================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 27, 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 Identification No.)
incorporation or other organization)
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 of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to the filing requirements for
at least the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition 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 [ ] Non-accelerated filer [X]
Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as
defined by Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the latest practical date:
Common shares outstanding at January 27, 2008: 12,634,526
Par Value: $0.05 per share
================================================================================
INDEX TO FORM 10-Q
For the period ended January 27, 2008
Page
----
Part I - Financial Statements
-----------------------------
Item 1. Unaudited Interim Consolidated Financial Statements:
---------------------------------------------------------------
Consolidated Statements of Net Income (Loss) -- Three and Nine
Months Ended January 27, 2008 and January 28, 2007 I-1
Consolidated Balance Sheets -- January 27, 2008, January 28, 2007 and April 29, 2007 I-2
Consolidated Statements of Cash Flows -- Nine Months Ended January 27, 2008 and January 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-27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I-27
------------------------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk I-41
---------------------------------------------------------------------
Item 4. Controls and Procedures I-41
----------------------------------
Part II - Other Information
---------------------------
Item 1. Legal Proceedings II-1
-------------------------
Item 1A. Risk Factors II-1
-----------------------
Item 5. Other Information II-1
-------------------------
Item 6. Exhibits II-2
----------------
Signatures II-3
Item 1. Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 27, 2008 AND JANUARY 28, 2007
(UNAUDITED)
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
-----------------------------------------------------------------
Amounts Percent of Sales
------------------------- ---------------------------
January 27, January 28, % Over January 27, January 28,
2008 2007 (Under) 2008 2007
----------- ------------- ----------- ------------ -------------
Net sales $ 60,482 $ 55,712 8.6 % 100.0 % 100.0 %
Cost of sales 53,706 51,001 5.3 % 88.8 % 91.5 %
----------- ------------- ------------ ------------- -------------
Gross profit 6,776 4,711 43.8 % 11.2 % 8.5 %
Selling, general and
administrative expenses 5,117 6,394 (20.0)% 8.5 % 11.5 %
Restructuring expense 412 1,275 (67.7)% 0.7 % 2.3 %
----------- ------------- ------------ ------------- -------------
Income (loss) from operations 1,247 (2,958) 142.2 % 2.1 % (5.3)%
Interest expense 753 952 (20.9)% 1.2 % 1.7 %
Interest income (77) (50) 54.0 % (0.1)% (0.1)%
Other income (72) (157) (54.1)% (0.1)% (0.3)%
----------- ------------- ------------ ------------- -------------
Income (loss) before income taxes 643 (3,703) 117.4 % 1.1 % (6.6)%
Income taxes * (260) (1,482) (82.5)% (40.4)% 40.0 %
----------- ------------- ------------ ------------- -------------
Net income (loss) $ 903 $ (2,221) (140.7)% 1.5 % (4.0)%
=========== ============= ============ ------------- -------------
Net income (loss) per share, basic $ 0.07 $ (0.19) N.M.
Net income (loss) per share, diluted 0.07 (0.19) N.M.
Average shares outstanding, basic 12,635 11,773 7.3 %
Average shares outstanding, diluted 12,738 11,773 8.2 %
NINE MONTHS ENDED
-----------------------------------------------------------------
Amounts Percent of Sales
------------------------- ---------------------------
January 27, January 28, % Over January 27, January 28,
2008 2007 (Under) 2008 2007
----------- ------------- ----------- ------------ -------------
Net sales $ 190,048 $ 177,337 7.2 % 100.0 % 100.0 %
Cost of sales 165,794 156,575 5.9 % 87.2 % 88.3 %
----------- ------------- ------------ ------------- -------------
Gross profit 24,254 20,762 16.8 % 12.8 % 11.7 %
Selling, general and
administrative expenses 17,275 19,240 (10.2)% 9.1 % 10.8 %
Restructuring expense 759 1,742 (56.4)% 0.4 % 1.0 %
----------- ------------- ------------ ------------- -------------
Income (loss) from operations 6,220 (220) N.M. 3.3 % (0.1)%
Interest expense 2,380 2,841 (16.2)% 1.3 % 1.6 %
Interest income (197) (147) 34.0 % (0.1)% (0.1)%
Other expense (income) 625 (98) N.M. 0.3 % (0.1)%
----------- ------------- ----------- ------------- -------------
Income (loss) before income taxes 3,412 (2,816) 221.2 % 1.8 % (1.6)%
Income taxes * 105 (1,540) (106.8)% 3.1 % 54.7 %
----------- ------------- ------------ ------------- -------------
Net income (loss) $ 3,307 $ (1,276) 359.2 % 1.7 % (0.7)%
=========== ============= ============ ------------- -------------
Net income (loss) per share, basic $ 0.26 $ (0.11) N.M.
