================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 2, 2008
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 27265-1402
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to the filing
requirements for at least the past 90 days. [X] YES NO [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "accelerated filer, large accelerated filer, and smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one);
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Smaller Reporting Company [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [_] YES NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common shares outstanding at November 2, 2008: 12,652,527
Par Value: $0.05 per share
INDEX TO FORM 10-Q
For the period ended November 2, 2008
Page
------
Part I - Financial Statements
-----------------------------
Item 1. Financial Statements:
-----------------------------
Consolidated Statements of Operations -- Three and Six Months
Ended November 2, 2008 and October 28, 2007 I-1
Consolidated Balance Sheets -- November 2, 2008, October 28,
2007 and April 27, 2008 I-2
Consolidated Statements of Cash Flows -- Six Months Ended
November 2, 2008 and October 28, 2007 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Cautionary Statement Concerning Forward-Looking Information I-28
Item 2. Management's Discussion and Analysis of Financial Condition
--------------------------------------------------------------------
and Results of Operations I-29
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk I-47
-------------------------------------------------------------------
Item 4. Controls and Procedures I-47
--------------------------------
Part II - Other Information
---------------------------
Item 1. Legal Proceedings II-1
--------------------------
Item 1A. Risk Factors II-1
---------------------
Item 4. Submission of Matters To A Vote of Security Holders II-1
------------------------------------------------------------
Item 5. Other Information II-2
--------------------------
Item 6. Exhibits II-2
-----------------
Signatures II-4
Item 1. Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 2, 2008 AND OCTOBER 28, 2007
(UNAUDITED)
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
---------------------------------------------------------------------
Amounts Percent of Sales
-------------------------- ---------------------------
November 2, October 28, % Over November 2, October 28,
2008 2007 (Under) 2008 2007
------------ ------------ ------------ ------------ -------------
Net sales $ 52,263 64,336 (18.8)% 100.0 % 100.0 %
Cost of sales 49,115 55,914 (12.2)% 94.0 % 86.9 %
------------ ------------ ------------ ------------ -------------
Gross profit 3,148 8,422 (62.6)% 6.0 % 13.1 %
Selling, general and
administrative expenses 4,439 5,838 (24.0)% 8.5 % 9.1 %
Restructuring expense (credit) 8,634 (84) N.M. 16.5 % (0.1)%
------------ ------------ ------------ ------------ -------------
(Loss) income from operations (9,925) 2,668 N.M. (19.0)% 4.1 %
Interest expense 663 809 (18.0)% 1.3 % 1.3 %
Interest income (21) (63) (66.7)% (0.0)% (0.1)%
Other (income) expense (250) 463 N.M. (0.5)% 0.7 %
------------ ------------ ------------ ------------ -------------
(Loss) income before income taxes (10,317) 1,459 N.M. (19.7)% 2.3 %
Income taxes * 30,551 (95) N.M. N.M. (6.5)%
------------ ------------ ------------ ------------ -------------
Net (loss) income $ (40,868) 1,554 N.M. N.M. 2.4 %
============ ============ ============ ------------ -------------
Net (loss) income per share, basic $ (3.23) 0.12 N.M.
Net (loss) income per share, diluted $ (3.23) 0.12 N.M.
Average shares outstanding, basic 12,650 12,635 0.1 %
Average shares outstanding, diluted 12,650 12,809 (1.2)%
SIX MONTHS ENDED
---------------------------------------------------------------------
Amounts Percent of Sales
-------------------------- ---------------------------
November 2, October 28, % Over November 2, October 28,
2008 2007 (Under) 2008 2007
------------ ------------ ------------ ------------ -------------
Net sales $ 111,585 129,566 (13.9)% 100.0 % 100.0 %
Cost of sales 101,035 112,088 (9.9)% 90.5 % 86.5 %
------------ ------------ ------------ ------------ -------------
Gross profit 10,550 17,478 (39.6)% 9.5 % 13.5 %
Selling, general and
administrative expenses 9,823 12,159 (19.2)% 8.8 % 9.4 %
Restructuring expense 9,036 348 N.M. 8.1 % 0.3 %
------------ ------------ ------------ ------------ -------------
(Loss) income from operations (8,309) 4,971 N.M. (7.4)% 3.8 %
Interest expense 1,095 1,627 (32.7)% 1.0 % 1.3 %
Interest income (55) (121) (54.5)% (0.0)% (0.1)%
Other (income) expense (236) 695 N.M. (0.2)% 0.5 %
------------ ------------ ------------ ------------ -------------
(Loss) income before income taxes (9,113) 2,770 N.M. (8.2)% 2.1 %
Income taxes * 30,975 365 N.M. N.M. 13.2 %
------------ ------------ ------------ ------------ -------------
Net (loss) income $ (40,088) 2,405 N.M. N.M. 1.9 %
============ ============ ============ ------------ -------------
Net (loss) income per share, basic $ (3.17) 0.19 N.M.
Net (loss) income per share, diluted $ (3.17) 0.19 N.M.
Average shares outstanding, basic 12,649 12,609 0.3 %
Average shares outstanding, diluted 12,649 12,776 (1.0)%
*Percent of sales column for income taxes is calculated as a % of (loss) income
before income taxes.
See accompanying notes to consolidated financial statements.
I-1
CULP, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 2, 2008, OCTOBER 28, 2007 AND APRIL 27, 2008
UNAUDITED
(Amounts in Thousands)
Amounts Increase
----------------------- (Decrease)
November 2, October 28, ------------------------ * April 27,
2008 2007 Dollars Percent 2008
---------- ---------- ----------- ----------- ---------
Current assets:
Cash and cash equivalents $ 8,522 16,830 (8,308) (49.4)% 4,914
Accounts receivable 18,801 22,885 (4,084) (17.8)% 27,073
Inventories 36,307 41,518 (5,211) (12.6)% 35,394
Deferred income taxes -- 5,376 (5,376) (100.0)% 4,380
Assets held for sale 4,827 341 4,486 1,315.5 % 5,610
Income taxes receivable -- 491 (491) 100.0 % 438
Other current assets 1,100 1,271 (171) (13.5)% 1,328
---------- ---------- ----------- ----------- ---------
Total current assets 69,557 88,712 (19,155) (21.6)% 79,137
Property, plant and equipment, net 26,802 37,887 (11,085) (29.3)% 32,939
Goodwill 11,593 4,114 7,479 181.8 % 4,114
Deferred income taxes -- 25,762 (25,762) (100.0)% 29,430
Other assets 2,975 2,439 536 22.0 % 2,409
---------- ---------- ----------- ----------- ---------
Total assets $110,927 158,914 (47,987) (30.2)% 148,029
========== ========== =========== =========== =========
Current liabilities:
Current maturities of long-term debt $ 7,383 12,834 (5,451) (42.5)% 7,375
Current portion of obligation under
a capital lease 692 -- 692 100.0 % --
Lines of credit -- 4,016 (4,016) (100.0)% --
Accounts payable-trade 19,192 20,341 (1,149) (5.6)% 21,103
Accounts payable - capital expenditures 1,020 783 237 30.3 % 1,547
Accrued expenses 5,259 9,040 (3,781) (41.8)% 8,300
Accrued restructuring costs 1,790 2,356 (566) (24.0)% 1,432
Income taxes payable - current 1,074 -- 1,074 100.0 % 150
---------- ---------- ----------- ----------- ---------
Total current liabilities 36,410 49,370 (12,960) (26.3)% 39,907
Accounts payable - capital expenditures 1,000 -- 1,000 100.0 % 1,449
Income taxes payable - long-term 742 4,299 (3,557) (82.7)% 4,802
Deferred income taxes 1,185 -- 1,185 100.0 % 1,464
Obligation under capital lease 280 -- 280 100.0 % --
Long-term debt, less current maturities 24,803 22,120 2,683 12.1 % 14,048
---------- ---------- ----------- ----------- ---------
Total liabilities 64,420 75,789 (11,369) (15.0)% 61,670
Shareholders' equity 46,507 83,125 (36,618) (44.1)% 86,359
---------- ---------- ----------- ----------- ---------
Total liabilities and
shareholders' equity $110,927 158,914 (47,987) (30.2)% 148,029
========== ========== =========== =========== =========
Shares outstanding 12,653 12,635 18 0.1 % 12,648
========== ========== =========== =========== =========
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-2
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 2, 2008 AND OCTOBER 28, 2007
(UNAUDITED)
(Amounts in Thousands)
SIX MONTHS ENDED
------------------------
Amounts
------------------------
November 2, October 28,
2008 2007
----------- ----------
Cash flows from operating activities:
Net (loss) income $(40,088) 2,405
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation 4,723 2,892
Amortization of other assets 208 186
Stock-based compensation 219 366
Excess tax benefit related to stock options exercised -- (21)
Deferred income taxes 33,534 266
Restructuring expenses, net of gain on sale of related assets 7,812 73
Changes in assets and liabilities, net of effects of acquisition of business:
Accounts receivable 8,272 6,625
Inventories 526 (888)
Other current assets 211 553
Other assets 88 (31)
Accounts payable (3,203) (1,687)
Accrued expenses (3,048) 370
Accrued restructuring 358 (1,002)
Income taxes (2,698) (250)
----------- ----------
Net cash provided by operating activities 6,914 9,857
----------- ----------
Cash flows from investing activities:
Capital expenditures (1,333) (3,385)
Net cash paid for acquisition of business (11,365) --
Proceeds from the sale of buildings and equipment -- 2,045
----------- ----------
Net cash used in investing activities (12,698) (1,340)
----------- ----------
Cash flows from financing activities:
Proceeds from lines of credit -- 1,423
Proceeds from the issuance of long-term debt 11,000 --
Payments on vendor-financed capital expenditures (874) (499)
Payments on capital lease obligation (412) --
Payments on long-term debt (237) (3,206)
Debt issuance costs (106) --
Proceeds from common stock issued 21 405
Excess tax benefit related to stock options exercised -- 21
----------- ----------
Net cash provided by (used in) financing activities 9,392 (1,856)
----------- ----------
Increase in cash and cash equivalents 3,608 6,661
Cash and cash equivalents at beginning of period 4,914 10,169
----------- ----------
Cash and cash equivalents at end of period $ 8,522 16,830
=========== ==========
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(Dollars in thousands, except share data)
Capital Accumulated
Common Stock Contributed Retained Other Total
------------------------- in Excess Earnings Comprehensive Shareholders'
Shares Amount of Par Value (Deficit) Loss Equity
---------- ---------- ---------- ---------- ----------- ----------
Balance, April 29, 2007 12,569,291 $ 629 46,197 32,255 (4) $ 79,077
Cumulative effect of adopting FASB
Interpretation No. 48 -- -- -- 847 -- 847
Net income -- -- -- 5,385 -- 5,385
Stock-based compensation -- -- 618 -- -- 618
Loss on cash flow hedge, net of taxes -- -- -- -- (44) (44)
Excess tax benefit related to stock
options exercised -- -- 17 -- -- 17
Common stock issued in connection
with stock option plans 78,736 3 456 -- -- 459
---------- ---------- ---------- ---------- ----------- ----------
Balance, April 27, 2008 12,648,027 632 47,288 38,487 (48) 86,359
Net loss -- -- -- (40,088) -- (40,088)
Stock-based compensation -- -- 219 -- -- 219
Loss on cash flow hedge, net of taxes -- -- -- -- (4) (4)
Common stock issued in connection
with stock option plans 4,500 1 20 21
---------- ---------- ---------- ---------- ----------- ----------
Balance, November 2, 2008 12,652,527 $ 633 $ 47,527 $ (1,601) $ (52) $ 46,507
========== ========== ========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
I-4
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc. and
subsidiaries (the "company") include all adjustments, which are, in the opinion
of management, necessary for fair presentation of the results of operations and
financial position. All of these adjustments are of a normal recurring nature
except as disclosed in notes 3, 15, 16 and 20 to the consolidated financial
statements. Results of operations for interim periods may not be indicative of
future results. The unaudited consolidated financial statements should be read
in conjunction with the audited consolidated financial statements, which are
included in the company's annual report on Form 10-K filed with the Securities
and Exchange Commission on July 9, 2008 for the fiscal year ended April 27,
2008.
The company's six months ended November 2, 2008 and October 28, 2007 represent
27 and 26 week periods, respectively.
2. Significant Accounting Policies
Significant accounting policies adopted by the company in fiscal 2009 are as
follows:
Fair Value Measurements:
The company adopted SFAS No. 157, Fair Value Measurements ("SFAS 157") for
financial assets and liabilities and SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159") on April 28, 2008. SFAS
157 (1) creates a single definition of fair value, (2) establishes a framework
for measuring fair value, and (3) expands disclosure requirements about items
measured at fair value. SFAS 157 applies to both items recognized and reported
at fair value in the financial statements and items disclosed at fair value in
the notes to the financial statements. SFAS 157 does not change existing
accounting rules governing what can or what must be recognized and reported at
fair value in the company's financial statements, or disclosed at fair value in
the company's notes to the financial statements. Additionally, SFAS 157 does not
eliminate practicability exceptions that exist in accounting pronouncements
amended by SFAS 157 when measuring fair value. As a result, the company will not
be required to recognize any new assets or liabilities at fair value.
Prior to SFAS 157, certain measurements of fair value were based on the price
that would be paid to acquire an asset, or received to assume a liability (an
entry price). SFAS 157 clarifies the definition of fair value as the price that
would be received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at the measurement date (that
is, an exit price). The exit price is based on the amount that the holder of the
asset or liability would receive or need to pay in an actual transaction (or in
a hypothetical transaction if an actual transaction does not exist) at the
measurement date. In some circumstances, the entry and exit price may be the
same; however, they are conceptually different.
Fair value is generally determined based on quoted market prices in active
markets for identical assets or liabilities. If quoted market prices are not
available, the company uses valuation techniques that place greater reliance on
observable inputs and less reliance on unobservable inputs. In measuring fair
value, the company may make adjustments for risks and uncertainties, if a market
participant would include such an adjustment in its pricing.
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
SFAS 157 establishes a fair value hierarchy that distinguishes between
assumptions based on market data (observable inputs) and the company's
assumptions (unobservable inputs). Determining where an asset or liability falls
within that hierarchy depends on the lowest level input that is significant to
the fair measurement as a whole. An adjustment to the pricing method used within
either level 1 or level 2 inputs could generate a fair value measurement that
effectively falls in a lower level in the hierarchy. The hierarchy consists of
three broad levels as follows:
Level 1 - Quoted market prices in active markets for identical assets or
liabilities;
Level 2 - Inputs other than level 1 inputs that are either directly or
indirectly observable, and
Level 3 - Unobservable inputs developed using the company's estimates and
assumptions, which reflect those that market participants would use.
The following table presents information about assets and liabilities measured
at fair value on a recurring basis:
Fair value measurements at November 2, 2008 using:
-------------------------------------------------------------------------------------------------------------
Quoted prices in
active markets Significant
for identical Significant other unobservable
assets observable inputs inputs
-------------------------------------------------------------------------------------------------------------
(amounts in thousands) Level 1 Level 2 Level 3 Total
-------------------------------------------------------------------------------------------------------------
Assets:
None Not applicable Not applicable Not applicable Not applicable
Liabilities:
Interest Rate Swap Agreement Not applicable 82 Not applicable 82
As shown above, the interest rate swap derivative is valued based on fair value
provided by the company's bank and is classified within level 2 of the fair
value hierarchy. The determination of where an asset or liability falls in the
hierarchy requires significant judgment. The company evaluates its hierarchy
disclosures each quarter based on various factors and it is possible that an
asset or liability may be classified differently from quarter to quarter.
However, the company expects that changes in classifications between different
levels will be rare.
Most derivative contracts are not listed on an exchange and require the use of
valuation models. Consistent with SFAS 157, the company attempts to maximize the
use of observable market inputs in its models. When observable inputs are not
available, the company defaults to unobservable inputs. Derivatives valued based
on models with significant unobservable inputs and that are not actively traded,
or trade activity is one way, are classified within level 3 of the fair value
hierarchy.
