termination benefits, $3,000 related to lease
termination costs. Of the total charge, $2.3 million was recorded in
restructuring expense and $52,000 in cost of sales 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 $ 309 0 309
Adjustments in fiscal 2006 92 0 92
Paid in fiscal 2006 (267) 0 (267)
- -------------------------------------------------------------------------------
Balance, January 29, 2006 $ 134 0 134
- -------------------------------------------------------------------------------
As of January 29, 2006, there were no assets classified as held for sale.
Fiscal 2003 Culp Decorative Fabrics Restructuring
During the third quarter of fiscal 2006, as a result of management's
continual evaluation of the restructuring accrual, the reserve was decreased by
approximately $135,000 in lease termination costs to reflect current estimates
of sub-lease income. During the nine month period of fiscal 2006, as a result of
management's continual evaluation of the restructuring accrual, the reserve was
decreased by approximately $234,000 to reflect current estimates of employee
termination benefits and lease termination costs to reflect current estimates of
sub-lease income.
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 $ 200 3,387 3,587
Adjustments in fiscal 2006 (66) (168) (234)
Paid in fiscal 2006 (34) (736) (770)
- -------------------------------------------------------------------------------
Balance, January 29, 2006 $ 100 2,483 2,583
- -------------------------------------------------------------------------------
As of January 29, 2006, there were no assets classified as held for sale.
Fiscal 2001 Culp Decorative Fabrics Restructuring
During the third quarter of fiscal 2006, as a result of management's
continual evaluation of the restructuring accrual, the reserve was increased by
approximately $80,000 to reflect current estimates of future health care claims.
During the nine month period of fiscal 2006, as a result of management's
continual evaluation of the restructuring accrual, the reserve was increased by
approximately $159,000 to reflect current estimates of future health care
claims.
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 159 0 159
Paid in fiscal 2006 (139) 0 (139)
- -------------------------------------------------------------------------------
Balance, January 29, 2006 $ 30 0 30
- -------------------------------------------------------------------------------
As of January 29, 2006, 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
- --------------------------------------------------------------------------------
January 29, January 30,
(amounts in thousands) 2006 2005
- --------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,562 11,550
Effect of dilutive stock options 0 0
- --------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,562 11,550
================================================================================
I-13
Options to purchase 498,125 shares and 590,625 shares of common stock were
not included in the computation of diluted loss per share for the three months
ended January 29, 2006 and January 30, 2005, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
Options to purchase 74,129 and 119,008 shares of common stock were not
included in the computation of diluted net loss per share for the three months
ended January 29, 2006 and January 30, 2005, respectively, because the company
incurred a net loss for the period.
Nine months ended
- --------------------------------------------------------------------------------
January 29, January 30,
(amounts in thousands) 2006 2005
- --------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,557 11,549
Effect of dilutive stock options 0 0
- --------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,557 11,549
- --------------------------------------------------------------------------------
Options to purchase 506,542 shares and 479,167 shares of common stock were
not included in the computation of diluted loss per share for the nine months
ended January 29, 2006 and January 30, 2005, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
Options to purchase 52,824 shares and 157,417 shares of common stock were
not included in the computation of diluted net loss per share for the nine
months ended January 29, 2006 and January 30, 2005, 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
- --------------------------------------------------------------------------------
January 29, January 30,
(dollars in thousands) 2006 2005
- --------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 22,681 $ 25,576
Upholstery Fabrics 38,354 43,484
- --------------------------------------------------------------------------------
$ 61,035 $ 69,060
- --------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 3,442 $ 3,478
Upholstery Fabrics 2,070 3,391
Restructuring related charges (1,335)(1) (4,302)(3)
- --------------------------------------------------------------------------------
$ 4,177 $ 2,567
- --------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 1,799 $ 1,589
Upholstery Fabrics (1,647) (2,010)
Unallocated corporate expenses (738) (901)
Restructuring and related charges (1,678)(2) (5,437)(4)
- --------------------------------------------------------------------------------
$ (2,264) $ (6,759)
- --------------------------------------------------------------------------------
I-14
(1) The $1.3 million represents restructuring related charges primarily for
inventory markdowns, termination benefits and other operating costs
associated with plant facilities that are in the process of being closed or
are closed and accelerated depreciation. These charges are included in the
cost of sales line item in the 2006 Consolidated Statements of Loss and are
related to the Upholstery Fabrics segment.
(2) The $1.7 million represents restructuring and related charges primarily for
inventory markdowns, termination benefits and other operating costs
associated with plant facilities that are in the process of being closed or
are closed, asset movement costs, accelerated depreciation, and lease
termination costs. Of the total charge, approximately $400,000 was recorded
in the restructuring expense line item and $1.3 million was included in the
cost of sales line item in the 2006 Consolidated Statements of Loss. These
charges are primarily related to the Upholstery Fabrics segment.