Net income (loss) per share, diluted 0.26 (0.11) N.M.
Average shares outstanding, basic 12,617 11,710 7.7 %
Average shares outstanding, diluted 12,770 11,710 9.1 %
*Percent of sales column for income taxes is calculated as a % of income (loss) before income taxes.
See accompanying notes to consolidated financial statements.
I-1
CULP, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 27, 2008, JANUARY 28, 2007 AND APRIL 29, 2007
(UNAUDITED)
(Amounts in Thousands)
Amounts Increase
--------------------------------
January 27, January 28, (Decrease) * April 29,
---------------------
2008 2007 Dollars Percent 2007
---------------- -------------- ----------- --------- -------------
Current assets:
Cash and cash equivalents $ 15,500 $ 10,675 4,825 45.2 % $ 10,169
Accounts receivable, net 23,370 23,755 (385) (1.6)% 29,290
Inventories 37,923 42,717 (4,794) (11.2)% 40,630
Deferred income taxes 5,376 7,120 (1,744) (24.5)% 5,376
Assets held for sale 4,972 1,231 3,741 303.9 % 2,499
Income taxes receivable 423 - 423 100.0 % -
Other current assets 995 2,710 (1,715) (63.3)% 1,824
---------------- -------------- ----------- --------- -------------
Total current assets 88,559 88,208 351 0.4 % 89,788
Property, plant and equipment, net 32,218 40,784 (8,566) (21.0)% 37,773
Goodwill 4,114 4,114 - 0.0 % 4,114
Deferred income taxes 25,993 23,232 2,761 11.9 % 25,683
Other assets 2,442 2,683 (241) (9.0)% 2,588
---------------- -------------- ----------- --------- -------------
Total assets $ 153,326 $ 159,021 (5,695) (3.6)% $ 159,946
================ ============== =========== ========= =============
Current liabilities:
Current maturities of long-term debt $ 8,569 $ 4,744 3,825 80.6 % $ 16,046
Lines of credit 2,783 - 2,783 100.0 % 2,593
Accounts payable 19,036 18,051 985 5.5 % 23,585
Accrued expenses 10,422 7,704 2,718 35.3 % 8,670
Accrued restructuring 1,875 3,490 (1,615) (46.3)% 3,282
Income taxes payable - current - 4,136 (4,136) (100.0)% 4,579
---------------- -------------- ----------- --------- -------------
Total current liabilities 42,685 38,125 4,560 12.0 % 58,755
Income taxes payable - long-term 4,497 - 4,497 100.0 % -
Long-term debt, less current maturities 22,026 41,965 (19,939) (47.5)% 22,114
---------------- -------------- ----------- --------- -------------
Total liabilities 69,208 80,090 (10,882) (13.6)% 80,869
Commitments and Contingencies (Notes 8 and 17)
Shareholders' equity 84,118 78,931 5,187 6.6 % 79,077
---------------- -------------- ----------- --------- -------------
Total liabilities and
shareholders' equity $ 153,326 $ 159,021 (5,695) (3.6)% $ 159,946
================ ============== =========== ========= =============
Shares outstanding 12,635 12,555 80 0.6 % 12,569
================ ============== =========== ========= =============
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-2
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 27, 2008 AND JANUARY 28, 2007
(UNAUDITED)
(Amounts in Thousands)
NINE MONTHS ENDED
---------------------------------
Amounts
---------------------------------
January 27, January 28,
2008 2007
------------------ --------------
Cash flows from operating activities:
Net income (loss) $ 3,307 (1,276)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 4,264 5,651
Amortization of other assets 280 59
Stock-based compensation 520 406
Excess tax benefit related to stock options exercised (21) -
Deferred income taxes 73 (3,056)
Loss on impairment of equipment 256 -
Restructuring expenses, net of gain on sale of related assets 123 (546)
Changes in assets and liabilities:
Accounts receivable 6,140 5,294
Inventories 2,707 (1,270)
Other current assets 829 787
Other assets (128) (46)
Accounts payable (3,716) (2,507)
Accrued expenses 1,651 (141)
Accrued restructuring (1,483) (564)
Income taxes 16 1,648
