UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 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
incorporation or other organization) Identification No.)
1823 Eastchester Drive, High Point, North Carolina 27265
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
Common Stock, par value $.05/ Share New York Stock Exchange
Rights for Purchase of Series A
Participating Preferred Shares New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
As of April 30, 2006, 11,654,959 shares of common stock were outstanding.
As of October 30, 2005, the aggregate market value of the voting stock held by
non-affiliates of the registrant on that date was $45,291,688 based on the
closing sales price of such stock as quoted on the New York Stock Exchange
(NYSE), assuming, for purposes of this report, that all executive officers and
directors of the registrant are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the company's Proxy Statement to be filed pursuant to Regulation 14A
of the Securities and Exchange Commission in connection with its Annual Meeting
of Shareholders to be held on September 26, 2006 are incorporated by reference
into Part III.
CULP, INC.
FORM 10-K REPORT
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
1. Business
Overview............................................................2
Segments............................................................4
Overview of Industry and Markets....................................6
Overview of Bedding Industry........................................6
Overview of Residential Furniture Industry..........................7
Overview of Commercial Furniture Industry...........................8
Products............................................................8
Manufacturing and Sourcing.........................................10
Product Design and Styling.........................................11
Distribution.......................................................11
Sources and Availability of Raw Materials..........................11
Seasonality........................................................12
Competition........................................................13
Environmental and Other Regulations................................13
Employees..........................................................14
Customers and Sales................................................14
Net Sales by Geographic Area.......................................15
Backlog............................................................15
1A. Risk Factors.........................................................15
1B. Unresolved Staff Comments............................................20
2. Properties...........................................................20
3. Legal Proceedings....................................................20
4. Submission of Matters to a Vote of Security Holders..................21
PART II
5. Market for the Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities..................21
6. Selected Financial Data..............................................22
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................23
7A. Quantitative and Qualitative Disclosures About Market Risk...........40
8. Consolidated Financial Statements and Supplementary Data.............41
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................70
9A. Controls and Procedures..............................................70
9B. Other Information....................................................70
Item No. Page
- -------- ----
PART III
10. Directors and Executive Officers of the Registrant...................71
11. Executive Compensation...............................................71
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.....................................71
13. Certain Relationships and Related Transactions.......................71
14. Principal Accountant Fees and Services...............................71
PART IV
15. Exhibits, Financial Statement Schedules..............................72
Documents Filed as Part of this Report...............................72
Exhibits.............................................................75
Financial Statement Schedules........................................75
Signatures...........................................................76
Exhibit Index........................................................77
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Parts I and II of this report contain statements that may be deemed
"forward-looking statements" within the meaning of the federal securities laws,
including the Private Securities Litigation Reform Act of 1995 (Section 27A of
the Securities Act of 1933 and Section 27A of the Securities and Exchange Act of
1934). Such statements are inherently subject to risks and uncertainties.
Further, forward-looking statements are intended to speak only as of the date on
which they are made. Forward-looking statements are statements that include
projections, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often but not always
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives, and include but are not limited to
statements about expectations for the company's future operations or success,
sales, gross profit margins, operating income, SG&A or other expenses, and
earnings, as well as any statements regarding future economic or industry trends
or future developments. Factors that could influence the matters discussed in
such statements include the level of housing starts and sales of existing homes,
consumer confidence, trends in disposable income, and general economic
conditions. Decreases in these economic indicators could have a negative effect
on the company's business and prospects. Likewise, increases in interest rates,
particularly home mortgage rates, and increases in consumer debt or the general
rate of inflation, could affect the company adversely. In addition, changes in
consumer preferences for various categories of furniture coverings, as well as
changes in costs to produce such products (including import duties and quotas or
other import costs) can have significant effect on demand for the company's
products. Also, changes in the value of the U.S. dollar versus other currencies
can affect the company's financial results because a significant portion of the
company's operations are located outside the United States. Further, economic
and political instability in international areas could affect the company's
operations or sources of goods in those areas, as well as demand for the
company's products in international markets. Finally, unanticipated delays or
costs in executing restructuring actions could cause the cumulative effect of
restructuring actions to fail to meet the objectives set forth by management.
Further information about these factors, as well as other factors that could
affect the company's future operations or financial results and the matters
discussed in forward-looking statements are included in the "Risk Factors"
section of this report in Item 1A.
PART I
ITEM 1. BUSINESS
Overview
Culp, Inc., which we sometimes refer to as the company, manufactures and markets
mattress fabrics (also known as mattress ticking) used for covering mattresses
and box springs and upholstery fabrics primarily for use in production of
upholstered furniture (residential and commercial). The company's executive
offices are located in High Point, NC. 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 the largest producer 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
mattresses, box springs, mattress sets, sofas, recliners, chairs, loveseats,
sectionals, sofa-beds, and office seating. Culp primarily markets fabrics that
have broad appeal in the "good" and "better" priced categories of furniture and
bedding.
The company has two operating segments - mattress fabrics and upholstery
fabrics. The mattress fabric business markets an array of fabrics used by
bedding manufacturers. The upholstery fabrics segment markets products in all
categories of fabric used as coverings for furniture. This segment also has a
small U.S. yarn production operation, which produces special purpose yarns (as
opposed to commodity yarns more readily available from outside suppliers) for
the company's internal use.
Total net sales in fiscal 2006 were $261.1 million. The mattress fabrics segment
had sales of $93.7 million (36% of total net sales) while the upholstery fabrics
segment had sales of $167.4 million (64% of total net sales).
Culp markets a variety of fabrics in different categories, including fabrics
produced at our manufacturing facilities and fabrics produced by other
suppliers. The company had eight active manufacturing plants as of the end of
fiscal 2006, which are located in North Carolina, South Carolina, Quebec,
Canada, and Shanghai, China. We also source fabrics from other manufacturers,
located primarily in China, Turkey and in the U.S., with almost all of those
fabrics being produced specifically for the company and created by Culp
designers. In recent years, the portion of total company sales represented by
fabrics produced outside of the company's U.S. and Canadian facilities has
increased significantly, while sales of goods produced in our U.S. manufacturing
plants have decreased. For fiscal 2006, sales of fabrics produced outside of
Culp's North American manufacturing plants were $86.8 million, or 33% of net
sales, compared to $59.3 million, or 21% of sales, in fiscal 2005. This trend is
especially strong in the upholstery fabrics segment, where almost half of our
sales now consist of fabrics produced in Asia.
2
Culp has experienced dramatic changes in its business during the past six years.
Significant demand has arisen for certain fabrics not produced in our U.S.
plants, and the company has moved rapidly to develop sources for the products
being demanded by our customers. Six years ago, we were a much more vertically
integrated manufacturer of fabrics, especially in upholstery fabrics, with large
amounts of capital committed to U.S.-based manufacturing fixed assets. Today,
the company is a more flexible fabric producer and marketer, with a smaller
fixed asset base, but also with significantly lower overall sales.
A significant and growing portion of our upholstery fabric products are now
produced by other manufacturers, but in most cases, the company continues to
control components of the production process, such as design, finishing, quality
control and distribution. In upholstery fabrics, microdenier suedes and a
variety of other fabrics are now sourced in China, where the company has
established a sourcing, finishing and distribution operation. In addition, we
have moved to outsource certain components of the production process, such as
yarn production and finishing of decorative fabrics in the upholstery fabrics
segment. In mattress ticking, knitted fabrics represent a small, but growing
portion of our sales. These fabrics, along with a portion of our damask product
line, are sourced from outside providers.
Along with these shifts in our business, the company has dramatically reduced
the size and scope of its U.S. upholstery fabrics manufacturing operations,
where almost half of our products are now sourced in China. In the mattress
ticking business, a shift by bedding makers to one-sided mattresses, along with
product shifts to knitted ticking for top panels of mattresses and common border
fabrics, which is the fabric on the side of the mattress and box spring have
affected demand for certain categories of our products. We have made dramatic
changes in our operating assets, product mix and business model to address the
challenges facing the company.
Changes continue to take place, and the company continues to adapt to these
changes. The trends that have caused the need for modifications in the way we do
business have not abated. The company's shift away from a vertically integrated
U.S.-based upholstery fabrics manufacturing operation and toward a focus upon
producing, sourcing and marketing fabrics from a variety of sources is expected
to continue. For further discussion about recent changes in the company's
operations, see the discussion below regarding individual business segments.
Our fiscal year is the 52 or 53 week period ending on the Sunday closest to
April 30. The fiscal years ended April 30, 2006, and May 1, 2005, included 52
weeks versus 53 weeks for fiscal 2004.
Culp maintains an Internet website at www.culpinc.com. The company will make
this annual report and its other annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to these reports,
available free of charge on its Internet site as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission. Information included on the company's
website is not incorporated by reference into this annual report.
3
Segments
The company's two operating segments are mattress fabrics and upholstery
fabrics. The following table sets forth certain information for each of the
company's segments.
Sales by Fiscal Year ($ in Millions) and
Percentage of Total Company Sales
-----------------------------------------------------------------
SEGMENT Fiscal 2006 Fiscal 2005 Fiscal 2004
- -------------------------------- --------------------- --------------------- ---------------------
Mattress Fabrics $93.7 (36%) $105.4 (37%) $106.3 (33%)
-----------------------------------------------------------------
Upholstery Fabrics
Non-U.S.-Produced Sales $59.2 (23%) $31.2 (11%) $15.7 (5%)
U.S.-Produced Sales $108.2 (41%) $149.8 (52%) $196.1 (62%)
-----------------------------------------------------------------
Total Upholstery $167.4 (64%) $181.1 (63%) $211.8 (67%)
-----------------------------------------------------------------
Total Company $261.1 (100%) $286.5 (100%) $318.1 (100%)
-----------------------------------------------------------------
Additional financial information about the company's operating segments can be
found in footnote 16 to the Consolidated Financial Statements included in Item 8
of this report.
Mattress Fabrics. The mattress fabrics segment, manufactures and markets
mattress ticking to bedding manufacturers. These fabrics encompass woven
jacquard ticking, knitted ticking and printed ticking. Culp Home Fashions, as
this business is known in the trade, manufacturing facilities are located in
Stokesdale, NC, and St. Jerome, Quebec, Canada. Both of these plants manufacture
jacquard (damask) ticking, while the St. Jerome plant also produces yarn for
internal consumption and the Stokesdale plant also produces printed ticking. The
Stokesdale plant also has finished goods distribution and the division offices.
Knitted ticking is sourced from a manufacturer who works closely with the
company to produce fabrics according to Culp's proprietary design specifications
and quality standards.
During fiscal 2005 and 2006, the company took significant steps to further
enhance its competitive position in this segment by consolidating all of our
mattress fabrics manufacturing into the Stokesdale and St. Jerome facilities.
The company had capital expenditures in fiscal 2006 and 2005 totaling $10.0
million, of which $7.0 million pertained to a capital project involving the
relocation of ticking looms from an upholstery fabric plant to the existing
facilities in the U.S. and Canada along with the purchase of new weaving
machines that are faster and more efficient than the equipment they replaced.
Additionally, the company had a $1.2 million capital project that significantly
enhances its finishing capabilities in this segment.
Upholstery Fabrics. The upholstery fabrics segment markets a variety of fabrics
for residential and commercial furniture, including jacquard woven fabrics,
velvets, microdenier suedes, woven dobbies, knitted fabrics, and piece-dyed
woven products. Historically, the majority of upholstery fabrics have been
produced in the company's U.S. manufacturing plants, but a growing percentage
are now made in non-U.S. locations, including the company's facilities in China.
This segment operates fabric manufacturing facilities in Graham, NC, Anderson,
SC, and Shanghai, China. The segment also includes a specialty yarn
manufacturing operation in Lincolnton, NC, which produces specialty yarns for
the company's internal consumption.
During fiscal 2006, we revamped our U.S. upholstery fabric product strategy by
offering a more select group of attractively priced, high volume decorative and
velvet fabrics packaged by color and coordination, eliminating many smaller
volume fabric patterns. Along with this shift in product strategy, we continued
4
to take aggressive steps to reduce our U.S. manufacturing costs, capacity,
and selling, general, and administrative expenses. The company consolidated two
velvet manufacturing operations, consolidated its finished goods distribution
and design centers, and closed two of its three yarn manufacturing plants. In
addition, we outsourced our decorative fabrics finishing operation. The company
has consolidated its sales, design, and customer service activities for two
divisions that were formerly operated separately within the upholstery fabrics
segment and related costs. The result of these actions has been a significant
reduction in capacity and related costs for U.S. production of upholstery
fabrics. These reductions have accompanied a shift in customer demand away from
U.S.-produced upholstery fabrics and a resulting decrease in sales of
U.S.-produced fabrics.
These developments are a continuation of a longer-term trend that has affected
the company and the upholstery fabric business for the past six years. At the
end of fiscal 2000, the company had fourteen manufacturing plants in the U.S.
for upholstery fabric manufacturing, with total sales in the segment of $382
million. The book value of these manufacturing assets in the segment was $93
million at the end of fiscal 2000 and $52 million at the end of fiscal 2004. By
comparison, there are now three U.S. manufacturing plants currently operating in
the upholstery fabrics segment, with a total book value of $10 million. Total
segment sales for fiscal 2006 were $167 million, and of that amount $108 million
represents sales of fabrics produced in the United States. During the fourth
quarter of fiscal 2006, non-U.S. produced fabrics accounted for 44% of total
upholstery segment sales. For additional discussion of restructuring activities
in the upholstery fabrics segment, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
As industry demand for U.S.-produced fabrics has been declining, there have been
significant increases in demand for and sales of the company's upholstery
fabrics produced overseas. Our China operations now include three manufacturing
plants near Shanghai, China. In 2003, the company began a strategy to link our
strong customer relationships, design expertise and production technology with
low cost fabric manufacturers in China in order to deliver enhanced value to our
customers throughout the world. The operations in China began with a finishing
and inspection operation, where goods woven in China by selected outside
suppliers are treated with finishing processes and subjected to our quality
control measures before being distributed to customers. In subsequent years, a
variety of finished goods (with no further finishing needed) began to be sourced
through our China operations. During the fourth quarter of fiscal 2006, the
operation was expanded to include a facility where upholstery fabrics are cut
and sewn into "kits" that are made to the specifications of furniture
manufacturing customers in the U.S. Such "cut and sewn" operations have become
an important method for furniture producers to reduce production costs by moving
a larger percentage of the labor component of furniture manufacturing to lower
cost environments, and the company's participation in this type of operation is
an important element of our ability to grow market share. Finally, the China
operation now includes a yarn sourcing initiative that sources and processes
yarn for use by our U.S. manufacturing plants. Other expansions of the company's
operations in China are being planned or analyzed, as this region continues to
grow as a center of activity in the furniture and upholstery fabric
manufacturing industries.
As the company's activities and opportunities in China continue to expand,
our strategy has not changed. The company entered China with the view that we
would take advantage of the variety of products and lower cost environment
available in China, while still maintaining control of the "value-added"
processes such as design, finishing, quality control, and logistics. This
strategic approach has allowed the company to limit its investment of capital in
fixed assets and to lower the costs of our products significantly, while
continuing to leverage the company's design and finishing expertise, industry
knowledge, and important relationships. In this way, the company maintains its
ability to provide furniture manufacturers with products from every category of
fabric used to cover upholstered furniture, and to meet continually changing
consumer preferences.
5
Overview of Industry and Markets
Culp markets products primarily to manufacturers that operate in three principal
markets. The mattress fabrics segment supplies the bedding industry. This market
includes mattress sets (mattresses, box springs, and foundations). The
upholstery fabrics segment supplies the residential and commercial furniture
industries. The residential furniture market includes upholstered furniture sold
to consumers for household use. Products include sofas, sleep sofas, chairs,
recliners and sectionals. The commercial furniture and fabrics market includes
upholstered office seating and modular office systems sold primarily for use in
offices and other institutional settings, and commercial textile wall covering.
The principal markets into which the company sells products are described below.
Overview of Bedding Industry
The bedding industry has experienced growth in sales in recent years, primarily
due to a strong market, as well as higher average selling prices of mattresses.
According to the International Sleep Products Association (ISPA), a trade
association, the U.S. wholesale bedding industry accounted for an estimated $6.4
billion in sales in 2005, a 10.6% increase over 2004. The industry is comprised
of over 700 manufacturers, but the largest four manufacturers accounted for more
than 53% of the total wholesale shipments in 2005. The bedding industry has
averaged approximately 6% annual growth over the past twenty years, with only
one year experiencing a decline in sales volume. It has proven to be a stable
and mature industry, and has grown despite several economic downturns over the
past twenty years. This stability and resistance to economic downturns is due to
replacement purchases, which account for an estimated 70% of bedding industry
sales.
Unlike the residential furniture industry, which has faced intense competition
from imports, the bedding industry has faced limited competition from imports.
The primary reasons for this fact include: 1) the short lead times demanded by
mattress retailers, 2) the limited inventories carried by retailers, 3) the
customized nature of each retailer's product lines, 4) high shipping cost, and
5) the relatively low direct labor content in mattresses and 6) strong brand
recognition.
The company believes that several important demographic factors are helping to
support the bedding industry. In particular, the growth of the aging and
affluent segment of the population has a significant impact on the bedding
industry. The increasing size of homes and growth in the number of vacation and
second homes also play major roles in the demand for bedding in the United
States. These trends have not only driven total unit increases, they have also
been a factor in the size and average selling prices of mattresses being sold in
the United States. According to ISPA, while wholesale sales of bedding increased
10.6% in 2005, the number of units sold increased only 4.0%.
While a majority of bedding sales is traditional innerspring bedding, several
specialty bedding producers have recorded significant sales gains in recent
years. The two largest specialty bedding producers, which produce mattresses
that do not use inner spring construction, together grew wholesale shipments by
27.4% in 2005. The specialty bedding segment has provided new growth
opportunities for bedding producers and those companies that supply components,
including fabric, to them.
6
Key issues facing the bedding industry include:
o The bedding industry over the last three years has been in the
transition to selling "one-sided" mattresses versus "two-sided"
mattresses, which had been the industry norm for many years. All of
the four largest bedding manufacturers and most others have converted
their product lines to the sale of one-sided mattresses. Since a
one-sided mattress uses approximately 30% less mattress ticking,
overall industry demand for mattress ticking has been significantly
reduced by this transition within the bedding industry.
o Mattress manufacturers are using common SKU's and less expensive
fabric for the borders, which is the ticking that goes around the side
of the mattresses and box springs. Virtually all of these border
fabrics are woven damask ticking of the type manufactured by the
company, and this trend has caused significant pricing pressures in
this category of mattress fabric.
o The bedding industry is focusing on producing flame-resistant material
that is designed to meet the State of California's new open flame
mattress flammability standard, which became effective January 1,
2006. A national standard for flame resistance in bedding has now been
established, and it is currently scheduled to become effective July 1,
2007. The company is continuing to monitor these standards and the
various methods that mattress manufacturers and ticking makers can use
to meet flammability standards.
o There is increasing popularity of knitted mattress tickings, as
opposed to woven and printed tickings. Knitted ticking was initially
used primarily on premium mattresses, but these products are now being
placed increasingly on mattresses at mid-range retail price points.
Knitted ticking is typically used on the top panel of a mattress,
while woven ticking remains the predominant fabric on the borders or
sides of mattress sets.
Overview of Residential Furniture Industry
The residential furniture industry is a mature industry, with long-term growth
rates generally close to the overall growth rate of the U.S. economy. According
to the American Home Furnishings Alliance (AHFA), a trade association, the U.S.
residential furniture industry has grown over the last 20 years from $12.7
billion in residential furniture wholesale shipments in 1985 to $26.9 billion in
2005. During the last five years, however, the residential furniture industry
has been impacted by slow economic conditions, and more substantially by a
structural shift to offshore sourcing, primarily from China, which has led to
deflation in retail furniture prices.
Key issues facing the residential furniture industry include:
o The sourcing of components and fully assembled furniture from overseas
continues to play a major role in the residential furniture industry,
with sales of imported furniture growing at a much faster rate than
the overall industry. According to Furniture/Today, an industry trade
publication, imports of residential furniture into the U.S. grew 11%
to almost $22 billion in 2005. By far, the largest source for these
imports continues to be China, which accounted for approximately 50%
of total U.S. imports in 2005, up from approximately 47% in 2004. In
past years, a large majority of furniture imports from China were
wooden "casegoods," but there has been significant recent growth in
imports of upholstered furniture components, including upholstery
fabric and "cut-and-sewn kits" for furniture covers. This trend has
been especially strong for leather furniture, and it now extends to
other coverings, including microdenier suedes and the more traditional
types of fabrics manufactured by the company. Fabrics entering the
U.S. from China and other low labor cost countries are resulting in
increased price competition in the upholstery fabric and upholstered
furniture markets. In addition, competition in the U.S. domestic
market has increased further following the January 1, 2005 expiration
of the quotas imposed under the Uruguay Round Agreement on Textiles
and Clothing on textile and apparel products coming into the U.S.
7
o Leather upholstered furniture has been gaining market share over the
last ten years. This trend has increased over the last four to five
years in large part because selling prices of leather furniture have
been declining significantly over this time period. Very recently,
however, we believe the rate of increase appears to be leveling off,
and this trend may be near its peak.
o The residential furniture industry has been consolidating at the
manufacturing level for several years. The result of this trend is
fewer, but larger, customers for upholstery fabric manufacturers.
o In recent years, several of the nation's larger furniture
manufacturers have opened retail outlets of their own. As top
retailers shift floor space to private label imports, manufacturers
are focused on distributing their own products. In addition, furniture
marketing by "lifestyle" retailers has increased, which has increased
the number of retail outlets for residential furniture but has also
increased the reliance on private brands or private labels.
o The company believes that demographic trends support the outlook for
continued long-term growth in the U.S. residential furniture. In
particular, "baby boomers" (people born between 1946 to 1964) are
reaching their highest earning power and are the most likely group to
upgrade their home decor. In addition, many of these individuals are
purchasing vacation and second homes, as evidenced by the increasing
number of such homes in the U.S. Additionally, the children of the
"baby boomers" are entering their college years and are expected to
drive the next wave of household formation in the U.S. According to
the U.S. Census Bureau, the home ownership rate remained at an
all-time high of 69% as of the end of calendar 2005, and the average
size of homes in the U.S. continues to increase, further driving
purchases of furniture.
Overview of Commercial Furniture Industry
The market for commercial furniture - furniture used in offices and other
institutional settings - grew approximately 12.7% from 2004 to 2005, following a
5.1% increase the previous year. These two years of growth represent a reversal
of a significant decline that had occurred over the three prior years. The
commercial furniture industry declined significantly from 2001 through 2003,
reflecting economic trends affecting businesses, which are the ultimate
customers in this industry. According to the Business and Institutional
Furniture Manufacturer's Association (BIFMA), a trade association, the
commercial furniture market in the U.S. totaled approximately $10.1 billion in
2005 in wholesale shipments by manufacturers. Although higher than 2004, this
total still represents a significant decrease from the industry's peak of $13.3
billion in 2000. From 1990 to 2000, the commercial furniture industry grew at a
compound annual growth rate of 5.3%. The commercial furniture industry is
largely affected by economic trends.
Products
As described above, the company's products include mattress fabrics and
upholstery fabrics, which are the company's identified operating segments.
Mattress Fabrics Segment
- ------------------------
Mattress fabrics segment sales constituted 36% of sales in fiscal 2006, and 37%
in fiscal 2005. The company has emphasized fabrics that have broad appeal at
prices generally ranging from $1.35 to $7.50 per yard. The average selling price
for fiscal 2006, 2005, and 2004 was $2.26, $2.33, and $2.45, respectively.