Some financial statement preparers have reported difficulties in applying SFAS
157 to certain nonfinancial assets and nonfinancial liabilities, particularly
those acquired in business combinations and those requiring a determination of
impairment. To allow the time to consider the effects of the implementation
issues that have arisen, the FASB issued FSP FAS 157-2 ("FSP 157-2") on February
12, 2008 to provide a one-year deferral of the effective date of SFAS 157 for
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed in financial statements at fair value on a recurring
basis (that is, at least annually). As a result of FSP 157-2, the company has
not yet adopted SFAS 157 for nonfinancial assets and liabilities that are valued
at fair value on a non-recurring basis. FSP 157-2 is effective for the company
in fiscal 2010 and the company is evaluating the impact that the application of
SFAS 157 to those nonfinancial assets and liabilities will have on its financial
statements.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS 159 provides the company with an option
to elect fair value as the initial and subsequent measurement attribute for most
financial assets and liabilities and certain other items. The fair value option
election is applied on an instrument-by-instrument basis (with some exceptions),
is irrevocable, and is applied to an entire instrument. The election may be made
as of the date of initial adoption for existing eligible items. Subsequent to
initial adoption, the company may elect the fair value option at initial
recognition of eligible items, on entering into an eligible firm commitment, or
when certain specified reconsideration events occur. Unrealized gains and losses
on items for which the fair value option has been elected will be reported in
earnings.
Upon adoption of SFAS 159 on April 28, 2008, the company did not elect to
account for any assets and liabilities under the scope of SFAS 159 at fair
value.
3. Asset Acquisition - Mattress Fabric Segment
Pursuant to an Asset Purchase Agreement among the company, Bodet & Horst USA, LP
and Bodet & Horst GMBH & Co. KG (collectively "Bodet & Horst") dated August 11,
2008, the company purchased certain assets and assumed certain liabilities of
the knitted mattress fabric operation of Bodet & Horst, including its
manufacturing operation in High Point, North Carolina. The purchase involved the
equipment, inventory, and intellectual property associated with the High Point
manufacturing operation, which has served as the company's primary source of
knitted mattress fabric for six years. Demand for this product line has grown
significantly, as knits are increasingly being utilized on mattresses at volume
retail price points. The purchase price for the assets was cash in the amount of
$11.4 million, which included an adjustment of $477,000 for changes in working
capital as defined in the Asset Purchase Agreement, and the assumption of
certain liabilities. Also, in connection with the purchase, the company entered
into a six-year consulting and non-compete agreement with the principal owner of
Bodet & Horst, providing for payments to the owner in the amount of $75,000 per
year to be paid in quarterly installments (of which $50,000 and $25,000 will be
allocated to the non-compete covenant and consulting fees, respectively) for the
agreement's full six-year term.
The acquisition was financed by $11.0 million of unsecured notes pursuant to a
Note Purchase Agreement ("2008 Note Agreement") dated August 11, 2008. The 2008
Note Agreement has a fixed interest rate of 8.01% and a term of seven years.
Principal payments of $2.2 million per year are due on the notes beginning three
years from the date of the 2008 Note Agreement. The 2008 Note Agreement contains
customary financial and other covenants as defined in the 2008 Note Agreement.
In connection with the 2008 Note Agreement, the company entered into a Consent
and Fifth Amendment (the "Consent and Amendment") that amends the previously
existing unsecured note purchase agreements. The purpose of the Consent and
Amendment was for the existing note holders to consent to the 2008 Note
Agreement and to provide that certain financial covenants in favor of the
existing note holders would be on the same terms as those contained in the 2008
Note Agreement.
In connection with the asset purchase agreement, the company assumed the lease
of the building where the operation is located. This lease is with a partnership
owned by certain shareholders and officers of the company and their immediate
families. The lease provides for monthly payments of $12,704, expires on June
30, 2010, and contains a renewal option for an additional three years. As of
November 2, 2008, the minimum lease payment requirements over the next three
fiscal years are: FY 2009 - $114,000; FY 2010 - $152,000; and FY 2011 - $25,000.
The following table presents the allocation of the acquisition cost, including
professional fees and other related acquisition costs, to the assets acquired
and liabilities assumed based on their fair values. The allocation of the
purchase price is based on a preliminary valuation and could change when the
final valuation is obtained. Differences between the preliminary valuation and
the final valuation are not expected to be significant. The preliminary
acquisition cost allocation is as follows:
I-7
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------------------------------------------------------------------------
(dollars in thousands) Fair Value
--------------------------------------------------------------------------------
Inventories $ 1,439
Other current assets 17
Property, plant, and equipment 3,000
Non-compete agreement (Note 7) 756
Goodwill 7,479
Accounts payable (1,291)
--------------------------------------------------------------------------------
$ 11,400
--------------------------------------------------------------------------------
Of the total consideration paid of $11,400, $11,365 and $35 was paid in fiscal
2009 and 2008, respectively.
The company recorded the non-compete agreement at its fair value based on
various valuation techniques. This non-compete agreement will be amortized on a
straight-line basis over the six year life of the agreement. Property, plant,
and equipment will be depreciated on a straight-line basis over useful lives
ranging from five to fifteen years. Goodwill is deductible for income tax
purposes over the statutory period of fifteen years.
The following unaudited pro forma consolidated results of operations for the
three month and six month periods ending November 2, 2008 and October 28, 2007
have been prepared as if the acquisition of Bodet & Horst had occurred at April
30, 2007.
--------------------------------------------------------------------------------
Three months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Net Sales $ 52,263 $ 64,336
(Loss) income from operations (9,925) 3,571
Net (loss) income (40,868) 2,026
Net (loss) income per share, basic (3.23) 0.16
Net (loss) income per share, diluted (3.23) 0.16
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Net Sales $ 111,585 $ 129,566
(Loss) income from operations (7,365) 7,386
Net (loss) income (39,852) 4,491
Net (loss) income per share, basic (3.15) 0.36
Net (loss) income per share, diluted (3.15) 0.35
--------------------------------------------------------------------------------
I-8
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The unaudited pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisition been consummated as of that time,
nor is it intended to be a projection of future results.
4. Stock-Based Compensation
On June 17, 2008, the company granted in total to two employees 25,000 options
to purchase shares of common stock at the fair market value on the date of
grant. These options will vest over five years and expire ten years after the
date of grant. The fair value of these option awards was estimated on the date
of grant using the Black-Scholes option-pricing model. The fair value of stock
options granted to these two employees during the six-month period ended
November 2, 2008, was $5.00 per share using the following assumptions:
Grant on June 17, 2008
--------------------------------------------------------------------------------
Risk-free interest rate 4.23%
Dividend yield 0.00%
Expected volatility 66.18%
Expected term (in years) 8.0
--------------------------------------------------------------------------------
On October 1, 2008, the company granted in total to their board of directors
6,000 options to purchase shares of common stock at the fair market value on the
date of grant. These options vest immediately and expire ten years after the
date of grant. The fair value of these option awards was estimated on the date
of grant using the Black-Scholes option-pricing model. The fair value of stock
options granted to the company's board of directors during the six-month period
ended November 2, 2008, was $4.14 per share using the following assumptions:
Grant on October 1, 2008
--------------------------------------------------------------------------------
Risk-free interest rate 3.77%
Dividend yield 0.00%
Expected volatility 64.12%
Expected term (in years) 10
--------------------------------------------------------------------------------
The assumptions utilized in the model are evaluated and revised, as necessary,
to reflect market conditions, actual historical experience, and groups of
employees that have similar exercise patterns that are considered separately for
valuation purposes. The risk-free interest rate for periods within the
contractual life of the option was based on the U.S. Treasury yield curve in
effect at the time of grant. The company does not plan to issue any dividends,
and, therefore, the yield is 0.00%. The expected volatility was derived using a
term structure based on historical volatility and the volatility implied by
exchange-traded options on the company's common stock. The expected term of the
options is based on the contractual term of the stock option award and expected
participant exercise trends.
I-9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The company recorded $121,000 and $219,000 of compensation expense for stock
options within selling, general, and administrative expense for the three-month
and six-month periods ended November 2, 2008. The company recorded $226,000 and
$366,000 of compensation expense for stock options within selling, general, and
administrative expense for the three-month and six-month periods ended October
28, 2007. The remaining unrecognized compensation costs related to unvested
awards at November 2, 2008 was $798,589 which is expected to be recognized over
a weighted average period of 2.9 years. During the six-month period ended
November 2, 2008, 4,500 stock options were exercised with an intrinsic value of
$8,932.
5. Accounts Receivable
A summary of accounts receivable follows:
--------------------------------------------------------------------------------
(dollars in thousands) November 2, 2008 April 27, 2008
--------------------------------------------------------------------------------
Customers $ 20,662 $ 28,830
Allowance for doubtful accounts (1,409) (1,350)
Reserve for returns and allowances and
discounts (452) (407)
--------------------------------------------------------------------------------
$ 18,801 $ 27,073
--------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
--------------------------------------------------------------------------------
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Beginning balance $ (1,350) $ (1,332)
(Provision) recovery of bad debt expense (276) 15
Write-offs, net of recoveries 217 169
--------------------------------------------------------------------------------
Ending balance $ (1,409) $ (1,148)
--------------------------------------------------------------------------------
A summary of the activity in the allowance for returns and allowances and
discounts accounts follows:
--------------------------------------------------------------------------------
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Beginning balance $ (407) $ (570)
Provision for returns and allowances
and discounts (1,001) (1,437)
Discounts taken 956 1,435
--------------------------------------------------------------------------------
Ending balance $ (452) $ (572)
--------------------------------------------------------------------------------
I-10
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Inventories
Inventories are carried at the lower of cost or market. Cost is determined using
the FIFO (first-in, first-out) method.
A summary of inventories follows:
--------------------------------------------------------------------------------
(dollars in thousands) November 2, 2008 April 27, 2008
--------------------------------------------------------------------------------
Raw materials $ 9,147 $ 9,939
Work-in-process 1,733 1,682
Finished goods 25,427 23,773
--------------------------------------------------------------------------------
$ 36,307 $ 35,394
--------------------------------------------------------------------------------
7. Other Assets
A summary of other assets follows:
--------------------------------------------------------------------------------
(dollars in thousands) November 2, 2008 April 27, 2008
--------------------------------------------------------------------------------
Cash surrender value - life insurance $ 1,269 $ 1,269
Non-compete agreements, net 1,370 789
Other 336 351
--------------------------------------------------------------------------------
$ 2,975 $ 2,409
--------------------------------------------------------------------------------
The company recorded non-compete agreements in connection with the company's
asset purchase agreements with International Textile Group, Inc. ("ITG") and
Bodet and Horst at their fair values based on valuation techniques. These
non-compete agreements pertain to the company's mattress fabrics segment. The
non-compete agreement associated with ITG is amortized on a straight line basis
over the four year life of the agreement. The non-compete agreement associated
with Bodet and Horst is amortized on a straight-line basis over the six year
life of the agreement and requires quarterly payments of $12,500 over the life
of the agreement (Note 3). As of November 2, 2008, the total remaining
non-compete payments were $287,500.
At November 2, 2008 and April 27, 2008, the gross carrying amount of these
non-compete agreements were $1.9 million and $1.1 million, respectively. At
November 2, 2008 and April 27, 2008, accumulated amortization for these
non-compete agreements were $546,000 and $359,000, respectively. Amortization
expense for these non-compete agreements for the three-month and six-month
periods ended November 2, 2008, was $116,000 and $187,000, respectively.
Amortization expense for the ITG non-compete agreement for the three-month and
six-month periods ended October 28, 2007, was $72,000 and $144,000,
respectively. No amortization expense was recorded for the Bodet and Horst
non-compete agreement for the three-month and six-month periods ended October
28, 2007 as the asset purchase agreement was effective August 11, 2008. The
remaining amortization expense (which includes the total remaining Bodet & Horst
non-compete payments of $287,500) for the next five fiscal years follows: FY
2009 - $259,000; FY 2010 - $458,000; FY 2011 - $383,000; FY 2012 - $171,000; FY
2013 - $171,000; and thereafter $216,000.
8. Accounts Payable - Capital Expenditures
The company has certain vendor financed arrangements regarding capital
expenditures that bear interest with fixed interest rates ranging from 6% to
7.14%. At November 2, 2008 and April 27, 2008, the company had total amounts due
regarding capital expenditures totaling $2.0 million and $3.0 million,
respectively. The payment requirements of these arrangements during the next
three years are: Year 1 - $1.0 million; Year 2 - $725,000; and Year 3 -
$275,000.
I-11
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. Goodwill
A summary of the change in the carrying amount of goodwill follows:
--------------------------------------------------------------------------------
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Beginning balance $ 4,114 $ 4,114
Bodet & Horst acquisition 7,479 -
--------------------------------------------------------------------------------
Ending balance $ 11,593 $ 4,114
--------------------------------------------------------------------------------
The goodwill balance relates to the mattress fabrics segment.
10. Accrued Expenses
A summary of accrued expenses follows:
--------------------------------------------------------------------------------
(dollars in thousands) November 2, 2008 April 27, 2008
--------------------------------------------------------------------------------
Compensation, commissions and related
benefits $ 3,088 $ 5,690
Interest 368 186
Accrued rebates 227 241
Other 1,576 2,183
--------------------------------------------------------------------------------
$ 5,259 $ 8,300
--------------------------------------------------------------------------------
11. Long-Term Debt and Lines of Credit
A summary of long-term debt and lines of credit follows:
--------------------------------------------------------------------------------
(dollars in thousands) November 2, 2008 April 27, 2008
--------------------------------------------------------------------------------
Unsecured term notes - existing $ 14,307 $ 14,307
Unsecured term notes - Bodet & Horst 11,000 -
Real estate loan - I 3,719 3,828
Real estate loan - II 2,500 2,500
Canadian government loan 660 788
--------------------------------------------------------------------------------
32,186 21,423
Current maturities of long-term debt (7,383) (7,375)
--------------------------------------------------------------------------------
Long-term debt, less current maturities
of long-term debt $ 24,803 $ 14,048
--------------------------------------------------------------------------------
Lines of credit $ - $ -
--------------------------------------------------------------------------------
Total borrowings $ 32,186 $ 21,423
--------------------------------------------------------------------------------
I-12
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Unsecured Term Notes- Bodet & Horst Acquisition
In connection with the Bodet & Horst Asset Purchase Agreement, the company
entered into the 2008 Note Agreement dated August 11, 2008. The 2008 Note
Agreement provides for the issuance of $11.0 million of unsecured term notes
with a fixed interest rate of 8.01% and a term of seven years. Principal
payments of $2.2 million per year are due on the notes beginning three years
from the date of the 2008 Note Agreement. The 2008 Note Agreement contains
customary financial and other covenants as defined in the 2008 Note Agreement.
Unsecured Term Notes- Existing
The company's existing unsecured term notes have a fixed interest rate of 8.80%
(payable semi-annually in March and September and subject to prepayment
provisions each fiscal quarter as defined in the agreement) and are payable over
an average remaining term of 1.3 years through March 2010. The principal
payments are required to be paid in annual installments over the next two years
as follows: March 2009 - $7.2 million; and March 2010 - $7.1 million.
In connection with the 2008 Note Agreement, the company entered into a Consent
and Amendment that amends the previously existing unsecured note purchase
agreements. The purpose of the Consent and Amendment was for the existing note
holders to consent to the 2008 Note Agreement and to provide that certain
financial covenants in favor of the existing note holders would be on the same
terms as those contained in the 2008 Note Agreement.
Real Estate Loan - I
The company has a real estate loan that is secured by a lien on the company's
corporate headquarters office located in High Point, North Carolina. This term
loan bears interest at the one-month LIBOR plus an adjustable margin (all in
rate of 5.71% at November 2, 2008) based on the company's debt/EBITDA ratio, as
defined in the agreement, and is payable in monthly installments through
September 2010, with a final payment of $3.3 million in October 2010.
Real Estate Loan - II
The company has a term loan in the amount of $2.5 million in connection with the
ITG asset purchase agreement. This term loan is secured by a lien on the
company's corporate headquarters office located in High Point, North Carolina
and bears interest at the one-month LIBOR plus an adjustable margin (all in rate
of 6.21% at November 2, 2008) based on the company's debt/EBITDA ratio, as
defined in the agreement. This agreement requires the company to pay interest
monthly with the entire principal due on June 30, 2010.
Revolving Credit Agreement - United States
The company has an unsecured credit agreement that provides for a revolving loan
commitment of $6.5 million, including letters of credit up to $5.5 million. This
agreement bears interest at the one-month LIBOR plus an adjustable margin (all
in rate of 5.71% at November 2, 2008) as defined in the agreement. As of
November 2, 2008, there were $1.6 million in outstanding letters of credit (of
which $700,000 and $925,000 related to inventory purchases and workers
compensation, respectively) and no borrowings were outstanding under the
agreement. The outstanding letters of credit of $700,000 that related to
inventory purchases expired on November 29, 2008.