(3) The $4.3 million represents restructuring related charges primarily for
accelerated depreciation. These charges are included in the cost of sales
line item in the 2006 Consolidated Statements of Loss and are related to
the Upholstery Fabrics segment.
(4) The $5.4 million represents restructuring and related charges primarily for
accelerated depreciation, asset movement costs, lease termination costs,
and fixed asset write-downs. Of the total charge, $1.1 million was recorded
in the restructuring expense line item and $4.3 million was included in the
cost of sales line item in the 2006 Consolidated Statements of Loss. These
charges relate to the Upholstery Fabrics segment.
Nine months ended
- --------------------------------------------------------------------------------
January 29, January 30,
(dollars in thousands) 2006 2005
- --------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 69,586 $ 78,414
Upholstery Fabrics 120,797 133,901
- --------------------------------------------------------------------------------
$ 190,383 $ 212,315
- --------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 9,839 $ 12,735
Upholstery Fabrics 10,027 13,575
Restructuring related charges (3,581)(5) (5,501)(7)
- --------------------------------------------------------------------------------
$ 16,285 $ 20,809
- --------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 4,823 $ 7,166
Upholstery Fabrics (2,093) (4,417)
Unallocated corporate expenses (2,322) (2,748)
Goodwill impairment 0 (5,126)(8)
Restructuring and related charges (13,184)(6) (7,790)(9)
- --------------------------------------------------------------------------------
$ (12,776) $ (12,915)
- --------------------------------------------------------------------------------
(5) The $3.6 million represents restructuring related charges primarily for
accelerated depreciation, inventory markdowns, termination benefits and
other operating costs associated with plant facilities that are in the
process of being closed or are closed. These charges are included in the
cost of sales line item of the 2006 Consolidated Statements of Loss and are
related to the Upholstery Fabrics segment.
(6) The $13.2 million represents restructuring and related charges primarily
for accelerated depreciation, write-downs of buildings and equipment, asset
movement costs, termination benefits and other operating costs associated
with plant facilities that are in the process of being closed or are
closed, inventory markdowns, and lease termination costs. Of the total
charge, $6.6 million was recorded in the restructuring expense line item,
$3.0 million was included in the selling, general, and administrative
expenses line item, and $3.6 million was included in the cost of sales line
item of the Consolidated Statements of Loss. These charges primarily
related to the Upholstery Fabrics segment.
(7) The $5.5 million represents restructuring related charges primarily for
accelerated depreciation and inventory markdowns. These charges are
included in the cost of sales line item of the Consolidated Statements of
Loss and are related to the Upholstery Fabrics segment.
I-15
(8) The $5.1 million represents a goodwill impairment charge related to the
Culp Decorative Fabrics division within the upholstery fabrics segment.
(9) The $7.8 million represents restructuring and related charges primarily for
accelerated depreciation, termination benefits, inventory markdowns, asset
movement costs, lease termination costs, and fixed asset write-downs. Of
the total charge, $2.3 million was recorded in the restructuring expense
line item and $5.5 million was recorded in the cost of sales line item of
the Consolidated Statements of Loss. These charges are related to the
Upholstery Fabrics segment.
Balance sheet information for the company's operating segments follow:
- --------------------------------------------------------------------------------
January 29, January 30,
(dollars in thousands) 2006 2005
- --------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics
Current assets $ 23,207 $ 24,951
Property, plant and equipment (10) 26,200 26,658
- --------------------------------------------------------------------------------
Total mattress fabrics assets 49,407 51,609
- --------------------------------------------------------------------------------
Upholstery Fabrics
Current assets 47,377 54,372
Property, plant and equipment (11) 26,312 39,273
- --------------------------------------------------------------------------------
Total upholstery fabrics assets 73,689 93,645
- --------------------------------------------------------------------------------
Total segment assets 123,096 145,254
Non-segment assets:
Cash and cash equivalents 12,870 5,107
Deferred income taxes 22,785 17,140
Other current assets 1,649 2,691
Property, plant and equipment 50 101
Goodwill 4,114 4,114
Other assets 1,775 1,716
- --------------------------------------------------------------------------------
Total assets $ 166,339 $ 176,123
- --------------------------------------------------------------------------------
Three months ended
- --------------------------------------------------------------------------------
January 29, January 30,
(dollars in thousands) 2006 2005
- --------------------------------------------------------------------------------
Capital additions:
Mattress Fabrics $ 134 $ 1,257
Upholstery Fabrics 256 485
Unallocated corporate 0 1,034(12)
- --------------------------------------------------------------------------------
$ 390 $ 2,776
- --------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 965 $ 912
Upholstery Fabrics 1,366 2,330
- --------------------------------------------------------------------------------
Total segment depreciation expense 2,331 3,242
Accelerated depreciation 108 4,363
- --------------------------------------------------------------------------------
$ 2,439 $ 7,605
- --------------------------------------------------------------------------------
I-16
Nine months ended
- -------------------------------------------------------------------------------
January 29, January 30,
(dollars in thousands) 2006 2005
- -------------------------------------------------------------------------------
Capital additions:
Mattress Fabrics $ 3,550 $ 1,988
Upholstery Fabrics 2,263 962
Unallocated corporate 0 5,376(12)
- -------------------------------------------------------------------------------
$ 5,813 $ 8,326
- -------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 2,714 $ 2,743
Upholstery Fabrics 4,582 7,184
- -------------------------------------------------------------------------------
Total segment depreciation expense 7,296 9,927
Accelerated depreciation 4,979 4,578
- -------------------------------------------------------------------------------
$ 2,275 $ 14,505
- -------------------------------------------------------------------------------
(10) Included in property, plant, and equipment are assets located in the U.S.