8
Upholstery Fabrics Segment
- --------------------------
Upholstery fabrics segment sales totaled 64% of sales for fiscal 2006, and 63%
in fiscal 2005. The company has emphasized fabrics that have broad appeal at
"good" and "better" prices, generally ranging from $2.75 to $8.00 per yard. The
average selling price for fiscal 2006, 2005, and 2004 was $4.22, $4.19, and
$4.20, respectively.
We market products in all categories of fabric that manufacturers currently use
for bedding and furniture. The following table indicates the product lines
within each segment, and a brief description of their characteristics.
Culp Fabric Categories by Segment
---------------------------------
Mattress Fabrics
----------------
Woven jacquards Florals and other intricate designs. Woven on complex
(damask) looms using synthetic and natural yarns.
Prints Variety of designs produced economically by screen
printing onto a variety of base fabrics, including
jacquards, knits, poly/cotton sheeting and non-wovens.
Knits Floral and other intricate designs produced on
special-width circular machines utilizing synthetic and
natural yarns. Knits have inherent stretching
properties and spongy softness, and conforms well with
layered foam packages.
Upholstery Fabrics
------------------
Woven jacquards Elaborate, complex designs such as florals and
tapestries in traditional, transitional and
contemporary styles. Woven on intricate looms using a
variety of synthetic and natural yarns.
Woven dobbies Fabrics that use straight lines to produce geometric
designs such as plaids, stripes and solids in
traditional and country styles. Woven on less
complicated looms using several weaving constructions
and primarily synthetic yarns.
Velvets Soft fabrics with a plush feel. Produced with synthetic
yarns, either by weaving or by "tufting" yarn into a
base fabric. Basic designs such as plaids in both
traditional and contemporary styles.
Suede fabrics Fabrics woven or knitted using microdenier polyester
yarns, which are piece dyed and finished, usually by
sanding. The fabrics are typically plain or small
jacquard designs, with some being printed. These are
sometimes referred to as microdenier suedes, and some
are "leather look" fabrics.
9
Manufacturing and Sourcing
Mattress Fabrics Segment
- ------------------------
The mattress fabrics segment operates two manufacturing plants, located in
Stokesdale, NC, and St. Jerome, Quebec, Canada. Over the past two years, we had
capital expenditures of approximately $10.0 million to consolidate all of our
production of woven jacquards, or damask ticking, to these two plants and to
modernize the equipment in these facilities. The result has been an increase in
manufacturing efficiency and a substantial reduction in operating costs. With
this new manufacturing configuration, jacquard ticking is woven at both ticking
plants, and printed ticking is produced at the Stokesdale, NC, facility.
Finishing and inspection processes for mattress fabrics are conducted at the
Stokesdale plant.
In addition to the mattress fabrics we manufacture, the company has important
supply arrangements in place that allow us to source mattress ticking from
strategic suppliers. A sourcing arrangement with a supplier that has established
a manufacturing plant in NC, allows the company to source knitted ticking based
on designs created by Culp designers. Also, a portion of our woven jacquard
ticking is obtained from a supplier located in Turkey, based on designs created
by Culp designers.
Upholstery Fabrics Segment
- --------------------------
As of April 30, 2006, the company operates three upholstery manufacturing
facilities in the U.S. and three in China. The U.S. facilities produce woven
jacquards and dobbies, velvets, and specialty yarn for internal uses. During
fiscal 2006, the company continued to significantly simplify its U.S.
manufacturing operations in this segment. Currently, woven jacquards are
produced in Graham, NC, while velvets are produced in Anderson, SC. Yarn
production operations have been consolidated into the Lincolnton, NC plant, and
the former yarn extrusion operation was sold in August 2005. In addition, in
fiscal 2006 the company outsourced its U.S. decorative fabrics finishing
operations to an outside provider.
Our three facilities in China are all located within the same industrial
park near Shanghai. At these plants, we apply strategic value-added finishing
processes to fabrics sourced from a limited number of strategic suppliers in
China, and we inspect sourced fabric there as well. In addition, the Shanghai
operations include a facility where sourced fabric is "cut and sewn" to provide
"kits" that are designed to be placed on specific furniture frames used by one
of the company's customers.
A growing portion of the upholstery fabrics segment's products, as well as
certain elements of our production processes, are now being sourced from outside
suppliers. The development of our facilities in China has provided a base from
which to access a variety of products, including some fabrics (such as
microdenier suedes) that are not produced anywhere within the U.S. We have found
opportunities to develop significant relationships with key overseas suppliers
that allow us to source products on a very cost effective basis while at the
same time limiting our investment of capital in manufacturing assets. The
company sources unfinished and finished fabrics from a limited number of
strategic suppliers in China who are willing to work with the company to commit
significant capacity to our needs while working with the company and its product
development team to meet the demands of our customers. In addition, a
significant initiative is now underway to source yarns in China, for our U.S.
produced product lines.
During fiscal 2006, the upholstery fabrics segment has outsourced much of its
U.S. yarn production, allowing us to close two yarn production plants. In
addition, our yarn extrusion operations were sold to a vendor who now extrudes
yarn for the company's use. During the past fiscal year, we have also outsourced
our U.S. decorative fabric finishing operations, allowing the company to obtain
those services on a variable basis at a lower unit cost from a supplier who has
long-term experience in upholstery fabric finishing. As these developments have
proceeded, the company has reduced the carrying value of its fixed assets
committed to U.S. upholstery fabric manufacturing from $32 million at the end of
fiscal 2005 to $10 million at the end of fiscal 2006. The company continues to
look for ways to lower production costs by outsourcing certain elements of our
manufacturing operations, while still maintaining control over the critical
value-added components of the business, such as product development, design and
quality control.
10
Product Design and Styling
Consumer tastes and preferences related to upholstered furniture and bedding
change over time. The use of new fabrics and designs remains an important
consideration for manufacturers to distinguish their products at retail and to
capitalize on changes in preferred colors, patterns and textures. Culp's success
is largely dependent on our ability to market fabrics with appealing designs and
patterns.
The process of developing new designs involves maintaining an awareness of
broad fashion and color trends both in the United States and internationally.
The company has developed a design and product development team that searches
continually for new ideas and for the best sources of raw materials, yarns and
fabrics, both domestic and international. The team then develops product
offerings using these ideas and materials, taking both fashion trends and cost
considerations into account, to offer products designed to meet the needs of
furniture manufacturers and ultimately the desires of consumers. Upholstery
fabric designs are introduced at major fabric trade conferences that occur twice
a year in the United States (June and December).
Mattress ticking designs are introduced, once annually, during the summer to
fall time frame. Additionally, the company works closely with its customers,
throughout the year, on new design introductions.
Distribution
Mattress Fabrics Segment
- ------------------------
All of the company's shipments of mattress ticking originate from our
manufacturing facility in Stokesdale, NC. Through arrangements with major
customers and in accordance with industry practice, the company maintains a
significant inventory of mattress fabrics at our distribution facility in
Stokesdale, so that products may be shipped to customers with short lead times
and on a "just in time" basis.
Upholstery Fabrics Segment
- --------------------------
The majority of the company's upholstery fabrics are marketed on a "make to
order" basis and are shipped directly from our distribution facilities in
Burlington, NC, and Shanghai, China. In addition, an inventory comprising a
limited number of fabric patterns is held at distribution facilities in Tupelo,
MS, and Shanghai, China, from which customers can obtain fabrics on a "purchase
from stock" basis.
Sources and Availability of Raw Materials
Mattress Fabrics Segment
- ------------------------
Raw materials account for approximately 70% of ticking production costs. The
mattress fabrics segment purchases synthetic yarns (polypropylene, polyester and
rayon), rayon staple fiber, certain greige (unfinished) goods, latex adhesives,
laminates, dyes and other chemicals. Most of these materials are available from
several suppliers, and prices fluctuate based on supply and demand, the general
rate of inflation, and particularly on the price of petrochemical products. Much
of the rayon yarn used to produce mattress fabric is spun at the company's
Canadian facility. The mattress fabrics segment has generally not had
significant difficulty in obtaining raw materials.
11
Upholstery Fabrics Segment
- --------------------------
Raw materials account for approximately 50%-60% of upholstery fabric
manufacturing costs. This segment purchases synthetic yarns (polypropylene,
polyester, acrylic and rayon), acrylic staple fiber, latex adhesives, dyes and
other chemicals from various suppliers.
As the upholstery fabric segment has moved to outsource more of its yarn
requirements, it has become more dependent upon suppliers for components yarn.
The company still produces a portion of our yarn in a company facility, but the
more commonly available yarn types are purchased from third parties. The yarns
produced by the company are mainly specialty yarns, such as wrap spun yarns,
that are not generally available outside the company. In addition, we have
outsourced a number of our U.S. upholstery fabric manufacturing services, to
suppliers, such as extrusion of yarn and upholstery fabric finishing. As the
reliance on outside suppliers for basic production needs such as base fabrics,
yarns, and finishing services has increased, the upholstery fabrics segment has
become more vulnerable to price increases, delays, or production interruptions
caused by problems within businesses that we do not control.
During the fourth quarter of fiscal 2005, Solutia, Inc., which was our only
supplier for acrylic fiber, exited the acrylic fiber business. In response to
this event, the upholstery fabrics segment identified certain international
suppliers as alternative sources for procuring acrylic fiber. Longer lead times
and less certainty of delivery times associated with offshore suppliers have
required the company to carry a larger inventory of acrylic fiber to accommodate
this change in supply for one of its major raw materials.
Both Segments
- -------------
Many of our basic raw materials are petrochemical products or are produced from
such products. For this reason, our material costs are especially sensitive to
changes in prices for petrochemicals and the underlying price of oil. Recent
increases in market prices for oil have caused significant increases in the raw
materials costs of both of the company's segments.
In addition, the financial condition and performance of a number of U.S.-based
yarn suppliers has been severely impacted by the reductions in the overall size
of the U.S. textile industry over the last several years. These conditions have
increased the risk of business failures or further consolidations among the
company's yarn suppliers to the North American-based portions of our business.
The company expects this situation to cause additional disruptions and pricing
pressures in the company's supply of yarns obtained in the U.S. as overall
demand for textiles produced in the U.S. declines.
Seasonality
Mattress Fabrics Segment
- ------------------------
The ticking business and the bedding industry in general are slightly seasonal,
with sales being the highest in late spring and late summer, with another peak
in mid-winter.
Upholstery Fabrics Segment
- --------------------------
The upholstery fabrics business is somewhat seasonal, with increased sales
during the company's second and fourth fiscal quarters. This seasonality results
from one-week closings of our manufacturing facilities, and the facilities of
most of our customers in the United States, during the company's first and third
fiscal quarters for the holiday weeks of July 4th and Christmas. This effect is
becoming less pronounced as a larger portion of our fabrics are produced or sold
in locations outside the United States.
12
Competition
Competition for the company's products is high and is based primarily on price,
design, quality, timing of delivery and service.
Mattress Fabrics Segment
- ------------------------
The mattress ticking market is concentrated in a few relatively large suppliers.
We believe our principal mattress ticking competitors are Bekaert Textiles B.V.,
Blumenthal Print Works, Inc., Burlington Industries (now a part of International
Textile Group, or ITG) and several smaller companies producing knitted ticking.
Upholstery Fabrics Segment
- --------------------------
In the upholstery fabric market, we compete against a large number of producers,
ranging from a few large manufacturers comparable in size to the company to
small producers, and a growing number of "converters" of fabrics. We believe our
principal upholstery fabric competitors are Joan Fabrics Corporation (including
its Mastercraft division), Richloom Fabrics, Specialty Textile, Inc. (or STI),
Quaker Fabric Corporation and Merrimack Fabrics.
Until approximately five years ago, overseas producers of upholstery fabric had
not historically been a source of significant competition for the company.
Recent trends, however, have shown significant increased competition in U.S.
markets by foreign producers of upholstery fabric, furniture components and
finished upholstery furniture, as well as increased sales in the U.S. of leather
furniture produced overseas (which competes with upholstered furniture for
market share). Foreign manufacturers often are able to produce upholstery fabric
and other components of furniture with significantly lower raw material and
production costs (especially labor) than those of the company's U.S. operations
and other U.S.-based manufacturers. The company competes with lower cost foreign
goods on the basis of design, quality, reliability and speed of delivery. In
addition, as discussed above, the company has established operations in China to
facilitate the sourcing and finishing of goods produced in China.
The trend in the upholstery fabrics industry to greater overseas competition and
the entry of more converters (companies who buy and re-sell, but do not
manufacture fabrics) has caused the upholstery fabrics industry to become
substantially more fragmented in recent years, with lower barriers to entry.
This has resulted in a larger number of competitors selling upholstery fabrics,
with an increase in competition based on price.
Environmental and Other Regulations
The company is subject to various federal and state laws and regulations,
including the Occupational Safety and Health Act and federal and state
environmental laws, as well as similar laws governing our manufacturing facility
in Canada. The company periodically reviews its compliance with such laws and
regulations in an attempt to minimize the risk of violations.
Our operations involve a variety of materials and processes that are subject to
environmental regulation. Under current law, environmental liability can arise
from previously owned properties, leased properties and properties owned by
third parties, as well as from properties currently owned and leased by the
company. Environmental liabilities can also be asserted by adjacent landowners
or other third parties in toxic tort litigation.
13
In addition, under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), and analogous state statutes,
liability can be imposed for the disposal of waste at sites targeted for cleanup
by federal and state regulatory authorities. Liability under CERCLA is strict as
well as joint and several.
We are periodically involved in environmental claims or litigation and requests
for information from environmental regulators. Each of these matters is
carefully evaluated, and the company provides for environmental matters based on
information presently available. Based on this information, the company does not
believe that environmental matters will have a material adverse effect on either
the company's financial condition or results of operations. However, there can
be no assurance that the costs associated with environmental matters will not
increase in the future.
Employees
As of April 30, 2006, the company had approximately 1,300 employees, compared to
approximately 1,900 at the end of fiscal 2005. The number of employees has been
reduced substantially over the past several years in connection with the
company's restructuring initiatives and efforts to reduce U.S. manufacturing
costs, as well as initiatives to outsource certain operations such as finishing
and yarn extrusion (see table below).
The hourly employees at our manufacturing facility in Canada (approximately 16%
of the company's workforce) are represented by a local, unaffiliated union. The
collective bargaining agreement for these employees was renewed in 2005 and
expires on February 1, 2008. The company is not aware of any efforts to organize
any more of our employees, and we believe our relations with our employees are
good.
The following table illustrates the changes in the location of the company's
workforce and number of employees over the past five years.
Number of Employees
-------------------------------------------------------------------------------
Fiscal 2006 Fiscal 2005 Fiscal 2004 Fiscal 2003 Fiscal 2002
--------------- --------------- --------------- --------------- ---------------
Mattress Fabrics Segment 351 372 362 387 392
--------------- --------------- --------------- --------------- ---------------
Upholstery Fabrics Segment
United States 659 1,404 1,915 2,100 2,614
China 270 109 40 0 0
--------------- --------------- --------------- --------------- ---------------
Total Upholstery Fabrics Segment 929 1,513 1,955 2,100 2,614
--------------- --------------- --------------- --------------- ---------------
Unallocated corporate 3 3 3 3 3
--------------- --------------- --------------- --------------- ---------------
Total 1,283 1,888 2,320 2,490 3,009
--------------- --------------- --------------- --------------- ---------------
Customers and Sales
Mattress Fabrics Segment
- ------------------------
Major customers include the leading bedding manufacturers: Sealy, Serta
(National Bedding), and Simmons. The loss of one or more of these customers
would have a material adverse effect on the company. Our mattress ticking
customers also include many small and medium-size bedding manufacturers.
14
Upholstery Fabrics Segment
- --------------------------
Major customers are leading manufacturers of upholstered furniture, including
Ashley, Bassett, Benchcraft, Berkline, Best Home Furnishings, Flexsteel,
Furniture Brands International (Broyhill, Thomasville, and Lane/Action),
Klaussner Furniture and La-Z-Boy (La-Z-Boy Residential, Bauhaus, England, and
Clayton Marcus). Major customers for the company's fabrics for commercial
furniture include HON Industries and Global Upholstery. Our two largest
customers in the upholstery fabrics segment are La-Z-Boy Incorporated and
Furniture Brands International, Inc., the loss of either of which would have a
material adverse effect on the company. The company's sales to La-Z-Boy
accounted for approximately 12.7% of the company's total net sales in fiscal
2006. Patrick H. Norton, the recently retired Chairman of La-Z-Boy, serves on
our board of directors.
The following table sets forth the company's net sales by geographic area by
amount and percentage of total net sales for the three most recent fiscal years.
Net Sales by Geographic Area
(dollars in thousands)
Fiscal 2006 Fiscal 2005 Fiscal 2004
----------- ----------- -----------
United States $213,552 81.7% $254,249 88.7% $282,865 88.8%
--------- --------- --------- --------- --------- ---------
North America 18,944 7.3 22,503 7.9 26,740 8.4
(Excluding USA)
Far East and Asia 28,104 10.8 8,690 3.0 6,954 2.2
All other areas 501 0.2 1,056 0.4 1,557 0.6
--------- --------- --------- --------- --------- ---------
Subtotal (International) 47,549 18.3 32,249 11.3 35,251 11.2
--------- --------- --------- --------- --------- ---------
Total $261,101 100.0% $286,498 100.0% $318,116 100.0%
========= ========= ========= ========= ========= =========
For additional segment information, see note 16 in the consolidated financial
statements.
Backlog
Mattress Ticking Segment
- ------------------------
The backlog for mattress ticking is not a reliable predictor of future shipments
because the majority of sales are on a just-in-time basis.
Upholstery Fabrics Segment
- --------------------------
Although it is difficult to predict the amount of backlog that is "firm," the
company has reported the portion of the upholstery fabric backlog from customers
with confirmed shipping dates within five weeks of the end of the fiscal year.
On April 30, 2006, the portion of the upholstery fabric backlog with confirmed
shipping dates prior to June 4, 2006 was $14.8 million, all of which are
expected to be filled early during fiscal year 2007, as compared to $12.5
million as of the end of fiscal 2005 (for confirmed shipping dates prior to June
5, 2005).
ITEM 1A. RISK FACTORS
Our business is subject to risks and uncertainties. In addition to the matters
described above under "Cautionary Statement Concerning Forward-Looking
Information," set forth below are some of the risks and uncertainties that could
cause a material adverse change in our results of operations or financial
condition.
15
Restructuring initiatives create short-term costs that may not be offset by
increased savings or efficiencies.
Over the past several years, we have undertaken significant restructuring
activities, which have involved closing manufacturing plants, realigning
manufacturing assets, and changes in product strategy. These actions are
intended to lower manufacturing costs and increase efficiency, but they involve
significant costs, including the write-off or write-down of assets, severance
costs for terminated employees, contract termination costs, equipment moving
costs, and similar charges. These charges have caused a decrease in earnings in
the short-term. In addition, during the time that restructuring activities are
underway, manufacturing inefficiencies are caused by moving equipment,
realignment of assets, personnel changes, and by the consolidation process for
certain functions. Unanticipated difficulties in restructuring activities or
delays in accomplishing our goals could cause the costs of our restructuring
initiatives to be greater than anticipated and the results achieved to be
significantly lower, which would negatively impact our results of operations and
financial condition.
Our sales have been declining, and we have reported net losses in each of the
past eight (8) fiscal quarters ending April 30, 2006.
We may not be able to restore the upholstery fabrics segment to consistent
profitability. Our overall sales declined almost 9% during the past fiscal year,
and they have declined by more than 32% since fiscal 2002. In the upholstery
fabrics segment, sales are down significantly, and they have been declining
rapidly for U.S. produced fabrics. We have undertaken a number of significant
restructuring actions in recent years to address our profitability, including
(i) consolidating production assets and purchasing more efficient equipment in
the mattress fabrics segment, (ii) closing a number of U.S. manufacturing
facilities in the upholstery fabrics segment, (iii) establishing upholstery
fabrics facilities in China to take advantage of a lower cost environment and
greater product diversity, and (iv) outsourcing certain production functions, in
the U.S., including yarn production, and finishing of decorative fabrics.
Successful completion of our restructuring plans depends on a number of
variables, including our ability to consolidate certain functions, manage
manufacturing processes with lower direct involvement, managing a longer supply
chain, and similar issues. Sales continue to decline in both segments. There is
no assurance that we will be able to manage our restructuring activities
successfully to restore the company, especially the upholstery fabrics segment,
to profitability.
Increased reliance on offshore operations and foreign sources of products or raw
materials increases the likelihood of disruptions to our supply chain or our
ability to deliver products to our customers on a timely basis.
During recent years, the company has established operations in China, and in
addition we have been purchasing an increasing share of our products and raw
materials from offshore sources, primarily in China. At the same time, our
domestic manufacturing capacity for the upholstery fabrics segment has been
greatly reduced. These changes have caused the company to place greater reliance
on a much longer supply chain and on a larger number of suppliers that we do not
control, which are inherently subject to greater risks of delay or disruption.
In addition, operations and sourcing in foreign areas are subject to the risk of
changing local governmental rules, taxes, changes in import rules or customs,
potential political unrest, or other threats that could disrupt or increase the
costs of operating in foreign areas or sourcing products overseas. Also, changes
in relative values of currencies could increase our costs. Any of the risks
associated with foreign operations and sources could cause unanticipated
increases in operating costs or disruptions in business, which could negatively
impact the company's ultimate financial results.
We may have difficulty managing the outsourcing arrangements increasingly being
used by the company for products and services.
The company is relying more on outside sources for various products and
services, including raw material, greige (unfinished) fabrics, finished fabrics,
and services such as weaving and finishing. Increased reliance on outsourcing
lowers our capital investment and fixed costs, but it decreases the amount of
control that we have over certain elements of our production capacity.
Interruptions in our ability to obtain raw materials, other required products or
services from our outside suppliers on a timely and cost effective basis,
especially if alternative suppliers cannot be immediately obtained, could
disrupt our production and damage our financial results.
16
Further write-offs or write-downs of upholstry fabric segment assets would
result in a decrease in our earnings.
The company has long-lived assets, consisting mainly of property, plant and
equipment. Accounting rules require that these assets be tested for impairment
of their valuation at least annually, as well as upon the occurrence of certain
events. When assets are taken out of service, which has occurred recently on
several occasions in connection with our restructuring activities, they must be
tested for impairment, which can result in significant write-downs in the value
of those assets. Restructuring activities and other tests for impairment have
resulted and could in the future result in the write-down of a portion of our
long-lived assets and a corresponding reduction in earnings and net worth. In
fiscal 2006, the company experienced asset write-downs of approximately $6.0
million, all in the upholstry fabrics segment.
Write-offs of assets or weak financial performance could cause us to breach
financial covenants in our debt agreements.
At the end of fiscal 2006, the company had $47.7 million of long-term debt, of
which approximately $42.4 million was owed on unsecured senior notes issued in
1998. Under the debt agreements that govern our long-term debt, we are required
to maintain compliance with certain financial covenants, including minimum
tangible net worth, debt to tangible capitalization, debt to capital, and
interest and lease payment coverage. The company has been able to maintain
compliance with these financial covenants. However, in some cases the "cushion"
between the required financial covenants and our actual financial performance
has been shrinking. For example, our tangible net worth has decreased
significantly in recent years due to asset write-offs and operating losses.