I-13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On November 3, 2008, the company entered into a thirteenth amendment to this
revolving credit agreement. This amendment extended the expiration date to
December 31, 2009, amended its financial covenants as defined in the agreement,
and provided for a cross default based on an "Event of Default" under the
company's unsecured term note agreements (existing and Bodet & Horst).
Revolving Credit Agreement - China
The company's China subsidiary has an unsecured revolving credit agreement with
a bank in China to provide a line of credit available up to approximately $5.0
million, of which approximately $1.0 million includes letters of credit. This
agreement bears interest at a rate determined by the Chinese government. There
were no borrowings outstanding under the agreement as of November 2, 2008.
Canadian Government Loan
The company has an agreement with the Canadian government for a term loan that
is non-interest bearing and is payable in 48 equal monthly installments
commencing December 1, 2009. The proceeds were used to partially finance capital
expenditures at the company's Rayonese facility located in Quebec, Canada.
Overall
The company's loan agreements require that the company maintain compliance with
certain financial ratios. At November 2, 2008, the company was in compliance
with these financial covenants.
As of November 2, 2008, the principal payment requirements of long-term debt
during the next five years are: Year 1 - $7.4 million; Year 2 - $13.3 million;
Year 3 - $2.4 million; Year 4 - $2.4 million; Year 5 - $2.4 million; and
thereafter - $4.3 million.
12. Capital Lease Obligation
In May 2008, the company entered into a capital lease to finance a portion of
the construction of certain equipment related to its mattress fabrics segment.
The lease agreement contains a bargain purchase option and bears interest at
8.5%. The lease agreement requires principal payments totaling $1.4 million
which commenced on July 1, 2008, and are being paid in quarterly installments
through April 2010. This agreement is secured by equipment with a carrying value
of $2.4 million. The principal payments required over the next two years are as
follows: Year 1 - $692,000; and Year 2 - $280,000.
The company has recorded $1.4 million in equipment under capital leases. This
balance is reflected in property, plant, and equipment in the accompanying
consolidated balance sheet as of November 2, 2008. Depreciation expense for the
three-month and six-month periods ending November 2, 2008 on the carrying value
of $2.4 million associated with this capital lease obligation was $35,000. The
equipment under this capital lease obligation was placed into service in the
company's second quarter of fiscal 2009.
I-14
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
13. Interest Rate Hedging
In connection with one of the company's real estate loans, the company was
required to have an agreement to hedge the interest rate risk exposure on the
real estate loan. The company entered into a $2,170,000 notional principal
interest rate swap, which represents 50% of the principal amount of the real
estate loan, that effectively converted the floating rate LIBOR based payments
to fixed payments at 4.99% plus the spread calculated under the real estate loan
agreement. This agreement expires October 2010.
The company accounts for the interest rate swap as a cash flow hedge whereby the
fair value of this contract is reflected in accrued expenses in the accompanying
consolidated balance sheets with the offset recorded as accumulated other
comprehensive loss. The fair value of the interest rate swap was approximately
$82,000 and $75,000 at November 2, 2008 and April 27, 2008, respectively.
14. Cash Flow Information
Payments for interest and income taxes follows:
--------------------------------------------------------------------------------
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Interest $ 955 $ 1,631
Net income tax (refund) payments (53) 830
--------------------------------------------------------------------------------
The company financed $1.4 million of its capital expenditures through a capital
lease for the six months ended November 2, 2008 (see note 12). The company did
not finance any of its capital expenditures for the six months ended October 28,
2007. Interest costs of $42,000 for the construction of qualifying fixed assets
were capitalized and are being amortized over the related assets' estimated
useful lives for the six months ended November 2, 2008. No interest costs were
capitalized for the six months ended October 28, 2007.
15. Restructuring and Restructuring Related Charges
The following summarizes the fiscal 2009 activity in the restructuring accrual
(dollars in thousands):
--------------------------------------------------------------------------------------------------------------------------
Employee
Termination Lease Lease
Employee Benefit Termination Termination
Termination Payments and Other and Other Balance
Balance, Benefit Net of Cobra Exit Cost Exit Cost November 2,
(dollars in thousands) April 27, 2008 Adjustments Premiums Adjustments Payments 2008
--------------------------------------------------------------------------------------------------------------------------
September 2008 Upholstery fabrics (1) $ - $ 35 $ (3) $ 437 $ (147) $ 322
December 2006 Upholstery fabrics (2) 990 763 (519) 10 (153) 1,091
Other Upholstery fabrics (3) 442 (22) (7) - (36) 377
--------------------------------------------------------------------------------------------------------------------------
Totals $ 1,432 $ 776 $ (529) $ 447 $ (336) $ 1,790
--------------------------------------------------------------------------------------------------------------------------
(1) On September 3, 2008, the board of directors approved changes to the
upholstery fabric operations, including consolidation of facilities in
China and reduction of excess manufacturing capacity. These actions
were in response to the extremely challenging industry conditions for
upholstery fabrics. The plant consolidations have been substantially
completed as of the end of the second quarter of fiscal 2009. The
restructuring accrual at November 2, 2008, represents employee
termination benefits and lease termination and other exit costs of $32
and $290, respectively.
I-15
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(2) The restructuring accrual at November 2, 2008 represents employee
termination benefits and lease termination and exit costs of $922 and
$169, respectively. The restructuring accrual at April 27, 2008
represents employee termination benefits and lease termination and
other exit costs of $679 and $311, respectively.
(3) The restructuring accrual at November 2, 2008, represents other exit
costs of $377. The restructuring accrual at April 27, 2008, represents
employee termination benefits and lease termination and other exit
costs $29 and $413, respectively.
The following summarizes restructuring and related charges incurred for the
six-month period ending November 2, 2008 (dollars in thousands):
-------------------------------------------------------------------------------------------------------------------------------
Sales
Operating Lease Proceeds from
Costs on Termination Write-Downs Employee Equipment
Closed and Other of Buildings Inventory Accelerated Termination With No
(dollars in thousands) Facilities Exit Costs and Equipment Markdowns Depreciation Benefits Carrying Value Total
-------------------------------------------------------------------------------------------------------------------------------
September 2008 Upholstery
fabrics (1) (4) $ 3 $ 437 $ 6,562 $ 319 $ 2,090 $ 35 $ - $ 9,446
December 2006 Upholstery
fabrics (5) 28 10 1,250 790 - 763 - 2,841
Other Upholstery
fabrics (6) - - - - - (22) - (22)
-------------------------------------------------------------------------------------------------------------------------------
Totals $ 31 $ 447 $ 7,812(7) $ 1,109 $ 2,090 $ 776 $ - $ 12,265
-------------------------------------------------------------------------------------------------------------------------------
(4) Of this total charge, $2.4 million and $7.0 million was recorded in
cost of sales and restructuring expense in the 2009 Consolidated
Statement of Net Loss. These charges relate to the Upholstery fabrics
segment.
(5) Of this total Charge, $813 was recorded in cost of sales, $4 was
recorded in selling, general, and administrative expense, and $2.0
million was recorded in restructuring expense in the 2009 Consolidated
Statement of Net Loss. Of this total charge, $2.4 million and $438 was
recorded in the second quarter and first quarter of fiscal 2009,
respectively. These charges relate to the Upholstery fabrics segment.
(6) This $22 credit was recorded in restructuring expense in the 2009
Consolidated Statement of Net Loss. This credit relates to the
Upholstery Fabrics segment.
(7) This $7.8 million restructuring charge represents impairments of $2.2
million for fixed assets that were abandoned in connection with the
consolidation of certain plant facilities in China and $795 for a
reduction in the selling price of the company's corporate headquarters
to $4.0 million (Note 16). This $4.0 million is recorded in assets
held for sale in the 2009 consolidated balance sheet. In addition,
during the course of the company's strategic review in the second
quarter of fiscal 2009 of its upholstery fabrics business, the company
assessed the recoverability of the carrying value of its upholstery
fabric fixed assets that are being held and used in operations. This
strategic review resulted in impairment losses of $4.4 million and
$456 for fixed assets located in China and the U.S., respectively.
These losses reflect the amounts by which the carrying values of these
fixed assets exceed their estimated fair values determined by their
estimated future discounted cash flow and quoted market prices.
The following summarizes restructuring and related charges for the six-month
period ending October 28, 2007. (dollars in thousands):
I-16
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
----------------------------------------------------------------------------------------------------------------------------------
Sales
Operating Lease Proceeds from
Costs on Termination Write-Downs Asset Employee Equipment
Closed and Other of Buildings Inventory Accelerated Movement Termination With No
(dollars in thousands) Facilities Exit Costs and Equipment Markdowns Depreciation Costs Benefits Carrying Value Total
----------------------------------------------------------------------------------------------------------------------------------
December 2006 Upholstery
fabrics (8) $ 741 $ 417 $ 388 $ 404 $ - $ 127 $ (260) $ (315) $ 1,502
Other Upholstery
fabrics (9) 13 129 - - - - (138) - 4
----------------------------------------------------------------------------------------------------------------------------------
Totals $ 754 $ 546 $ 388 $ 404 $ - $ 127 $ (398) $ (315) $ 1,506
----------------------------------------------------------------------------------------------------------------------------------
(8) Of this total charge, $1.1 million was recorded in cost of sales, $51
was recorded in selling, general, and, administrative expense, and
$357 was recorded in restructuring expense in the 2008 Consolidated
Statement of Net Income.
(9) Of this total charge, a charge of $13 was recorded in cost of sales
and a credit of $9 was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
Management remains committed to taking additional steps if necessary to address
the low profitability of the company's upholstery fabric operations. The company
could experience additional inventory markdowns, write-downs of its property,
plant, and equipment, and further restructuring charges in the upholstery fabric
operations if sales and profitability continue to decline and further
restructuring actions become necessary.
16. Assets Held for Sale
At November 2, 2008, the company had assets held for sale with carrying values
totaling $4.8 million. These assets held for sale consist of the company's
corporate headquarters with a carrying value of $4.0 million, certain equipment
related to its U.S. upholstery fabric operations with a carrying value of
$792,000, and certain equipment related to the mattress fabrics segment totaling
$35,000. The carrying value of these assets held for sale are presented in the
2009 Consolidated Balance Sheet and are no longer being depreciated.
The company has entered into a contract dated December 4, 2008, providing for
the sale of its headquarters building in High Point, North Carolina for a
purchase price of $4.0 million. The contract also contemplates that the company
would lease the building back from the purchaser for an initial term of three
years, at a rental rate of $360,240 per year, plus approximately two-thirds of
the building's operating costs. The contract is subject to the purchaser's
ability to obtain financing and is subject to a due diligence period extending
until January 9, 2009, during which the purchaser may inspect the premises,
conduct appraisals and other examinations, and during which the purchaser may
terminate the contract without penalty. The transaction is also subject to
approval by the company's lenders. The closing is anticipated to occur on or
before January 30, 2009. The proceeds of the sale would be used by the company
to pay down the bank loan that is currently secured by the building, which has a
balance of approximately $6.2 million. The remaining balance of the loan would
become an unsecured term loan from the same bank lender, subject to a one
percent increase in the interest rate on the loan. The loan would be due in one
repayment in June 2010. In connection with this disposal, the company determined
that its carrying value of their corporate headquarters building was more than
its fair value, less cost to sell. Consequently, the company recorded an
impairment charge of $795,000 in restructuring expense in the 2009 Consolidated
Statement of Loss.
I-17
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
17. Net (loss) income Per Share
Basic net (loss) income per share is computed using the weighted-average number
of shares outstanding during the period. Diluted net (loss) 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
per share follows:
--------------------------------------------------------------------------------
Three months ended
(amounts in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Weighted average common shares outstanding,
basic 12,650 12,635
Effect of dilutive stock options - 174
--------------------------------------------------------------------------------
Weighted average common shares outstanding,
diluted 12,650 12,809
--------------------------------------------------------------------------------
Options to purchase 303,250 and 46,000 shares of common stock were not included
in the computation of diluted net (loss) income per share for the three months
ended November 2, 2008 and October 28, 2007, respectively, because the exercise
price of the options was greater than the average market price of the common
shares. Options to purchase 4,357 shares were not included in the computation of
diluted net loss per share for the three-months ended November 2, 2008, because
the company incurred a net loss for this period.
--------------------------------------------------------------------------------
Six months ended
(amounts in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Weighted average common shares outstanding,
basic 12,649 12,609
Effect of dilutive stock options - 167
--------------------------------------------------------------------------------
Weighted average common shares outstanding,
diluted 12,649 12,776
--------------------------------------------------------------------------------
Options to purchase 293,250 and 52,000 shares of common stock were not included
in the computation of diluted net (loss) income per share for the six months
ended November 2, 2008 and October 28, 2007, respectively, because the exercise
price of the options was greater than the average market price of the common
shares. Options to purchase 43,131 shares were not included in the computation
of diluted net loss per share for the six-months ended November 2, 2008, because
the company incurred a net loss for this period.
18. Comprehensive (Loss) Income
Comprehensive (loss) income is the total (loss) income and other changes in
shareholders' equity, except those resulting from investments by shareholders
and distributions to shareholders not reflected in net (loss) income.
I-18
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of comprehensive (loss) income follows:
--------------------------------------------------------------------------------
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Net (loss) income $ (40,088) $ 2,405
(Loss) gain on cash flow hedge, net of
income taxes (4) 4
--------------------------------------------------------------------------------
Comprehensive (loss) income $ (40,092) $ 2,409
--------------------------------------------------------------------------------
19. Segment Information
The company's operations are classified into two business segments: mattress
fabrics and upholstery fabrics. The mattress fabrics segment manufactures and
sells fabrics to bedding manufacturers. The upholstery fabrics segment
manufactures and sells fabrics primarily to residential and commercial
(contract) furniture manufacturers.
The company evaluates the operating performance of its segments based upon
income (loss) from operations before restructuring and related charges or
credits and certain unallocated corporate expenses. Unallocated corporate
expenses primarily represent compensation and benefits for certain executive
officers and all costs related to being a public company. Segment assets include
assets used in the operations of each segment and primarily consist of accounts
receivable, inventories, and property, plant and equipment. The mattress fabrics
segment also includes in segment assets, assets held for sale, goodwill and
other non-current assets associated with the ITG and Bodet & Horst acquisitions.
The upholstery fabrics segment also includes assets held for sale in segment
assets.
Financial information for the company's operating segments is as follows:
--------------------------------------------------------------------------------
Three months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 28,048 $ 36,010
Upholstery Fabrics 24,215 28,326
--------------------------------------------------------------------------------
$ 52,263 $ 64,336
--------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 5,084 $ 6,038
Upholstery Fabrics 1,277 2,975
--------------------------------------------------------------------------------
Total segment gross profit 6,361 9,013
Restructuring related charges (3,213)(1) (591)(3)
--------------------------------------------------------------------------------
$ 3,148 $ 8,422
--------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 1,833 $ 2,166
Upholstery Fabrics 2,081 2,774
--------------------------------------------------------------------------------
Total segment selling, general,
and administrative expenses 3,914 4,940
Unallocated corporate expenses 523 873
Restructuring related charges 2(1) 25(3)
--------------------------------------------------------------------------------
$ 4,439 $ 5,838
--------------------------------------------------------------------------------
I-19
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Income (loss) from operations:
Mattress Fabrics $ 3,251 $ 3,872
Upholstery Fabrics (804) 201
--------------------------------------------------------------------------------
Total segment income from operations 2,447 4,073
Unallocated corporate expenses (523) (873)
Restructuring and related charges (11,849)(2) (532)(4)
--------------------------------------------------------------------------------
Total (loss) income from operations (9,925) 2,668
Interest expense (663) (809)
Interest income 21 63
Other income (expense) 250 (463)
--------------------------------------------------------------------------------
(Loss) income before income taxes $ (10,317) $ 1,459
--------------------------------------------------------------------------------
(1) The $3.2 million restructuring related charge represents $2.1 million for
accelerated depreciation, $1.1 million for inventory markdowns, and $15 for
other operating costs associated with closed plant facilities. The $2
restructuring related charge represents other operating costs associated
with closed plant facilities. These charges relate to the Upholstery
Fabrics segment.
(2) The $11.8 million represents $7.8 million for write-downs of a building and
equipment, $2.1 million for accelerated depreciation, $1.1 million for
inventory markdowns, $460 for lease termination and other exit costs, $362
for employee termination benefits, and $17 for other operating costs
associated with closed plant facilities. Of this total charge, $3.2
million, $2, and $8.6 million are included in cost of sales, selling,
general, and administrative expense, and restructuring expense,
respectively. These charges relate to the Upholstery Fabrics segment.