------------------ --------------
Net cash provided by operating activities 14,818 4,439
------------------ --------------
Cash flows from investing activities:
Capital expenditures (4,303) (2,492)
Acquisition of assets - (2,500)
Proceeds from the sale of buildings and equipment 2,336 3,260
------------------ --------------
Net cash used in investing activities (1,967) (1,732)
------------------ --------------
Cash flows from financing activities:
Net proceeds from lines of credit 190 -
Payments on vendor-financed capital expenditures (571) (927)
Payments on long-term debt (7,565) (3,513)
Proceeds from the issuance of long-term debt - 2,500
Proceeds from common stock issued 405 194
Excess tax benefit related to stock options exercised 21 -
------------------ --------------
Net cash used in financing activities (7,520) (1,746)
------------------ --------------
Increase in cash and cash equivalents 5,331 961
Cash and cash equivalents at beginning of period 10,169 9,714
------------------ --------------
Cash and cash equivalents at end of period $ 15,500 10,675
================== ==============
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(Dollars in thousands, except share data)
Capital Accumulated
Common Stock Contributed Other Total
----------------------- in Excess Retained Comprehensive Shareholders'
Shares Amount of Par Value Earnings Income (Loss) Equity
-------------- ------- ------------ -------- ------------- -------------
Balance, April 30, 2006 11,654,959 $ 584 40,350 33,571 18 $ 74,523
Net loss - - - (1,316) - (1,316)
Stock-based compensation - - 525 - - 525
Loss on cash flow hedge, net of taxes - - - - (22) (22)
Common stock issued in connection
with acquisition of assets 798,582 40 5,043 - - 5,083
Common stock issued in connection
with stock option plans 115,750 5 279 - - 284
-------------- ------- ----------- -------- ------------ -------------
Balance, April 29, 2007 12,569,291 629 46,197 32,255 (4) 79,077
Net income - - - 3,307 - 3,307
Stock-based compensation - - 520 - - 520
Loss on cash flow hedge, net of taxes - - - - (59) (59)
Excess tax benefit related to stock
options exercised - - 21 - - 21
Common stock issued in connection
with stock option plans 65,235 3 402 - - 405
Cumulative effect of adopting FASB
Interpretation No. 48 - - - 847 - 847
-------------- ------- ----------- -------- ------------ -------------
Balance, January 27, 2008 12,634,526 $ 632 47,140 36,409 (63) $ 84,118
============== ======= =========== ======== ============ =============
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 11, 12 and 15 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 19, 2007 for the fiscal year ended April 29,
2007.
The company's nine months ended January 27, 2008 and January 28, 2007 represent
39 week periods.
Foreign Currency Adjustments
The United States dollar is the functional currency for the company, including
its Canadian and Chinese subsidiaries. All foreign currency asset and liability
accounts are remeasured into U.S. dollars at exchange rates at the end of each
reporting period, except for inventories, and property, plant, and equipment,
which are recorded at historical rates. Foreign currency revenues and expenses
are remeasured at average exchange rates in effect during each reporting period,
except for certain expenses related to balance sheet amounts recorded at
historical exchange rates. Exchange gains and losses from remeasurement of
foreign currency denominated monetary assets and liabilities are recorded in the
other expense (income) line item in the Consolidated Statements of Net Income
(Loss) in the period in which they occur.
The value of the U.S. dollar relative to the Canadian dollar strengthened by 5%
for the three-month periods ending January 27, 2008 and January 28, 2007.