totaling $13.2 million and $12.2 million at January 29, 2006 and May 1,
2005, respectively.
(11) Included in property, plant, and equipment are assets located in the U.S.
totaling $21.2 million and $36.2 million at January 29, 2006 and May 1,
2005, respectively. Included in this U.S. property, plant, and equipment
are various other corporate allocations totaling $4.1 million at January
29, 2006. At May 1, 2005, allocations to this segment totaled $5.3 million
for the distribution facility and design center that were sold in June
2005, as well as and various other corporate asset 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 this 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.
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. 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.
I-17
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 U.S. products manufactured by
the company;
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 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.
o Recently enacted quotas on imports of textile products from China
could have an adverse impact of the company's cost of sourcing fabric
from China.
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
39 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 nine months ended January 29, 2006 and January 30, 2005.
I-20
CULP, INC.
NET SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE THREE MONTHS ENDED JANUARY 29, 2006 AND JANUARY 30, 2005
(UNAUDITED)
(Amounts in thousands)
THREE MONTHS ENDED
----------------------------------------------------------------------
Amounts Percent of Net Sales
-------------------------- ----------------------------
January 29, January 30, % Over January 29, January 30,
Net Sales by Segment 2006 2005 (Under) 2006 2005
- ------------------------------------- ------------ ----------- ----------- ------------ -------------
Mattress Fabrics $ 22,681 25,576 (11.3)% 37.2 % 37.0 %
Upholstery Fabrics 38,354 43,484 (11.8)% 62.8 % 63.0 %
------------ ----------- ----------- ------------ -------------
Net Sales $ 61,035 69,060 (11.6)% 100.0 % 100.0 %
============ =========== =========== ============ =============
Gross Profit by Segment Gross Profit Margin
- ------------------------------------- ----------------------------
Mattress Fabrics $ 3,442 3,478 (1.0)% 15.2 % 13.6 %
Upholstery Fabrics 2,070 3,391 (39.0)% 5.4 % 7.8 %
------------ ----------- ----------- ------------ -------------
Subtotal 5,512 6,869 (19.8)% 9.0 % 9.9 %
Restructuring related charges (1,335)(1) (4,302)(3) 69.0 % (2.2)% (6.2)%
------------ ----------- ----------- ------------ -------------
Gross Profit $ 4,177 2,567 62.7 % 6.8 % 3.7 %
============ =========== =========== ============ =============
Selling, General and Administrative
expenses by Segment Percent of Net Sales
- ------------------------------------- ----------------------------
Mattress Fabrics $ 1,643 1,889 (13.0)% 7.2 % 7.4 %
Upholstery Fabrics 3,717 5,401 (31.2)% 9.7 % 12.4 %
Unallocated Corporate expenses 738 901 (18.1)% 1.2 % 1.3 %
------------ ----------- ----------- ------------ -------------
Selling, General and
Administrative expense $ 6,098 8,191 (25.6)% 10.0 % 11.9 %
============ =========== =========== ============ =============
Operating Income (loss) by Segment Operating Income(Loss)Margin
- ------------------------------------- ----------------------------
Mattress Fabrics $ 1,799 1,589 13.2 % 7.9 % 6.2 %
Upholstery Fabrics (1,647) (2,010) (18.1)% (4.3)% (4.6)%
Unallocated corporate expenses (738) (901) 18.1 % (1.2)% (1.3)%
------------ ----------- ----------- ------------ -------------
Subtotal (586) (1,322) (55.7)% (1.0)% (1.9)%
Restructuring and related charges (1,678)(2) (5,437)(4) 69.1 % (2.7)% (7.9)%
------------ ----------- ----------- ------------ -------------
Operating loss $ (2,264) (6,759) 66.5 % (3.7)% (9.8)%
============ =========== =========== ============ =============
Depreciation by Segment
- -------------------------------------
Mattress Fabrics $ 965 912 5.8 %
Upholstery Fabrics 1,366 2,330 (41.4)%
------------ ----------- -----------
Subtotal 2,331 3,242 (28.1)%
Accelerated Depreciation 108 4,363 (97.5)%
------------ ----------- -----------
Total Depreciation $ 2,439 7,605 (67.9)%
============ =========== ===========
(1) The $1.3 million represents restructuring related charges primarily for
inventory markdowns, termination benefits and other operating costs
associated with plant facilities that are in the process of being closed or
are closed, and accelerated depreciation.