(3) The $591 restructuring related charge represents $348 for inventory
markdowns and $243 for other operating costs associated with closed plant
facilities. The $25 restructuring related charge represents other operating
costs associated with closed plant facilities. These charges relate to the
Upholstery Fabrics segment.
(4) The $532 represents $348 for inventory markdowns, $268 for other operating
costs associated with closed plant facilities, $179 for lease termination
costs, $73 for asset movement costs, $27 for write-downs of a building and
equipment, a credit of $114 for sales proceeds received on equipment with
no carrying value, and a credit of $249 for employee termination benefits.
Of this total charge, $591 was recorded in cost of sales, $25 was recorded
in selling, general, and administrative expense, and a credit of $84 was
recorded in restructuring expense. These charges relate to the Upholstery
Fabrics segment.
I-20
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------------------------------------------------------------------------
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 63,610 $ 72,546
Upholstery Fabrics 47,975 57,020
--------------------------------------------------------------------------------
$ 111,585 $ 129,566
--------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 11,428 $ 11,843
Upholstery Fabrics 2,347 6,742
--------------------------------------------------------------------------------
Total segment gross profit 13,775 18,585
Restructuring related charges (3,225)(5) (1,107)(7)
--------------------------------------------------------------------------------
$ 10,550 $ 17,478
--------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 3,961 $ 4,208
Upholstery Fabrics 4,565 6,092
--------------------------------------------------------------------------------
Total segment selling, general,
and administrative expenses 8,526 10,300
Unallocated corporate expenses 1,293 1,808
Restructuring related charges 4(5) 51(7)
--------------------------------------------------------------------------------
$ 9,823 $ 12,159
--------------------------------------------------------------------------------
Income (loss) from operations:
Mattress Fabrics $ 7,467 $ 7,635
Upholstery Fabrics (2,218) 650
--------------------------------------------------------------------------------
Total segment income from operations 5,249 8,285
Unallocated corporate expenses (1,293) (1,808)
Restructuring and related charges (12,265)(6) (1,506)(8)
--------------------------------------------------------------------------------
Total (loss) income from operations (8,309) 4,971
Interest expense (1,095) (1,627)
Interest income 55 121
Other income (expense) 236 (695)
--------------------------------------------------------------------------------
(Loss) income before income taxes $ (9,113) $ 2,770
--------------------------------------------------------------------------------
(5) The $3.2 million restructuring related charge represents $2.1 million for
accelerated depreciation, $1.1 million for inventory markdowns, and $27 for
other operating costs associated with closed plant facilities. The $4
restructuring related charge represents other operating costs associated
with closed plant facilities. These charges relate to the Upholstery
Fabrics segment.
(6) The $12.3 million represents $7.8 million for write-downs of a building and
equipment, $2.1 million for accelerated depreciation, $1.1 million for
inventory markdowns, $776 for employee termination benefits, $447 for lease
termination and other exit costs, and $31 for other operating costs
associated with closed plant facilities. Of this total charge, $3.2
million, $4, and $9.0 million are included in cost of sales, selling,
general, and administrative expense, and restructuring expense,
respectively. These charges relate to the Upholstery Fabrics segment.
I-21
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) The $1.1 million restructuring related charge represents $703 for other
operating costs associated with closed plant facilities and $404 for
inventory markdowns. The $51 restructuring related charge represents other
operating costs associated with closed plant facilities. These charges
relate to the Upholstery Fabrics segment.
(8) The $1.5 million represents $754 for other operating costs associated with
closed plant facilities, $546 for lease termination and other exit costs,
$404 for inventory markdowns, $388 for write-downs of buildings and
equipment, $127 for asset movement costs, a credit of $315 for sales
proceeds received on equipment with no carrying value, and a credit of $398
for employee termination benefits. Of this total charge, $1.1 million $51,
and $348 was recorded in cost of sales, selling, general, and
administrative expense, and restructuring expense, respectively. These
charges relate to the Upholstery Fabrics segment.
Balance sheet information for the company's operating segments follow:
--------------------------------------------------------------------------------
(dollars in thousands) November 2, 2008 April 27, 2008
--------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics
Current assets (9) $ 28,206 $ 27,572
Assets held for sale 35 35
Non-compete agreements, net 1,370 789
Goodwill 11,593 4,114
Property, plant and equipment (10) 25,071 21,519
--------------------------------------------------------------------------------
Total mattress fabrics assets 66,275 54,029
--------------------------------------------------------------------------------
Upholstery Fabrics
Current assets (9) 26,902 34,895
Assets held for sale 792 792
Property, plant and equipment (11) 1,029 10,701
--------------------------------------------------------------------------------
Total upholstery fabrics assets 28,723 46,388
--------------------------------------------------------------------------------
Total segment assets 94,998 100,417
Non-segment assets:
Cash and cash equivalents 8,522 4,914
Assets held for sale 4,000 4,783
Income taxes receivable - 438
Deferred income taxes - 33,810
Other current assets 1,100 1,328
Property, plant and equipment 702 719
Other assets 1,605 1,620
--------------------------------------------------------------------------------
Total assets $ 110,927 $ 148,029
--------------------------------------------------------------------------------
I-22
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Capital expenditures (12):
Mattress Fabrics $ 2,271 $ 1,266
Upholstery Fabrics 373 1,844
--------------------------------------------------------------------------------
Total capital expenditures $ 2,644 $ 3,110
--------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 1,693 $ 1,795
Upholstery Fabrics 940 1,097
--------------------------------------------------------------------------------
Total segment depreciation expense $ 2,633 $ 2,892
--------------------------------------------------------------------------------
Accelerated deprecation 2,090 -
--------------------------------------------------------------------------------
Total depreciation expense 4,723 2,892
--------------------------------------------------------------------------------
(9) Current assets represent accounts receivable and inventory for the
respective segment.
(10) The $25.1 million at November 2, 2008, represents property, plant, and
equipment of $17.2 million and $7.9 million located in the U.S. and Canada,
respectively. The $21.5 million at April 27, 2008, represents property,
plant, and equipment of $13.1 million and $8.4 million located in the U.S
and Canada, respectively.
(11) The $1.0 million at November 2, 2008, represents property, plant, and
equipment located in the U.S. The $10.7 million at April 27, 2008,
represents property, plant, and equipment of $9.0 million and $1.7 million
located in China and the U.S., respectively.
(12) Capital expenditure amounts are stated on the accrual basis. See
Consolidated Statement of Cash Flows for capital expenditure amounts on a
cash basis.
20. Income Taxes
Effective Income Tax Rate
The effective income tax rate (income taxes as a percentage of (loss) income
before income taxes) for the six month periods ended November 2, 2008 and
October 28, 2007 were 339.9% and 13.2%, respectively. The change in our
effective income tax rate during fiscal 2009 was primarily attributable to the
recording of a $31.2 million valuation allowance against our net deferred tax
assets regarding our U.S. and China operations, changes in the value of the
Canadian dollar in relation to the U.S. dollar, and provision for uncertain
income tax positions. The company's effective income tax rate for the six month
periods ended November 2, 2008 and October 28, 2007, was based upon the
estimated effective income tax rate applicable for the full year after giving
effect to any significant items related specifically to interim periods. The
effective income tax rate can be impacted over the fiscal year by the mix and
timing of actual earnings from the company's U.S. operations and foreign sources
versus annual projections and changes in foreign currencies in relation to the
U.S. dollar.
I-23
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Deferred Income Taxes
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", we evaluate our deferred income taxes to
determine if a valuation allowance is required. SFAS No. 109 requires that
companies assess whether a valuation allowance should be established based on
the consideration of all available evidence using a "more likely than not"
standard with significant weight being given to evidence that can be objectively
verified. The significant uncertainty in current and expected demand for
furniture and mattresses, along with the prevailing uncertainty in the overall
economic climate, has made it very difficult to forecast both short-term and
long-term financial results, and therefore, present significant negative
evidence as to whether we need to record a valuation allowance against our net
deferred tax assets. Based on this significant negative evidence, we have
recorded a $31.2 million valuation allowance, of which, $29.0 million and $2.2
million were against the net deferred tax assets of our U.S. and China
operations, respectively. The company's net deferred tax asset primarily
resulted from the recording of the income tax benefit of U.S. income tax loss
carryforwards over the last several years, which totals approximately $75.0
million. This non-cash charge of $31.2 million has no effect on the company's
operations, loan covenant compliance, or the possible utilization of the U.S.
income tax loss carryforwards in the future. If and when the company utilizes
any of these U.S. income tax loss carryforwards to offset future U.S. taxable
income, the income tax benefit would be recognized at that time.
The remaining net deferred tax liability of $1.2 million pertains to our
operations in Canada.
Uncertainty In Income Taxes
At November 2, 2008, the company had $5.4 million of total gross unrecognized
tax benefits, of which $4.9 million represents the amount of gross unrecognized
tax benefits that, if recognized would favorably affect the income tax rate in
future periods. Of the total gross unrecognized tax benefits of $5.4 million as
of November 2, 2008, $4.6 million and $742,000 are classified in net non-current
deferred income taxes and income taxes payable -long-term in the accompanying
consolidated balance sheets.
The company anticipates that the amount of unrecognized tax benefits will
increase by approximately $582,000 by the end of the fiscal year. This increase
primarily relates to double taxation under applicable tax treaties with foreign
tax jurisdictions.
21. Statutory Reserves
The company's subsidiaries located in China are required to transfer 10% of
their net income, as determined in accordance with the People's Republic of
China (PRC) accounting rules and regulations, to a statutory surplus reserve
fund until such reserve balance reaches 50% of the company's registered capital.
The transfer to this reserve must be made before distributions of any dividend
to shareholders. As of November 2, 2008, the company's statutory surplus reserve
was $1.7 million, representing 10% of accumulated earnings and profits
determined in accordance with PRC accounting rules and regulations. The surplus
reserve fund is non-distributable other than during liquidation and can be used
to fund previous years' losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholding or by increasing the par value
of the shares currently held by them provided that the remaining reserve balance
after such issue is not less than 25% of the registered capital.
I-24
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
22. Commitments and Contingencies
The company leased a manufacturing facility in Chattanooga, Tennessee from
Joseph E. Proctor d/b/a Jepco Industrial Warehouses (the "Landlord') for a term
of 10 years. This lease expired on April 30, 2008. The company closed this
facility approximately five years ago and has not occupied the facility except
to provide supervision and security. The company continued to make its lease
payments to the landlord as required by the lease. A $1.4 million lawsuit was
filed by the Landlord on April 10, 2008, in the Circuit Court for Hamilton
County Tennessee to collect the remainder of the rent due under the lease for
the months of March and April of 2008, additional expenses to be paid by the
company for March and April 2008, including utilities, insurance, property
taxes, and other tenant-paid expenses that would result in the triple net rent
due the Landlord, and for extensive repairs, refitting, renovation, and capital
improvement items the Landlord alleges he is entitled to have the company pay
for. The Landlord unilaterally took possession of the leased premises on or
about March 10, 2008, even though the lease was in good standing and the company
was entitled to complete possession. Consequently, the company has paid their
lease payments through March 10, 2008 but the Landlord has not accepted the
company's position. The company will assert the repossessory action of the
Landlord as a bar to his further action under the lease to collect any items
from the company. A significant portion of the Landlord's claim relates to the
company's alleged liability for physical damage to the premises, to refit the
premises to its original condition, and to make physical improvements or
alterations to the premises. The company disputes the matters described in this
litigation and intends to defend itself vigorously and consequently no reserve
has been recorded.
A lawsuit was filed against the company and other defendants (Chromatex, Inc.,
Rossville Industries, Inc., Rossville Companies, Inc. and Rossville Investments,
Inc.) on February 5, 2008 in United States District Court for the Middle
District of Pennsylvania. The plaintiffs are Alan Shulman, Stanley Siegel, Ruth
Cherenson as Personal Representative of Estate of Alan Cherenson, and Adrienne
Rolla and M.F. Rolla as Executors of the Estate of Joseph Byrnes. The plaintiffs
were partners in a general partnership that formerly owned a manufacturing plant
in West Hazleton, Pennsylvania (the "Site"). Approximately two years after this
general partnership sold the Site to defendants Chromatex, Inc. and Rossville
Industries, Inc. the company leased and operated the Site as part of the
company's Rossville/Chromatex division. The lawsuit involves court judgments
that have been entered against the plaintiffs and against defendant Chromatex,
Inc. requiring them to pay costs incurred by the United States Environmental
Protection Agency ("USEPA") responding to environmental contamination at the
Site, in amounts approximating $8.6 million. Neither USEPA nor any other
governmental authority has asserted any claim against the company on account of
these matters. The plaintiffs seek contribution from the company and other
defendants and a declaration that the company and the other defendants are
responsible for environmental response costs under environmental laws and
certain agreements. The company does not believe it has any liability for the
matters described in this litigation and intends to defend itself vigorously and
consequently no reserve has been recorded. In addition, the company has an
indemnification agreement with certain other defendants in the litigation
pursuant to which the other defendants agreed to indemnify the company for any
damages it incurs as a result of the environmental matters that are subject of
this litigation.
In addition to the above, the company is involved in legal proceedings and
claims which have arisen in the ordinary course of 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.
I-25
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
23. Recently Issued Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141 (revised 2007) "Business
Combinations." SFAS No. 141 requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose all information required to evaluate and understand the
nature and financial effect of the business combination. This statement is
effective for acquisition dates on or after the beginning of the first annual
reporting period beginning after December 15, 2008. This statement is effective
for the company in fiscal 2010 and is not expected to have a material effect on
our consolidated financial statements to the extent we do not enter into a
business acquisition subsequent to adoption.
The FASB issued SFAS No. 160,"Noncontrolling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51." It is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Earlier application is prohibited.
SFAS No. 160 requires that accounting and reporting minority interests will be
re-characterized as non-controlling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements and disclosures
that clearly identify and distinguish between interests of the parent and the
interests of the non-controlling owners. This statement applies to all entities
that prepare consolidated financial statements, but will affect only those
entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement is effective for
interim periods beginning in fiscal 2010 and is not expected to have a material
effect on our consolidated financial statements to the extent we do not obtain a
non-controlling interest in an entity subsequent to adoption.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, An Amendment of FASB Statement No. 133."
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
does not provide adequate information about how derivative and hedging
activities affect an entity's financial position, financial performance, and
cash flows. Accordingly, SFAS No. 161 requires enhanced disclosures about an
entity's derivative and hedging activities and thereby improves transparency of
financial reporting. SFAS No. 161 is effective for fiscal and interim periods
beginning after November 15, 2008 and is effective for the company in third
quarter of fiscal 2009. The adoption of the provisions of SFAS No. 161 is not
expected to have a material effect on the company's financial position.
In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3,
"Determination of the Useful Life of Intangible Assets" (FSP 142-3). The
guidance is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible
Assets", and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141(R), "Business Combinations", and other guidance
under U.S. generally accepted accounting principles (GAAP). FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those years. This statement is
effective for the company in fiscal 2010 and is not expected to have a material
effect on our consolidated financial statements to the extent we do not enter
into a business acquisition subsequent to adoption.
I-26
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In May 2008, the FASB issued SFAS No. 162,"The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162)." SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity GAAP in the United States (the GAAP hierarchy). SFAS 162
is effective on November 15, 2008. The adoption of SFAS 162 is not expected to
have a material impact on the company's results of operations, financial
condition, and equity.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-06-1,"Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities,' (FSP EITF 03-6-1). FSP EITF 03-6-1 requires that
unvested share-based payment awards containing non-forfeited rights to dividends
be included in the computation of earnings per common share. The adoption of FSP
EITF 03-6-1 is effective January 1, 2009 and restrospective application is
required. This statement will be effective beginning with our third quarter of
this fiscal year. We are currently determining the impact, if any, FSP EITF
03-6-1 will have on our consolidated financial statements.
I-27
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report and the exhibits attached hereto contain statements that may be
deemed "forward-looking statements" within the meaning of the federal securities
laws, including the Private Securities Litigation Reform Act of 1995 (Section
27A of the Securities Act of 1933 and Section 27A of the Securities and Exchange
Act of 1934). Such statements are inherently subject to risks and uncertainties.