Additional write-offs of assets or continued operating losses would decrease the
company's tangible net worth further, which could lead to a breach of financial
covenants and a default under our loan agreements. In particular, we reported a
deferred income tax asset of $27.3 million as of April 30, 2006. Our continued
ability to carry this deferred tax asset on our balance sheet at its full value
depends upon our ability to generate taxable income in the future attributable
to U.S. operations. A write-off of a portion or all of this asset would cause a
breach of the minimum tangible net worth covenant that applies to our unsecured
senior notes. A breach of our debt covenants would give the lenders under our
long term debt agreements the right to declare all of the debt immediately due
and payable and to terminate our right to obtain further borrowings. If such an
event occurred, it is unlikely that we would be able to repay all of our debt
from current resources, and there is no assurance that we would be able to find
alternative sources of financing.
Changes in the price, availability and quality of raw materials could increase
our costs or cause production delays and sales interruptions, which would result
in decreased earnings.
The company depends upon outside suppliers for most of its raw material needs,
and increasingly we rely upon outside suppliers for component materials such as
yarn and unfinished fabrics, as well as for certain services such as finishing
and weaving. Fluctuations in the price, availability and quality of these goods
and services could have a negative effect on our production costs and ability to
meet the demands of our customers, which would affect our ability to generate
sales and earnings. In many cases, we are not able to pass through increased
costs of raw materials or increased production costs to our customers through
price increases. In particular, many of our basic raw materials are
petrochemical products or are produced from such products. For this reason, our
material costs are especially sensitive to changes in prices for petrochemicals
and the underlying price of oil. Increases in prices for oil, petrochemical
products or other raw materials and services provided by outside suppliers could
significantly increase our costs and negatively affect earnings.
Increases in energy costs would increase our operating costs and could adversely
affect earnings.
Higher prices for electricity, natural gas and fuel increase our production and
shipping costs. A significant shortage, increased prices, or interruptions in
the availability of these energy sources would increase the costs of producing
and delivering products to our customers, and would be likely to adversely
affect our earnings. In many cases, we are not able to pass along the full
extent of increases in our production costs to customers through price
increases. During fiscal 2006, energy prices increased significantly, in part
due to supply disruptions caused by hurricanes. Although some price increases
were implemented to offset the effect of these increased costs, we were not able
to fully recoup these costs, and operating margins were negatively affected.
Further increases in energy costs could have a negative effect on our earnings.
17
Business difficulties or failures of large customers could result in a decrease
in our sales and earnings.
The company currently has several customers that account for a substantial
portion of its sales. In the mattress fabric segment, several large bedding
manufacturers have large market shares and comprise a significant portion of our
mattress fabric sales. In the upholstery fabrics segment, La-Z-Boy Inc.
accounted for 13% of consolidated net sales during fiscal 2006, and several
other large furniture manufacturers comprised a significant portion of sales. A
business failure or other significant financial difficulty by one or more of our
major customers could cause a significant loss in sales, an adverse effect on
our earnings, and collection of our trade accounts receivable.
If we are unable to manage our cash effectively, we will not have funds
available to repay debt and to maintain the flexibility necessary for successful
operation of our business.
Our ability to meet our cash obligations depends on our operating cash flow,
access to trade credit, and our ability to borrow under our debt agreements. In
addition to the cash needs of operating our business, we have substantial debt
repayments that are due over the next several years on our unsecured senior
notes (see note 10 to the consolidated financial statements). During the past
fiscal year, in spite of incurring losses, we were able to generate substantial
cash flow through reductions of working capital. Our ability to generate cash
flow going forward will rely to a heavier degree on our ability to generate
profits from our business, and we have not been able to generate earnings on a
consistent basis in recent quarters. If we are not able to generate cash during
the coming year, we may not be able to provide the funds needed to operate and
maintain our business or to make payments on our debt as they become due.
Further loss of market share due to competition would result in further declines
in sales and could result in additional losses or decreases in earnings.
Our business is highly competitive, and in particular the upholstery fabric
industry is fragmented and is experiencing an increase in the number of
competitors. As a result, we face significant competition from a large number of
competitors, both foreign and domestic. We compete with many other manufacturers
of fabric, as well as converters who source fabrics from various producers and
market them to manufacturers of furniture and bedding. In many cases, these
fabrics are sourced from foreign suppliers who have a lower cost structure than
the company. The highly competitive nature of our business means we are
constantly subject to the risk of losing market share. Our sales have decreased
significantly over the past five years due in part to the increased number of
competitors in the marketplace, especially foreign sources of fabric. As a
result of increased competition, there have been deflationary pressures on the
prices for many of our products, which makes it more difficult to pass along
increased operating costs such as raw materials, energy or labor in the form of
price increases and puts downward pressure on our profit margins. Also, the
large number of competitors and wide range of product offerings in our business
can make it more difficult to differentiate our products through design,
styling, finish and other techniques.
If we fail to anticipate and respond to changes in consumer tastes and fashion
trends, our sales and earnings may decline.
Demand for various types of upholstery fabrics and mattress coverings change
over time due to fashion trends and changing consumer tastes for furniture and
bedding. Our success in marketing our fabrics depends upon our ability to
anticipate and respond in a timely manner to fashion trends in home furnishings.
If we fail to identify and respond to these changes, our sales of these products
may decline. In addition, incorrect projections about the demand for certain
products could cause the accumulation of excess raw material or finished goods
inventory, which could lead to inventory write-downs and further decreases in
earnings.
18
An economic downturn could result in a decrease in our sales and earnings.
Overall demand for our products depends upon consumer demand for furniture and
bedding, which is subject to variations in the general economy. Because
purchases of furniture or bedding are discretionary purchases for most
individuals and businesses, demand for these products is sometimes more easily
influenced by economic trends than demand for other products. Economic downturns
can affect consumer spending habits and demand for home furnishings, which
reduces the demand for our products and therefore could cause a decrease in our
sales and earnings.
We are subject to litigation and environmental regulations that could adversely
impact our sales and earnings.
We are, and in the future may be, a party to legal proceedings and claims,
including environmental matters, product liability and employment disputes, some
of which claim significant damages. We face the continual business risk of
exposure to claims that our business operations have caused personal injury or
property damage. We maintain insurance against product liability claims and in
some cases have indemnification agreements with regard to environmental claims,
but there can be no assurance that these arrangements will continue to be
available on acceptable terms or that such arrangements will be adequate for
liabilities actually incurred. Given the inherent uncertainty of litigation,
there can be no assurance that claims against the company will not have a
material adverse impact on our earnings or financial condition. We are also
subject to various laws and regulations in our business, including those
relating to environmental protection and the discharge of materials into the
environment. We could incur substantial costs as a result of noncompliance with
or liability for cleanup or other costs or damages under environmental laws or
other regulations.
The company must comply with a number of governmental regulations applicable to
our business, and changes in those regulations could adversely affect our
business.
Our products and raw materials are and will continue to be subject to regulation
in the United States by various federal, state and local regulatory authorities.
In addition, other governments and agencies in other jurisdictions regulate the
manufacture, sale and distribution of our products and raw materials. For
example, standards for flame resistance of fabrics have been recently introduced
in the state of California, and additional standards are scheduled to apply on a
nationwide basis beginning July 1, 2007. Also, rules and restrictions regarding
the importation of fabrics and other materials, including custom duties, quotas
and other regulations, are continually changing. Environmental laws, labor laws,
tax regulations and other regulations also continually affect our business. All
of these rules and regulations can and do change from time to time, which can
increase our costs or require us to make changes in our manufacturing processes,
product mix, sources of products and raw materials, or distribution. Changes in
the rules and regulations applicable to our business may negatively impact our
sales and earnings.
The company's market capitalization and shareholders equity have fallen below
the level required for continued listing on the New York Stock Exchange.
Our common stock is currently traded on the New York Stock Exchange (NYSE).
Under the NYSE's current listing standards, we are required to have market
capitalization or shareholders equity of more than $75 million to maintain
compliance with continued listing standards. The company's market capitalization
is now below $75 million, and as of the end of fiscal 2006 our shareholders'
equity was $74.5 million. As a result, the company will be listed as "below
compliance" with NYSE listing standards, and we must submit a plan regarding our
ability to return to compliance with these standards. If the company is not able
to return to compliance with the NYSE standards, our stock will be delisted from
trading on the NYSE, resulting in the need to find another market on which our
stock can be listed or causing our stock to cease to be traded on an active
market, which could result in a reduction in the liquidity for our stock and a
reduction in demand for our stock.
19
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The company's headquarters are located in High Point, North Carolina. As of the
end of fiscal 2006, the company owned or leased ten (10) active and three (3)
inactive manufacturing or distribution facilities, and a corporate headquarters.
The following is a list of the company's principal administrative, manufacturing
and distribution facilities. The manufacturing facilities and distribution
centers are organized by segment.
Approx.
Total Area Expiration
Location Principal Use Sq. Ft.) of Lease (1)
- -------- ------------- -------- ------------
o Administrative:
High Point, North Carolina Corporate headquarters and 55,000 Owned
upholstery fabric division
offices
o Mattress Fabrics:
Stokesdale, North Carolina Manufacturing, distribution, 220,000 Owned
and division offices
St. Jerome, Quebec, Canada Manufacturing 202,500 Owned
o Upholstery Fabrics:
Graham, North Carolina Manufacturing - decorative fabrics 341,000 Owned
Anderson, South Carolina Manufacturing - velvets 99,000 Owned
Lincolnton, North Carolina Manufacturing - specialty yarns 78,000 Owned
Burlington, North Carolina Finished goods distribution 275,000 2007
Tupelo, Mississippi Regional distribution 57,000 2018
Shanghai, China Manufacturing and offices 69,000 2006
Shanghai, China Manufacturing and distribution 100,000 2008
Shanghai, China Manufacturing and warehousing 90,000 2009
o Inactive
Chattanooga, Tennessee Idle 290,000 2008
Burlington, North Carolina (2) Idle 302,000 Owned
Shelby, North Carolina (3) Idle 101,000 Owned
- ------------------------------------------------
(1) Includes all options to renew, except for inactive properties
(2) Facility is under contract to be sold during the second quarter of fiscal
2007.
(3) The company sold this facility in May 2006.
The company believes that its facilities are in good condition, well-maintained
and suitable and adequate for present utilization. Due to the significant
restructuring efforts in the upholstery fabrics segment during fiscal 2006,
including closing multiple plant locations, determining an accurate measure of
capacity segment is difficult. In the mattress fabrics segment, however,
management has estimated that the company has manufacturing capacity to produce
approximately 5% more products (measured in yards) than it sold during fiscal
2006. In addition, the company has the ability to source additional mattress
ticking and upholstery fabrics from outside suppliers, further increasing its
ultimate output of finished goods.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the company, or its subsidiaries, is a
party or of which any of their property is the subject that are required to be
disclosed under this item.
20
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter ended April 30, 2006.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Registrar and Transfer Agent
Computershare Trust Company, N.A.
c/o Computershare Investor Services
Post Office Box 43023
Providence, Rhode Island 02940-3023
(800) 254-5196
(781) 575-2879 (Foreign shareholders)
www.computershare.com\equiserve
-------------------------------
As of April 30, 2006, the company's market capitalization and shareholders'
equity have fallen below the level required for continued listing on the NYSE.
Under the NYSE's current listing standards, the company is required to have
market capitalization or shareholders' equity of more than $75 million to
maintain compliance with continued listing standards. The company's market
capitalization is now below $75 million, and as of April 30, 2006, its
shareholders equity was $74.5 million. As a result, the company will be listed
as "below compliance" with NYSE listing standards, and the company must submit a
plan regarding its ability to return to compliance with these standards. If the
company is not able to return to compliance with NYSE standards, its stock will
be delisted from trading on the NYSE. See "Risk Factors."
Stock Listing
Culp, Inc. common stock is traded on the New York Stock Exchange under the
symbol CFI. As of April 30, 2006, Culp, Inc. had approximately 1,500
shareholders based on the number of holders of record and an estimate of
individual participants represented by security position listings.
Analyst Coverage
These analysts cover Culp, Inc.:
BB&T Capital Markets - Joel Havard
Morgan Keegan - Laura Champine, CFA
Raymond, James & Associates - Budd Bugatch, CFA
Value Line - Craig Sirois
See Item 6, Selected Financial Data, and selected Quarterly Data in Item 8, for
market and dividend information regarding the company's common stock.
21
ITEM 6. SELECTED FINANCIAL DATA
percent
fiscal fiscal fiscal fiscal fiscal change
(amounts in thousands, except per share amounts) 2006 2005 2004 2003 2002 2006/2005
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) STATEMENT DATA
net sales $ 261,101 286,498 318,116 339,646 382,574 (8.9) %
cost of sales (6) 237,233 260,341 259,794 282,073 319,717 (8.9)
- ----------------------------------------------------------------------------------------------------------------
gross profit 23,868 26,157 58,322 57,573 62,857 (8.8)
selling, general, and administrative expenses
(6) 28,954 35,357 41,019 40,040 48,059 (18.1)
goodwill impairment/amortization - 5,126 - - 1,395 (100.0)
restructuring (credit) expense and asset
impairment (6) 10,273 10,372 (1,047) 12,981 10,368 (1.0)
- ----------------------------------------------------------------------------------------------------------------
income (loss) from operations (15,359) (24,698) 18,350 4,552 3,035 (37.8)
interest expense 4,010 3,713 5,528 6,636 7,907 8.0
interest income (126) (134) (376) (596) (176) (6.0)
early extinguishment of debt - - 1,672 - - -
other expense 634 517 750 805 1,444 22.6
- ----------------------------------------------------------------------------------------------------------------
income (loss) before income taxes (19,877) (28,794) 10,776 (2,293) (6,140) (31.0)
income taxes (8,081) (10,942) 3,556 (1,557) (2,700) (26.1)
- ----------------------------------------------------------------------------------------------------------------
income (loss) before cumulative effect of
accounting change (11,796) (17,852) 7,220 (736) (3,440) (33.9)
cumulative effect of accounting change, net of
income tax - - - (24,151) - -
- ----------------------------------------------------------------------------------------------------------------
net income (loss) $ (11,796) (17,852) 7,220 (24,887) (3,440) 33.9
- ----------------------------------------------------------------------------------------------------------------
depreciation (7) $ 14,362 18,884 13,642 13,990 17,274 (23.9)
- ----------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 11,567 11,549 11,525 11,462 11,230 0.2
weighted average shares outstanding, assuming
dilution 11,567 11,549 11,777 11,462 11,230 0.2
- ----------------------------------------------------------------------------------------------------------------
PER SHARE DATA
basic income (loss) per share:
income (loss) before cumulative effect of
accounting change $ (1.02) (1.55) 0.63 (0.06) (0.31) N.M
cumulative effect of accounting change - - - (2.11) - -
- ----------------------------------------------------------------------------------------------------------------
net income (loss) $ (1.02) (1.55) 0.63 (2.17) (0.31) 34.03
- ----------------------------------------------------------------------------------------------------------------
diluted income (loss) per share:
income (loss) before cumulative effect of
accounting change $ (1.02) (1.55) 0.61 (0.06) (0.31) N.M
cumulative effect of accounting change - - - (2.11) - -
- ----------------------------------------------------------------------------------------------------------------
net income (loss) $ (1.02) (1.55) 0.61 (2.17) (0.31) 34.0
- ----------------------------------------------------------------------------------------------------------------
book value 6.39 7.43 8.95 8.33 10.52 (13.9)
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
operating working capital (5) $ 44,907 56,471 64,441 61,937 76,938 (20.5) %
property, plant and equipment, net 44,639 66,032 77,770 84,962 89,772 (32.4)
total assets 157,467 176,123 193,816 218,153 287,713 (10.6)
capital expenditures 6,470 14,360 6,747 12,229 4,729 (54.9)
long-term debt (1) 47,722 50,550 51,030 76,500 108,484 (5.6)
shareholders' equity 74,523 85,771 103,391 95,765 119,065 (13.1)
capital employed (3) 122,245 136,321 154,421 172,265 227,549 (10.3)
- ----------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA
gross profit margin 9.1% 9.1% 18.3% 17.0% 16.4%
operating income (loss) margin (5.9)% (8.6)% 5.8% 1.3% 0.8%
net income (loss) margin before cumulative effect of
accounting change (4.5)% (6.2)% 2.3% (0.2)% (0.9)%
effective income tax rate 40.7% 38.0% 33.0% 67.9% 44.0%
long-term debt to total capital employed ratio
(1) 39.0% 37.1% 33.0% 44.4% 47.7%
operating working capital turnover (5) 5.0 4.8 5.2 5.0 4.5
days sales in receivables 41 37 35 35 41
inventory turnover 5.4 5.2 5.3 5.3 5.4
- ----------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $ 5.23 9.10 12.28 17.89 10.74
low 3.83 4.20 5.05 3.75 2.12
close 4.64 4.70 8.61 5.00 9.30
P/E ratio (2)
high (4) N.M. N.M. 20 N.M. N.M.
low (4) N.M. N.M. 8 N.M. N.M.
daily average trading volume (shares) 12.5 21.1 55.9 92.3 24.9
- ----------------------------------------------------------------------------------------------------
(1) Long-term debt includes long- and current maturities of long-term debt.
(2) P/E ratios based on trailing 12-month net income (loss) per share
(3) Capital employed includes long-term debt and shareholders' equity
(4) N.M - Not meaningful
(5) Operating working capital for this calculation is accounts receivable,
inventories and accounts payable
(6) The company incurred restructuring and related charges in fiscal 2006,
2005, 2003, and 2002. See note 2 of the company's consolidated financial
statements
(7) Includes accelerated depreciation of $5.0 and $6.0 million for fiscal 2006
and 2005, respectively.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
notes attached thereto.
Overview
The company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to April 30. The years ended April 30, 2006 and May 1, 2005 each
included 52 weeks. The company's operations are classified into two business
segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment
manufactures and sells fabrics to bedding manufacturers. The upholstery fabrics
segment manufacturers and sells fabrics primarily to residential and commercial
(contract) furniture manufacturers.
The company evaluates the operating performance of its segments based upon
income (loss) from operations before restructuring and related charges or
credits, goodwill impairment, and certain unallocated corporate expenses.
Unallocated corporate expenses represent primarily compensation and benefits for
certain executive officers and all costs related to being a public company.
Segment assets include assets used in the operation of each segment and consist
of accounts receivable, inventories, and property, plant and equipment.
The company's net sales for fiscal 2006 decreased 8.9% to $261.1 million,
compared with $286.5 million for fiscal 2005. The company reported a net loss of
$11.8 million, or $1.02 per share diluted, compared with a net loss of $17.9
million, or $1.55 per share diluted in fiscal 2005. Restructuring and related
charges of $17.9 million were included in the net loss for fiscal 2006. In
addition, restructuring and related charges of $18.0 million and goodwill
impairment of $5.1 million were included in the net loss for fiscal 2005. The
overall sales decline reflects lower sales in both operating segments. The sales
decline in the upholstery fabrics segment was attributable to continued soft
demand industry-wide for U.S. produced fabrics, driven by consumer preference
for leather and suede furniture and other imported fabrics, including an
increasing amount of cut and sewn kits. This sales decline in domestically
produced upholstery fabrics was partially offset by the growth in sales from
non-U.S. produced upholstery fabrics from the company's China operations. Sales
of non-U.S. produced fabrics were $59.2 million, up 89.4% from $31.3 million
fiscal 2005. In the mattress ticking segment, the sales decline was due to
overall softness in industry sales of mattresses in the first half of fiscal
2006, and a decline in demand for printed ticking, which has become a less
popular category. Also impacting mattress fabrics sales in fiscal 2006 was
industry-wide shortage of polyurethane foam used by mattress manufacturers
related to disruptions from hurricane activity on the Gulf Coast in the second
quarter of fiscal 2006. In addition to the restructuring and related charges
that lowered operating income in fiscal 2006, the company's financial
performance was further impacted by higher raw material costs, the
underutilization of the company's U.S. manufacturing capacity and manufacturing
variances related to restructuring actions in the upholstery fabrics segment,
and duty customs assessments and manufacturing variances related to the start-up
of a capital project in the first and second quarters of fiscal 2006 in the
mattress ticking segment.
In fiscal 2006, the company implemented two major restructuring initiatives in
the upholstery fabrics segment, both of which were designed to bring U.S.
manufacturing capacity in line with demand, reduce costs, increase asset
utilization and improve profitability. In addition, in an effort to offset the
loss in sales of U. S. produced upholstery fabric products, the company expanded
its sourcing and marketing of upholstery fabric produced internationally,
primarily from China. These measures are part of the company's continuing
efforts to meet demand from consumers for certain types of fabrics, as well as
serve the growing segment of the company's customer base that is establishing or
expanding production in international areas. As a result of the company's
offshore efforts, including its China platform, the company is experiencing
higher sales of upholstery fabrics products produced outside the company's U. S.
manufacturing plants, a trend that is expected to continue.
23
Results of Operations
The following table sets forth certain items in the company's consolidated
statements of income (loss) as a percentage of net sales.
2006 2005 2004
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.9 90.9 81.7
----- ----- -----
Gross profit 9.1 9.1 18.3
Selling, general and administrative expenses 11.1 12.3 12.9
Goodwill impairment 0.0 1.8 0.0
Restructuring (credit) expense and asset
impairments 3.9 3.6 (0.3)
----- ----- -----
Income (loss) from operations (5.9) (8.6) 5.8
Interest expense, net 1.5 1.3 1.6
Early extinguishment of debt 0.0 0.0 0.5
Other expense 0.2 0.2 0.2
----- ----- -----
Income (loss) before income taxes (7.6) (10.1) 3.4
Income taxes * 40.7 38.0 33.0
----- ----- -----
Net income (loss) (4.5)% (6.2)% 2.3%
===== ===== =====
* Calculated as a percentage of income (loss) before income taxes
The following tables set forth the company's sales, gross profit and operating
income (loss) by segment for the fiscal years ended April 30, 2006, May 1, 2005
and May 2, 2004.
24
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE YEARS ENDED APRIL 30, 2006 AND MAY 1, 2005
(Amounts in thousands)
YEARS ENDED
------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------- -------------------------
April 30, May 1, % Over April 30, May 1,
Net Sales by Segment 2006 2005 (Under) 2006 2005
- -------------------------------------------- ----------- ----------- ----------- ----------- -----------
Mattress Fabrics $ 93,688 105,432 (11.1)% 35.9 % 36.8 %
Upholstery Fabrics 167,413 181,066 (7.5)% 64.1 % 63.2 %
----------- ----------- ----------- ----------- -----------
Net Sales $ 261,101 286,498 (8.9)% 100.0 % 100.0 %
=========== =========== =========== =========== ===========
Gross Profit by Segment Gross Profit Margin
- -------------------------------------------- -------------------------
Mattress Fabrics $ 13,579 16,819 (19.3)% 14.5 % 16.0 %
Upholstery Fabrics 14,909 16,899 (11.8)% 8.9 % 9.3 %
----------- ----------- ----------- ----------- -----------
Subtotal 28,488 33,718 (15.5)% 10.9 % 11.8 %
Restructuring Related Charges (4,620)(1) (7,561)(4) (38.9)% (1.8)% (2.6)%
----------- ----------- ----------- ----------- -----------
Gross Profit $ 23,868 26,157 (8.8)% 9.1 % 9.1 %
=========== =========== =========== =========== ===========
Selling, General and Administrative
Expenses by Segment Percent of Sales
- -------------------------------------------- -------------------------
Mattress Fabrics $ 6,724 7,430 (9.5)% 7.2 % 7.0 %
Upholstery Fabrics 15,863 23,334 (32.0)% 9.5 % 12.9 %
Unallocated Corporate Expenses 3,345 4,480 (25.3)% 1.3 % 1.6 %
----------- ----------- ----------- ----------- -----------
Subtotal 25,932 35,244 (26.4)% 9.9 % 12.3 %
Restructuring Related Charges 3,022 (2) 113 (5) 2,574.3 % 1.2 % 0.0 %
----------- ----------- ----------- ----------- -----------
Selling, General and
Administrative expenses $ 28,954 35,357 (18.1)% 11.1 % 12.3 %
=========== =========== =========== =========== ===========
Operating Income
Operating Income (Loss) by Segment (Loss) Margin
- -------------------------------------------- -------------------------
Mattress Fabrics $ 6,855 9,389 (27.0)% 7.3 % 8.9 %
Upholstery Fabrics (954) (6,435) 85.2 % (0.6)% (3.6)%
Unallocated Corporate Expenses (3,345) (4,480) 25.3 % (1.3)% (1.6)%
----------- ----------- ----------- ----------- -----------
Subtotal 2,556 (1,526) 267.5 % 1.0 % (0.5)%
Goodwill Impairment 0 (5,126)(6) (100.0)% 0.0 % (1.8)%
Restructuring and Related Charges (17,915)(3) (18,046)(7) (0.7)% (6.9)% (6.3)%
----------- ----------- ----------- ----------- -----------
Operating Loss $ (15,359) (24,698) 37.8 % (5.9)% (8.6)%
=========== =========== =========== =========== ===========
Depreciation by Segment
- --------------------------------------------
Mattress Fabrics $ 3,662 3,635 0.7 %
Upholstery Fabrics 5,740 9,227 (37.8)%
----------- ----------- -----------
Subtotal 9,402 12,862 (26.9)%
Accelerated Depreciation 4,960 6,022 (17.6)%
----------- ----------- -----------
Total Depreciation $ 14,362 18,884 (23.9)%
=========== =========== ===========
(1) The $4.6 million represents restructuring related charges of $2.0 million
for inventory markdowns, $1.9 million for accelerated depreciation,
$665,000 for operating costs associated with the closing of or closed plant
facilities.