(2) The $1.7 million represents restructuring and related charges primarily for
inventory markdowns, termination benefits and other operating costs
associated with the closing of or closed plant facilities, asset movement
costs, accelerated depreciation, and lease termination costs.
(3) The $4.3 million represents represents restructuring related charges for
accelerated depreciation.
(4) The $5.4 million represents represents restructuring and related charges
primarily for accelerated depreciation, asset movement costs, lease
termination costs, and fixed asset write-downs.
I-21
CULP, INC.
NET SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE NINE MONTHS ENDED JANUARY 29, 2006 AND JANUARY 30, 2005
(UNAUDITED)
(Amounts in thousands)
NINE MONTHS ENDED
--------------------------------------------------------------------
Amounts Percent of Net Sales
------------------------- ----------------------------
January 29, January 30, % Over January 29, January 30,
Net Sales by Segment 2006 2005 (Under) 2006 2005
- ------------------------------------- ------------ ---------- ----------- ------------- -------------
Mattress Fabrics $ 69,586 78,414 (11.3)% 36.6 % 36.9 %
Upholstery Fabrics 120,797 133,901 (9.8)% 63.4 % 63.1 %
------------ ---------- ----------- ------------- -------------
Net Sales $ 190,383 212,315 (10.3)% 100.0 % 100.0 %
============ ========== =========== ============= =============
Gross Profit by Segment Gross Profit Margin
- ------------------------------------- ----------------------------
Mattress Fabrics $ 9,839 12,735 (22.7)% 14.1 % 16.2 %
Upholstery Fabrics 10,027 13,575 (26.1)% 8.3 % 10.1 %
------------ ---------- ----------- ------------- -------------
Subtotal 19,866 26,310 (24.5)% 10.4 % 12.4 %
Restructuring related charges (3,581)(1) (5,501)(4) 34.9 % (1.9)% (2.6)%
------------ ---------- ----------- ------------- -------------
Gross Profit $ 16,285 20,809 (21.7)% 8.6 % 9.8 %
============ ========== =========== ============= =============
Selling, General and Administrative
expenses by Segment Percent of Net Sales
- ------------------------------------- ----------------------------
Mattress Fabrics $ 5,016 5,569 (9.9)% 7.2 % 7.1 %
Upholstery Fabrics 12,120 17,992 (32.6)% 10.0 % 13.4 %
Unallocated Corporate expenses 2,322 2,748 (15.5)% 1.2 % 1.3 %
------------ ---------- ----------- ------------- -------------
Subtotal 19,458 26,309 (26.0)% 10.2 % 12.4 %
Restructuring related charges 3,022 (2) 0 100.0 % 1.6 % 0.0 %
------------ ---------- ----------- ------------- -------------
Selling, General and
Administrative expenses $ 22,480 26,309 (14.6)% 11.8 % 12.4 %
============ ========== =========== ============= =============
Operating Income (loss) by Segment Operating Income(Loss)Margin
- ------------------------------------- ----------------------------
Mattress Fabrics $ 4,823 7,166 (32.7)% 6.9 % 9.1 %
Upholstery Fabrics (2,093) (4,417) 52.6 % (1.7)% (3.3)%
Unallocated corporate expenses (2,322) (2,748) 15.5 % (1.2)% (1.3)%
------------ ---------- ----------- ------------- -------------
Subtotal 408 1 40.7 % 0.2 % 0.0 %
Goodwill impairment 0 (5,126)(5) (100.0)% 0.0 % (2.4)%
Restructuring and related charges (13,184)(3) (7,790)(6) (69.2)% (6.9)% (3.7)%
------------ ---------- ----------- ------------- -------------
Operating loss $ (12,776) (12,915) 1.1 % (6.7)% (6.1)%
============ ========== =========== ============= =============
Depreciation by Segment
- -------------------------------------
Mattress Fabrics $ 2,714 2,743 (1.1)%
Upholstery Fabrics 4,582 7,184 (36.2)%
------------ ---------- -----------
Subtotal 7,296 9,927 (26.5)%
Accelerated Depreciation 4,979 4,578 8.8 %
------------ ---------- -----------
Total Depreciation $ 12,275 14,505 (15.4)%
============ ========== ===========
(1) The $3.6 million represents restructuring related charges primarily for
accelerated depreciation, inventory markdowns, termination benefits and
other operating costs associated with plant facilities that are in the
process of being closed or are closed.