Further, forward looking statements are intended to speak only as of the date on
which they are made. Forward-looking statements are statements that include
projections, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often but not always
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives, and include but are not limited to
statements about expectations for the company's future operations or success,
sales, gross profit margins, operating income, SG&A or other expenses, and
earnings, as well as any statements regarding future economic or industry trends
or future developments. Factors that could influence the matters discussed in
such statements include 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, increases in utility and energy costs, 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 and bedding coverings, as well as changes in costs to
produce such products (including import duties and quotas or other import costs)
can have a significant effect on demand for the company's products. 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. Strengthening of the U.S. dollar against
other currencies could make the company's products less competitive on the basis
of price in markets outside the United States, and strengthening of currencies
in Canada and China can have a negative impact on the company's sales of
products produced in those countries. 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. Also, the level of success in integrating the acquisition
of assets from Bodet & Horst could affect the company's ability to meet its
profitability goals. 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 Part II, Item 1A "Risk Factors" in
this report, and in the Item 1A "Risk Factors" in the company's Form 10-K filed
with the Securities and Exchange Commission on July 9, 2008 for the fiscal year
ended April 27, 2008.
I-28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
The following analysis of financial condition and results of operations should
be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
Overview
The company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to April 30. The company's six months ended November 2, 2008, and
October 28, 2007, represent 27 and 26 week periods, respectively. The company
has operations classified into two business segments: mattress fabrics and
upholstery fabrics. The mattress fabrics segment primarily manufacturers,
sources and sells fabrics to bedding manufacturers. The upholstery fabrics
segment sources, manufactures and sells fabrics primarily to residential and
commercial (contract) furniture manufacturers. We believe that Culp is the
largest marketer of mattress fabrics in North America, and one of the largest
marketers of upholstery fabrics for furniture in North America, both measured by
total sales.
The company evaluates the operating performance of its segments based upon
income (loss) from operations before restructuring and related charges or
credits 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 operations of each segment and primarily consist of accounts
receivable, inventories, and property, plant, and equipment. The mattress
fabrics segment also includes in segment assets, assets held for sale, goodwill
and other non-current assets associated with the ITG and Bodet & Horst
acquisitions. The upholstery fabrics segment also includes assets held for sale
in its segment assets.
The following tables set forth the net sales, gross profit, selling, general and
administrative expenses and operating income (loss) by segment for the three
months and six months ended November 2, 2008, and October 28, 2007.
I-29
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE THREE MONTHS ENDED NOVEMBER 2, 2008 AND OCTOBER 28, 2007
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------------- --------------------------------
November 2, October 28, % Over November 2, October 28,
Net Sales by Segment 2008 2007 (Under) 2008 2007
------------------------------------------ -------------- ------------- ------------- --------------- -------------
Mattress Fabrics $ 28,048 36,010 (22.1)% 53.7 % 56.0 %
Upholstery Fabrics 24,215 28,326 (14.5)% 46.3 % 44.0 %
-------------- ------------- ------------- ------------- -------------
Net Sales $ 52,263 64,336 (18.8)% 100.0 % 100.0 %
============== ============= ============= ============= =============
Gross Profit by Segment Gross Profit Margin
------------------------------------------ --------------------------------
Mattress Fabrics $ 5,084 6,038 (15.8)% 18.1 % 16.8 %
Upholstery Fabrics 1,277 2,975 (57.1)% 5.3 % 10.5 %
-------------- ------------- ------------- ------------- -------------
Subtotal 6,361 9,013 (29.4)% 12.2 % 14.0 %
Restructuring related charges (3,213)(1) (591) (3) N.M. (6.1)% (0.9)%
-------------- ------------- ------------- ------------- -------------
Gross Profit $ 3,148 8,422 (62.6)% 6.0 % 13.1 %
============== ============= ============= ============= =============
Selling, General and Administrative
expenses by Segment Percent of Sales
------------------------------------------ --------------------------------
Mattress Fabrics $ 1,833 2,166 (15.4)% 6.5 % 6.0 %
Upholstery Fabrics 2,081 2,774 (25.0)% 8.6 % 9.8 %
Unallocated Corporate expenses 523 873 (40.1)% 1.0 % 1.4 %
-------------- ------------- ------------- ------------- -------------
Subtotal 4,437 5,813 (23.7)% 8.5 % 9.0 %
Restructuring related charges 2 (1) 25 (3) (92.0)% 0.0 % 0.0 %
-------------- ------------- ------------- ------------- -------------
Selling, General and Administrative
expenses $ 4,439 5,838 (24.0)% 8.5 % 9.1 %
============== ============= ============= ============= =============
Operating Income (loss) by Segment Operating Income (Loss) Margin
------------------------------------------ --------------------------------
Mattress Fabrics $ 3,251 3,872 (16.0)% 11.6 % 10.8 %
Upholstery Fabrics (804) 201 N.M. (3.3)% 0.7 %
Unallocated corporate expenses (523) (873) (40.1)% (1.0)% (1.4)%
-------------- ------------- ------------- ------------- -------------
Subtotal 1,924 3,200 (39.9)% 3.7 % 5.0 %
Restructuring expense and restructuring
related charges (11,849)(2) (532) (4) N.M. (22.7)% (0.8)%
-------------- ------------- ------------- ------------- -------------
Operating (loss) income $ (9,925) 2,668 N.M. (19.0)% 4.1 %
============== ============= ============= ============= =============
Depreciation by Segment
------------------------------------------
Mattress Fabrics $ 935 898 4.1 %
Upholstery Fabrics 439 547 (19.7)%
-------------- ------------- -------------
Subtotal 1,374 1,445 (4.9)%
Accelerated depreciation 2,090 - 100.0 %
-------------- ------------- -------------
Total Depreciation 3,464 1,445 139.7 %
============== ============= =============
Notes:
(1) The $3.2 million restructuring related charge represents $2.1 million for
accelerated depreciation, $1.1 million for inventory markdowns, and $15 for
other operating costs associated with closed plant facilities. The $2
restructuring related charge represents other operating costs associated
with closed plant facilities.
(2) The $11.8 million represents $7.8 million for write-downs of a building and
equipment, $2.1 million for accelerated depreciation, $1.1 million for
inventory markdowns, $460 for lease termination and other exit costs, $362
for employee termination benefits, and $17 for other operating costs
associated with closed plant facilities. Of this total charge, $3.2
million, $2, and $8.6 million was recorded in cost of sales,
selling,general, and administrative expenses, and restructurintg expense,
respectively.
(3) The $591 restructuring related charge represents $348 for inventory
markdowns and $243 for other operating costs associated with closed plant
facilities. The $25 restructuring related charge represents other operating
costs associated with closed plant facilities.
(4) The $532 represents $348 for inventory markdowns, $268 for other operatings
costs associated with closed plant facilities, $179 for lease termination
and other exit costs, $73 for asset movement costs, $27 for write-downs of
a building and equipment, a credit of $114 for proceeds received on
equipment with no carrying value, and a credit of $249 for employee
termination benefits. Of this total charge, $591 was recorded in cost of
sales, $25 was recorded in selling, general, and administrative expenses,
and a credit of $84 was recorded in restructuring expense.
I-30
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE SIX MONTHS ENDED NOVEMBER 2, 2008 AND OCTOBER 28, 2007
(Amounts in thousands)
SIX MONTHS ENDED (UNAUDITED)
-----------------------------------------------------------------------------
Amounts Percent of Total Sales
----------------------------- -------------------------------
November 2, October 28, % Over November 2, October 28,
Net Sales by Segment 2008 2007 (Under) 2008 2007
-------------------------------------------------- ------------- ------------ ------------ -------------- --------------
Mattress Fabrics $ 63,610 72,546 (12.3)% 57.0 % 56.0 %
Upholstery Fabrics 47,975 57,020 (15.9)% 43.0 % 44.0 %
------------- ------------ ------------ -------------- --------------
Net Sales $ 111,585 129,566 (13.9)% 100.0 % 100.0 %
============= ============ ============ ============== ==============
Gross Profit by Segment Gross Profit Margin
-------------------------------------------------- -------------------------------
Mattress Fabrics $ 11,428 11,843 (3.5)% 18.0 % 16.3 %
Upholstery Fabrics 2,347 6,742 (65.2)% 4.9 % 11.8 %
------------- ------------ ------------ -------------- --------------
Subtotal 13,775 18,585 (25.9)% 12.3 % 14.3 %
Restructuring related charges (3,225)(1) (1,107)(3) 191.3 % (2.9)% (0.9)%
------------- ------------ ------------ -------------- --------------
Gross Profit $ 10,550 17,478 (39.6)% 9.5 % 13.5 %
============= ============ ============ ============== ==============
Selling, General and Administrative expenses by Segment Percent of Sales
------------------------------------------------------- -------------------------------
Mattress Fabrics $ 3,961 4,208 (5.9)% 6.2 % 5.8 %
Upholstery Fabrics 4,565 6,092 (25.1)% 9.5 % 10.7 %
Unallocated Corporate expenses 1,293 1,808 (28.5)% 1.2 % 1.4 %
------------- ------------ ------------ -------------- --------------
Subtotal 9,819 12,108 (18.9)% 8.8 % 9.3 %
Restructuring related charges 4 (1) 51 (3) (92.2)% 0.0 % 0.0 %
------------- ------------ ------------ -------------- --------------
Selling, General and Administrative expenses $ 9,823 12,159 (19.2)% 8.8 % 9.4 %
============= ============ ============ ============== ==============
Operating Income (loss) by Segment Operating Income (Loss) Margin
-------------------------------------------------- -------------------------------
Mattress Fabrics $ 7,467 7,635 (2.2)% 11.7 % 10.5 %
Upholstery Fabrics (2,218) 650 (441.2)% (4.6)% 1.1 %
Unallocated corporate expenses (1,293) (1,808) (28.5)% (1.2)% (1.4)%
------------- ------------ ------------ -------------- --------------
Subtotal 3,956 6,477 (38.9)% 3.5 % 5.0 %
Restructuring expense and restructuring
related charges (12,265)(2) (1,506)(4) N.M. (11.0)% (1.2)%
------------- ------------ ------------ -------------- --------------
Operating (loss) income $ (8,309) 4,971 N.M. (7.4)% 3.8 %
============= ============ ============ ============== ==============
Depreciation by Segment
--------------------------------------------------
Mattress Fabrics $ 1,693 1,795 (5.7)%
Upholstery Fabrics 940 1,097 (14.3)%
------------- ------------ ------------
Subtotal 2,633 2,892 (9.0)%
Accelerated depreciation 2,090 - 100.0 %
------------- ------------ ------------
Total depreciation 4,723 2,892 63.3 %
============= ============ ============
Notes:
(1) The $3.2 million represents restructuring related charges of $2.1 million
for accelerated depreciation, $1.1 million for inventory markdowns, and
$27 for other operating costs associated with closed plant facilities.
The $4 represents restructuring related charges for other operating costs
associated with closed plant facilities.
(2) The $12.3 million represents $7.8 million for write-downs of a building
and equipment, $2.1 million for accelerated depreciation, $1.1 million
for inventory markdowns, $776 for employee termination benefits, $447 for
lease termination and other exit costs, and $31 for other operating costs
associated with closed plant facilities. Of this total charge, $3.2
million, $4, and $9.0 million were recorded in cost of sales, selling,
general, and administrative expenses, and restructuring expense,
respectively.
(3) The $1.1 million represents restructuring related charges of $703 for
other operating costs associated with closed plant facilities and $404
for inventory markdowns. The $51 restructuring related charge represents
other operating costs associated with closed plant facilities.
(4) The $1.5 million represents $754 for other operating costs on closed
plant facilities, $546 for lease termination and other exit costs, $404
for inventory markdowns, $388 for write-downs of buildings and equipment,
$127 for asset movement costs, a credit of $315 for sales proceeds
received on equipment with no carrying value, and a credit of $398 for
employee termination benefits. Of this total charge, $1.1 million was
recorded in cost of sales, $51 was recorded in selling, general, and
administrative expenses, and $348 was recorded in restructuring expense.
I-31
Three and Six months ended November 2, 2008 compared with the Three and Six
Months ended October 28, 2007
Overview
For the three months ended November 2, 2008, net sales decreased 19% to $52.3
million compared with $64.3 million for the second quarter of fiscal 2008. The
company reported a net loss of $40.9 million, or $3.23 per diluted share, for
the second quarter of fiscal 2009. The net loss of $40.9 million included a
non-cash income tax charge of $31.2 million, or $0.76 per diluted share for the
establishment of a valuation allowance against our net deferred tax assets
regarding our U.S. and China operations. The company reported net income of $1.6
million or $0.12 per diluted share, for the second quarter of fiscal 2008. The
company reported a loss before income taxes of $10.3 million, which includes
restructuring and related charges of $11.8 million (of which $11.0 million and
$839,000 represent non-cash and cash charges, respectively) for the second
quarter of fiscal 2009. The company reported income before income taxes of $1.5
million, which includes restructuring and related charges of $532,000 (of which
$158,000 and $374,000 represent cash and non-cash charges, respectively) for the
second quarter of fiscal 2008.
For the six months ended November 2, 2008, net sales decreased 14% to $111.6
million compared with $129.6 million for the six months ended October 28, 2007.
The company reported a net loss of $40.1 million, or $3.17 diluted share, for
the six months ended November 2, 2008. The net loss of $40.1 million included a
non-cash income tax charge of $31.2 million, or $0.78 per diluted share for the
establishment of a valuation allowance against our net deferred tax assets
regarding our U.S. and China operations. The company reported net income of $2.4
million, or $0.19 per diluted share, for the six months ended October 28, 2007.
The company reported a loss before income taxes of $9.1 million, which includes
restructuring and related charges of $12.3 million (of which $11.0 million and
$1.3 million represent non-cash and cash charges, respectively) for the six
months ended November 2, 2008. The company reported income before income taxes
of $2.8 million, which includes restructuring and related charges of $1.5
million (of which $713,000 and $793,000 represent cash and non-cash charges,
respectively) for the six months ended October 28, 2007.
Restructuring and Related Charges
September 2008 Upholstery Fabrics Restructuring Plan
On September 3, 2008, the board of directors approved changes to the upholstery
fabric operations, including the consolidation of facilities in China and
reduction of excess manufacturing capacity. Those actions were in response to
the extremely challenging industry conditions for upholstery fabrics.
Restructuring and related charges for this plan totaled $9.4 million, of which
$6.6 million related to impairment charges on equipment, $2.1 million for
accelerated depreciation, $437,000 for lease termination and other exit costs,
$319,000 for inventory markdowns, $35,000 for employee termination benefits, and
$3,000 for other operating costs associated with closed plant facilities. The
plant closings associated with this restructuring plant were substantially
completed by the end of the second quarter of fiscal 2009.
Three months ended November 2, 2008 compared with Three Months Ended October 28,
2007
During the second quarter of fiscal 2009, total restructuring and related
charges were $11.8 million, of which $2.1 million related to accelerated
depreciation in connection with the consolidation of plant facilities in China,
$1.1 million for inventory markdowns related to further streamlining of the
upholstery fabrics product line and raw material components, $460,000 for lease
termination and other exit costs primarily related to the consolidation of plant
facilities in China, $362,000 for employee termination benefits related to SG&A
staffing reductions, and $17,000 for other operating costs associated with
closed plant facilities.
I-32
The $11.8 million in restructuring and related charges also includes $7.8
million for fixed write-downs that consist of impairment charges of $2.2 million
for fixed assets that were abandoned in connection with the consolidation of
certain plant facilities in China and $795,000 for a reduction in selling price
of the company's corporate headquarters to $4.0 million. This $4.0 million is
recorded in assets held for sale in the 2009 consolidated balance sheet. In
addition, during the course of the company's strategic review in the second
quarter of its upholstery fabrics business, the company assessed the
recoverability of the carrying value of its upholstery fabric fixed assets that
were being held and used in operations. This strategic review resulted in
impairment losses of $4.4 million and $456,000 for fixed assets located in China
and the U.S., respectively. These losses reflect the amounts by which the
carrying values of these fixed assets exceed their estimated fair values
determined by their estimated future discounted cash flows and quoted market
prices.
Of the total $11.8 million restructuring and related charges, $3.2 million was
recorded in cost of sales, $2,000 was recorded in selling, general, and
administrative expense, and $8.6 million was recorded in restructuring expense
in the 2009 Consolidated Statement of Net Loss. Of the total $11.8 million
restructuring and related charges, $9.4 million and $2.4 million pertained to
the September 2008 Upholstery Fabrics and December 2006 Upholstery Fabrics
restructuring plans.