(2) The $3.0 million represents accelerated depreciation.
(3) The $17.9 million represents restructuring and related charges of $6.0
million for write-downs of buildings and equipment, $5.0 million for
accelerated depreciation, $2.2 million for asset movement costs, $2.0
million for inventory markdowns, $1.7 million for termination benefits,
$665,000 for operating costs associated with the closing of or closed plant
facilities, and $316,000 for lease termination and other exit costs. Of
this total charge, $10.3 million, $4.6 million, and $3.0 million were
included in restructuring expense, cost of sales, and selling, general, and
administrative expenses, respectively.
(4) The $7.6 million represents restructuring related charges of $6.0 million
for accelerated depreciation and $1.6 million for inventory markdowns.
(5) The $113,000 represents accelerated depreciation.
(6) The $5.1 million represents a goodwill impairment charge related to the
Culp Decorative Fabrics division within the upholstery fabrics segment.
(7) The $18.0 million represents $6.0 million for accelerated depreciation,
$5.7 million for write-downs of buildings and equipment, $2.5 million
related to asset movement costs, $2.2 million related to termination
benefits, and $1.6 million for inventory markdowns. Of this total charge,
$10.4 million, $7.6 million, and $113,000 were included in restructuring
expense, cost of sales, and selling, general, and administrative expenses,
respectively.
25
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE YEARS ENDED MAY 1, 2005 AND MAY 2, 2004
(Amounts in thousands)
YEARS ENDED
------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------- -------------------------
May 1, May 2, % Over May 1, May 2,
Net Sales by Segment 2005 2004 (Under) 2005 2004
- -------------------------------------------- ----------- ----------- ----------- ----------- -----------
Mattress Fabrics $ 105,432 106,322 (0.8) % 36.8 % 33.4 %
Upholstery Fabrics 181,066 211,794 (14.5) % 63.2 % 66.6 %
----------- ----------- ----------- ----------- -----------
Net Sales $ 286,498 318,116 (9.9) % 100.0 % 100.0 %
=========== =========== =========== =========== ===========
Gross Profit by Segment Gross Profit Margin
- -------------------------------------------- -------------------------
Mattress Fabrics $ 16,819 23,376 (28.1) % 16.0 % 22.0 %
Upholstery Fabrics 16,899 34,946 (51.6) % 9.3 % 16.5 %
----------- ----------- ----------- ----------- -----------
Subtotal 33,718 58,322 (42.2) % 11.8 % 18.3 %
Restructuring related charges (7,561)(1) 0 (100.0) % (2.6)% 0.0 %
----------- ----------- ----------- ----------- -----------
Gross Profit $ 26,157 58,322 (55.2) % 9.1 % 18.3 %
=========== =========== =========== =========== ===========
Selling, General and Administrative
Expenses by Segment Percent of Sales
- -------------------------------------------- -------------------------
Mattress Fabrics $ 7,430 8,390 (11.4) % 7.0 % 7.9 %
Upholstery Fabrics 23,334 28,110 (17.0) % 12.9 % 13.3 %
Unallocated corporate expenses 4,480 4,519 (0.9) % 1.6 % 1.4 %
----------- ----------- ----------- ----------- -----------
Subtotal 35,244 41,019 (14.1) % 12.3 % 12.9 %
Restructuring related charges 113 (2) 0 (100.0) % 0.0 % 0.0 %
----------- ----------- ----------- ----------- -----------
Selling, General and Administrative
expenses $ 35,357 41,019 (13.8) % 12.3 % 12.9 %
=========== =========== =========== =========== ===========
Operating Income
Operating Income (loss) by Segment (Loss) Margin
- -------------------------------------------- -------------------------
Mattress Fabrics $ 9,389 14,986 (37.3) % 8.9 % 14.1 %
Upholstery Fabrics (6,435) 6,836 (194.1) % (3.6)% 3.2 %
Unallocated corporate expenses (4,480) (4,519) (0.9) % (1.6)% (1.4)%
----------- ----------- ----------- ----------- -----------
Subtotal (1,526) 17,303 (108.8) % (0.5)% 5.4 %
Goodwill impairment (5,126)(3) 0 (100.0) % (1.8)% 0.0 %
Restructuring and related charges and credits (18,046)(4) 1,047 (5)(1,823.6) % (6.3)% 0.3 %
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ (24,698) 18,350 (234.6) % (8.6)% 5.8 %
=========== =========== =========== =========== ===========
Depreciation by Segment
- --------------------------------------------
Mattress Fabrics $ 3,635 3,753 (3.1) %
Upholstery Fabrics 9,227 9,889 (6.7) %
----------- ----------- -----------
Subtotal 12,862 13,642 (5.7) %
Accelerated Depreciation 6,022 0 100.0 %
----------- ----------- -----------
Total Depreciation $ 18,884 13,642 38.4 %
=========== =========== ===========
(1) The $7.6 million represents restructuring related charges of $6.0 million
for accelerated depreciation and $1.6 million for inventory write-downs.
(2) The $113,000 represents accelerated depreciation.
(3) The $5.1 million represents goodwill impairment charge related to the Culp
Decorative Fabrics division within the upholstery fabrics segment.
(4) The $18.0 million represents $6.0 million for accelerated depreciation,
$5.7 million for write-downs of buildings and equipment, $2.5 million
related to asset movement costs, $2.2 million related to termination
benefits, and $1.6 million for inventory markdowns. Of this total charge,
$10.4 million, $7.6 million, and $113,000 was included in restructuring
expense, cost of sales, and selling, general, and administrative expenses,
respectively.
(5) The $1.0 million restructuring credit represents adjustment of accrued
employee benefit and other plant closing costs related to the shutdown of
the Chattanooga, TN and Lumberton, NC operations.
26
2006 compared with 2005
The company's net sales for fiscal 2006 decreased 8.9% to $261.1 million
compared to $286.5 million for fiscal 2005. The company reported a net loss of
$11.8 million, or $1.02 per share diluted, compared to a net loss of $17.9
million, or $1.55 per share diluted in fiscal 2005. Restructuring and related
charges of $17.9 million were included in the net loss for fiscal 2006. In
addition, restructuring and related charges of $18.0 million and goodwill
impairment of $5.1 million were included in the net loss for fiscal 2005.
During fiscal 2006, the company implemented two major restructuring initiatives,
the September 2005-Upholstery Fabrics and August 2005-Upholstery Fabric plans. A
detailed explanation of the significant restructuring plans is presented in the
"Restructuring and Related Charges" section below. The total charges incurred
for all of the company's restructuring plans were $17.9 million. Of the total
charges, $10.3 million was recorded in restructuring expense, $4.6 million was
recorded in cost of sales, and $3.0 million was recorded in selling, general,
and administrative expenses in the 2006 Consolidated Statement of Loss.
Restructuring and Related Charges
Fiscal 2006
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
closed its finishing plant in Burlington, NC, thereby reducing the number of
associates by approximately 100 people.
During fiscal 2006, total restructuring and related charges incurred were $1.4
million, of which $533,000 related to employee termination benefits, $419,000
related to asset movement costs, $238,000 related to accelerated depreciation,
$177,000 related to write-downs of equipment, and $10,000 related to operating
costs associated with the closing of the plant facility. Of the total charge,
$1.1 million was recorded in restructuring expense and $245,000 was recorded in
cost of sales in the 2006 Consolidated Statement of Loss.
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 yarn operations into the Lincolnton, NC facility. The company
is outsourcing the open-end yarns previously produced at the Shelby, NC
facility. As a result, the company has one yarn plant in Lincolnton, NC for
producing wrap-spun yarns and a small texturizing yarn operation in Graham, NC.
Overall, these actions reduced the number of associates by approximately 100
people.
During fiscal 2006, total restructuring and related charges incurred were $5.5
million, of which $2.6 million related to write-downs of building and equipment,
$1.2 million related to accelerated depreciation, $567,000 related to employee
termination benefits, $565,000 related to inventory markdowns, $394,000 related
to operating costs associated with the closing of the plant facility, $175,000
related to asset movement costs, and $11,000 related to lease termination costs.
Of this total charge, $3.4 million was recorded in restructuring expense and
$2.1 million was recorded in cost of sales in the 2006 Consolidated Statement of
Loss.
27
Fiscal 2005
April 2005-Upholstery Fabrics: In April 2005, the board of directors approved a
restructuring plan within the upholstery fabrics segment designed to reduce
costs, increase asset utilization, and improve profitability. The restructuring
plan included consolidation of the company's two velvet fabrics manufacturing
operations, fixed manufacturing cost reductions in the decorative fabrics
operation, and significant reductions in selling, general, and administrative
expenses within the upholstery fabrics segment. Another element of the
restructuring plan was a substantial reduction in raw material and finished
goods stock keeping units or SKUs, to simplify manufacturing processes, increase
productivity and reduce inventories. The company relocated velvet production
equipment from the manufacturing facility in Burlington, NC, to its other velvet
plant in Anderson, SC, resulting in significant reductions of fixed
manufacturing costs. The Burlington, NC facility is currently being utilized as
an inspection and distribution facility for fabrics imported from offshore
sources and for finished goods warehousing of domestically produced upholstery
fabrics. Also, the company combined its sales, design, and customer service
activities within the upholstery fabrics segment. As a result, on June 30, 2005
the company sold two buildings, both located in Burlington, NC, consisting of
approximately 140,000 square feet for proceeds of $2,850,000. These initiatives
significantly reduced the company's selling, general, and administrative
expenses. Overall, these restructuring actions have reduced the number of
associates by 350 people.
During fiscal 2006, the total restructuring and related charges incurred were
$8.8 million, of which approximately $3.5 million related to accelerated
depreciation, $2.3 million related to write-downs of equipment, $1.5 million
related to inventory markdowns, $557,000 related to asset movement costs,
$529,000 related to employee termination benefits primarily from headcount
reductions within the upholstery fabrics segment, and $435,000 related to lease
termination costs. Of this total charge, $3.7 million was recorded in
restructuring expense, $2.1 million was recorded in cost of sales, and $3.0
million was recorded in selling, general, and administrative expenses in the
2006 Consolidated Statement of Loss.
During fiscal 2005, the total restructuring and related charges incurred were
$7.1 million, of which approximately $4.3 million related to write-downs of
building and equipment, $1.9 million related to employee termination benefits,
$874,000 related to accelerated depreciation and inventory markdowns, and
$47,000 related to lease termination costs. Of this total charge, $6.2 million
was recorded in restructuring expense, $761,000 was recorded in cost of sales,
and $113,000 was recorded in selling, general, and administrative expenses in
the 2005 Consolidated Statement of Loss.
October 2004-Upholstery Fabrics: In October 2004, the board of directors
approved a restructuring plan within the upholstery fabrics segment aimed at
reducing costs, increasing asset utilization and improving profitability. Due to
continued pressure on demand in this segment, management decided to adjust the
company's cost structure and bring U.S. manufacturing capacity in line with
current and expected demand. The restructuring plan principally involved
consolidation of the company's decorative fabrics weaving operations by closing
Culp's facility in Pageland, SC, and consolidating those operations into the
Graham, NC facility. Additionally, the company consolidated its yarn operations
by integrating the production of the Cherryville, NC plant into the company's
Shelby, NC facility. Another element of the restructuring plan was a substantial
reduction in certain raw material and finished goods stock keeping units, or
SKUs, to reduce manufacturing complexities and lower costs, with the ongoing
objective of identifying and eliminating products that were not generating
acceptable volumes or margins. These initiatives significantly reduced the
company's selling, general, and administrative expenses. Overall, these
restructuring actions reduced the number of associates by approximately 250
people.
28
During fiscal 2006, the total restructuring and related charges incurred were
$2.4 million, of which approximately $1.3 million related to asset movement
costs, $1.0 million related to write-downs of equipment, $88,000 related to
employee termination benefits to reflect current estimates of future health care
claims, $52,000 related to operating costs associated with the closing of the
plant facilities, and $3,000 related to lease termination costs. Of this total
charge, $2.3 million was recorded in restructuring expense, and $52,000 in cost
of sales in the 2006 Consolidated Statement of Loss.
During fiscal 2005, the total restructuring and related charges incurred were
$16.3 million, of which approximately $6.8 million related to accelerated
depreciation and inventory markdowns, $5.1 million of goodwill impairment, which
represented all of the remaining goodwill associated with the upholstery fabrics
segment, $2.4 million related to asset movement costs, $1.3 million related to
write-downs of buildings and equipment, and $722,000 related to employee
termination benefits. Of the total charge, $4.4 million was recorded in
restructuring expense and $6.8 million was recorded in cost of sales in the 2005
Consolidated Statement of Loss.
Segment Analysis
Mattress Fabrics Segment
Net Sales -- For fiscal 2006, the mattress fabrics segment reported net sales of
$93.7 million compared with $105.4 million for fiscal 2005. Mattress fabrics
sales represented approximately 36% of total sales for fiscal 2006, down from
37% in fiscal 2005. Mattress ticking yards sold during fiscal 2006 were 41.5
million compared with 45.0 million yards sold in fiscal 2005, a decrease of
7.6%. This trend reflects the overall softness in industry sales for mattresses,
a decline in demand for printed ticking, which has become a less popular
category, and the industry-wide shortage of polyurethane foam used by mattress
manufacturers related to disruptions from the hurricane activity in the Gulf
Coast in the second quarter of fiscal 2006. The average selling price for fiscal
2006 was $2.26 compared with $2.33 in fiscal 2005. The lower pricing trend
reflects the ongoing shift mattress manufacturers are making to less expensive
common border ticking, which is the fabric that goes on the side of mattresses
and box springs. While prices in all product lines have continued to trend
lower, the product mix began to change throughout fiscal 2006 with a higher
percentage of sales of knitted ticking, which has a higher average selling
price. The company expects knitted ticking to account for an increasingly higher
percentage of ticking sales as demand for this category is expected to increase.
Operating income -- For fiscal 2006, the mattress fabrics segment reported
operating income of $6.9 million, or 7.3% of sales, compared with $9.4 million,
or 8.9% of sales, for fiscal 2005. During fiscal 2006, operating income was
affected by duty assessments from U.S. customs totaling $864,000, higher raw
material prices that were not offset by customer surcharges (price increases),
and manufacturing variances related to the start-up of the $7.0 million capital
project in the first and second quarters of fiscal 2006.
Starting in fiscal 2005, the company took aggressive steps to address the
strategic challenges facing its business in this segment. The company reduced
operating costs by consolidating its mattress ticking operations. The $7.0
million capital project involved relocating ticking looms from a higher cost
upholstery fabric plant to existing ticking facilities in the U. S. and Canada
and the purchase of new weaving machines that are faster and more efficient than
the equipment they replaced. This transition was completed in the second quarter
of fiscal 2006. Second, to partially offset higher material costs, the company
implemented a price increase of approximately three percent in this segment
during the fourth quarter of fiscal 2005. Also, the company placed more design
emphasis on new products with higher margins. As a result of these actions,
operating income increased from 5.9% in the first quarter, to 6.9% in the second
quarter, to 7.9% in the third quarter, and to 8.4% in the fourth quarter of
fiscal 2006.
29
Segment Assets-- Segment assets consist of accounts receivable, inventory and
property, plant and equipment. As of April 30, 2006, accounts receivable and
inventory totaled $21.2 million, compared to $25.0 million at the end of fiscal
2005. Also as of April 30, 2006, property, plant and equipment totaled $25.4
million, compared to $26.7 million at the end of fiscal 2005. Included in
property, plant and equipment are assets located in the U. S. totaling $12.9
million and $12.2 million at April 30, 2006 and May 1, 2005, respectively.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for fiscal 2006 were $167.4 million, down
8% to $181.1 million for fiscal 2005. Upholstery fabrics sales represented
approximately 64% of total sales for fiscal 2006, up from 63% in fiscal 2005.
Upholstery fabric yards sold during fiscal 2006 were 39.7 million versus 43.2
million in fiscal 2005, a decline of 8.2%. Average selling price was $4.22 per
yard for fiscal 2006 compared with $4.19 per yard in fiscal 2005. The lower
sales 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 an increasing amount of cut and sewn kits. However, in fiscal
2006, the company continued to source and market upholstery fabrics produced
internationally, primarily in China. These measures are part of the company's
continuing efforts to meet consumer preferences for certain types of fabrics, as
well as to serve the growing segment of the company's customer base that is
establishing or expanding furniture production in international areas. As a
result of the company's production and offshore sourcing efforts, including its
China platform, the company is experiencing higher sales of upholstery fabric
products produced outside of the company's U. S. manufacturing plants. For
fiscal 2006, these sales increased 89% from fiscal 2005 and accounted for $59.2
million, or 35% of upholstery fabric sales, in fiscal 2006. Sales of fabric
produced offshore of $31.3 million accounted for 17% of upholstery fabric sales
for fiscal 2005. The growth in offshore produced fabrics is a trend that is
expected to continue.
A major component of the company's offshore business is its China operation,
which began manufacturing operations during the fourth quarter of fiscal 2004.
This initiative involves a strategy to link the company's existing customer
relationships, design expertise and production technology with low-cost fabric
manufacturing in China, while continuing to maintain high quality standards. The
company is currently leasing three facilities in the Shanghai region of China,
where fabrics sourced in China are inspected and tested to assure compliance
with the company's quality standards before shipment to its customers. In many
cases, additional value-added finishing steps are applied to the fabrics in
China before shipment. The company's offshore business represents a significant
growth opportunity in an increasing global furniture and fabrics market place.
The company's U. S. customers have continued to move an increasing amount of
their fabric purchases, including cut and sewn kits, to China, and the company
is in position to meet their fabric needs.
Operating Loss -- Operating loss for fiscal 2006 was $954,000, or 0.6% of sales,
compared with an operating loss of $6.4 million, or 3.6% of sales, for fiscal
2005. These results reflect continued growth in sales and profits of non-U.S.
produced fabrics, lower U.S. manufacturing fixed costs and variances, and lower
selling, general, and administrative expenses. 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, utilizing an
increasing amount of lower cost imported yarns. Over this time period, the
company has significantly reduced stock keeping units, or SKUs, of lower volume
products that do not fit the company's U.S. operating model, including the
discontinuation of the U.S. produced printed upholstery fabrics. As a result,
the company has reduced its product complexity going forward. 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
employment levels. The company consolidated two velvet manufacturing operations
30
and consolidated its finished goods distribution and design centers. Also, the
company closed two of its three yarn manufacturing plants and outsourced these
yarns to current suppliers. In addition, the company completed the outsourcing
for its decorative fabrics finishing operation and closed this plant at the end
of the fiscal year. The company has also combined its sales, design, and
customer service activities for two divisions that were formerly operated
separately within the upholstry fabrics segment, resulting in a more unified
approach to service its customers. As a result of these activities, the company
has reduced selling, general, and administrative expenses for the upholstery
fabrics segment by 32% for fiscal 2006.
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 fiscal 2006 compared to fiscal 2005 and accounted for
approximately 35% of upholstery fabric sales for fiscal 2006. Management
believes that the development of its China platform represents a significant
growth 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. A key element of the 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 - As previously discussed, management has continued to take
very aggressive actions over the past year to bring U.S. manufacturing costs and
capacity in line with current and expected demand trends. As a result of these
activities, the company now has 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 of April 30, 2006, the book value of
the company's U.S. based upholstery fabrics fixed assets is $9.8 million,
compared with approximately $32 million at the end of fiscal 2005. As of April
30, 2006, the company had assets held for sale with a carrying value of $3.1
million. These assets held for sale are expected to be sold in fiscal 2007 for
this amount. Total U.S. employment in the company's upholstery fabric operations
was 660 at the end of fiscal 2006 compared with 1404 at the end of fiscal 2005.
This reconfiguration reflects the company's goal to be a more market driven
company with fewer fixed assets and also substantially reduces our risk level
going forward.
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 April 30, 2006, accounts receivable and
inventory totaled $44.6 million, compared to $54.4 million at the end of fiscal
2005. Also as of April 30, 2006, property, plant and equipment totaled $19.2
million, compared to $39.3 million at the end of fiscal 2005. Included in
property, plant and equipment are assets located in the U. S. totaling $9.8
million and $32.0 million for April 30, 2006 and May 1, 2005, respectively.
These balances exclude various other corporate allocations totaling $4.1 million
and $4.2 million at April 30, 2006 and May 1, 2005, respectively.
Other Corporate Expenses
Selling, General and Administrative Expenses - Selling, general, and
administrative expenses of $29.0 million for fiscal 2006 decreased $6.4 million,
or 18.1%, from fiscal 2005. As a percent of net sales, SG&A expenses decreased
to 11.1% from 12.3% in fiscal 2005. Included in the $29.0 million was $3.0
million in accelerated depreciation associated with the company's design and
distribution centers sold in June 2005. The 26.4% decrease to the remaining
$26.0 million for fiscal 2006 compared to $35.4 million for fiscal 2005 was
primarily due to significant cost reductions resulting from restructuring
activities in the upholstery fabrics segment.
31
Interest Expense (Income) -- Interest expense for fiscal 2006 increased to $4.0
million from $3.7 million in fiscal 2005 due to the addition of a real estate
loan in October of 2005. Interest income decreased to $126,000 from $134,000 in
fiscal 2005 due to lower invested balances in fiscal 2006.
Income Taxes -- The effective income tax rate (taxes as a percentage of loss
before income taxes for fiscal 2006 and 2005) was 40.7% in fiscal 2006 compared
with 38.0% for fiscal 2005. The increase in the effective income tax rate
reflects losses from the company's U.S. operations combined with lower income
tax rates on income from foreign sources.
As of April 30, 2006, the company had net deferred income tax assets of $27.2
million, an increase of $10.1 million over net deferred income tax assets of
$17.1 million recorded as of May 1, 2005. This increase results primarily from
the federal and state tax benefits recorded for the loss from U. S. operations
for fiscal 2006 (see note 9 in the Notes to Consolidated Financial Statements).