(2) The $3.0 million represents accelerated depreciation.
(3) The $13.2 million represents restructuring and related charges primarily
for accelerated depreciation, write-downs of buildings and equipment, asset
movement costs, termination benefits and other operating costs associated
with plant facilities that are in the process of being closed or are
closed, inventory markdowns, and lease termination costs.
(4) The $5.5 million represents restructuring related charges primarily for
accelerated depreciation and inventory markdowns.
(5) The $5.1 million represents a goodwill impairment charge related to the
Culp Decorative Fabrics division within the upholstery fabrics segment.
(6) The $7.8 million represents restructuring and related charges primarily for
accelerated depreciation, termination benefits, inventory markdowns, asset
movement costs, lease termination costs, and fixed asset write-downs.
I-22
Three and Nine Months ended January 29, 2006 compared with Three and Nine Months
ended January 30, 2005
For the third quarter of fiscal 2006, net sales decreased 11.6% to $61.0 million
compared to $69.1 million for the third quarter of fiscal 2005. The company
reported a net loss of $2.2 million, or $0.19 per diluted share, for the third
quarter of fiscal 2006, which included restructuring and related pre-tax charges
of $1.7 million. The company reported a net loss of $4.9 million, or $0.42 per
diluted share, in the third quarter of fiscal 2005, which included restructuring
and related pre-tax charges of $5.4 million.
For the nine month period of fiscal 2006, net sales decreased 10.3% to $190.4
million compared to $212.3 million for the nine month period of fiscal 2005. The
company reported a net loss of $10.3 million, or $0.89 per share diluted, for
the nine month period of fiscal 2006, which included restructuring and related
pre-tax charges of $13.2 million. The company reported a net loss of $10.1
million, or $0.88 per share diluted, for the nine month period of fiscal 2005,
which included restructuring and related pre-tax charges of $7.8 million and
$5.1 million in goodwill impairment.
Restructuring and Related Charges
During the third quarter of fiscal 2006, total restructuring and related charges
incurred were $1.7 million, with approximately $838,000 related to inventory
markdowns, $303,000 for termination benefits, $371,000 for asset movement costs,
$141,000 for operating costs associated with the closing of or closed plant
facilities, $108,000 for accelerated depreciation, $49,000 for lease termination
costs, and a credit of $135,000 to reflect current estimates for sub-lease
income of the company's closed facility in Chattanooga, TN. Of the total charge,
$400,000 was recorded in the restructuring expense line item and $1.3 million
was recorded in the cost of sales line item in the 2006 Consolidated Statements
of Loss. For the nine month period of fiscal 2006, total restructuring and
related charges incurred were $13.2 million, of which approximately $4.9 million
related to accelerated depreciation, $2.8 million for write-downs of buildings
and equipment, $1.9 million related to asset movement costs, $1.9 million for
termination benefits, $1.2 million for inventory markdowns, $427,000 for lease
termination costs, $141,000 for operating costs associated with the closing of
or closed plant facilities, and a credit of $135,000 to reflect current
estimates for sub-lease income of the company's closed facility in Chattanooga,
TN. Of the total charge, $6.6 million was recorded in the restructuring expense
line item, $3.0 million in the selling, general, and administrative expense line
item, and $3.6 million in the cost of sales line item in the 2006 Consolidated
Statements of Loss. These charges relate to the Upholstery Fabrics segment.
Mattress Fabrics Segment
Net Sales -- Mattress fabric sales (known as mattress ticking) for the third
quarter of fiscal 2006 decreased 11.3% to $22.7 million compared to $25.6
million for the third quarter of fiscal 2005. Mattress ticking yards sold during
the third quarter of fiscal 2006 decreased by 11.8% compared with the third
quarter of fiscal 2005. This trend reflects overall softness in industry sales
of mattresses, and a decline in demand for the printed ticking product line,
which has become a less popular category. The average selling price for mattress
ticking was essentially unchanged for the third quarter of fiscal 2006 compared
to the third quarter of fiscal 2005. For the nine month period of fiscal 2006,
net sales decreased 11.3% to $69.6 million compared to $78.4 million for the
nine month period of fiscal 2005. Mattress ticking yards sold during the nine
month period of fiscal 2006 decreased by 7.2% over the third quarter of fiscal
2005. For the nine month period of fiscal 2006, the average selling price for
mattress fabrics was $2.26 per yard compared to $2.35 for the nine month period
in fiscal 2005. This decrease in net sales reflects overall softness in industry
sales for mattress ticking, 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, and the industry-wide shortage of
polyurethane foam used by mattress manufacturers that related to disruptions
from the hurricane activity on the Gulf Coast in the second quarter of fiscal
2006.