During the second quarter of fiscal 2008, total restructuring and related
charges were $532,000, of which $348,000 related to inventory markdowns,
$268,000 for other operating costs associated with closed plant facilities,
$179,000 for lease termination and other exit costs, $73,000 for asset movement
costs, $27,000 for write-downs of a building and equipment, a credit of $114,000
for proceeds received on equipment with no carrying value, and a credit of
$249,000 for employee termination benefits. Of this total charge, $591,000 was
recorded in cost of sales, $25,000 was recorded in selling, general, and
administrative expense, and a credit of $84,000 was recorded in restructuring
expense in the 2008 Consolidated Statement of Net Income. These charges
primarily relate to the December 2006 Upholstery Fabrics restructuring plan.
Six months ended November 2, 2008 compared with Six Months Ended October 28,
2007
During the six months ended November 2, 2008, total restructuring and related
charges were $12.3 million, of which $7.8 million related to fixed asset
impairments (see above paragraph for components of this impairment charge
recorded in the second quarter of fiscal 2009), $2.1 million related to
accelerated depreciation in connection with the consolidation of plant
facilities in China, $1.1 million for inventory markdowns related to further
streamlining of the upholstery fabrics product line and raw material components,
$776,000 for employee termination benefits related to SG&A staffing reductions,
$447,000 for lease termination and other exit costs primarily related to the
consolidation of plant facilities in China, and $31,000 for other operating
costs associated with closed plant facilities. Of the total $12.3 million
restructuring and related charges, $3.2 million was recorded in cost of sales,
$4,000 was recorded in selling, general, and administrative expense, and $9.0
million was recorded in restructuring expense in the 2009 Consolidated Statement
of Net Loss. Of the total $12.3 million restructuring and related charges, $9.4
million and $2.9 million pertained to the September 2008 Upholstery Fabrics and
December 2006 Upholstery Fabrics restructuring plans, respectively.
During the six months ended October 28, 2007, total restructuring and related
charges were $1.5 million, of which $754,000 related to other operating costs
associated with closed plant facilities, $546,000 for lease termination and
other exit costs, $404,000 for inventory markdowns, $388,000 for write-downs of
buildings and equipment, $127,000 for asset movement costs, a credit of $315,000
for sales proceeds received on equipment with no carrying value, and a credit of
$398,000 for employee termination benefits. Of this total charge, $1.1 million
was recorded in cost of sales, $51,000 was recorded in selling, general, and
administrative expense, and $348,000 was recorded in restructuring expense in
the 2008 Consolidated Statement of Net Income. These charges primarily relate to
the December 2006 Upholstery Fabrics restructuring plan.
I-33
Mattress Fabrics Segment
Asset Acquisition
Pursuant to an Asset Purchase Agreement among the company, Bodet & Horst USA, LP
and Bodet & Horst GMBH & Co. KG (collectively "Bodet & Horst") dated August 11,
2008, the company purchased certain assets and assumed certain liabilities of
the knitted mattress fabric operation of Bodet & Horst, including its
manufacturing operation in High Point, North Carolina. The purchase involved the
equipment, inventory, and intellectual property associated with the High Point
manufacturing operation, which has served as the company's primary source of
knitted mattress fabric for six years. Demand for this product line has grown
significantly, as knits are increasingly being utilized on mattresses at volume
retail price points. The purchase price for the assets was cash in the amount of
$11.4 million, which included an adjustment of $477,000 for changes in working
capital as defined in the Asset Purchase Agreement, and the assumption of
certain liabilities. Also, in connection with the purchase, the company entered
into a six-year consulting and non-compete agreement with the principal owner of
Bodet & Horst, providing for payments to the owner in the amount of $75,000 per
year to be paid in quarterly installments (of which $50,000 and $25,000 will be
allocated to the non-compete covenant and consulting fees, respectively) for the
agreement's full six-year term.
The acquisition was financed by $11.0 million of unsecured notes pursuant to a
Note Purchase Agreement ("2008 Note Agreement") dated August 11, 2008. The 2008
Note Agreement has a fixed interest rate of 8.01% and a term of seven years.
Principal payments of $2.2 million per year are due on the notes beginning three
years from the date of the 2008 Note Agreement. The 2008 Note Agreement contains
customary financial and other covenants as defined in the 2008 Note Agreement.
In connection with the 2008 Note Agreement, the company entered into a Consent
and Fifth Amendment (the "Consent and Amendment") that amends the previously
existing unsecured note purchase agreements. The purpose of the Consent and
Amendment was for the existing note holders to consent to the 2008 Note
Agreement and to provide that certain financial covenants in favor of the
existing note holders would be on the same terms as those contained in the 2008
Note Agreement.
In connection with the asset purchase agreement, the company assumed the lease
of the building where the operation is located. This lease is with a partnership
owned by certain shareholders and officers of the company and their immediate
families. The lease provides for monthly payments of $12,704, expires on June
30, 2010, and contains a renewal option for an additional three years. As of
November 2, 2008, the minimum lease payment requirements over the next three
fiscal years are: FY 2009 - $114,000; FY 2010 - $152,000; and FY 2011 - $25,000.
The following table presents the allocation of the acquisition cost, including
professional fees and other related acquisition costs, to the assets acquired
and liabilities assumed based on their fair values. The allocation of the
purchase price is based on a preliminary valuation and could change when the
final valuation is obtained. Differences between the preliminary valuation and
the final valuation are not expected to be significant. The preliminary
acquisition cost allocation is as follows:
--------------------------------------------------------------------------------
(dollars in thousands) Fair Value
--------------------------------------------------------------------------------
Inventories $ 1,439
Other current assets 17
Property, plant, and equipment 3,000
Non-compete agreement (Note 7) 756
Goodwill 7,479
Accounts payable (1,291)
--------------------------------------------------------------------------------
$ 11,400
--------------------------------------------------------------------------------
I-34
Of the total consideration paid of $11,400, $11,365 and $35 was paid in fiscal
2009 and 2008, respectively.
The company recorded the non-compete agreement at its fair value based on
various valuation techniques. This non-compete agreement will be amortized on a
straight-line basis over the six year life of the agreement. Property, plant,
and equipment will be depreciated on a straight-line basis over useful lives
ranging from five to fifteen years. Goodwill is deductible for income tax
purposes over the statutory period of fifteen years.
The following unaudited pro forma consolidated results of operations for the
three month and six month periods ending November 2, 2008, and October 28, 2007,
have been prepared as if the acquisition of Bodet & Horst had occurred at April
30, 2007.
--------------------------------------------------------------------------------
Three months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Net Sales $ 52,263 $ 64,336
(Loss) income from operations (9,925) 3,571
Net (loss) income (40,868) 2,026
Net (loss) income per share, basic (3.23) 0.16
Net (loss) income per share, diluted (3.23) 0.16
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Six months ended
(dollars in thousands) November 2, 2008 October 28, 2007
--------------------------------------------------------------------------------
Net Sales $ 111,585 $ 129,566
(Loss) income from operations (7,365) 7,386
Net (loss) income (39,852) 4,491
Net (loss) income per share, basic (3.15) 0.36
Net (loss) income per share, diluted (3.15) 0.35
--------------------------------------------------------------------------------
The unaudited pro forma information is presented for informational purposes only
and is not necessarily indicative of the results of operations that actually
would have been achieved had the acquisition been consummated as of that time,
nor is it intended to be a projection of future results.
I-35
Net Sales -- Mattress fabrics (known as mattress ticking) net sales for the
second quarter of fiscal 2009 were $28.0 million, a 22% decrease compared with
$36.0 million for the second quarter of fiscal 2009. On a unit volume basis,
total yards sold for the second quarter of fiscal 2009 decreased by 25% compared
with the second quarter of fiscal 2008. This trend reflects the extremely weak
retail environment for the mattress fabrics industry due to decreased consumer
spending. For the six months ended November 2, 2008, net sales were $63.6
million, a 12% decrease compared to $72.5 million for the six months ended
October 28, 2007. On a unit volume basis, total yards sold for the six months
ended November 2, 2008, decreased by 15% compared to the six months ended
October 28, 2007. This trend reflects the extremely weak retail environment for
the mattress fabrics industry due to decreased consumer spending and the planned
discontinuance of certain products from the ITG acquisition. In response to this
environment, the company is carefully managing their inventories and taking the
necessary steps to reduce operating costs.
The average selling price of $2.47 for the second quarter of fiscal 2009
increased 3% over the same period a year ago. The average selling price of $2.48
for the six months ended November 2, 2008 increased 3% over the same period a
year ago. This trend reflects the continued shift to knitted mattress fabrics
with a higher selling price.
Mattress fabric net sales represented 54% and 57% of the company's net sales for
the three month and six month periods ended November 2, 2008. Mattress fabric
net sales represented 56% of the company's net sales for both the three month
and six month periods ended October 28, 2007.
Operating Income -- For the second quarter of fiscal 2009, the mattress fabrics
segment reported operating income of $3.3 million, or 11.6% of net sales,
compared to $3.9 million, or 10.8% of net sales, for the second quarter of
fiscal 2008. For the six months ended November 2, 2008, the mattress fabrics
segment reported operating income of $7.5 million, or 11.7% of net sales
compared to $7.6 million, or 10.5% of net sales for the six months ended October
28, 2007.
Selling, general, and administrative expenses were $1.8 million, or 6.5% of net
sales in the second quarter of fiscal 2009, compared with $2.2 million, or 6.0%
of net sales in the second quarter of fiscal 2008. Selling, general, and
administrative expenses were $3.9 million, or 6.2% of net sales for the six
months ended November 2, 2008, compared with $4.2 million, or 5.8% of net sales
for the six months ended October 28, 2007.
Despite the larger-than-expected decline in sales for the second quarter,
operating margins in mattress fabrics increased from 11.6 % in the second
quarter of fiscal 2009 compared with 10.8% in the second quarter of fiscal 2008.
During fiscal 2009, we completed a $5.0 million capital project to significantly
strengthen our woven fabrics manufacturing operations and provide further
reactive capacity to its customers. Additionally, the expanded capacity this
capital project provides should effectively position the company to pursue
future growth opportunities. In addition, the recent acquisition of the knitted
mattress fabrics operation of Bodet & Horst further enhances the company's
strong service platform with improved supply logistics from pattern inception to
fabric delivery, allowing accelerated responsiveness and greater stability. With
the weaving expansion and the completion of the Bodet & Horst acquisition, the
company now has a large and modern, vertically integrated manufacturing platform
in all major product categories of the mattress fabrics industry.
Segment assets -- Segment assets consist of accounts receivable, inventory,
assets held for sale, non-compete agreements associated with the ITG and Bodet &
Horst acquisitions, goodwill, and property, plant, and equipment. As of November
2, 2008, accounts receivable and inventory totaled $28.2 million compared with
$27.6 million at April 27, 2008. As of November 2, 2008, and April 27, 2008, the
carrying value of assets held for sale was $35,000. We expect that the final
sale and disposal of these assets will be completed within a year from the date
the plan of sale was adopted.
I-36
As of November 2, 2008 and April 27, 2008, the carrying value of the non-compete
agreements was $1.4 million and $789,000, respectively. As of November 2, 2008
and April 27, 2008, the carrying value of the segment's goodwill was $11.6
million and $4.1 million, respectively. The increase in the carrying value of
the non-compete agreements and goodwill pertains to the Bodet & Horst
acquisition.
Also as of November 2, 2008, property, plant and equipment totaled $25.1 million
compared with $21.5 million at April 27, 2008. This increase reflects the
completion of the $5.0 million capital project, and property, plant, and
equipment purchased in connection with the Bodet & Horst acquisition. The $25.1
million at November 2, 2008, represents property, plant, and equipment of $17.2
million and $7.9 million located in the U.S. and Canada, respectively. The $21.5
million at April 27, 2008, represents property, plant, and equipment of $13.1
million and $8.4 million located in the U.S. and Canada, respectively.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric net sales (which include both fabric and cut and
sewn kits) for the second quarter of fiscal 2009 was $24.2 million, a 15%
decline compared with $28.3 million in the second quarter of fiscal 2008. On a
unit volume basis, total yards sold (which excludes fabric used in cut and sewn
kits) for the second quarter of fiscal 2009 decreased by 21% compared with the
second quarter of fiscal 2008. The average selling price of $4.38 increased 3.1%
for the second quarter of fiscal 2009 compared with the second quarter of fiscal
2008. For the six months ended November 2, 2008, upholstery fabric net sales
(which include both fabric and cut and sewn kits) were $48.0 million, a 16%
decline compared with $57.0 million for the six months ended October 28, 2007.
On a unit volume basis, total yards sold (which exclude fabric used in cut and
sewn kits) for the six months ended November 2, 2008 decreased by 19% compared
with the six months ended October 28, 2007. The average selling price of $4.37
increased 3% for the six months ended November 2, 2008, compared with the six
months ended October 28, 2007.
Upholstery fabrics sales reflect very weak demand industry wide, as well as
continued soft demand for U.S. produced upholstery fabrics, driven by consumer
preference for leather and suede furniture and other imported furniture and
fabrics. Net sales of upholstery fabrics produced outside the company's U.S.
manufacturing operations were $18.1 million in the second quarter of fiscal
2009, an increase of 7% from $16.9 million in the second quarter of fiscal 2008.
Net sales of upholstery fabrics produced outside the company's U.S.
manufacturing operations were $35.5 million for the six months ended November 2,
2008, compared to $35.8 million for the six months ended October 28, 2007. Net
sales of U.S. produced upholstery fabrics were $6.1 million in the second
quarter of fiscal 2009, a decrease of 46% from $11.4 million in the second
quarter of fiscal 2008. Net sales of U.S. produced upholstery fabrics were $12.5
million for the six months ended November 2, 2008, a decrease of 41% from $21.2
million for the six months ended October 28, 2007.
Operating Income (Loss) - The upholstery fabrics segment had an operating loss
for the second quarter of fiscal 2009 of $804,000 compared with operating income
of $201,000 for the second quarter of fiscal 2008. The upholstery fabrics
segment had an operating loss of $2.2 million for the six months ended November
2, 2008 compared with operating income of $650,000 for the six months ended
October 28, 2007. These results reflect decreased consumer demand for upholstery
fabric sales (mostly for U.S. produced goods) due to the uncertain economy,
depressed housing market, and credit crisis. In response to this environment,
during the second quarter we initiated a profit improvement plan in the
upholstery fabrics business, which now includes the following major actions:
o Consolidated our China operations into fewer facilities and reduced
excess manufacturing capacity, reducing costs by at least $2.0 million
on an annualized basis. (See Restructuring and Related Charges section
for further details)
I-37
o Implemented a 30% reduction in selling, general and administrative
expenses, which reduced these costs by $3.0 million on an annual
basis.
o Reduced base compensation for executive and senior management and the
company's board of directors.
o Significantly reduced the cost structure of our U.S. velvet operations
located in Anderson, South Carolina
o Implemented a modest price increase on certain upholstery fabrics; and
wherever possible, obtained price concessions from suppliers on
certain high volume items where we could not increase our selling
prices.
Due to the company's restructuring activities and profit improvement plan noted
above, selling, general and administrative expenses for second quarter of fiscal
2009 were down 25% from the second quarter of fiscal 2008 and the upholstery
fabrics operating loss of $804,000 for the second quarter of fiscal 2009 was
lower than the operating loss of $1.4 million reported in the first quarter of
fiscal 2009.
Management remains cautiously optimistic about the company's long-term prospects
in the upholstery fabrics business because of the following: a) we have been
receiving significantly higher fabric placements, including cut and sewn kits;
b) a declining base of competitors due to the challenging economic environment;
c) our China-produced products provide a higher value to the customer and have
been especially popular at recent furniture markets; d) we have established a
mature and scalable model in China that will allow us to capitalize on this
demand when the industry recovers; and e) the above mentioned results from our
profit improvement plan. While these are all favorable indicators, management
remains committed to taking additional steps if necessary to address the low
profitability of the company's upholstery fabric operations, regardless of
prevailing economic and business conditions. The company could experience
additional inventory markdowns, write-downs of its property, plant, and
equipment, and further restructuring charges in the upholstery fabric operations
if sales and profitability continue to decline and further restructuring actions
become necessary.
Segment Assets -- Segment assets consist of accounts receivable, inventory,
property, plant, and equipment, and assets held for sale. As of November 2,
2008, accounts receivable and inventory totaled $26.9 million compared to $34.9
million at April 27, 2008. This decline reflects lower sales and improved
working capital management. As of November 2, 2008, property, plant, and
equipment totaled $1.0 million compared to $10.7 million at April 27, 2008. This
decline reflects restructuring charges of $7.8 million and $2.1 million for
fixed asset impairments and accelerated depreciation, respectively. The $1.0
million at November 2, 2008, represents property, plant, and equipment located
in the U.S. The $10.7 million at April 27, 2008, represents property, plant, and
equipment of $9.0 million and $1.7 million located in China and the U.S.,
respectively.