2005 compared with 2004
The company's net sales for fiscal 2005 decreased 10% to $286.5 million; and the
company reported a net loss of $17.9 million, or $1.55 per share diluted, versus
net income of $7.2 million, or $0.61 per share diluted, in fiscal 2004.
Restructuring and related charges of $18.1 million and goodwill impairment of
$5.1 million were included in the net loss for fiscal 2005. In addition,
restructuring credits of $1.0 million and an early extinguishment of debt charge
of $1.7 million were included in net income for fiscal 2004.
Mattress Fabrics Segment
Net Sales -- For fiscal 2005, the mattress fabrics segment reported sales of
$105.4 million compared with $106.3 million for fiscal 2004. Mattress fabrics
sales represented approximately 37% of total sales for fiscal 2005, up from 33%
in fiscal 2004. Mattress ticking yards sold during fiscal 2005 were 45.0 million
compared with 43.0 million yards sold in fiscal 2004, an increase of 4.5%. This
increase in yards sold was noteworthy because it occurred as the bedding
industry completed the transition to selling predominantly one-sided mattresses,
which utilize about one-third less mattress ticking. The average selling price
for mattress ticking was $2.33 per yard compared to $2.45 per yard in fiscal
2004, a decrease of 5.0%.
Operating income -- For fiscal 2005, the mattress fabrics segment reported
operating income of $9.4 million, or 8.9% of sales, compared with $15.0 million,
or 14.1% of sales, for fiscal 2004. During fiscal 2005, operating income was
affected by industry wide pricing pressure, as well as higher raw material costs
due primarily to the increased cost of petroleum based products. In addition to
these pressures, operating income was affected by lower margins on closeout
sales and manufacturing variances related to the relocation of mattress ticking
looms.
Segment Assets-- Segment assets consist of accounts receivable, inventory and
property, plant and equipment. As of May 1, 2005, accounts receivable and
inventory totaled $25.0 million, compared to $24.6 million at the end of fiscal
2004. Also as of May 1, 2005, property, plant and equipment totaled $26.7
million, compared to $23.1 million at the end of fiscal 2004. Included in
property, plant and equipment were assets located in the U.S. totaling $12.2
million and $9.8 million at May 1, 2005 and May 2, 2004, respectively.
32
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for fiscal 2005 decreased $30.7 million, or
14.5%, to $181.1 million. Upholstery fabric yards sold during fiscal 2005 were
42.4 million versus 49.6 million in fiscal 2004, a decline of 14.5%. Average
selling price was $4.19 per yard for fiscal 2005 compared with $4.20 per yard in
fiscal 2004. The lower sales dollars and yards reflected continued soft demand
industry wide for U.S. produced fabrics, as a result of consumer preferences for
leather and suede furniture and growing competition from imported fabrics and
cut and sewn kits, primarily from China.
In fiscal 2005, the company implemented several initiatives to source and market
upholstery fabrics produced internationally, primarily in Asia. As a result of
the company's production and offshore sourcing efforts, including the China
platform, the company experienced higher sales of upholstery fabric products
produced outside of the company's U.S. manufacturing plants. For fiscal 2005,
these sales doubled over the prior year and accounted for approximately $31.3
million or 17% of upholstery fabric sales in fiscal 2005. Sales of fabric
produced offshore of $15.6 million accounted for approximately 7% of upholstery
fabric sales for fiscal 2004.
Operating income (loss) -- Operating loss for fiscal 2005 was $6.4 million or
3.6% of sales, compared with operating income of $6.8 million, or 3.2% of sales,
for fiscal 2004. The decrease in segment operating income as compared to fiscal
2004 was primarily due to underutilization of the company's U.S. manufacturing
capacity and manufacturing variances related to restructuring activities.
Additionally, the upholstery fabrics segment experienced higher raw material
costs in fiscal 2005 due mainly to the increase in cost of petroleum based
products.
During the fourth quarter of fiscal 2005, the company's supplier for acrylic
fiber, Solutia, exited the acrylic fiber business. In response to this event,
the company identified certain international suppliers as alternative sources
for procuring acrylic fiber. However, in transitioning away from using Solutia,
the company incurred higher fiber costs and increased inventory levels. To
partially offset higher raw material prices, the company implemented a price
increase of approximately three to four percent on domestically produced
upholstery fabrics.
Segment Assets -- Segment assets consist of accounts receivable, inventory and
property, plant and equipment. As of May 1, 2005, accounts receivable and
inventory totaled $54.4 million, compared to $55.1 million at the end of fiscal
2004. Also as of May 1, 2005, property, plant and equipment totaled $39.3
million, compared to $54.6 million at the end of fiscal 2004. Included in
property, plant and equipment were assets located in the U.S. totaling $32.5
million and $51.5 million for May 1, 2005 and May 2, 2004, respectively. The
total of $32.5 million excludes allocations of various other corporate
allocations totaling $4.2 million.
Other Corporate Expenses
Selling, General and Administrative Expenses -- SG&A expenses of $35.4 million
for fiscal 2005 decreased $5.7 million, or 13.8%, from fiscal 2004. As a percent
of net sales, SG&A expenses decreased to 12.3% from 12.9% in fiscal 2004, due
mostly to lower incentive compensation expense and significant cost reductions,
mainly in the sales and marketing expense areas. The 13.8% spending decrease was
achieved despite significantly higher professional fees, which included
significant expenses incurred to comply with the requirements of the
Sarbanes-Oxley Act of 2002.
Interest Expense (Income) -- Interest expense for fiscal 2005 declined to $3.7
million from $5.5 million in fiscal 2004 due to lower borrowings outstanding.
Interest income decreased to $134,000 from $376,000 in fiscal 2004 due to lower
invested balances in fiscal 2005.
33
Income Taxes -- The effective tax rate (taxes as a percentage of pretax income
(loss)) for fiscal 2005 was 38.0% compared with 33.0% for fiscal 2004.
As of May 1, 2005, the company had net deferred income tax assets of $17.1
million, an increase of $12.0 million over net deferred income tax assets of
$5.1 million recorded at the fiscal year ended May 2, 2004. This increase
resulted primarily from the federal and state tax benefits recorded for the loss
from U.S. operations for fiscal 2005.
Handling Costs
The company records warehousing costs in selling, general and administrative
expenses. These costs were $4.2 million, $4.4 million and $4.6 million in fiscal
2006, fiscal 2005 and fiscal 2004, respectively. Warehousing costs include the
operating expenses of the company's various finished goods distribution centers,
such as personnel costs, utilities, building rent and material handling
equipment lease expense. Had these costs been included in cost of sales, gross
profit would have been $19.7 million, or 7.5%, in fiscal 2006, $21.8 million, or
7.6%, in fiscal 2005, and $53.7 million, or 16.8%, in fiscal 2004.
Liquidity and Capital Resources
The company's sources of liquidity include cash and cash equivalents, cash flow
from operations and amounts available under its revolving credit line. These
sources have been adequate for day-to-day operations and capital expenditures.
The company believes its sources of liquidity continue to be adequate to meet
its current needs. Cash and cash equivalents as of April 30, 2006 increased to
$9.7 million from $5.1 million at the end of fiscal 2005. The company improved
cash flow from operations to $10.3 million in fiscal 2006 compared with $4.0
million in fiscal 2005. In addition, the company received cash proceeds from the
sale of buildings and equipment as part of the company's restructuring
activities of $4.0 million, had capital expenditures and payments on vendor
financed capital expenditures of $7.2 million, payments of long-term debt of
$7.8 million, proceeds from a real estate loan of $4.3 million, proceeds from a
loan with the Canadian government of $680,000, and proceeds from the issuance of
common stock of $369,000.
Working Capital
Accounts receivable as of April 30, 2006, increased 0.8% from May 1, 2005.
Days sales outstanding totaled 41 and 37 days at April 30, 2006, and May 1,
2005, respectively. Inventories at the end of the fiscal year decreased 27% from
a year ago, primarily in the upholstery fabrics segment. Inventory turns for the
year were 5.4 versus 5.2 for the year-earlier period. The accounts payable
balance as of April 30, 2006, decreased 8.8% from May 1, 2005. Operating working
capital (comprised of accounts receivable and inventories, less trade accounts
payable) was $44.9 million at April 30, 2006, down from $56.5 million at May 1,
2005.
Financing Arrangements
Unsecured Term Notes
The company's unsecured 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 three years beginning March 2007 through March 2010. The principal
payments are required to be paid in annual installments over the next four years
as follows: 2007 - $7.5 million; 2008 - $19.9 million; 2009 -$7.5 million; and
2010 - $7.5 million. The company made its first annual principal payment
installment of $7.5 million on March 15, 2006.
34
Real Estate Loan
In October 2005, the company entered into an agreement with its bank 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 and adjustable
margin based on the company's debt/EBITDA ratio as defined in the agreement and
is payable in varying monthly installments through September 2010, with a final
payment of $3.3 million in October 2010.
Revolving Credit Agreement
In August of 2005, the company amended its credit agreement with its bank 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 April 30, 2006,
there were $4.0 million in outstanding letters of credit and no borrowings
outstanding under the agreement.
On December 7, 2005, the company entered into a Seventh Amendment to this credit
agreement. This agreement requires the company to maintain collected deposit
balances of at least $3.0 million after March 15, 2006. Additionally, this
amendment reduced 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 this credit
agreement. This agreement raised the company's capital expenditures limit to
$6.5 million for the year ending April 30, 2006.
On July 20, 2006, the company entered into a Ninth Amendment to this credit
agreement. This agreement extended the expiration date of the agreement from
August 31, 2006 to August 31, 2007, limits annual capital expenditures to $2.5
million for fiscal 2007, and requires the company to maintain collected deposit
balances of at least $2 million. The amended agreement also requires the company
to maintain certain other financial covenants as defined in the agreement.
Canadian Government Loans
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 had an existing
non-interest bearing term loan with the Canadian government which was paid in
May 2006.
35
Commitments
The following table summarizes the company's contractual payment obligations and
commitments (in thousands):
2007 2008 2009 2010 2011 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Accounts payable -
capital expenditures $ 1,449 $ 1,000 $ - $ - $ - $ - $ 2,449
Operating leases (1) 3,362 2,198 873 150 40 17 6,640
Long-term debt-interest
3,549 2,838 1,390 787 131 - 8,695
Long-term debt -
principal 8,060 20,046 7,757 7,830 3,552 477 47,722
- ---------------------------------------------------------------------------------------------------------------
Total $ 16,420 $ 26,082 $ 10,020 $ 8,767 $ 3,723 $ 494 $ 65,506
- ---------------------------------------------------------------------------------------------------------------
Note: Payment Obligations by Fiscal Year Ending April
(1) Includes accrued restructuring expenses for the company's inactive
Chattanooga manufacturing facility of $869 for fiscal 2007 and 2008 and
other leases of $139 and $26 for fiscal 2007 and 2008, respectively.
Capital Expenditures
Capital spending for fiscal 2006 was $6.5 million, including $942,000 that is
the non-cash portion of capital expenditures representing vendor financing.
Depreciation for fiscal 2006 was $14.4 million, of which approximately $5.0
million was related to accelerated depreciation. The company's capital spending
plans for fiscal 2007 are not expected to exceed $2.0 million. The company
estimates depreciation to be $7.0 million for fiscal 2007, with $3.6 million,
$2.9 million, and $500,000 in the mattress fabrics segment, upholstery fabrics
segment, and unallocated corporate, respectively.
Inflation
The cost of certain of the company's raw materials, principally fibers from
petroleum derivatives, and utility/energy costs, increased during fiscal 2006 as
oil and other 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. See "Risk Factors."
Critical Accounting Policies
U. S. generally accepted accounting principles require the company to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Some of these estimates require
difficult, subjective and/or complex judgments about matters that are inherently
uncertain, and as a result actual results could differ significantly from those
estimates. Due to the estimation processes involved, management considers the
following summarized accounting policies and their application to be critical to
understanding the company's business operations, financial condition and results
of operations.
36
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 April 30, 2006, accounts receivable from furniture manufacturers totaled
approximately $19.4 million, and from bedding manufacturers approximately $9.6
million. Additionally, as of April 30, 2006, the aggregate accounts receivable
balance of the company's ten largest customers was $8.6 million, or 29.7% 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 markdowns 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 markdowns is the
age of the inventory. As a result, the company provides inventory valuation
markdowns based upon set percentages for inventory aging categories, generally
using six, nine, twelve and fifteen month categories. While management believes
that adequate markdowns for excess and obsolete inventory have been made in the
consolidated financial statements, significant unanticipated changes in demand
or changes in consumer tastes and preferences could result in additional excess
and obsolete inventory in the future.
Long-lived Assets. The company follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes an impairment accounting model for long-lived assets to be held and
used, disposed of by sale, or disposed of by abandonment or other means.
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Unforeseen events and
changes in circumstances and market conditions could negatively affect the value
of assets and result in an impairment charge.
In fiscal 2006, the company prepared an impairment evaluation on its upholstery
fabrics segment due to continued adverse business results requiring further
restructuring. The company's assessment indicated that the net undiscounted
future operating cash flows of the segment was sufficient to recover the
carrying amount of the long-lived assets to be held and used.
The determination of future operating cash flows involves considerable
estimation and judgment about future market conditions, future sales and
profitability, and future asset utilization. Although the company believes it
has based the impairment testing on reasonable estimates and assumptions, the
use of different estimates and assumptions, or a decision to dispose of
substantial portions of these assets, could result in materially different
results.
37
Goodwill. The company applies the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets," which requires goodwill to no longer be amortized and
that goodwill be tested annually for impairment by comparing each reporting
unit's carrying value to its fair value. SFAS No. 142 also requires that, at
least annually, goodwill be retested for impairment.
As of April 30, 2006, the company's remaining $4.1 million of goodwill relates
to the mattress fabrics segment.
In October 2004, due to lower than expected operating profits and cash flow for
the second quarter and year-to-date for fiscal 2005 in the upholstery fabrics
segment, management determined that the remaining goodwill associated with this
segment should be tested for impairment. An independent business valuation
specialist was engaged to assist the company in the valuation. As a result of
this valuation, the company recorded in its second quarter of fiscal 2005 a
goodwill impairment charge of $5.1 million ($3.2 million net of taxes), or $0.28
per share diluted.
The determination of fair value involves considerable estimation and judgment.
In particular, determining the fair value of a business unit involves, among
other things, developing forecasts of future cash flows and appropriate discount
rates. Although the company believes it has based the impairment testing on
reasonable estimates and assumptions, the use of different estimates and
assumptions could result in materially different results.
Restructuring Charges. In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS 146, a liability for a cost associated with an exit or disposal
activity shall be recognized and measured initially at its fair value in the
period in which the liability is incurred, except for certain employee
termination benefits that qualify under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
The upholstery fabric segment 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. In an effort to reduce operating expenses and scale U. S.
productive capacity in line with current and expected demand trends, 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.
Severance and related charges are accrued at the date the restructuring was
approved by the board of directors based on an estimate of amounts that will be
paid to affected employees, in accordance with SFAS 112. Under SFAS 144, asset
impairment charges related to the consolidation or closure of manufacturing
facilities are based on an estimate of expected sales prices for the real estate
and equipment. Other exit costs, which principally consist of charges for lease
termination and losses from termination of existing contracts, equipment
relocation costs and inventory markdowns that are related to the restructuring
are accounted for in accordance with SFAS 146.
The company reassesses the individual accrual requirements at the end of each
reporting period. If circumstances change, causing current estimates to differ
from original estimates, adjustments are recorded in the period of change.
Restructuring charges, and adjustments of those charges, are summarized in note
2 to the consolidated financial statements.
Income Taxes. The company is required to estimate its actual current tax
exposure and to assess temporary differences resulting from differing treatment
of items for tax and accounting purposes. At April 30, 2006, the company had
deferred tax assets of $31.4 million (all of which are related to U. S.
operations) and deferred tax liabilities of $4.1 million, resulting in net
deferred tax assets of $27.3 million. The U. S. deferred tax liabilities total
$2.2 million (all of which reverse in the carry forward period), resulting in
net U. S. deferred tax assets of $29.2 million. 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.
38
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 that have been
completed 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 and the ultimate realization
of benefits is dependent on the generation of taxable income from future U.S.
operations.
Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, and amendment
of ARB No. 43, Chapter 4," which clarifies the types of costs that should be
expensed rather than capitalized as inventory. This statement also clarifies the
circumstances under which fixed overhead costs associated with operating
facilities involved in inventory processing should be capitalized. The
provisions of SFAS No. 151 are effective for fiscal years beginning after June
15, 2005 and the company will adopt this standard in the first quarter of fiscal
2007. The company does not expect there to be any material effect on its
consolidated financial statements upon adoption of the new standard.
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 the
first quarter of fiscal 2007. The company does not expect there to be any
material effect on its consolidated financial statements upon adoption of the
new standard.
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 as 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 was effective for the company on April 30, 2006.
The adoption of FIN 47 did not have a material effect on the company's
consolidated financial statements.
39
ITEM 7A. 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 April 30, 2006, there were $4.2 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 term loan, and effectively converts the floating rate LIBOR
based payments to fixed payments at 4.99% plus the spread calculated under the
real estate term loan agreement. The company's unsecured senior term notes have
a fixed interest rate of 7.76% and the Canadian government loans are
non-interest bearing. Additionally, approximately 91% of the company's long-term
debt is at a fixed rate or is non-interest bearing. Thus, any foreseeable change
in the interest rates would not expect to have a material effect on the company.
The company's exposure to fluctuations in foreign currency exchange rates are
due primarily to foreign subsidiaries domiciled in Canada and China. These
subsidiaries use 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 their foreign subsidiaries. The
amount of Canadian-denominated and Chinese-denominated net sales and
manufacturing costs are not material to the company's consolidated results of
operations; therefore a 10% change in the exchange rate at April 30, 2006 would
not have a significant impact on the company's results of operations or
financial position.
40
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
Management's Report on Internal Control over Financial Reporting
To the Shareholders of
Culp, Inc.
High Point, North Carolina
Management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of management, including the
principal executive officer and principal financial officers, the Company
conducted an evaluation of the effectiveness of internal control over financial
reporting based on the framework in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on the Company's evaluation under that framework, management concluded
that the Company's internal control over financial reporting was effective as of
April 30, 2006. Management's assessment of the effectiveness of internal control
over financial reporting as of April 30, 2006 has been audited by KPMG LLP, the
Company's independent registered public accounting firm, as stated in their
reports which are included herein.
Robert G. Culp, III Franklin N. Saxon Kenneth R. Bowling
Chairman and President and Vice President, Finance and
Chief Executive Officer Chief Operating Officer Treasurer
(principal executive officer) (principal financial officer) (principal accounting officer)
July 20, 2006 July 20, 2006 July 20, 2006
41
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Culp, Inc.:
We have audited the accompanying consolidated balance sheets of Culp, Inc. and
subsidiaries (the Company) as of April 30, 2006 and May 1, 2005, and the related
consolidated statements of income (loss), shareholders' equity and cash flows
for each of the years in the three-year period ended April 30, 2006. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Culp, Inc. and
subsidiaries as of April 30, 2006 and May 1, 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended April 30, 2006, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of April 30, 2006, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated July 20, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Greensboro, North Carolina
July 20, 2006
42
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Culp, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Culp,
Inc. and subsidiaries (the Company) maintained effective internal control over
financial reporting as of April 30, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of April 30, 2006, is fairly
stated, in all material respects, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of April 30, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Culp, Inc. and subsidiaries as of April 30, 2006 and May 1, 2005, and the
related consolidated statements of income (loss), shareholders' equity and cash
flows for each of the years in the three-year period ended April 30, 2006, and
our report dated July 20, 2006 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Greensboro, North Carolina
July 20, 2006
43
CONSOLIDATED BALANCE SHEETS
April 30, 2006 and May 1, 2005 (dollars in thousands) 2006 2005
- --------------------------------------------------------------------------------
ASSETS
current assets:
cash and cash equivalents $ 9,714 5,107
accounts receivable 29,049 28,824
inventories 36,693 50,499
deferred income taxes 7,120 7,054
assets held for sale 3,111 -
other current assets 1,287 2,691
- --------------------------------------------------------------------------------
total current assets 86,974 94,175
property, plant and equipment, net 44,639 66,032
goodwill 4,114 4,114
deferred income taxes 20,176 10,086
other assets 1,564 1,716
- --------------------------------------------------------------------------------
total assets $ 157,467 176,123
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt $ 8,060 8,110
accounts payable 20,835 22,852
accrued expenses 7,845 9,556
accrued restructuring costs 4,054 5,850
income taxes payable 2,488 1,544
- --------------------------------------------------------------------------------
total current liabilities 43,282 47,912
long-term debt, less current maturities 39,662 42,440
- --------------------------------------------------------------------------------
total liabilities 82,944 90,352
- --------------------------------------------------------------------------------
commitments and contingencies (note 11)
shareholders' equity:
preferred stock, $.05 par value, authorized 10,000,000
shares - -
common stock, $.05 par value, authorized 40,000,000
shares, issued and outstanding 11,654,959 at April
30, 2006 and 11,550,759 at May 1, 2005 584 579
capital contributed in excess of par value 40,350 39,964
unearned compensation - (139)
retained earnings 33,571 45,367
accumulated other comprehensive income 18 -
- --------------------------------------------------------------------------------
total shareholders' equity 74,523 85,771
- --------------------------------------------------------------------------------
total liabilities and shareholders' equity $ 157,467 176,123
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
44
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended April 30, 2006, May 1, 2005 and May 2, 2004
(dollars in thousands, except per share data) 2006 2005 2004
- --------------------------------------------------------------------------------
net sales $ 261,101 286,498 318,116
cost of sales 237,233 260,341 259,794
- --------------------------------------------------------------------------------
gross profit 23,868 26,157 58,322
selling, general and administrative expenses 28,954 35,357 41,019
goodwill impairment - 5,126 -
restructuring expense (credit) and asset
impairments 10,273 10,372 (1,047)
- --------------------------------------------------------------------------------
income (loss) from operations (15,359) (24,698) 18,350
interest expense 4,010 3,713 5,528
interest income (126) (134) (376)
early extinguishment of debt - - 1,672
other expense 634 517 750
- --------------------------------------------------------------------------------
income (loss) before income taxes (19,877) (28,794) 10,776
income tax expense (benefit) (8,081) (10,942) 3,556
- --------------------------------------------------------------------------------
net income (loss) $ (11,796) (17,852) 7,220
- --------------------------------------------------------------------------------
net income (loss) per share-basic $(1.02) $(1.55) $0.63
net income (loss) per share-diluted $(1.02) $(1.55) $0.61
The accompanying notes are an integral part of these consolidated financial
statements.