I-23
Operating income -- For the third quarter of fiscal 2006, the mattress fabrics
segment reported operating income of $1.8 million, or 7.9% of net sales,
compared to $1.6 million, or 6.2% of net sales, for the third quarter of fiscal
2005. This trend reflects productivity gains from the capital project undertaken
in this segment since its announcement in October 2004 and further improvement
is expected as the company moves closer to target productivity levels by the end
of fiscal 2006. Operating income for the nine month period of fiscal 2006 was
$4.8 million, or 6.9% of net sales, compared with $7.2 million, or 9.1% of net
sales, for the nine month period of fiscal 2005. Operating income for the nine
month period of fiscal 2006 in this segment was affected by customs assessments
totaling $621,000, which reduced operating income for the nine month period by
approximately 1%, higher raw material prices that were not offset by customer
surcharges, manufacturing variances related to the start-up of the capital
project in the first and second quarters of fiscal 2006, overall softness in
industry sales of mattresses, and the ongoing shift mattress manufacturers are
making to less expensive common border ticking.
Segment assets -- Segment assets consist of accounts receivable, inventory, and
property, plant, and equipment. As of January 29, 2006, accounts receivable and
inventory totaled $23.2 million compared to $25.0 million at May 1, 2005. Also
as of January 29, 2006, property, plant and equipment totaled $26.2 million
compared to $26.7 million at May 1, 2005. Included in property, plant, and
equipment are assets located in the U.S. totaling $13.2 million and $12.2
million at January 29, 2006 and May 1, 2005, respectively.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for the third quarter of fiscal 2006
decreased 11.8% to $38.4 million, compared with $43.5 million in the third
quarter of fiscal 2005. Upholstery fabric yards sold during the third quarter of
fiscal 2006 declined by 13.1% compared with the third quarter of fiscal 2005.
The average selling price increased 1.4% compared with the third quarter of
fiscal 2005. For the nine month period of fiscal 2006, net sales decreased 9.8%
to $120.8 million compared with $133.9 million for the nine month period of
fiscal 2005. For the nine month period of fiscal 2006, the average selling price
for upholstery fabrics was essentially unchanged compared to the nine month
period of fiscal 2005. Sales of upholstery fabrics reflect continued soft demand
industry-wide for U.S. produced fabrics, driven by consumer preference for
leather and suede furniture and other imported fabrics, including cut and sewn
kits.
Operating loss - Operating loss for the third quarter of fiscal 2006 was $1.6
million or 4.3% of net sales compared with an operating loss of $2.0 million, or
4.6% of net sales, for the third quarter of fiscal 2005. These results reflect
significantly lower gross profit in U.S. operations due to lower sales volumes
and higher manufacturing variances as the company has experienced transition
issues related to moving its finishing and yarn operations to outside suppliers
and consolidating its velvet operations. Offsetting the lower gross profit in
this segment were lower selling, general, and administrative expenses, which
were down 31% for the third quarter of fiscal 2006 compared with the third
quarter of fiscal 2005. Operating loss for the nine month period of fiscal 2006
was $2.1 million or 1.7% of net sales, compared with an operating loss of $4.4
million, or 3.3% of net sales, for the nine month period of fiscal 2005. Since
the beginning of fiscal 2006, the company has revamped its U.S. upholstery
fabric product strategy by offering a more select group of attractively priced,
high volume decorative and velvet fabrics that are well packaged by color and
coordination. Along with this shift in product strategy, the company has taken
aggressive steps since the beginning of fiscal 2006 to reduce its U.S.
manufacturing costs and capacity and selling, general, and administrative
expenses. The company consolidated two velvet manufacturing operations,
consolidated finished goods distribution and design centers, and closed two of
its three yarn manufacturing plants. In addition, the company is currently
outsourcing its decorative fabrics finishing operation. The company has also
combined its sales, design, and customer service activities for Culp Decorative
Fabrics and Culp Velvets/Prints, the two divisions within the upholstery fabrics
segment, 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 32.6% for the nine month period of fiscal 2006 compared with the nine
month period of fiscal 2005.
I-24
Non-U.S. Produced Sales - Sales of upholstery fabrics produced outside the
company's U.S. manufacturing operations, including fabrics produced at our China
facility, were up 89% in the third quarter of fiscal 2006 over the third quarter
of fiscal 2005 and accounted for approximately 38% of upholstery fabric sales in
the third quarter of 2006. Fabric produced offshore accounted for approximately
18% of upholstery fabric sales for the third quarter of fiscal 2005. For the
nine month period of fiscal 2006, these sales increased approximately 92% over
the nine month period of fiscal 2005 and accounted for approximately 32% of
upholstery fabric sales, compared to approximately 15% of upholstery fabric
sales for the nine month period 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 April 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 $13 million (excluding corporate asset allocations) by the
end 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.