At November 2, 2008 and April 27, 2008, this segment had assets held for sale
with a carrying value of $792,000 for certain equipment related to the company's
U.S. upholstery fabric operations. We expect that the final sale and disposal of
these assets will be completed within a year from the date the plan of sale was
adopted.
Other Income Statement Categories
Selling, General and Administrative Expenses - Selling, general, and
administrative expenses (SG&A) for the company as a whole were $4.4 million for
the second quarter of fiscal 2009 compared with $5.8 million for the second
quarter of fiscal 2008, a decrease of 24%. As a percent of net sales, SG&A
expenses were 8.5% in the second quarter of fiscal 2009 compared with 9.1% in
the second quarter of fiscal 2008. SG&A expenses for the company as a whole were
$9.8 million for the six months ended November 2, 2008 compared with $12.2
million for the six months ended October 28, 2007, a decrease of 19%. As a
percent of net sales, SG&A expenses were 8.8% for the six months ended November
2, 2008 compared with 9.4% for the six months ended October 28, 2007. This trend
primarily reflects the company's restructuring efforts and profit improvement
plan associated with its upholstery fabric operations.
I-38
Interest Expense (Income) -- Interest expense for the second quarter of fiscal
2009 was $663,000 compared to $809,000 for the second quarter of fiscal 2008.
Interest expense for the six months ended November 2, 2008 was $1.1 million
compared to $1.6 million for the six months ended October 28, 2007. This trend
primarily reflects lower outstanding balances on our existing unsecured term
notes and the decrease in the one-month LIBOR, which is the interest rate upon
which our real estate loans are based. Interest expense for the second quarter
of fiscal 2009 increased from $431,000 in the first quarter of fiscal 2009 due
to the financing needed for the Bodet & Horst asset acquisition.
Interest income was $21,000 for the second quarter of fiscal 2009 compared to
$63,000 for the second quarter of fiscal 2008. Interest income for the six
months ended November 2, 2008, was $55,000 compared to $121,000 for the six
months ended October 28, 2007. This trend reflects lower cash and cash
equivalent balances, which were invested in money market funds.
Other (Income) Expense - Other income for the second quarter of fiscal 2009 was
$250,000 compared with other expense of $463,000 for the second quarter of
fiscal 2008. Other income for the six months ended November 2, 2008 was $236,000
compared with other expense of $695,000 for the six months ended October 28,
2007. This change primarily reflects fluctuations in foreign currency exchange
rates for subsidiaries domiciled in China and Canada.
Income Taxes
Effective Income Tax Rate
The effective income tax rate (income taxes as a percentage of (loss) income
before income taxes) for the six month periods ended November 2, 2008 and
October 28, 2007 were 339.9% and 13.2%, respectively. The change in our
effective income tax rate during fiscal 2009 was primarily attributable to the
recording of a $31.2 million valuation allowance against our net deferred tax
assets regarding our U.S. and China operations, changes in the value of the
Canadian dollar in relation to the U.S. dollar, and provision for uncertain
income tax positions. The company's effective income tax rate for the six month
periods ended November 2, 2008 and October 28, 2007, was based upon the
estimated effective income tax rate applicable for the full year after giving
effect to any significant items related specifically to interim periods. The
effective income tax rate can be impacted over the fiscal year by the mix and
timing of actual earnings from our U.S. operations and foreign sources versus
annual projections and changes in foreign currencies in relation to the U.S.
dollar.
I-39
Deferred Income Taxes
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", we evaluate our deferred income taxes to
determine if a valuation allowance is required. SFAS No. 109 requires that
companies assess whether a valuation allowance should be established based on
the consideration of all available evidence using a "more likely than not"
standard with significant weight being given to evidence that can be objectively
verified. The significant uncertainty in current and expected demand for
furniture and mattresses, along with the prevailing uncertainty in the overall
economic climate, has made it very difficult to forecast both short-term and
long-term financial results, and therefore, present significant negative
evidence as to whether we need to record a valuation allowance against our net
deferred tax assets. Based on this significant negative evidence, we have
recorded a $31.2 million valuation allowance, of which, $29.0 million and $2.2
million were against the net deferred tax assets of our U.S. and China
operations, respectively. The company's net deferred tax asset primarily
resulted from the recording of the income tax benefit of U.S. income tax loss
carryforwards over the last several years, which totals approximately $75.0
million. This non-cash charge of $31.2 million has no effect on the company's
operations, loan covenant compliance, or the possible utilization of the U.S.
income tax loss carryforwards in the future. If and when the company utilizes
any of these U.S. income tax loss carryforwards to offset future U.S. taxable
income, the income tax benefit would be recognized at that time.
The remaining net deferred tax liability of $1.2 million pertains to our
operations in Canada.
Uncertainty In Income Taxes
At November 2, 2008, the company had $5.4 million of total gross unrecognized
tax benefits, of which $4.9 million represents the amount of gross unrecognized
tax benefits that, if recognized would favorably affect the income tax rate in
future periods. Of the total gross unrecognized tax benefits of $5.4 million as
of November 2, 2008, $4.6 million and $742,000 are classified in net non-current
deferred income taxes and income taxes payable -long-term in the accompanying
consolidated balance sheets.
The company anticipates that the amount of unrecognized tax benefits will
increase by approximately $582,000 by the end of the fiscal year. This increase
primarily relates to double taxation under applicable tax treaties with foreign
tax jurisdictions.
Liquidity and Capital Resources
Liquidity - Our sources of liquidity include cash and cash equivalents, cash
flow from operations, assets held for sale, and amounts available under its
unsecured revolving credit lines. These sources have been adequate for
day-to-day operations. We believe our sources of liquidity continue to be
adequate to meets its needs.
Cash and cash equivalents as of November 2, 2008, were $8.5 million compared
with $4.9 million as of April 27, 2008. The company's cash position reflects
cash flow from operations of $6.9 million for the six months ended November 2,
2008 compared with $9.9 million for the six months ended October 28, 2007. The
company's cash position also reflects cash outlays for capital expenditures of
$1.3 million, and payments on vendor-financed capital expenditures, a capital
lease obligation, and long-term debt totaling $1.5 million for the six months
ended November 2, 2008. The company also paid cash of $11.4 million for the
acquisition of the knitted mattress fabrics operation of Bodet & Horst, which
was financed through $11.0 million in cash proceeds from the issuance of
long-term debt.
I-40
The company is taking further steps to support is liquidity, including ongoing
efforts to improve working capital turnover, sell certain assets, and further
reduce selling, general, and administrative expenses in its upholstery fabrics
segment. In addition, the company has entered into a contract dated December 4,
2008, providing for the sale of its headquarters building in High Point, North
Carolina for a purchase price of $4.0 million. The contract also contemplates
that the company would lease the building back from the purchaser for an initial
term of three years, at a rental rate of $360,240 per year, plus approximately
two-thirds of the building's operating costs. The contract is subject to the
purchaser's ability to obtain financing and is subject to a due diligence period
extending until January 9, 2009, during which the purchaser may inspect the
premises, conduct appraisals and other examinations, and during which the
purchaser may terminate the contract without penalty. The transaction is also
subject to approval by the company's lenders. The closing is anticipated to
occur on or before January 30, 2009. The proceeds of the sale would be used by
the company to pay down the bank loan that is currently secured by the building,
which has a balance of approximately $6.2 million. The remaining balance of the
loan would become an unsecured term loan from the same bank lender, subject to a
one percent increase in the interest rate on the loan. The loan would be due in
one repayment in June 2010. In connection with this disposal, the company
determined that its carrying value of their corporate headquarters building was
more than its fair value, less cost to sell. Consequently, the company recorded
an impairment charge of $795,000 in restructuring expense in the 2009
Consolidated Statement of Loss.
The company's cash position may be adversely affected by factors beyond its
control, such as weakening industry demand, delays in receipt of payment on
accounts receivable, and the availability of trade credit.
Working Capital -- Accounts receivable as of November 2, 2008 decreased $4.1
million, or 18%, in comparison to October 28, 2007. This decrease is primarily
related to the decrease in sales volume in the second quarter of fiscal 2009
compared with the second quarter of fiscal 2008. Days sales outstanding totaled
33 and 32 days at November 2, 2008 and October 28, 2007, respectively.
Inventories as of November 2, 2008, decreased $5.2 million or 13% in comparison
to October 28, 2007. This decrease in inventories primarily reflects lower sales
volume. Inventory turns for the second quarter of fiscal 2009 were 5.1 versus
5.4 for the second quarter of fiscal 2008. Operating working capital (comprised
of accounts receivable and inventories, less accounts payable) was $33.9 million
at November 2, 2008, down from $43.3 million at October 28, 2007. Working
capital turnover was 6.1 and 5.4 at November 2, 2008 and October 28, 2007,
respectively.
Financing Arrangements
Unsecured Term Notes- Bodet & Horst Acquisition
In connection with the Bodet & Horst Asset Purchase Agreement, the company
entered into the 2008 Note Agreement dated August 11, 2008. The 2008 Note
Agreement provides for the issuance of $11.0 million of unsecured term notes
with a fixed interest rate of 8.01% and a term of seven years. Principal
payments of $2.2 million per year are due on the notes beginning three years
from the date of the 2008 Note Agreement. The 2008 Note Agreement contains
customary financial and other covenants as defined in the 2008 Note Agreement.
Unsecured Term Notes- Existing
The company's existing unsecured term notes have a fixed interest rate of 8.80%
(payable semi-annually in March and September and subject to prepayment
provisions each fiscal quarter as defined in the agreement) and are payable over
an average remaining term of 1.3 years through March 2010. The principal
payments are required to be paid in annual installments over the next two years
as follows: March 2009 - $7.2 million; and March 2010 - $7.1 million.
In connection with the 2008 Note Agreement, the company entered into a Consent
and Amendment that amends the previously existing unsecured note purchase
agreements. The purpose of the Consent and Amendment was for the existing note
holders to consent to the 2008 Note Agreement and to provide that certain
financial covenants in favor of the existing note holders would be on the same
terms as those contained in the 2008 Note Agreement.
I-41
Real Estate Loan - I
The company has a real estate loan that is secured by a lien on the company's
corporate headquarters office located in High Point, North Carolina. This term
loan bears interest at the one-month LIBOR plus an adjustable margin (all in
rate of 5.71% at November 2, 2008) based on the company's debt/EBITDA ratio, as
defined in the agreement, and is payable in monthly installments through
September 2010, with a final payment of $3.3 million in October 2010.
Real Estate Loan - II
The company has a term loan in the amount of $2.5 million in connection with the
ITG asset purchase agreement. This term loan is secured by a lien on the
company's corporate headquarters office located in High Point, North Carolina
and bears interest at the one-month LIBOR plus an adjustable margin (all in rate
of 6.21% at November 2, 2008) based on the company's debt/EBITDA ratio, as
defined in the agreement. This agreement requires the company to pay interest
monthly with the entire principal due on June 30, 2010.
Revolving Credit Agreement - United States
The company has an unsecured credit agreement that provides for a revolving loan
commitment of $6.5 million, including letters of credit up to $5.5 million. This
agreement bears interest at the one-month LIBOR plus an adjustable margin (all
in rate of 5.71% at November 2, 2008) as defined in the agreement. As of
November 2, 2008, there were $1.6 million in outstanding letters of credit (of
which $700,000 and $925,000 related to inventory purchases and workers
compensation, respectively) and no borrowings were outstanding under the
agreement. The outstanding letters of credit of $700,000 that related to
inventory purchases expired on November 29, 2008.
On November 3, 2008, the company entered into a thirteenth amendment to this
revolving credit agreement. This amendment extended the expiration date to
December 31, 2009, amended its financial covenants as defined in the agreement,
and provided for a cross default based on an "Event of Default" under the
company's unsecured term note agreements (existing and Bodet & Horst).
Revolving Credit Agreement - China
The company's China subsidiary has an unsecured revolving credit agreement with
a bank in China to provide a line of credit available up to approximately $5.0
million, of which approximately $1.0 million includes letters of credit. This
agreement bears interest at a rate determined by the Chinese government. There
were no borrowings outstanding under the agreement as of November 2, 2008.
Canadian Government Loan
The company has an agreement with the Canadian government for a term loan that
is non-interest bearing and is payable in 48 equal monthly installments
commencing December 1, 2009. The proceeds were used to partially finance capital
expenditures at the company's Rayonese facility located in Quebec, Canada.
Overall
The company's loan agreements require that the company maintain compliance with
certain financial ratios. At November 2, 2008, the company was in compliance
with these financial covenants.
As of November 2, 2008, the principal payment requirements of long-term debt
during the next five years are: Year 1 - $7.4 million; Year 2 - $13.3 million;
Year 3 - $2.4 million; Year 4 - $2.4 million; Year 5 - $2.4 million; and
thereafter - $4.3 million.
I-42
Capital Expenditures
Capital expenditures for the six months ended November 2, 2008 were
approximately $2.7 million, of which $1.3 was paid in cash and approximately
$1.4 million was financed through a capital lease. The capital spending of $2.7
million consisted of $2.3 million from the mattress fabrics segment and $373,000
from the upholstery fabrics segment. Depreciation expense for the six months
ended November 2, 2008 was approximately $4.7 million, of which $1.7 million
related to the mattress fabrics segment and $3.0 million related the upholstery
fabrics segment. The $3.0 million in depreciation expense related to the
upholstery fabrics segment includes $2.1 million in accelerated depreciation in
connection with the consolidation of certain plant facilities located in China.
The company currently expects total capital expenditures to be approximately
$3.4 million in fiscal 2009, of which $2.0 million will be paid in cash and $1.4
million was financed through a capital lease on a project initiated prior to the
end of fiscal 2008. The capital spending of $3.4 million primarily relates to
the mattress fabrics segment. The company currently estimates depreciation
expense to be $6.9 million for fiscal 2009, of which $3.6 million relates to the
mattress fabrics segment and $3.3 million relates to the upholstery fabrics
segment (which includes $2.1 million in accelerated depreciation in connection
with the consolidation of certain plant facilities in China). The company
expects the availability of funds from cash flow from operations and its
revolving credit lines to fund its remaining capital needs.
The company has certain vendor financed arrangements regarding capital
expenditures that bear interest with fixed interest rates ranging from 6% to
7.14%. At November 2, 2008 and April 27, 2008, the company had total amounts due
regarding capital expenditures totaling $2.0 million and $3.0 million,
respectively. The payment requirements of these arrangements during the next
three years are: Year 1 - $1.0 million; Year 2 - $725,000; and Year 3 -
$275,000.
In May 2008, the company entered into a capital lease to finance a portion of
the construction of certain equipment related to its mattress fabrics segment.
The lease agreement contains a bargain purchase option and bears interest at
8.5%. The lease agreement requires principal payments totaling $1.4 million
which commenced on July 1, 2008, and are being paid in quarterly installments
through April 2010. This agreement is secured by equipment with a carrying value
of $2.4 million. The principal payments required over the next two years are as
follows: Year 1 - $692,000; and Year 2 - $280,000.
Critical Accounting Policies and Recent Accounting Developments
Significant accounting policies adopted by the company in fiscal 2009 are as
follows:
Fair Value Measurements:
The company adopted SFAS No. 157, Fair Value Measurements ("SFAS 157") for
financial assets and liabilities and SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159") on April 28, 2008. SFAS
157 (1) creates a single definition of fair value, (2) establishes a framework
for measuring fair value, and (3) expands disclosure requirements about items
measured at fair value. SFAS 157 applies to both items recognized and reported
at fair value in the financial statements and items disclosed at fair value in
the notes to the financial statements. SFAS 157 does not change existing
accounting rules governing what can or what must be recognized and reported at
fair value in the company's financial statements, or disclosed at fair value in
the company's notes to the financial statements. Additionally, SFAS 157 does not
eliminate practicability exceptions that exist in accounting pronouncements
amended by SFAS 157 when measuring fair value. As a result, the company will not
be required to recognize any new assets or liabilities at fair value.
Prior to SFAS 157, certain measurements of fair value were based on the price
that would be paid to acquire an asset, or received to assume a liability (an
entry price). SFAS 157 clarifies the definition of fair value as the price that
would be received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants at the measurement date (that
is, an exit price). The exit price is based on the amount that the holder of the
asset or liability would receive or need to pay in an actual transaction (or in
a hypothetical transaction if an actual transaction does not exist) at the
measurement date. In some circumstances, the entry and exit price may be the
same; however, they are conceptually different.