45
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
capital accumulated
For the years ended April 30, common common contributed other total
2006, May 1, 2005 and May 2, stock stock in excess of unearned retained comprehensive shareholders'
2004 shares amount par value compensation earnings income equity
- ------------------------------------------------------------------------------------------------------------------------------
balance, April 27, 2003 11,515,459 $ 576 39,749 (559) 55,999 - 95,765
net income - - - - 7,220 - 7,220
stock-based compensation - - - 210 - - 210
common stock issued in
connection with stock
option plans 31,175 2 194 - - - 196
- ------------------------------------------------------------------------------------------------------------------------------
balance, May 2, 2004 11,546,634 578 39,943 (349) 63,219 - 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 - - - - (11,796) - (11,796)
stock-based compensation - - - 139 - - 139
gain on cash flow hedge,
net of taxes - - - - - 18 18
common stock issued in
connection with stock
option plans 104,200 5 386 - - - 391
- ------------------------------------------------------------------------------------------------------------------------------
balance, April 30, 2006 11,654,959 $ 584 40,350 - 33,571 18 74,523
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
46
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 30, 2006, May 1, 2005 and May 2, 2004
(dollars in thousands) 2006 2005 2004
- --------------------------------------------------------------------------------
cash flows from operating activities:
net income (loss) $ (11,796) (17,852) 7,220
adjustments to reconcile net income (loss)
to net cash
provided by operating activities:
depreciation 14,362 18,884 13,642
amortization of other assets 93 130 173
stock-based compensation 139 210 210
goodwill impairment - 5,126 -
deferred income taxes (10,156) (12,022) 3,334
restructuring expense (credit) 6,582 6,690 (183)
changes in assets and liabilities:
accounts receivable (225) 1,895 1,540
inventories 13,806 (1,454) 507
other current assets 1,404 (969) 1,482
other assets (44) 67 607
accounts payable (1,302) 6,251 (951)
accrued expenses (1,711) (3,560) (955)
accrued restructuring (1,796) 882 (2,775)
income taxes payable 944 (306) 1,501
- --------------------------------------------------------------------------------
net cash provided by operating
activities 10,300 3,972 25,352
- --------------------------------------------------------------------------------
cash flows from investing activities:
capital expenditures (6,242) (11,448) (5,976)
proceeds from the sale of buildings and
equipment 3,950 - -
purchases of short-term investments - - (17,282)
proceeds from the sale of short-term
investments - - 27,325
- --------------------------------------------------------------------------------
net cash (used in) provided by
investing activities (2,292) (11,448) 4,067
- --------------------------------------------------------------------------------
cash flows from financing activities:
payments on vendor-financed capital
expenditures (942) (1,527) (3,932)
payments on long-term debt (7,848) (480) (25,470)
proceeds from the issuance of long-term debt 5,020 - -
proceeds from common stock issued 369 22 196
- --------------------------------------------------------------------------------
net cash used in financing
activities (3,401) (1,985) (29,206)
- --------------------------------------------------------------------------------
increase (decrease) in cash and cash
equivalents 4,607 (9,461) 213
cash and cash equivalents at beginning of year 5,107 14,568 14,355
- --------------------------------------------------------------------------------
cash and cash equivalents at end of year $ 9,714 5,107 14,568
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include
the accounts of the company and its subsidiaries, which are wholly-owned.
All significant intercompany balances and transactions have been eliminated
in consolidation.
Description of Business - The company manufactures and markets upholstery
fabrics and mattress fabrics ("ticking") primarily for the furniture and
bedding industries, with the majority of its business conducted in North
America.
Fiscal Year - The company's fiscal year is the 52 or 53 week period ending
on the Sunday closest to April 30. Fiscal 2006, 2005 and 2004 included 52,
52 and 53 weeks, respectively.
Cash and Cash Equivalents - Cash and cash equivalents include demand
deposit and money market accounts. For purposes of the consolidated
statements of cash flows, the company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents.
Accounts Receivable - Substantially all of the company's accounts
receivable are due from manufacturers in the furniture and bedding
industries. The company grants credit to customers, a substantial number of
which are located in North America and generally does not require
collateral. Management continuously performs credit evaluations of its
customers, considering numerous inputs including financial position, past
payment history, cash flows, management ability, historical loss experience
and economic conditions and prospects. The company does not have any
off-balance sheet credit exposure related to its customers.
Inventories - Prior to the fourth quarter of fiscal 2004, principally all
inventories were valued at the lower of last-in, first-out (LIFO) cost or
market. During the fourth quarter of fiscal 2004, the company changed its
method of accounting for inventories to the lower of first-in, first-out
(FIFO) cost or market. The change in accounting principle was made to
provide a better matching of revenue and expenses. Additionally, the change
enables the financial reporting to parallel the way management assesses the
financial and operational performance of the company's segments.
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 markdowns is the age of the inventory. As a result, the company
provides inventory valuation write-downs based upon set percentages for
inventory aging categories, generally using six, nine and twelve month
categories.
Property, Plant and Equipment - Property, plant and equipment is recorded
at cost. Depreciation is generally computed using the straight-line method
over the estimated useful lives of the respective assets. Major renewals
and betterments are capitalized. Maintenance, repairs and minor renewals
are expensed as incurred. When properties are retired or otherwise disposed
of, the related cost and accumulated depreciation are removed from the
accounts. Amounts received on disposal less the book value of assets sold
are charged or credited to income (loss).
Management reviews long-lived assets, which consist principally of
property, plant and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recovered. Recoverability of long-lived assets to be held and used is
measured by a comparison of the carrying amount of the asset to future net
undiscounted cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the excess of the carrying amount over
the fair value of the asset. Assets to be disposed of by sale are reported
at the lower of the carrying value or fair value less cost to sell when the
company has committed to a disposal plan, and are reported separately as
assets held for sale in the consolidated balance sheets.
48
Interest costs of $62,000, $212,000 and $50,000 incurred during the years
ended April 30, 2006, May 1, 2005 and May 2, 2004, respectively, for the
construction of qualifying fixed assets were capitalized and are being
amortized over the related assets' estimated useful lives.
Foreign Currency Translation - The United States dollar is the functional
currency for the company's Canadian and Chinese subsidiaries. Translation
losses for the Canadian subsidiary of $460,000, $158,000 and $153,000 are
included in the other expense line item in the Consolidated Statements of
Income (Loss) for the fiscal years ended April 30, 2006, May 1, 2005 and
May 2, 2004, respectively. A translation gain for the Chinese subsidiaries
of $96,000 was included in the other expense line item in the Consolidated
Statements of Income (Loss) for the fiscal year ended April 30, 2006. There
were no fluctuations in the Chinese RMB exchange rate for fiscal years
ended May 1, 2005 and May 2, 2004, respectively.
Goodwill - The company applies the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets, which requires that goodwill no longer be
amortized and that goodwill be tested for impairment by comparing each
reporting unit's carrying value to its fair value. SFAS No. 142 also
requires that, at least annually, goodwill be retested for impairment.
Due to continued adverse business conditions, the upholstery fabrics
segment experienced operating profits and cash flows in the second quarter
of 2005 significantly lower than expected. As a result, management
determined that the goodwill associated with the segment should be tested
for impairment in accordance with the provisions of SFAS No. 142. An
independent business valuation specialist was engaged to assist the company
in the determination of the fair market value of the Culp Decorative
Fabrics division ("CDF") within the upholstery fabrics segment. The fair
value of CDF, determined using several different methods, including
comparable companies, comparable transactions, and discounted cash flow
analysis, was less than the carrying value. Accordingly the company
recorded a goodwill impairment charge of $5.1 million ($3.2 million net of
taxes of $1.9 million), or $0.28 per share diluted in the second quarter of
fiscal 2005, related to the goodwill associated with the upholstery fabrics
segment. After this goodwill impairment charge, the company's remaining
goodwill of $4.1 million relates to the mattress fabrics segment.
The company updated its goodwill impairment test as of April 30, 2006 for
its mattress fabrics segment. This updated impairment test, which was
prepared by the company, did not indicate any impairment of goodwill. The
determination of fair value involves considerable estimation and judgment.
In particular, determining the fair value of a business unit involves,
among other things, developing forecasts of future cash flows and
appropriate discount rates.
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred income taxes are recognized for temporary differences
between the financial statement carrying amounts and the tax bases of the
company's assets and liabilities and operating loss and tax credit
carryforwards at income tax rates expected to be in effect when such
amounts are realized or settled. The effect on deferred income taxes of a
change in tax rates is recognized in income (loss) in the period that
includes the enactment date.
No provision is made for income taxes which may be payable if undistributed
income of the company's foreign subsidiaries were to be paid as dividends
to the company, since the company intends that such earnings will continue
to be invested. The company has determined that no amounts will be remitted
under the foreign earnings repatriation provision of the American Jobs
Creation Act of 2004. At April 30, 2006, the amount of such undistributed
income was $42.6 million. Foreign tax credits may be available as a
reduction of United States income taxes in the event of such distributions.
Revenue Recognition - Revenue is recognized upon shipment, when title and
risk of loss pass to the customer. Provision is made currently for
estimated product returns, claims and allowances. Management considers
historical claims and return experience, among other things, when
establishing the allowance for returns and allowances.
49
Shipping and Handling Costs - Revenue received for shipping and handling
costs, which is immaterial for all periods presented, is included in net
sales. Shipping costs, principally freight, that comprise payments to
third-party shippers are classified as cost of sales. Handling costs, which
consist principally of finished goods warehousing costs in the company's
various distribution facilities, were $4.2 million, $4.4 million and $4.6
million in 2006, 2005 and 2004, respectively, and are included in selling,
general and administrative expenses.
Stock-Based Compensation - Compensation costs related to employee stock
option plans are recognized utilizing the intrinsic value-based method
prescribed by APB No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. The company has adopted the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation, as
amended by SFAS No. 148. Accordingly, compensation cost is recorded over
the vesting period of the options based upon the difference in option price
and fair market price at the date of grant, if any. The company's
stock-based compensation plans are described more fully in note 12 to the
consolidated financial statements.
The following table illustrates the effect on net income (loss) and income
(loss) per share if the company had applied the fair value recognition
provisions of SFAS No. 123 for the past three fiscal years:
(dollars in thousands, except per share data) 2006 2005 2004
- --------------------------------------------------------------------------------------------------------
net income (loss), as reported $ (11,796) (17,852) 7,220
add: total stock-based employee compensation
expense included in net income (loss), net of tax 83 132 141
deduct: total stock-based employee compensation
expense determined under fair value-based method
for all awards, net of tax (413) (506) (456)
- --------------------------------------------------------------------------------------------------------
pro forma net income (loss) $ (12,126) (18,226) 6,905
- --------------------------------------------------------------------------------------------------------
income (loss) per share:
basic - as reported $ (1.02) (1.55) 0.63
basic - pro forma (1.05) (1.58) 0.60
diluted - as reported $ (1.02) (1.55) 0.61
diluted - pro forma (1.05) (1.58) 0.59
- --------------------------------------------------------------------------------------------------------
Fair Value of Financial Instruments - The carrying amount of cash and cash
equivalents, accounts receivable, other current assets, accounts payable
and accrued expenses approximates fair value because of the short maturity
of these financial instruments.
The fair value of the company's long-term debt is estimated by discounting
the future cash flows at rates currently offered to the company for similar
debt instruments of comparable maturities. At April 30, 2006, the carrying
value of the company's long-term debt is $47.7 million and the fair value
is $46.4 million. At May 1, 2005, the carrying value of the company's
long-term debt is $50.6 million and the fair value is $49.7 million.
Use of Estimates - The preparation of financial statements in conformity
with U. S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
50
2. RESTRUCTURING AND ASSET IMPAIRMENT
A summary of accrued restructuring costs follows:
- --------------------------------------------------------------------------------
(dollars in thousands) April 30, 2006 May 1, 2005
- --------------------------------------------------------------------------------
September 2005 Upholstery fabrics $ 439 -
August 2005 Upholstery Fabrics 134 -
April 2005 Upholstery Fabrics 1,000 1,944
October 2004 Upholstery Fabrics 64 309
Fiscal 2003 Culp Decorative Fabrics 2,412 3,587
Fiscal 2001 Culp Decorative Fabrics 5 10
- --------------------------------------------------------------------------------
$ 4,054 5,850
- --------------------------------------------------------------------------------
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 closed its finishing plant in Burlington, NC, thereby reducing
the number of associates by approximately 100 people.
During fiscal 2006, total restructuring and related charges incurred were
$1.4 million of which $533,000 related to employee termination benefits,
$419,000 related to asset movement costs, $238,000 related to accelerated
depreciation, $177,000 related to write-downs of equipment, and $10,000
related to operating costs associated with the closing of the plant
facility. Of the total charge, $1.1 million was recorded in restructuring
expense and $245,000 was recorded in cost of sales in the 2006 Consolidated
Statement of Loss.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
---------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
---------------------------------------------------------------------------
accrual established in fiscal 2006 $ 510 - 510
adjustments in fiscal 2006 23 - 23
paid in fiscal 2006 (94) - (94)
---------------------------------------------------------------------------
balance, April 30, 2006 $ 439 - 439
---------------------------------------------------------------------------
As of April 30, 2006, assets classified as held for sale consisted of a
building with a value of $641,000.
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.
51
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 yarn operations into the Lincolnton, NC facility. The
company is outsourcing 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 wrap-spun yarns and a small texturizing yarn
operation in Graham, NC. Overall, these actions reduced the number of
associates by approximately 100 people.
During fiscal 2006, total restructuring and related charges incurred were
$5.5 million, of which $2.6 million related to write-downs of building and
equipment, $1.2 million related to accelerated depreciation, $567,000
related to employee termination benefits, $565,000 related to inventory
markdowns, $394,000 related to operating costs associated with the closing
of the plant facility, $175,000 related to asset movement costs, and
$11,000 related to lease termination costs. Of this total charge, $3.4
million was recorded in restructuring expense and $2.1 million was recorded
in cost of sales in the 2006 Consolidated Statement of Loss.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
---------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
---------------------------------------------------------------------------
accrual established in fiscal 2006 $ 570 14 584
adjustments in fiscal 2006 (3) (3) (6)
paid in fiscal 2006 (440) (4) (444)
---------------------------------------------------------------------------
balance, April 30, 2006 $ 127 7 134
---------------------------------------------------------------------------
As of April 30, 2006, assets classified as held for sale consisted of a
building and equipment with a value of $1.2 million.
April 2005 Upholstery Fabrics
In April 2005, management and the company's board of directors approved a
restructuring plan within the upholstery fabrics segment designed to reduce
costs, increase asset utilization, and improve profitability. The
restructuring plan included consolidation of the company's velvet fabrics
manufacturing operations, additional fixed manufacturing cost reductions in
the decorative fabrics operation, and significant reductions in selling,
general and administrative expenses within the upholstery fabrics segment.
Another element of the restructuring plan is a substantial reduction in raw
material and finished goods stock keeping units or SKUs, to simplify
manufacturing processes, increase productivity and reduce inventories. The
company also relocated its velvet production equipment from the
manufacturing facility in Burlington, NC, to its other velvet plant in
Anderson, SC, resulting in significant reductions of fixed manufacturing
costs. The Burlington, NC facility is currently being utilized as an
inspection and distribution facility for fabrics imported from offshore
sources and for finished goods warehousing of domestically produced
upholstery fabrics. The company combined its sales, design, and customer
service activities within the upholstery fabrics segment. As a result, on
June 30, 2005, the company sold two buildings in Burlington, NC consisting
of approximately 140,000 square feet for proceeds of $2,850,000. These
initiatives significantly reduced the company's selling, general and
administrative expenses. Overall, these restructuring actions have reduced
the number of associates by 350 people.
During fiscal 2005, the total restructuring and related charges incurred
were $7.1 million, of which approximately $4.3 million related to
write-downs of building and equipment, $1.9 million related to employee
termination benefits, $874,000 related to accelerated depreciation and
inventory markdowns, and $47,000 related to lease termination costs. Of the
total charge, $6.2 million was recorded in restructuring expense in the
2005 Consolidated Statement of Loss; $761,000 related to accelerated
depreciation and inventory markdowns was recorded in cost of sales in the
2005 Consolidated Statement of Loss; and $113,000 related to accelerated
depreciation was recorded in selling, general and administrative expenses
in the 2005 Consolidated Statement of Loss.
52
During fiscal 2006, the total restructuring and related charges incurred
were $8.8 million, of which approximately $3.5 million related to
accelerated depreciation, $2.3 million related to write-downs of equipment,
$1.5 million related to inventory markdowns, $557,000 related to asset
movement costs, $529,000 related to employee termination benefits primarily
from headcount reductions within the upholstery fabrics segment, and
$435,000 related to lease termination costs. Of this total charge, $3.7
million was recorded in restructuring expense, $2.1 million was recorded in
cost of sales, and $3.0 million was recorded in selling, general and
administrative expenses in the 2006 Consolidated Statement of Loss.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
---------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
---------------------------------------------------------------------------
accrual established in fiscal 2005 $ 1,897 47 1,944
paid in fiscal 2005 - - -
---------------------------------------------------------------------------
balance, May 1, 2005 1,897 47 1,944
additions in fiscal 2006 - 406 406
adjustments in fiscal 2006 529 29 558
paid in fiscal 2006 (1,627) (281) (1,908)
---------------------------------------------------------------------------
balance, April 30, 2006 $ 799 201 1,000
---------------------------------------------------------------------------
As of April 30, 2006, assets classified as held for sale consisted of
equipment with a value of $1.3 million. As of May 1, 2005, assets
classified as held for sale consisted of equipment with a value of
$198,000.
October 2004 Upholstery Fabrics
In October 2004, management and the company's board of directors approved a
restructuring plan within the upholstery fabrics segment aimed at reducing
costs, increasing asset utilization and improving profitability. Due to
continued pressure on demand in this segment, management decided to further
adjust the company's cost structure and bring U. S. manufacturing capacity
in line with current and expected demand. The restructuring plan
principally involved consolidation of the company's decorative fabrics
weaving operations by closing Culp's facility in Pageland, SC, and
consolidating those operations into the Graham, NC facility. Additionally,
the company consolidated its yarn operations by integrating the production
of the Cherryville, NC plant into the company's Shelby, NC facility.
Another element of the restructuring plan was a substantial reduction in
certain raw material and finished goods stock keeping units, or SKUs, to
reduce manufacturing complexities and lower costs, with the ongoing
objective of identifying and eliminating products that are not generating
acceptable volumes of margins. Finally, the company made reductions in
selling, general, and administrative expenses. Overall, these restructuring
actions reduced the number of associates by approximately 250 people.
During fiscal 2005, the total restructuring and related charges incurred
were $16.3 million, of which approximately $6.8 million related to
accelerated depreciation and inventory markdowns, $5.1 million of goodwill
impairment, which represents all of the remaining goodwill associated with
the upholstery fabrics segment, $2.4 million related to asset movement
costs, $1.3 million related to write-downs of buildings and equipment, and
$722,000 related to employee termination benefits. Of the total charge,
$4.4 million was recorded in restructuring expense in the 2005 Consolidated
Statement of Loss; and $6.8 million related to accelerated depreciation and
inventory markdowns was recorded in cost of sales in the 2005 Consolidated
Statement of Loss.
53
During fiscal 2006, the total restructuring and related charges incurred
were $2.4 million, of which approximately $1.3 million related to asset
movement costs, $1.0 million related to write-downs of equipment, $88,000
related to employee termination benefits to reflect the current estimates
of future health care claims, $52,000 related to operating costs associated
with the closing of the plant facilities, $3,000 related to lease
termination costs. Of this total charge, $2.3 million was recorded in
restructuring expense, and $52,000 in cost of sales in the 2006
Consolidated Statement of Loss.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
---------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
---------------------------------------------------------------------------
accrual established in fiscal 2005 $ 1,305 - 1,305
adjustments in fiscal 2005 (583) - (583)
paid in fiscal 2005 (413) - (413)
---------------------------------------------------------------------------
balance, May 1, 2005 309 - 309
additions in fiscal 2006 - 3 3
adjustments in fiscal 2006 88 - 88
paid in fiscal 2006 (333) (3) (336)
---------------------------------------------------------------------------
balance, April 30, 2006 $ 64 - 64
---------------------------------------------------------------------------
As of April 30, 2006, there were no assets classified as held for sale. As
of May 1, 2005, assets classified as held for sale consisted of equipment
with a value of $165,000.
Fiscal 2003 Culp Decorative Fabrics Restructuring
In August 2002, management and the company's board of directors approved a
restructuring plan within CDF aimed at lowering manufacturing costs,
simplifying the dobby fabric upholstery line, increasing asset utilization
and enhancing the division's manufacturing competitiveness. The
restructuring plan principally involved (1) consolidation of the division's
weaving, finishing, yarn making and distribution operations by closing the
facility in Chattanooga, TN and integrating these functions into other
plants, (2) a significant reduction in the number of stock keeping units,
or SKUs offered in the dobby product line and (3) a net reduction in
workforce of approximately 300 positions.
During fiscal 2004, as a result of management's continual evaluation of the
restructuring accrual, the reserve was increased $178,000 to reflect
current estimates of future health care claims and decreased $684,000 to
reflect current estimates of remaining lease expenses and other exit costs.
Additionally, the company recorded a restructuring charge of $8,000
representing a non-cash impairment of equipment.
During fiscal 2005, as a result of management's continual evaluation of the
restructuring accrual, the reserve was reduced $214,000 in employee
termination benefits to reflect the current estimates of future health care
claims and reduced $169,000 in lease termination and other exit costs to
reflect current estimates of sub-lease income.
During fiscal 2006, as a result of management's continual evaluation of the
restructuring accrual, the reserve was decreased by approximately $241,000
in lease termination and other exit costs to reflect current estimates of
sub-lease income and other exit costs and $66,000 to reflect current
estimates of employee termination benefits. Additionally, the company
recorded a restructuring related charge of $34,000 for other operating
costs associated with the closed plant facility. This $34,000 restructuring
related charge was recorded in cost of sales in the 2006 Consolidated
Statement of Loss.
54
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
---------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
---------------------------------------------------------------------------
balance, April 27, 2003 $ 744 6,245 6,989
adjustments in fiscal 2004 178 (684) (506)
paid in fiscal 2004 (422) (1,227) (1,649)
---------------------------------------------------------------------------
balance, May 2, 2004 500 4,334 4,834
adjustments in fiscal 2005 (214) (169) (383)
paid in fiscal 2005 (86) (778) (864)
---------------------------------------------------------------------------
balance, May 1, 2005 200 3,387 3,587
adjustments in fiscal 2006 (66) (241) (307)
paid in fiscal 2006 (46) (822) (868)
---------------------------------------------------------------------------
balance, April 30, 2006 $ 88 2,324 2,412
---------------------------------------------------------------------------
As of April 30, 2006 and May 1, 2005, there were no assets classified as
held for sale.
Wet Printed Flock Restructuring
In April 2002, management and the company's board of directors approved a
plan to exit the wet printed flock upholstery fabric business. The exit
plan involved closing a printing facility and flocking operation within the
velvet fabrics manufacturing operations, reduction in related selling and
administrative expenses and termination of 86 employees.
During fiscal 2004, due to management's continual evaluation of the
restructuring accrual, the reserve was reduced $101,000 to reflect current
estimates of employee termination benefits and future health care claims
and reduced $277,000 to reflect current estimates of other exit costs. The
company also recognized a restructuring credit of $171,000 related to the
sale of assets classified as held for sale in connection with the
restructuring.
During fiscal 2005, assets held for sale consisting of land and a building
valued at $180,000 were sold, resulting in a restructuring credit of
$54,000. An additional restructuring credit of $84,000 was recognized
relating to lease termination and other exit costs.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
---------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
---------------------------------------------------------------------------
balance, April 27, 2003 $ 96 447 543
adjustments in fiscal 2004 (101) (277) (378)
paid in fiscal 2004 5 (70) (65)
---------------------------------------------------------------------------
balance, May 2, 2004 - 100 100
adjustments in fiscal 2005 - (84) (84)
paid in fiscal 2005 - (16) (16)
---------------------------------------------------------------------------
balance, May 1, 2005 $ - - -
---------------------------------------------------------------------------
As of May 1, 2005, there were no assets classified as held for sale.