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 of fiscal 2006, 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 reduced the number of associates by
approximately 100 people.
As a result of an internal analysis, the company commenced an initiative to
discontinue a number of lower volume products that do not fit the company's U.S.
upholstery fabrics operating model to produce more volume-oriented products. As
of January 29, 2006, the company recorded an inventory markdown charge of
$816,000 (included in restructuring related charges) based on an analysis by
management of lower volume products that are expected to be discontinued in the
fourth quarter of fiscal 2006. The ultimate recovery of the carrying value of
these products and its associated raw material components will be based on
market reaction and there could be further inventory markdown charges in the
fourth quarter of fiscal 2006, related to this initiative.
I-25
While management believes it is important to produce some level of upholstery
fabric in the U.S. to support its customers' domestic fabric requirements,
management remains committed to take additional steps if necessary to address
the profitability of the company's 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 January 29, 2006, accounts receivable and
inventory totaled $47.4 million compared to $54.4 million at May 1, 2005. As of
January 29, 2006, property, plant, and equipment totaled $26.3 million compared
to $39.3 million at May 1, 2005. Included in property, plant, and equipment are
assets located in the U.S. totaling $21.2 million and $36.2 million at January
29, 2006, and May 1, 2005, respectively. Included in this U.S. property, plant,
and equipment are various other corporate asset allocations totaling $4.1
million at January 29, 2006. At May 1, 2005, allocations to this segment totaled
$5.3 million for the distribution facility and design center that were sold in
June 2005, as well as various other corporate asset allocations totaling $4.2
million.
Other Expenses
Selling, General and Administrative Expenses -- SG&A expenses of $6.1 million
for the third quarter of fiscal 2006 decreased approximately $2.1 million, or
25.6%, from $8.2 million in the third 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
$22.5 million for the nine month period of fiscal 2006 decreased approximately
$3.8 million, or 14.6%, from $26.3 million the nine month period of fiscal 2005.
Included in the $22.5 million was $3.0 million in accelerated depreciation
associated with the company's design and distribution centers sold in June 2005.
The 25.9% decrease to the remaining $19.5 million for the nine month period of
fiscal 2006 from the $26.3 million in the nine month period 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 third quarter of 2006 was
$ 1.1 million compared to $912,000 for the third quarter of fiscal 2005. This
increase is primarily due to increased borrowings from the real estate loan.
Interest income was $43,000 for the third quarter of 2006 compared to $42,000
for the third quarter of fiscal 2005.
Income Taxes -- The effective tax rate (taxes as a percentage of loss before
income taxes) for the third quarter of fiscal 2006 was 36.6% compared with 36.5%
for the third 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 January 29, 2006,
increased to $12.9 million from $5.1 million as of May 1, 2005, primarily
reflecting cash flow from operations of $5.3 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 $6.3 million, proceeds from the real estate loan of $4.3
million, and proceeds from a loan with the Canadian government of $680,000.
Working Capital -- Accounts receivable as of January 29, 2006, increased 6.8% in
comparison to January 30, 2005. Days sales outstanding totaled 39 days at
January 29, 2006, compared with 32 days at January 30, 2005. Inventories at
January 29, 2006 decreased 9.8% from January 30, 2005. Inventory turns for the
third quarter of fiscal 2006 were 5.0 versus 5.6 for the third quarter of fiscal
2005. Operating working capital (comprised of accounts receivable and
inventories, less trade accounts payable) was $52.6 million at January 29, 2006,
down from $58.2 million at January 30, 2005.
Financing Arrangements -- The company's long-term debt of $55.3 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 loans with the
Canadian government of $1.0 million. 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.
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 January 29,
2006, there were $3.7 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.
On March 8, 2006, the company entered into an Eighth Amendment to the Amended
and Restated Credit Agreement, which amends the credit agreement between the
company and its bank (Wachovia). The principal terms of the Eighth Amendment
raised the company's capital expenditures limit to $6.5 million for the year
ending April 30, 2006.
I-27
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. This loan is non-interest bearing and is payable in
48 equal monthly installments commencing December 1, 2009. In addition to the
term loan entered into in November 2005, the company has an existing
non-interest bearing term loan with the Canadian government with its final
payment due in fiscal 2007. At January 29, 2006, the balance of the term loan
entered into in November 2005 and the existing term loan were $695,000 and
$315,000, respectively.
The company was in compliance with all financial covenants in its loan
agreements as of January 29, 2006.