I-43
Fair value is generally determined based on quoted market prices in active
markets for identical assets or liabilities. If quoted market prices are not
available, the company uses valuation techniques that place greater reliance on
observable inputs and less reliance on unobservable inputs. In measuring fair
value, the company may make adjustments for risks and uncertainties, if a market
participant would include such an adjustment in its pricing.
SFAS 157 establishes a fair value hierarchy that distinguishes between
assumptions based on market data (observable inputs) and the company's
assumptions (unobservable inputs). Determining where an asset or liability falls
within that hierarchy depends on the lowest level input that is significant to
the fair measurement as a whole. An adjustment to the pricing method used within
either level 1 or level 2 inputs could generate a fair value measurement that
effectively falls in a lower level in the hierarchy. The hierarchy consists of
three broad levels as follows:
Level 1 - Quoted market prices in active markets for identical assets or
liabilities;
Level 2 - Inputs other than level 1 inputs that are either directly or
indirectly observable, and
Level 3 - Unobservable inputs developed using the company's estimates and
assumptions, which reflect those that market participants would use.
The following table presents information about assets and liabilities measured
at fair value on a recurring basis:
Fair value measurements at November 2, 2008 using:
--------------------------------------------------------------------------------------------------------------------------------
Quoted prices in
active markets Significant
for identical Significant other unobservable
assets observable inputs inputs
--------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands) Level 1 Level 2 Level 3 Total
--------------------------------------------------------------------------------------------------------------------------------
Assets:
None Not applicable Not applicable Not applicable Not applicable
Liabilities:
Interest Rate Swap Agreement Not applicable 82 Not applicable 82
As shown above, the interest rate swap derivative is valued based on fair value
provided by the company's bank and is classified within level 2 of the fair
value hierarchy. The determination of where an asset or liability falls in the
hierarchy requires significant judgment. The company evaluates its hierarchy
disclosures each quarter based on various factors and it is possible that an
asset or liability may be classified differently from quarter to quarter.
However, the company expects that changes in classifications between different
levels will be rare.
Most derivative contracts are not listed on an exchange and require the use of
valuation models. Consistent with SFAS 157, the company attempts to maximize the
use of observable market inputs in its models. When observable inputs are not
available, the company defaults to unobservable inputs. Derivatives valued based
on models with significant unobservable inputs and that are not actively traded,
or trade activity is one way, are classified within level 3 of the fair value
hierarchy.
I-44
Some financial statement preparers have reported difficulties in applying SFAS
157 to certain nonfinancial assets and nonfinancial liabilities, particularly
those acquired in business combinations and those requiring a determination of
impairment. To allow the time to consider the effects of the implementation
issues that have arisen, the FASB issued FSP FAS 157-2 ("FSP 157-2") on February
12, 2008 to provide a one-year deferral of the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed in financial statements at fair value on a recurring
basis (that is, at least annually). As a result of FSP 157-2, the company has
not yet adopted SFAS 157 for nonfinancial assets and liabilities that are valued
at fair value on a non-recurring basis. FSP 157-2 is effective for the company
in fiscal 2010 and the company is evaluating the impact that the application of
SFAS 157 to those nonfinancial assets and liabilities will have on its financial
statements.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS 159 provides the company with an option
to elect fair value as the initial and subsequent measurement attribute for most
financial assets and liabilities and certain other items. The fair value option
election is applied on an instrument-by-instrument basis (with some exceptions),
is irrevocable, and is applied to an entire instrument. The election may be made
as of the date of initial adoption for existing eligible items. Subsequent to
initial adoption, the company may elect the fair value option at initial
recognition of eligible items, on entering into an eligible firm commitment, or
when certain specified reconsideration events occur. Unrealized gains and losses
on items for which the fair value option has been elected will be reported in
earnings.
Upon adoption of SFAS 159 on April 28, 2008, the company did not elect to
account for any assets and liabilities under the scope of SFAS 159 at fair
value.
Recently Issued Accounting Standards
In December 2007, the FASB issued SFAS No. 141 (revised 2007) "Business
Combinations." SFAS No. 141 requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose all information required to evaluate and understand the
nature and financial effect of the business combination. This statement is
effective for acquisition dates on or after the beginning of the first annual
reporting period beginning after December 15, 2008. This statement is effective
for the company in fiscal 2010 and is not expected to have a material effect on
our consolidated financial statements to the extent we do not enter into a
business acquisition subsequent to adoption.
The FASB issued SFAS No. 160,"Noncontrolling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51." It is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Earlier application is prohibited.
SFAS No. 160 requires that accounting and reporting minority interests will be
re-characterized as non-controlling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements and disclosures
that clearly identify and distinguish between interests of the parent and the
interests of the non-controlling owners. This statement applies to all entities
that prepare consolidated financial statements, but will affect only those
entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement is effective for
interim periods beginning in fiscal 2010 and is not expected to have a material
effect on our consolidated financial statements to the extent we do not obtain a
non-controlling interest in an entity subsequent to adoption.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, An Amendment of FASB Statement No. 133."
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
does not provide adequate information about how derivative and hedging
activities affect an entity's financial position, financial performance, and
cash flows. Accordingly, SFAS No. 161 requires enhanced disclosures about an
entity's derivative and hedging activities and thereby improves transparency of
financial reporting. SFAS No. 161 is effective for fiscal and interim periods
beginning after November 15, 2008 and is effective for the company in third
quarter of fiscal 2009. The adoption of the provisions of SFAS No. 161 is not
expected to have a material effect on the company's financial position.
In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3,
"Determination of the Useful Life of Intangible Assets" (FSP 142-3). The
guidance is intended to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible
Assets", and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141(R), "Business Combinations", and other guidance
under U.S. generally accepted accounting principles (GAAP). FSP 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those years. This statement is
effective for the company in fiscal 2010 and is not expected to have a material
effect on our consolidated financial statements to the extent we do not enter
into a business acquisition subsequent to adoption.
I-45
In May 2008, the FASB issued SFAS No. 162,"The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162)." SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity GAAP in the United States (the GAAP hierarchy). SFAS 162
is effective on November 15, 2008. The adoption of SFAS 162 is not expected to
have a material impact on the company's results of operations, financial
condition, and equity.
In June 2008, the FASB issued FASB Staff Position No. EITF 03-06-1,"Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities,' (FSP EITF 03-6-1). FSP EITF 03-6-1 requires that
unvested share-based payment awards containing non-forfeited rights to dividends
be included in the computation of earnings per common share. The adoption of FSP
EITF 03-6-1 is effective January 1, 2009 and restrospective application is
required. This statement will be effective beginning with our third quarter of
this fiscal year. We are currently determining the impact, if any, FSP EITF
03-6-1 will have on our consolidated financial statements.
Contractual Obligations
Unsecured Term Notes- Bodet & Horst Acquisition
In connection with the Bodet & Horst Asset Purchase Agreement, the company
entered into the 2008 Note Agreement dated August 11, 2008. The 2008 Note
Agreement provides for the issuance of $11.0 million of unsecured term notes
with a fixed interest rate of 8.01% and a term of seven years. Principal
payments of $2.2 million per year are due on the notes beginning three years
from the date of the 2008 Note Agreement. The 2008 Note Agreement contains
customary financial and other covenants as defined in the 2008 Note Agreement.
Building Lease - Bodet & Horst Acquisition
In connection with the asset purchase agreement, the company assumed the lease
of the building where the operation is located. This lease is with a partnership
owned by certain shareholders and officers of the company and their immediate
families. The lease provides for monthly payments of $12,704, expires on June
30, 2010, and contains a renewal option for an additional three years. As of
November 2, 2008, the minimum lease payment requirements over the next three
fiscal years are: FY 2009 - $114,000; FY 2010 - $152,000; and FY 2011 - $25,000.
Capital Lease Obligation
In May 2008, the company entered into a capital lease to finance a portion of
the construction of certain equipment related to its mattress fabrics segment.
The lease agreement contains a bargain purchase option and bears interest at
8.5%. The lease agreement requires principal payments totaling $1.4 million
which commenced on July 1, 2008, and are being paid in quarterly installments
through April 2010. This agreement is secured by equipment with a carrying value
of $2.4 million. The principal payments required over the next two years are as
follows: Year 1 - $692,000; and Year 2 - $280,000.
I-46
Inflation
Any significant increase in the company's raw material costs, utility/energy
costs and general economic inflation could have a material adverse impact on the
company, because competitive conditions have limited the company's ability to
pass significant operating cost increases on to its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company's exposure to interest
rate risk consists of floating rate debt based on the London Interbank Offered
Rate (LIBOR) plus an adjustable margin under the company's revolving credit
agreement in the United States and its real estate term loans. As of November 2,
2008, there were $6.2 million in borrowings outstanding under the company's real
estate term loans and no borrowings under the company's revolving credit
agreement in the United States. In connection with the first 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 term notes issued in connection with the
Bodet & Horst acquisition have a fixed interest rate of 8.01%, the existing
unsecured term notes have a fixed interest rate of 8.80%, and the Canadian
government loan is non-interest bearing. The company's revolving credit
agreement associated with its China subsidiary bears interest at a rate
determined by the Chinese government. There were no borrowings outstanding under
this agreement at November 2, 2008. At November 2, 2008, $27.8 million of the
company's total borrowings of $32.2 million are at a fixed rate or non-interest
bearing. Thus, the company would not expect any foreseeable change in the
interest rates to have a material effect on the company's financial results.
The company is exposed to market risk from changes in the value of foreign
currencies for their subsidiaries domiciled in China and Canada. The company
generally does not use financial derivative instruments to hedge foreign
currency exchange rate risks associated with its foreign subsidiaries. At
November 2, 2008, the company did not have any foreign currency contracts
outstanding. The company's foreign subsidiaries use the United States dollar as
their functional currency. A substantial portion of the company's imports
purchased outside the United States are denominated in U.S. dollars. A 10%
change in either exchange rate at November 2, 2008, would not have a significant
impact on the company's results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
The company has conducted an evaluation of the effectiveness of its disclosure
controls and procedures as of November 2, 2008, the end of the period covered by
this report. This evaluation was conducted under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer. Based upon that evaluation, we have concluded that these
disclosure controls and procedures were effective to ensure that information
required to be disclosed in the reports filed by us and submitted under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded,
processed, summarized, and reported as and when required. Further, we concluded
that our disclosure controls and procedures have been designed to ensure that
information required to be disclosed in reports filed by us under the Exchange
Act is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, in a manner to allow timely decisions
regarding the required disclosures.
I-47
There has been no change in our internal control over financial reporting that
occurred during the quarter ended November 2, 2008 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
I-48
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
There has not been any material changes with regards to our legal proceedings
during the six months ended November 2, 2008. Our legal proceedings are
disclosed in the company's annual report on Form 10-K filed with the Securities
and Exchange Commission on July 9, 2008 for the fiscal year ended April 27,
2008.
Item 1A. Risk Factors
In addition to the information set forth below in this quarterly report on Form
10-Q, you should carefully consider the factors discussed the factors discussed
in Part 1, Item 1A "Risk Factors" in our annual report on Form 10-K filed with
Securities and Exchange Commission on July 9, 2008 for the fiscal year ended
April 27, 2008.
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
and shareholders equity are both now below $75 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. Regardless of this plan, if our average market capitalization over a
30 trading-day period is below $25 million, the NYSE is expected to start
immediate delisting procedures. If the company is not able to return to and
maintain 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.
Difficulties In Integrating Our Recent Acquisition Could Negatively Affect The
Profits of our Mattress Fabrics Segment
Pursuant to an asset purchase agreement among the company and Bodet & Horst
dated August 11, 2008, the company purchased certain assets of their knitted
mattress fabric operations. Our success will depend upon our ability to
successfully integrate this product line into our business. These integration
activities will place substantial demands on our management, operational
resources, and service capabilities. If we experience customer dissatisfaction
or operational problems as a result of integrating the additional business
acquired, our mattress fabrics business could be negatively affected.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the company was held in High Point, North
Carolina on September 23, 2008. Of the 12,648,027 shares of common stock
outstanding on the record date of July 17, 2008, 11,789,549 shares of common
stock were present in person or by proxy.
At the Annual Meeting, shareholders voted on:
Proposal 1
Election of Directors
Director Nominee For Withheld
---------------- --- --------
Kenneth R. Larson 11,595,724 193,825
Kenneth W. McAllister 11,595,241 194,308
Franklin N. Saxon 11,438,424 351,125
II-1
Proposal 2
Ratify the appointment of Grant Thornton LLP as the company's independent
auditors for fiscal 2009
For 11,782,840
Against 5,023
Abstain 1,686
Item 5. Other Information.
On December 11, 2008, the New York Stock Exchange ("NYSE") provided formal
notice to the company that it is not in compliance with the NYSE's continued
listing standards because over a consecutive 30 trading-day period the company's
average market capitalization was less than $75 million,($32.8 million as of
December 11, 2008), and its most recently reported shareholders' equity was
below $75 million ($46,507,000 as of November 2, 2008, the most recently
reported date). Under applicable NYSE procedures, unless the NYSE determines
otherwise, the company has 45 days from the date of its receipt of the notice to
submit a plan to the NYSE to demonstrate its ability to achieve compliance with
the continued listing standards within 18 months. The company intends to submit
a plan to demonstrate compliance with the listing standards within the required
time frame. If the plan is accepted, the NYSE will monitor the company on a
quarterly basis and can deem the plan period over prior to the end of the 18
months if a company is able to demonstrate returning to compliance with the
applicable continued listing standards (which would mean the company would have
to either increase its shareholders' equity to $75 million or demonstrate market
capitalization of at least $75 million), or achieving the ability to qualify
under an original listing standard, for a period of two consecutive quarters.
Regardless of this plan, if the company's average market capitalization over a
30 trading-day period falls below $25 million, the NYSE is expected to start
immediate delisting procedures. Beginning on or about December 18, 2008, the
NYSE will make available on its consolidated tape an indicator, ".BC," to
indicate that the company is below the NYSE's quantitative listing standards.
The indicator will be removed at such time as the company is deemed compliant
with the NYSE's continued listing standards.
Item 6. Exhibits
The following exhibits are filed as part of this report.
3(i) Articles of Incorporation of the company, as amended, were
filed as Exhibit 3(i) to the company's Form 10-Q for the
quarter ended July 28, 2002, filed September 11, 2002, and
are incorporated herein by reference.
3 (ii) Restated and Amended Bylaws of the company, as amended
November 12, 2007, were filed as Exhibit 3.1 to the
company's Form 8-K dated November 12, 2007, and incorporated
herein by reference.
10.1 Asset Purchase Agreement among Culp Inc., Bodet & Horst USA,
LP and Bodet & Horst GMBH & Co. KG, dated August 11, 2008,
filed as Exhibit 10.1 to the company's Form 8-K dated August
11, 2008, and incorporated herein by reference.
10.2 Note Purchase Agreement among Culp, Inc., Mutual of Omaha
Insurance Company and United of Omaha Insurance Company
dated August 11, 2008, filed as Exhibit 10.2 to the
company's Form 8-K dated August 11, 2008, and incorporated
herein by reference.
10.3 Consent and Fifth Amendment to Note Purchase Agreement dated
August 11, 2008, by and among Culp, Inc., Life Insurance
Company of North America, Connecticut General Life Insurance
Company, Beachside & Co., MONY Life Insurance Company,
United of Omaha Life Insurance Company, Mutual of Omaha Life
Insurance Company, and Prudential Retirement Insurance and
Annuity Company, filed as Exhibit 10.3 to the company's Form
8-K dated August 11, 2008, and incorporated herein by
reference.
II-2
10.4 Thirteenth Amendment to Amended and Restated Credit
Agreement dated as of November 3, 2008 among Culp, Inc. and
Wachovia Bank, National Association as Agent and as Bank,
filed as Exhibit 10.1 to the company's Form 8-K dated
November 6, 2008, and incorporated herein by reference.
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CULP, INC.
(Registrant)
Date: December 12, 2008 By: /s/ Kenneth R. Bowling
-------------------------------------------------
Kenneth R. Bowling
Vice President and Chief Financial Officer
(Authorized to sign on behalf of the registrant
and also signing as principal financial officer)
By: /s/ Thomas B. Gallagher, Jr.
-------------------------------------------------
Thomas B. Gallagher, Jr.
Corporate Controller
(Authorized to sign on behalf of the registrant
and also signing as principal accounting officer)
II-4
EXHIBIT INDEX
Exhibit Number Exhibit
-------------- -------
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.