55
Fiscal 2001 Culp Decorative Fabrics Restructuring
During fiscal 2001, management and the company's board of directors
approved a restructuring plan in its upholstery fabric segment which
involved (1) the consolidation of certain fabric manufacturing capacity
within CDF, (2) closing one of the company's four yarn manufacturing
plants, (3) an extensive reduction in selling, general and administrative
expenses including the termination of 110 employees and (4) a comprehensive
SKU reduction initiative related to finished goods and raw materials in
CDF.
During fiscal 2004, as a result of management's continual evaluation of the
restructuring accrual, the reserve was increased $33,000 to reflect current
estimates of future health care claims and reduced $32,000 to reflect
current estimates of other exit costs.
During fiscal 2005, as a result of management's continual evaluation of the
restructuring accrual, the reserve was reduced $12,000 to reflect current
estimates of future health care claims.
During fiscal 2006, as a result of management's continual evaluation of the
restructuring accrual, the reserve was increased $109,000 to reflect
current estimates of future health care claims. Additionally, the company
recorded a restructuring related charge of $34,000 for other operating
costs associated with the closed plant facility.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
---------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
---------------------------------------------------------------------------
balance, April 27, 2003 $ 35 176 211
adjustments in fiscal 2004 33 (32) 1
paid in fiscal 2004 (34) (144) (178)
---------------------------------------------------------------------------
balance, May 2, 2004 34 - 34
adjustments in fiscal 2005 (12) - (12)
paid in fiscal 2005 (12) - (12)
---------------------------------------------------------------------------
balance, May 1, 2005 10 - 10
adjustments in fiscal 2006 109 - 109
paid in fiscal 2006 (114) - (114)
---------------------------------------------------------------------------
balance, April 30, 2006 $ 5 - 5
---------------------------------------------------------------------------
As of April 30, 2006 and May 1, 2005, there were no assets classified as
held for sale.
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
April 30, May 1,
(dollars in thousands) 2006 2005
---------------------------------------------------------------------------
customers $ 30,924 30,803
allowance for doubtful accounts (1,049) (1,142)
reserve for returns and allowances and discounts (826) (837)
---------------------------------------------------------------------------
$ 29,049 28,824
---------------------------------------------------------------------------
56
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
beginning balance $ (1,142) (1,442) (1,558)
provision for bad debts (5) 272 (139)
net write-offs 98 28 255
---------------------------------------------------------------------------
ending balance $ (1,049) (1,142) (1,442)
---------------------------------------------------------------------------
A summary of the activity in the allowance for returns and allowances and
discounts follows:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
beginning balance $ (837) (903) (763)
provision for returns and allowances
discounts (1,834) (2,144) (2,465)
discounts taken 1,845 2,210 2,325
---------------------------------------------------------------------------
ending balance $ (826) (837) (903)
---------------------------------------------------------------------------
4. INVENTORIES
A summary of inventories follows:
April 30, May 1,
(dollars in thousands) 2006 2005
---------------------------------------------------------------------------
raw materials $ 13,561 23,204
work-in-process 2,020 3,000
finished goods 21,112 24,295
---------------------------------------------------------------------------
$ 36,693 50,499
---------------------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
depreciable lives April 30, May 1,
(dollars in thousands) (in years) 2006 2005
---------------------------------------------------------------------------
land and improvements 10 $ 2,051 2,779
buildings and improvements 7-40 21,372 30,798
leasehold improvements 7-10 3,194 1,954
machinery and equipment 3-12 93,452 134,179
office furniture and equipment 3-10 6,062 8,463
capital projects in progress 951 4,880
---------------------------------------------------------------------------
127,082 183,053
accumulated depreciation and amortization (82,443) (117,021)
---------------------------------------------------------------------------
$ 44,639 66,032
---------------------------------------------------------------------------
The company incurred total capital expenditures of $6.5 million $14.4
million , and $6.7 million in fiscal years 2006, 2005 and 2004,
respectively. The non-cash portion of these capital expenditures
representing vendor financing totaled $942,000, $1.5 million and $331,000
in fiscal years 2006, 2005 and 2004, respectively.
57
6. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
beginning balance $ 4,114 9,240 9,240
impairment charge - (5,126) -
---------------------------------------------------------------------------
ending balance $ 4,114 4,114 9,240
---------------------------------------------------------------------------
7. ACCOUNTS PAYABLE
A summary of accounts payable follows:
April 30, May 1,
(dollars in thousands) 2006 2005
---------------------------------------------------------------------------
accounts payable - trade $ 18,386 19,688
accounts payable - capital expenditures 2,449 3,164
---------------------------------------------------------------------------
$ 20,835 22,852
---------------------------------------------------------------------------
8. ACCRUED EXPENSES
A summary of accrued expenses follows:
April 30, May 1,
(dollars in thousands) 2006 2005
---------------------------------------------------------------------------
compensation, commissions and related benefits $ 4,757 5,483
interest 433 448
accrued rebates 705 1,444
other 1,950 2,181
---------------------------------------------------------------------------
$ 7,845 9,556
---------------------------------------------------------------------------
9. INCOME TAXES
Total income taxes (benefits) were allocated as follows:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
income (loss) from operations $ (8,081) (10,942) 3,556
shareholders' equity, related to
the tax benefit arising from the
exercise of stock options (21) (4) (60)
shareholders' equity, related to tax
effect of cash flow hedge 11 - -
---------------------------------------------------------------------------
$ (8,091) (10,946) 3,496
---------------------------------------------------------------------------
58
Income tax expense (benefit) attributable to income (loss) from operations
consists of:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
current
federal $ - - -
state - - -
foreign 2,066 1,080 222
---------------------------------------------------------------------------
2,066 1,080 222
---------------------------------------------------------------------------
deferred
federal (8,742) (10,852) 3,144
state (970) (1,000) 520
foreign (455) (170) (330)
---------------------------------------------------------------------------
(10,167) (12,022) 3,334
---------------------------------------------------------------------------
$ (8,081) (10,942) 3,556
---------------------------------------------------------------------------
Income before income taxes related to the company's foreign operations for
the years ended April 30, 2006, May 1, 2005 and May 2, 2004, was $6.5
million, $5.9 million and $2.7 million, respectively.
Under a tax holiday in the People's Republic of China, the company was
granted an exemption from income taxes for two years commencing from the
first profit-making year on a calendar year basis and a 50% reduction in
the income tax rates for the following three years. Calendar year 2004 was
the first profit-making year. The company is entitled to a 50% income tax
reduction for the calendar years 2006, 2007, and 2008. The applicable
income tax rate is 27%. Had the company not been entitled to the tax
holiday, the income tax benefit for fiscal year 2006 and 2005 would have
been $6.9 million and $10.5 million, respectively.
The following schedule summarizes the principal differences between income
tax expense (benefit) at the federal income tax rate and the effective
income tax rate reflected in the consolidated financial statements:
2006 2005 2004
---------------------------------------------------------------------------
federal income tax rate (34.0)% (34.0)% 34.0%
state income taxes, net of federal
income tax benefit (5.1) (4.8) 3.2
extraterritorial income (2.9) 0.3 (0.1)
adjustment to estimated income tax
accruals (0.0) (0.0) (5.6)
other 1.3 0.5 1.5
---------------------------------------------------------------------------
(40.7)% (38.0)% 33.0%
---------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities consist of the
following:
(dollars in thousands) 2006 2005
---------------------------------------------------------------------------
deferred tax assets:
accounts receivable $ 642 656
inventories 2,812 2,846
goodwill 5,748 6,939
compensation 1,181 1,064
liabilities and reserves 1,286 2,605
alternative minimum tax 1,320 1,320
net operating loss carryforwards 18,405 9,819
---------------------------------------------------------------------------
gross deferred tax assets 31,394 25,249
valuation allowance - -
---------------------------------------------------------------------------
total deferred tax assets 31,394 25,249
---------------------------------------------------------------------------
deferred tax liabilities:
property, plant and equipment, net (4,038) (8,070)
other (60) (39)
---------------------------------------------------------------------------
total deferred tax liabilities (4,098) (8,109)
---------------------------------------------------------------------------
$ 27,296 17,140
---------------------------------------------------------------------------
59
Federal and state net operating loss carryforwards with related tax
benefits of $18.4 million at April 30, 2006 and principally expire in 16-20
years, fiscal 2022 through fiscal 2026. The company also has an alternative
minimum tax credit carryforward of approximately $1.3 million for federal
income tax purposes that does not expire.
The realization of the company's deferred tax assets is dependent upon the
generation of future taxable income attributable from U.S. operations. The
company assesses the need to establish a valuation allowance against its
deferred tax assets to the extent the company no longer believes it is more
likely than not that the tax assets will be fully utilized. Management
considers the scheduled reversal of deferred tax liabilities, projected
future taxable income exclusive of reversing temporary differences and
carryforwards, and tax planning strategies in making this assessment. Based
upon the level of historical taxable income and projections for future
operations, management believes it is more likely than not that the company
will generate sufficient taxable income to realize the existing deferred
tax assets. The amount of the deferred tax assets considered realizable,
however, could be reduced if estimates of future taxable income during the
carryforward period are reduced.
Income tax payments, net of income tax refunds, were $1.4 million in fiscal
2006 and $1.3 million in fiscal 2005. Income tax refunds, net of income tax
payments, were $1.3 million in fiscal 2004.
10. LONG-TERM DEBT
A summary of long-term debt follows:
April 30, May 1,
(dollars in thousands) 2006 2005
---------------------------------------------------------------------------
unsecured term notes $ 42,440 49,975
real estate loan 4,242 -
canadian government loans 1,040 575
---------------------------------------------------------------------------
47,722 50,550
current maturities (8,060) (8,110)
---------------------------------------------------------------------------
$ 39,662 42,440
---------------------------------------------------------------------------
Unsecured Term Notes
The company's unsecured 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 three years beginning March 2007 through March
2010. The principal payments are required to be paid in annual installments
over the next four years as follows: 2007 - $7.5 million; 2008 - $19.9
million; 2009 - $7.5 million; and 2010 - $7.5 million. the Company made its
first annual principal payment of $7.5 million on March 15, 2006.
Real Estate Loan
In October 2005, the company entered into an agreement with its bank 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
September 2010, with a final payment of $3.3 million in October, 2010.
Revolving Credit Agreement
In August of 2005, the company amended its credit agreement with its bank
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 April 30, 2006, there were $4.0 million in outstanding
letters of credit and no borrowings outstanding under the agreement.
60
On December 7, 2005, the company entered into a Seventh Amendment to this
credit agreement. This agreement required the company to maintain collected
deposit balances of at least $3.0 million after March 15, 2006.
Additionally, this amendment reduced 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 this
credit agreement. This agreement raised the company's capital expenditures
limit to $6.5 million for the year ending April 30, 2006.
On July 20, 2006, the company entered into a Ninth Amendment to this credit
agreement. This agreement extended the expiration date of the agreement
from August 31, 2006 to August 31, 2007, limits annual capital expenditures
to $2.5 million for fiscal 2007, and requires the company to maintain
collected deposit balances of at least $2 million. The amended agreement
also requires the company to maintain certain other financial covenants as
defined in the agreement.
Canadian Government Loans
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 which was paid in May 2006. At April 30, 2006, the balance of
the term loan entered into in November 2005 and the existing term loan were
$716,000 and $324,000, respectively.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At April 30, 2006, the
company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five
fiscal years are: 2007 - $8.1 million; 2008 - $20.0 million; 2009- $7.8
million; 2010 - $7.8 million; 2011 - $3.6 million; and thereafter
- $477,000.
Interest paid during 2006, 2005 and 2004 totaled $4.1 million, $3.9 million
and $5.9 million, respectively.
11. COMMITMENTS AND CONTINGENCIES
The company leases certain office, manufacturing and warehouse facilities
and equipment, primarily computers and vehicles, under noncancellable
operating leases. Lease terms related to real estate range from one to
three years with renewal options for additional periods ranging from two to
ten years. The leases generally require the company to pay real estate
taxes, maintenance, insurance and other expenses. Rental expense for
operating leases was $3.6 million in fiscal 2006; $5.0 million in fiscal
2005; and $5.0 million in fiscal 2004. Future minimum rental commitments
for noncancellable operating leases are $3.4 million in fiscal 2007; $2.2
million in fiscal 2008; $873,000 in fiscal 2009; $150,000 in fiscal 2010;
and $40,000 in fiscal 2011. Management expects that in the normal course of
business, these leases will be renewed or replaced by other operating
leases.
The company is involved in legal proceedings and claims which have arisen
in the ordinary course of its business. These actions, when ultimately
concluded and settled, will not, in the opinion of management, have a
material adverse effect upon the financial position, results of operations
or cash flows of the company.
61
12. STOCK OPTION PLANS
The company has a fixed stock option plan (1993 Stock Option Plan) under
which options to purchase common stock may be granted to officers,
directors and key employees. At April 30, 2006, 391,500 shares of common
stock were authorized for issuance under the plan. Of this total, none
remain available for grant. Options are generally exercisable from one to
five years after the date of grant and generally expire five to ten years
after the date of grant.
No compensation cost has been recognized for this stock option plan as
options were granted at an option price not less than fair market value at
the date of grant.
A summary of the status of this plan as of April 30, 2006, May 1, 2005, and
May 2, 2004 and changes during the years ended on those dates is presented
below:
2006 2005 2004
- -------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------
outstanding at beginning
of year 556,450 $ 7.56 682,450 $ 7.65 775,500 $ 7.91
exercised (104,200) 3.55 (3,250) 3.44 (31,175) 4.35
canceled/expired (60,750) 7.71 (122,750) 8.18 (61,875) 12.33
- -------------------------------------------------------------------------------------------------------------
outstanding at end of year 391,500 8.60 556,450 7.56 682,450 7.65
- -------------------------------------------------------------------------------------------------------------
options exercisable at
year-end 391,500 $ 8.60 499,950 $ 7.95 512,950 $ 8.88
weighted-average fair value of
options granted during the
year $ 0.00 $ 0.00 $ 0.00
- -------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 4/30/06 Contractual Life Exercise Price at 4/30/06 Exercise Price
- -------------------------------------------------------------------------------------------------------------
$ 3.05 - $ 3.05 7,500 5.4 years $3.05 7,500 $3.05
$ 4.00 - $ 7.50 173,375 0.5 4.35 173,375 4.35
$ 7.63 - $ 7.63 90,000 2.4 7.63 90,000 7.63
$ 9.13 - $ 12.13 42,000 1.8 10.56 42,000 10.56
$ 13.34 - $ 20.94 78,625 1.2 18.59 78,625 18.59
- -------------------------------------------------------------------------------------------------------------
391,500 1.3 $8.60 391,500 $8.60
- -------------------------------------------------------------------------------------------------------------
During September 1997, the company's shareholders approved the 1997 option
plan which provides for the one-time grant to certain officers and senior
managers of options to purchase 106,000 shares of the company's common
stock at $1.00 per share. Options under the plan are generally exercisable
on January 1, 2006. As of April 30, 2006, the 71,000 options outstanding
under the plan have exercise prices of $1.00 and a weighted-average
remaining contractual life of 0.7 years. There were no options exercised
during fiscal 2006, 2005 and 2004, respectively. Compensation expense
recorded under the plan was $139,000 for fiscal 2006 and $210,000 for
fiscal 2005 and 2004, respectively.
During September 2002, the company's shareholders approved the 2002 option
plan under which options to purchase up to 1,000,000 shares of common stock
may be granted to officers, directors and key employees. Of this total,
467,750 remain available for grant. Options are generally exercisable from
one to four years after the date of grant and generally expire five to ten
years after the date of grant. No compensation cost has been recognized for
this stock option plan as options are granted under the plan at an option
price not less than the fair market value at the date of grant.
62
A summary of the status of this plan as of April 30, 2006, May 1, 2005,
and May 2, 2004 and changes during the years ended on those dates is
presented below:
2006 2005 2004
- -------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------
outstanding at beginning
of year 276,125 $ 8.95 180,000 $ 10.25 93,250 $ 13.43
granted 257,000 4.59 128,750 7.14 88,750 6.99
exercised 0 0.00 (875) 6.61 0 0.00
canceled/expired (1,750) 13.99 (31,750) 9.51 (2,000) 6.61
- -------------------------------------------------------------------------------------------------------------
outstanding at end of year 531,375 6.82 276,125 8.95 180,000 10.25
- -------------------------------------------------------------------------------------------------------------
options exercisable at
year-end 157,875 $ 9.38 85,250 $ 10.57 43,000 $ 11.62
weighted-average fair value of
options granted during the
year $ 2.52 $ 4.26 $ 4.07
- -------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 4/30/06 Contractual Life Exercise Price at 4/30/06 Exercise Price
- -------------------------------------------------------------------------------------------------------------
$ 4.59 - $ 4.59 257,000 4.7 years $ 4.59 14,000 $ 4.59
$ 6.61 - $ 6.61 64,625 2.1 6.61 31,875 6.61
$ 7.13 - $ 7.27 118,750 3.6 7.14 38,125 7.17
$ 9.37 - $ 9.57 22,500 6.9 9.47 22,500 9.47
$ 13.99 - $ 13.99 68,500 1.1 13.99 51,375 13.99
- -------------------------------------------------------------------------------------------------------------
531,375 3.8 $ 6.82 157,875 $ 9.38
- -------------------------------------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2006, 2005 and 2004, respectively: dividend
yield of 0%, 0%, and 0%; risk-free interest rates of 4.4%, 4.2%, and 1.9%;
expected volatility of 74%, 77%, and 80%, and expected life of 8.5 years.
13. DERIVATIVES
The company applies the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by
SFAS No. 137, SFAS No. 138 and SFAS No. 149, requires the company to
recognize all derivative instruments on the balance sheet at fair value.
These statements also establish new accounting rules for hedging
instruments, which depend on the nature of the hedge relationship. A fair
value hedge requires that the effective portion of the change in the fair
value of a derivative instrument be offset against the change in the fair
value of the underlying asset, liability, or firm commitment being hedged
through earnings. A cash flow hedge requires that the effective portion of
the change in the fair value of a derivative instrument be recognized in
Other Comprehensive Income ("OCI"), a component of Shareholders' Equity,
and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The ineffective portion of a
derivative instrument's change in fair value is immediately recognized in
earnings.
63
In connection with the company's real estate loan with its bank, 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 in 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 agreement at April 30, 2006 was $29,000 as determined by quoted market
prices.
14. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average
number of shares outstanding during the period. Diluted net income per
share uses the weighted-average number of shares outstanding during the
period plus the dilutive effect of stock options calculated using the
treasury stock method. Weighted average shares used in the computation of
basic and diluted net income (loss) per share are as follows:
(in thousands) 2006 2005 2004
---------------------------------------------------------------------------
weighted-average common
shares outstanding, basic 11,567 11,549 11,525
effect of dilutive stock options - - 252
---------------------------------------------------------------------------
weighted-average common
shares outstanding, diluted 11,567 11,549 11,777
---------------------------------------------------------------------------
Options to purchase 504,938, 495,969 and 348,337 shares of common stock
were not included in the computation of diluted net income (loss) per share
for fiscal 2006, 2005 and 2004, respectively, because the exercise price of
the options was greater than the average market price of the common shares.
Options to purchase 50,385 and 143,970 shares were not included in the
computation of diluted net income (loss) per share for fiscal 2006 and
2005, respectively, because the company incurred a net loss for these
fiscal years.
15. BENEFIT PLANS
The company has a defined contribution plan which covers substantially all
employees and provides for participant contributions on a pre-tax basis and
discretionary matching contributions by the company, which are determined
annually. Company contributions to the plan were $1.0 million in fiscal
2006, $1.5 million in fiscal 2005; and $1.6 million in fiscal 2004.
In addition to the defined contribution plan, the company implemented a
nonqualified deferred compensation plan covering officers and certain other
associates in fiscal 2003. The plan provides for participant deferrals on a
pre-tax basis and non-elective contributions made by the company. Company
contributions to the plan were $72,000 for fiscal 2006 and $62,000 for
fiscal 2005 and fiscal 2004, respectively. The company's nonqualified plan
liability of $650,000 and $491,000 at April 30, 2006 and May 1, 2005,
respectively, is included in accrued expenses in the Consolidated Balance
Sheets.
16. SEGMENT INFORMATION
The company's operations are classified into two business segments:
mattress fabrics and upholstery fabrics. The mattress fabrics segment
manufactures and sells fabrics to bedding manufacturers. The upholstery
fabrics segment manufactures and sells fabrics primarily to residential and
commercial (contract) furniture manufacturers.
64
International sales, of which 89%, 97% and 98% were denominated in U. S.
dollars in 2006, 2005 and 2004, respectively, accounted for 18%, 11% and
11% of net sales in 2006, 2005 and 2004, respectively, and are summarized
by geographic area as follows:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
north america (excluding USA) $ 18,944 22,503 26,740
far east and asia 28,104 8,690 6,954
all other areas 501 1,056 1,557
---------------------------------------------------------------------------
$ 47,549 32,249 35,251
---------------------------------------------------------------------------
The company evaluates the operating performance of its segments based upon
income (loss) from operations before restructuring and related charges or
credits, goodwill impairment, and certain unallocated corporate expenses.
Unallocated corporate expenses represent primarily compensation and
benefits of certain executive officers and all costs related to being a
public company. Segment assets include assets used in the operation of each
segment and consist of accounts receivable, inventories, and property,
plant, and equipment.
Sales and gross profit for the company's operating segments are as follows:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
net sales:
upholstery fabrics $ 167,413 181,066 211,794
mattress fabrics 93,688 105,432 106,322
---------------------------------------------------------------------------
$ 261,101 286,498 318,116
---------------------------------------------------------------------------
gross profit:
upholstery fabrics $ 14,909 16,899 34,946
mattress fabrics 13,579 16,819 23,376
---------------------------------------------------------------------------
total segment gross profit 28,488 33,718 58,322
restructuring related charges (4,620)(1) (7,561)(4) -
---------------------------------------------------------------------------
$ 23,868 26,157 58,322
---------------------------------------------------------------------------
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
selling, general, and administrative
expenses:
upholstery fabrics $ 15,863 23,334 28,110
mattress fabrics 6,724 7,430 8,390
unallocated corporate 3,345 4,480 4,519
---------------------------------------------------------------------------
total segment selling, general,
and administrative expenses 25,932 35,244 41,019
restructuring related charges 3,022(2) 113(5) -
---------------------------------------------------------------------------
$ 28,954 35,357 41,019
---------------------------------------------------------------------------
income (loss) from operations:
upholstery fabrics $ (954) (6,435) 6,836
mattress fabrics 6,855 9,389 14,986
---------------------------------------------------------------------------
total income from operations 5,901 2,954 21,822
unallocated corporate expenses (3,345) (4,480) (4,519)
goodwill impairment - (5,126)(6) -
restructuring and related charges (17,915)(3) (18,046)(7) 1,047
---------------------------------------------------------------------------
$ (15,359) (24,698) 18,350
---------------------------------------------------------------------------
65
(1) The $4.6 million represents restructuring related charges of $2.0 million
for inventory markdowns, $1.9 million for accelerated depreciation, and
$665,000 for operating costs associated with the closing of or closed plant
facilities. These items primarily relate to the upholstery fabrics segment.
(2) The $3.0 million represents accelerated depreciation. This charge primarily
relates to the upholstery fabrics segment.
(3) The $17.9 million represents restructuring and related charges of $6.0
million for write-downs of buildings and equipment, $5.0 million for
accelerated depreciation, $2.2 million for asset movement costs, $2.0
million for inventory markdowns, $1.7 million for employee termination
benefits, $665,000 for operating costs associated with the closing of or
closed plant facilities, and $316,000 for lease termination and other exit
costs. These items primarily relate to the upholstery fabrics segment.