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 $ 103 $ - $ - $ - $ - $ - $ 103
Accounts payable
capital expenditures 677 1,000 1,000 - - - 2,677
Operating leases (1) 914 2,958 1,793 437 135 37 6,274
Long-term debt 7,585 8,051 20,046 7,757 7,842 3,997 55,278
- --------------------------------------------------------------------------------------------------------
Total $ 9,279 $ 12,009 $ 22,839 $ 8,194 $ 7,977 $ 4,034 $ 64,332
- --------------------------------------------------------------------------------------------------------
Note: Payment Obligations by Fiscal Year Ending April
(1) Includes accrued restructuring expenses for the company's inactive
Chattanooga manufacturing facility of $217 in 2006, and $869 in 2007 and
2008 and other leases of $40, $139, and $26 for fiscal years 2006, 2007,
and 2008, respectively.
Capital Expenditures -- Capital spending for the nine month period of fiscal
2006 was $5.8 million, including $1.7 million that is the non-cash portion of
capital expenditures representing vendor financing. The company anticipates
capital spending not to exceed $6.5 million (of which approximately $3.6 million
and $2.4 million is expected for the mattress fabric segment and Culp China
respectively) for fiscal 2006, 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 nine month
period of fiscal 2006 was $12.3 million, of which approximately $5.0 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.
Capital expenditures are not expected to exceed $3.0 million in fiscal 2007. The
company estimates depreciation for fiscal year 2006 to be $14.4 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.
I-28
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 January 29, 2006, accounts receivable from furniture manufacturers totaled
approximately $19.3 million, and from bedding manufacturers approximately $9.2
million. Additionally, as of January 29, 2006, the aggregate accounts receivable
balance of the company's ten largest customers was $10.2 million, or 35.8% of
trade accounts receivable.
The company continuously performs credit evaluations of its customers,
considering numerous inputs including customers' financial position, past
payment history, cash flows and management capability; historical loss
experience; and economic conditions and prospects. Once evaluated, each customer
is assigned a credit grade. Credit grades are adjusted as warranted. Significant
management judgment and estimates must be used in connection with establishing
the reserve for allowance for doubtful accounts. While management believes that
adequate allowances for doubtful accounts have been provided in the consolidated
financial statements, it is possible that the company could experience
additional unexpected credit losses.
Inventory Valuation. The company operates as a "make-to-order" and
"make-to-stock" business. Although management closely monitors demand in each
product area to decide which patterns and styles to hold in inventory, the
increasing availability of low cost imports and the gradual shifts in consumer
preferences expose the company to write-downs of inventory.
Management continually examines inventory to determine if there are indicators
that the carrying value exceeds its net realizable value. Experience has shown
that the most significant indicator of the need for inventory write-downs is the
age of the inventory. As a result, the company provides inventory valuation
write-downs based upon set percentages for inventory aging categories, generally
using six, nine, twelve and fifteen month categories. While management believes
that adequate write-downs for excess and obsolete inventory have been made in
the consolidated financial statements, significant unanticipated changes in
demand or changes in consumer tastes and preferences could result in additional
excess and obsolete inventory in the future.
Long-Lived Assets. The company follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes an impairment accounting model for long-lived assets to be held and
used, disposed of by sale, or disposed of by abandonment or other means.
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. During the nine month
period 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.
I-29
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 January 29, 2006, 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 nine
month period 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)."
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.
I-30
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 January 29, 2006, the
company's net deferred tax assets total $22,785,000, an increase of $5,645,000
from the end of fiscal 2005, primarily reflecting the federal and state tax
benefits recorded for the loss from U.S. operations during the nine month period
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.
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 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). 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.
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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 nine month
period of fiscal 2006 as oil and energy prices increased and had an impact on
the company's 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.
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 January 29, 2006, there were $4.3 million in
borrowings outstanding under the real estate term loan and no borrowings
outstanding under the revolving credit agreement. In connection with the real
estate term loan, the company entered into a $2,170,000 notional principal
interest rate swap agreement, which represents 50% of the principal amount on
the real estate loan, and effectively converts the floating rate LIBOR based
payments to fixed payments at 4.99% plus the spread calculated under the real
estate loan 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 92% 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 January 29, 2006
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 January 29, 2006 would not have a
significant impact on the company's results of operations or financial position.
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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 January 29,
2006, 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.
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Part II - Other Information
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Item 5. Other Information
On March 8, 2006, the company entered into an Eighth Amendment to the Amended
and Restated Credit Agreement, which amends the credit agreement between the
company and its bank (Wachovia). The principal terms of the Eighth Amendment
raised the company's capital expenditures limit to $6.5 million for the year
ending April 30, 2006.
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) Eighth Amendment to Amended and Restated Credit Agreement 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.
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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: March 10, 2006 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-2