(4) The $7.6 million represents restructuring and related charges of $6.0
million for accelerated depreciation and $1.6 million for inventory
markdowns. These items primarily relate to the upholstery fabrics segment.
(5) The $113,000 represents accelerated depreciation. This charge primarily
relates to the upholstery fabrics segment.
(6) The $5.1 million represents a goodwill impairment charge related to CDF.
(7) The $18.0 million represents $6.0 million for accelerated depreciation,
$5.7 million for write-downs of buildings and equipment, $2.5 million
related to asset movement costs, $2.2 million related to termination
benefits, and $1.6 million for inventory markdowns. These items primarily
relate to the upholstery fabrics segment.
One customer within the upholstery fabrics segment represented
approximately 13%, 15% and 13% of consolidated net sales for fiscal 2006,
2005 and 2004, respectively. No other customer accounted for 10% or more of
consolidated net sales during those years.
66
Balance sheet information for the company's operating segments follow:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
segment assets
mattress fabrics
current assets $ 21,179 24,951 24,639
property, plant, and equipment 25,357(8) 26,658(8) 23,126(8)
---------------------------------------------------------------------------
total mattress fabrics assets $ 46,536 51,609 47,765
---------------------------------------------------------------------------
upholstery fabrics
current assets $ 44,563 54,372 55,125
property, plant, and equipment 19,229(9) 39,273(9) 54,644(9)
---------------------------------------------------------------------------
total upholstery fabrics
assets $ 63,792 93,645 109,769
---------------------------------------------------------------------------
total segment assets 110,328 145,254 157,534
non-segment assets
cash and cash equivalents 9,714 5,107 14,568
deferred income taxes 27,296 17,140 9,256
other current assets 1,287 2,691 1,722
property, plant, and equipment 53 101 -
assets held for sale 3,111 - -
goodwill 4,114 4,114 9,240
other assets 1,564 1,716 1,496
---------------------------------------------------------------------------
total assets $ 157,467 176,123 193,816
---------------------------------------------------------------------------
capital expenditures:
mattress Fabrics $ 3,659 6,321 913
upholstery Fabrics 2,811 1,895 5,834
unallocated corporate - 6,144(10) -
---------------------------------------------------------------------------
$ 6,470 14,360 6,747
---------------------------------------------------------------------------
depreciation expense
mattress fabrics $ 3,662 3,635 3,753
upholstery fabrics 5,740 9,227 9,889
---------------------------------------------------------------------------
total segment depreciation
expense 9,402 12,862 13,642
accelerated depreciation -
upholstery fabrics 4,960 6,022 -
---------------------------------------------------------------------------
$ 14,362 18,884 13,642
---------------------------------------------------------------------------
(8) Included in property, plant, and equipment are assets located in the U.S.
totaling $12.9 million, $12.2 million, and $9.8 million, for fiscal 2006,
2005, and 2004, respectively.
(9) Included in property, plant, and equipment are assets located in the U.S.
totaling $13.8 million, $36.2 million, and $51.5 million for fiscal 2006,
2005, and 2004, respectively. Included in this U.S. property, plant, and
equipment are various other corporate allocations totaling $4.1 million and
$4.2 million at April 30, 2006 and May 1, 2005, respectively.
(10) Unallocated corporate expenditures for fiscal 2005 primarily represent
capital spending for the new corporate office building.
67
17. RELATED PARTY TRANSACTIONS
A director of the company is also an officer and director of a major
customer of the company. The amount of net sales to this customer was
approximately $33.3 million in fiscal 2006, $42.3 million in fiscal 2005;
and $41.8 million in fiscal 2004. The amount due from this customer at
April 30, 2006 and May 1, 2005 was approximately $2.4 million and $3.7
million, respectively.
Rents paid to entities owned by certain shareholders and officers of the
company and their immediate families were approximately $158,000 in fiscal
2006, $622,000 in fiscal 2005, and $682,000 in fiscal 2004. Effective May
2, 2005, the company modified a lease agreement with a related party to
reduce their monthly base rent from $45,375 to $15,000 and extend the
expiration date from February 2006 to April 2007.
18. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of net income (loss) and other
changes in equity, except those resulting from investments by shareholders
and distributions to shareholders not reflected in net income (loss).
A summary of comprehensive income (loss) follows:
(dollars in thousands) 2006 2005 2004
---------------------------------------------------------------------------
net income (loss) $ (11,796) (17,852) 7,220
gain on cash flow hedge, net of taxes 18 - -
---------------------------------------------------------------------------
$ (11,778) (17,852) 7,220
---------------------------------------------------------------------------
19. RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, and
amendment of ARB No. 43, Chapter 4," which clarifies the types of costs
that should be expensed rather than capitalized as inventory. This
statement also clarifies the circumstances under which fixed overhead costs
associated with operating facilities involved in inventory processing
should be capitalized. The provisions of SFAS No. 151 are effective for
fiscal years beginning after June 15, 2005 and the company will adopt this
standard in the first quarter of fiscal 2007. The company does not expect
there to be any material effect on its consolidated financial statements
upon adoption of the new standard.
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 the first quarter
of fiscal 2007. The company does not expect there to be any material effect
on its consolidated financial statements upon adoption of this new
standard.
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 was effective for the
company on April 30, 2006. The adoption of FIN 47 did not have a material
effect on the company's consolidated financial statements.
68
SELECTED QUARTERLY DATA
fiscal fiscal fiscal fiscal fiscal fiscal fiscal fiscal
2006 2006 2006 2006 2005 2005 2005 2005
4th 3rd 2nd 1st 4th 3rd 2nd 1st
(amounts in thousands, except per share amounts) quarter quarter quarter quarter quarter quarter quarter quarter
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) STATEMENT DATA
net sales $ 70,718 61,035 67,006 62,340 74,183 69,060 75,406 67,849
cost of sales 63,135 56,858 61,455 55,785 68,835 66,493 65,839 59,174
- ---------------------------------------------------------------------------------------------------------------------------------
gross profit 7,583 4,177 5,551 6,555 5,348 2,567 9,567 8,675
selling, general and administrative expenses 6,474 6,098 6,526 9,856 9,048 8,191 8,838 9,280
goodwill impairment - - - - - - 5,126 -
restructuring expense (credit) and asset
impairments 3,692 343 4,412 1,826 8,083 1,135 1,292 (138)
- ---------------------------------------------------------------------------------------------------------------------------------
loss from operations (2,583) (2,264) (5,387) (5,127) (11,783) (6,759) (5,689) (467)
interest expense 1,055 1,063 942 948 924 912 937 940
interest income (48) (43) (19) (16) (36) (42) (29) (27)
other expense 152 135 214 133 81 49 173 214
- ---------------------------------------------------------------------------------------------------------------------------------
loss before income taxes (3,742) (3,419) (6,524) (6,192) (12,752) (7,678) (6,770) (1,594)
income taxes (2,208) (1,250) (2,372) (2,251) (5,022) (2,801) (2,577) (542)
- ---------------------------------------------------------------------------------------------------------------------------------
net loss $ (1,534) (2,169) (4,152) (3,941) (7,730) (4,877) (4,193) (1,052)
- ---------------------------------------------------------------------------------------------------------------------------------
depreciation $ 2,087 2,439 3,665 6,172 4,379 7,605 3,538 3,362
- ---------------------------------------------------------------------------------------------------------------------------------
weighted average shares outstanding 11,594 11,562 11,559 11,551 11,550 11,550 11,549 11,547
weighted average shares outstanding,
assuming dilution 11,594 11,562 11,559 11,551 11,550 11,550 11,549 11,547
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
net loss per share - basic $ (0.13) (0.19) (0.36) (0.34) (0.67) (0.42) (0.36) (0.09)
net loss per share - diluted (0.13) (0.19) (0.36) (0.34) (0.67) (0.42) (0.36) (0.09)
book value 6.39 6.55 6.73 7.09 7.43 8.09 8.51 8.87
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
operating working capital (3) $ 44,907 49,915 53,755 56,620 56,471 57,750 59,926 61,468
property, plant and equipment, net 44,639 52,562 54,212 60,190 66,032 71,024 76,062 78,880
total assets 157,467 166,339 166,539 167,187 176,123 175,931 182,040 188,599
capital expenditures 657 390 1,379 4,044 6,033 2,776 1,008 4,543
long-term debt (1) 47,722 55,278 54,930 50,566 50,550 50,559 51,163 51,064
shareholders' equity 74,523 75,707 77,818 81,885 85,771 93,441 98,265 102,398
capital employed (2) 122,245 130,985 132,748 132,451 136,321 144,000 149,428 153,462
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS & OTHER DATA
gross profit margin 10.7% 6.8% 8.3% 10.5% 7.2% 3.7% 12.7% 12.8%
operating loss margin (3.7) (3.7) (8.0) (8.2) (15.9) (9.8) (7.5) (0.7)
net loss margin (2.2) (3.6) (6.2) (6.3) (10.4) (7.1) (5.6) (1.6)
effective income tax rate 59.0 36.6 36.4 36.4 39.4 36.5 38.1 34.0
long-term debt-to-total capital employed
ratio (1) 39.0 42.2 41.4 38.2 37.1 35.1 34.1 33.3
operating working capital turnover (3) 5.0 4.8 4.8 4.8 4.8 4.9 4.9 5.1
days sales in receivables 37 39 37 31 35 32 32 30
inventory turnover 6.4 5.7 5.1 4.3 5.7 5.6 5.2 4.7
- ---------------------------------------------------------------------------------------------------------------------------------
STOCK DATA
stock price
high $ 5.10 5.23 5.20 5.08 6.55 6.97 8.00 9.10
low 4.45 4.42 4.18 3.83 4.20 4.96 5.80 6.64
close 4.64 4.50 5.13 4.55 4.70 6.39 6.00 7.80
daily average trading volume (shares) 4.0 7.0 17.6 21.0 15.0 24.3 16.5 29.2
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Long-term debt includes long-term and current maturities of long-term debt.
(2) Capital employed includes long-term debt and shareholders' equity
(3) Operating working capital for this calculation is accounts receivable,
inventories and accounts payable
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 30, 2006, there were no changes of
accountants and/or disagreements on any matters of accounting principles or
practices or financial statement disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the evaluation, the principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act of 1934, as
amended, is accumulated and communicated to the Company's management, including
its principal executive officer and principal financial officer, as appropriate
to allow timely decisions regarding required disclosure and are effective to
provide reasonable assurance that such information is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission ("SEC") rules and forms.
Management's Report on Internal Control over Financial Reporting
In accordance with Section 404 of the Sarbanes-Oxley Act and SEC rules
thereunder, management has conducted an assessment of the Company's internal
control over financial reporting as of April 30, 2006. Management's report
regarding that assessment appears on page 41 of this report and is incorporated
herein by reference.
Changes in Internal Controls
There have been no changes in the Company's internal control over financial
reporting for the Company's fourth quarter ended April 30, 2006, that have
materially affected, or are reasonably likely to materially affect, the
company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
70
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to executive officers and directors of the company is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the caption "Nominees, Directors and
Executive Officers," which information is herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included in the company's
definitive Proxy Statement to be filed within 120 days after the end of the
company's fiscal year pursuant to Regulation 14A of the Securities and Exchange
Commission, under the caption "Executive Compensation," which information is
herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information with respect to the security ownership of certain beneficial owners
and management is included in the company's definitive Proxy Statement to be
filed within 120 days after the end of the company's fiscal year pursuant to
Regulation 14A of the Securities and Exchange Commission, under the caption
"Voting Securities," which information is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the subcaption "Certain Relationships
and Related Transactions," which information is herein incorporated by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to accountants fees and services is included in the
company's definitive Proxy Statement to be filed within 120 days after the end
of the company's fiscal year pursuant to Regulation 14A of the Securities and
Exchange Commission, under the caption "Fees Paid to Independent Registered
Public Accounting Firm," which information is herein incorporated by reference.
71
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Consolidated Financial Statements
The following consolidated financial statements of Culp, Inc. and its
subsidiaries are filed as part of this report.
Page of Annual
Report on
Item Form 10-K
- ---- ---------
Consolidated Balance Sheets - April 30, 2006 and May 1, 2005.......... 44
Consolidated Statements of Income (Loss) - for the years ended
April 30, 2006, May 1, 2005 and May 2, 2004.......................... 45
Consolidated Statements of Shareholders' Equity - for the years
ended April 30, 2006, May 1, 2005 and May 2, 2004.................... 46
Consolidated Statements of Cash Flows - for the years ended
April 30, 2006, May 1, 2005 and May 2, 2004.......................... 47
Notes to Consolidated Financial Statements............................ 48
Reports of Independent Registered Public Accounting Firm.............. 42
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
The following exhibits are attached at the end of this report, or
incorporated by reference herein. Management contracts, compensatory plans, and
arrangements are marked with an asterisk (*).
3(i) Articles of Incorporation of the company, as amended, were filed
as Exhibit 3(i) to the company's Form 10-Q for the quarter ended
July 28, 2002, filed September 11, 2002, and are incorporated
herein by reference.
3(ii) Restated and Amended Bylaws of the company, as amended June 12,
2001, were filed as Exhibit 3(ii) to the company's Form 10-Q for
the quarter ended July 29, 2001, filed September 12, 2001, and
are incorporated herein by reference.
72
10(b) Management Incentive Plan of the company, dated August 1986 and
amended July 1989, filed as Exhibit 10(o) to the company's Form
10-K for the year ended May 3, 1992, filed on August 4, 1992, and
is incorporated herein by reference. (*)
10(c) Lease Agreement, dated September 6, 1988, with Partnership 74 was
filed as Exhibit 10(h) to the company's Form 10-K for the year
ended April 28, 1991, filed on July 25, 1991, and is incorporated
herein by reference.
10(d) First Amendment of Lease Agreement dated July 27, 1992 with
Partnership 74 Associates was filed as Exhibit 10(n) to the
company's Form 10-K for the year ended May 2, 1993, filed on July
29, 1993, and is incorporated herein by reference.
10(e) Second Amendment of Lease Agreement dated June 15, 1994 with
Partnership 74 Associates was filed as Exhibit 10(v) to the
company's Form 10-Q for the quarter ended October 29, 1995, filed
on December 12, 1995, and is incorporated herein by reference.
10(f) 1993 Stock Option Plan was filed as Exhibit 10(o) to the
company's Form 10-K for the year ended May 2, 1993, filed on July
29, 1993, and is incorporated herein by reference. (*)
10(g) Amendments to 1993 Stock Option Agreement dated September 26,
2000. This amendment was filed as Exhibit 10(rr) to the company's
Form 10-Q for the quarter ended October 29, 2000, and is
incorporated herein by reference. (*)
10(h) Form of Note Purchase Agreement (providing for the issuance by
Culp, Inc. of its $20 million 6.76% Series A Senior Notes due
3/15/08 and its $55 million 6.76% Series B Senior Notes due
3/15/10), each dated March 4, 1998, between Culp, Inc. and each
of the following:
1. Connecticut General Life Insurance Company;
2. The Mutual Life Insurance Company of New York;
3. United of Omaha Life Insurance Company;
4. Mutual of Omaha Insurance Company;
5. The Prudential Insurance Company of America;
6. Allstate Life Insurance Company;
7. Life Insurance Company of North America; and
8. CIGNA Property and Casualty Insurance Company
This agreement was filed as Exhibit 10(ll) to the company's Form
10-K for the year ended May 3, 1998, filed on July 31, 1998, and
is incorporated herein by reference.
10(i) First Amendment, dated January 31, 2002 to Note Purchase
Agreement (providing for the issuance by Culp, Inc. of its $20
million 6.76% Series A Senior Notes due 3/15/08 and its $55
million 6.76% Series B Senior Notes due 3/15/10), each dated
March 4, 1998, between Culp, Inc. and each of the following:
1. Connecticut General Life Insurance Company;
2. Life Insurance Company of North America;
3. ACE Property and Casualty;
4. J. Romeo & Co.;
5. United of Omaha Life Insurance Company;
6. Mutual of Omaha Insurance Company;
7. The Prudential Insurance of America; and
8. Allstate Life Insurance Company
This amendment was filed as Exhibit 10(a) to the company's Form
10-Q for the quarter ended January 27, 2002, and is incorporated
herein by reference.
10(j) Rights Agreement, dated as of October 8, 1999, between Culp, Inc.
and EquiServe Trust Company, N.A., as Rights Agent, including the
form of Articles of Amendment with respect to the Series A
Participating Preferred Stock included as Exhibit A to the Rights
Agreement, the forms of Rights Certificate included as Exhibit B
to the Rights Agreement, and the form of Summary of Rights
included as Exhibit C to the Rights Agreement. The Rights
Agreement was filed as Exhibit 99.1 to the company's Form 8-K
dated October 12, 1999, and is incorporated herein by reference.
73
10(k) Form of Change of Control and Noncompetition Agreement, each
dated December 11, 2001, by and between the company and each of
Robert G. Culp, III, Franklin N. Saxon, Kenneth M. Ludwig, was
filed as Exhibit 10hh to the company's Form 10-K for the year
ended April 28, 2002, filed on July 26, 2002, and is incorporated
herein by reference. (*)
10(l) 2002 Stock Option Plan was filed as Exhibit 10(a) to the
company's Form 10-Q for the quarter ended January 26, 2003, filed
on March 12, 2003, and is incorporated herein by reference.(*)
10(m) Amended and Restated Credit Agreement dated as of August 23, 2002
among Culp, Inc. and Wachovia Bank, National Association, as
Agent and as Bank, was filed as Exhibit 10(a) to the company's
Form10-Q for the quarter ended July 28, 2002, filed September 11,
2002, and is incorporated herein by reference.
10(n) First Amendment to Amended and Restated Credit Agreement dated as
of March 17, 2003 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as exhibit 10(p) to
the company's form 10-K for the year ended April 27, 2003, filed
on July 25, 2003, and is incorporated here by reference.
10(o) Second Amendment to Amended and Restated Credit Agreement dated
as of June 3, 2003 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as exhibit 10(q) to
the company's form 10-K for the year ended April 27, 2003, filed
on July 25, 2003, and is incorporated here by reference.
10(p) Third Amendment to Amended and Restated Credit Agreement dated as
of August 23, 2004 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 10 to
the Current Report on Form 8-K dated August 26, 2004, and is
incorporated herein by reference.
10(q) Fourth Amendment to Amended and Restated Credit Agreement dated
as of December 7, 2004 among Culp, Inc. and Wachovia Bank,
National Association, as Agent and as Bank, was filed as Exhibit
10(b) to the company's form 10-Q for the quarter ended October
31, 2004, filed on December 9, 2004, and is incorporated here by
reference.
10(r) Fifth Amendment to Amended and Restated Credit Agreement dated as
of February 18, 2005 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 99(c) to
Current Report on form 8-K dated February 18, 2005, and is
incorporated herein by reference.
10(s) Severance Agreement and Waiver of Claims between Rodney A. Smith
and Culp, Inc. was filed as Exhibit 10.1 to Current Report on
form 8-K dated May 6, 2005, and is incorporated herein by
reference.
10(t) Sixth Amendment to Amended and Restated Credit Agreement dated as
of August 30, 2005 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 99(c) to
Current Report on form 8-K dated August 30, 2005, and is
incorporated herein by reference.
10(u) Real Estate Loan Commitment letter between Culp, Inc. and
Wachovia, National Association, was filed as Exhibit 99(d) to
Current Report on form 8-K dated August 30, 2005, and is
incorporated herein by reference.
10(v) Seventh Amendment to Amended and Restated Credit Agreement dated
as of December 7, 2005 among Culp, Inc. and Wachovia Bank,
National Association, as Agent and as Bank., was filed as Exhibit
10(c) to the company's form 10-Q for the quarter ended October
30, 2005, filed December 9, 2005, and is incorporated herein by
reference.
74
10(w) Eighth Amendment to Amended and Restated Credit Agreement dated
as of January 29, 2006 among Culp, Inc. and Wachovia Bank,
National Association, as Agent and as Bank., was filed as Exhibit
10(a) to the company's form 10-Q for the quarter ended January
29, 2006, filed March 10, 2006, and is incorporated herein by
reference.
21 List of subsidiaries of the company
23(a) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on Form
S-8 (File Nos. 33-13310, 33-37027, 33-80206, 33-62843, 333-27519,
333-59512, 333-59514 and 333-101850), dated March 20, 1987,
September 18, 1990, June 13, 1994, September 22, 1995, May 21,
1997, April 25, 2001, April 25, 2001 and December 12, 2002.
24(a) Power of Attorney of Jean L.P. Brunel, dated July 10, 2006
24(b) Power of Attorney of Howard L. Dunn, dated July 10, 2006
24(c) Power of Attorney of Patrick B. Flavin, dated July 10, 2006
24(d) Power of Attorney of Kenneth R. Larson, dated July 10, 2006
24(e) Power of Attorney of Kenneth W. McAllister, dated July 10, 2006
24(f) Power of Attorney of Patrick H. Norton, dated July 10, 2006
31(a) Certification of Principal Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
31(b) Certification of Principal Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
b) Exhibits:
The exhibits to this Form 10-K are filed at the end of this Form 10-K
immediately preceded by an index. A list of the exhibits begins on page 77 under
the subheading "Exhibits Index."
c) Financial Statement Schedules:
See Item 15(a) (2)
75
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, CULP, INC. has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 26th day of July 2006.
CULP, INC.
By: /s/ Robert G. Culp, III
-------------------
Robert G. Culp, III
Chairman and Chief Executive Officer
(principal executive officer)
By: /s/ Franklin N. Saxon
-----------------
Franklin N. Saxon
President and Chief Operating Officer
(principal financial officer)
By: /s/ Kenneth R. Bowling
------------------
Kenneth R. Bowling
Vice President Finance, Treasurer
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 26th day of July 2006.
/s/ Robert G. Culp, III /s/ Patrick H. Norton *
------------------- ------------------
Robert G. Culp, III Patrick H. Norton
(Chairman of the Board of Directors) (Director)
/s/ Franklin N. Saxon /s/ Jean L.P.. Brunel *
----------------- -----------------
Franklin N. Saxon Jean L.P. Brunel
(Director) (Director)
H. Bruce English
-------------------
(Director)
/s/ Howard L. Dunn, Jr.*
------------------- /s/ Kenneth R. Larson *
Howard L. Dunn, Jr. -------------------
(Director) Kenneth R. Larson
(Director)
/s/ Patrick B. Flavin*
-----------------
Patrick B. Flavin
(Director)
/s/ Kenneth W. McAllister*
---------------------
Kenneth W. McAllister
(Director)
* By Franklin N. Saxon, Attorney-in-Fact, pursuant to Powers of Attorney filed
with the Securities and Exchange Commission.
76
EXHIBIT INDEX
Exhibit Number Exhibit
- -------------- -------
21 List of subsidiaries of the company
23(a) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on
Form S-8 (File Nos. 33-13310, 33-37027, 33-80206, 33-62843,
333-27519, 333-59512, 333-59514 and 333-101850), dated March
20, 1987, September 18, 1990, June 13, 1994, September 22,
1995, May 21, 1997, April 25, 2001, April 25, 2001 and
December 12, 2002.
24(a) Power of Attorney of Jean L.P. Brunel, dated July 10, 2006
24(b) Power of Attorney of Howard L. Dunn, dated July 10, 2006
24(c) Power of Attorney of Patrick B. Flavin, dated July 10, 2006
24(d) Power of Attorney of Kenneth R. Larson, dated July 10, 2006
24(e) Power of Attorney of Kenneth W. McAllister, dated July 10,
2006
24(f) Power of Attorney of Patrick H. Norton, dated July 10, 2006
31(a) Certification of Principal Executive Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31(b) Certification of Principal Financial Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
77