Foreign currency remeasurement gains for the Canadian subsidiary were $112,000
and $119,000 for the three-month periods ending January 27, 2008 and January 28,
2007, respectively. The Chinese subsidiary had a remeasurement loss of $13,000
for the three-month period ending January 27, 2008, and a remeasurement gain of
$100,000 for the three-month period ending January 28, 2007.
The value of the U.S. dollar relative to the Canadian dollar declined 11% and
strengthened by 5% for the nine-month periods ending January 27, 2008 and
January 28, 2007, respectively. The foreign currency remeasurement loss for the
Canadian subsidiary was $389,000 for the nine-month period ending January 27,
2008. The foreign currency remeasurement gain for the Canadian subsidiary was
$78,000 for the nine-month period ending January 28, 2007. The Chinese
subsidiary had a remeasurement loss of $80,000 for the nine-month period ending
January 27, 2008, and a remeasurement gain of $211,000 for the nine-month period
ending January 28, 2007.
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Accounting for Uncertainty in Income Taxes
During the first quarter of fiscal 2008, the company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48) which supplements SFAS No. 109,
"Accounting for Income Taxes", by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements. FIN 48
requires that the tax effects of a position to be recognized only if it is
"more-likely-than-not" to be sustained based solely on its technical merits as
of the reporting date. The more-likely-than-not threshold represents a positive
assertion by management that a company is entitled to the economic benefits of a
tax position. If a tax position is not considered more-likely-than-not to be
sustained based solely on its technical merits, no benefits of the tax position
are to be recognized. Moreover, the more-likely-than-not threshold must continue
to be met in each reporting period to support continued recognition of the
benefit. With the adoption of FIN 48, entities are required to adjust their
financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained. Any necessary adjustment would be recorded
directly to retained earnings and reported as a change in accounting principle.
The company adopted FIN 48 as of April 30, 2007, and recorded an increase in
retained earnings of $847,000 as a cumulative effect of a change in accounting
principle. Refer to Note 15 for more information regarding the impact of
adopting FIN 48. Adjustments subsequent to initial adoption are reflected within
the company's income tax expense.
2. Stock-Based Compensation
Overview
Effective May 1, 2006, the company began recording compensation expense
associated with its stock option plans in accordance with SFAS No. 123R,
"Share-Based Payment" which requires the measurement of the cost of employee
services received in exchange for an award of an equity instrument based on the
grant date fair value of the award. The company adopted the modified prospective
transition method provided for under SFAS No. 123R, and consequently has not
retroactively adjusted results from prior periods. Under this transition method,
compensation expense associated with stock options granted on or after May 1,
2006 is recorded in accordance with the provisions of SFAS No. 123R and stock
compensation expense associated with the remaining unvested portion of options
granted prior to May 1, 2006 is recorded based on their grant date fair value
estimated in accordance with the original provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
The company recorded $154,000 and $520,000 of compensation expense for stock
options within selling, general, and administrative expense for the three-month
and nine-month periods ended January 27, 2008. The company recorded $119,000 and
$406,000 of compensation expense for stock options within selling, general, and
administrative expense for the three-month and nine-month periods ended January
28, 2007.
Prior to the adoption of SFAS No. 123R, the benefit of tax deductions in excess
of recognized compensation costs were reported as a reduction of taxes paid
within operating cash flow. SFAS No. 123R requires such benefits be recorded as
a financing cash flow. For the nine-month period ended January 27, 2008, the
company recognized $21,000 of excess tax benefits. There were no excess tax
benefits during the nine-month period ended January 28, 2007.
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The remaining unrecognized compensation costs related to unvested awards at
January 27, 2008 is $965,000 which is expected to be recognized over a weighted
average period of 3.1 years.
Equity Incentive Plans
On September 20, 2007, the company's shareholders approved a new equity
incentive plan entitled the Culp, Inc. 2007 Equity Incentive Plan (the "2007"
Plan"). The 2007 Plan will expand the types of equity based awards available for
grant by the company's Compensation Committee. The types of equity based awards
available for grant include stock options, stock appreciation rights, restricted
stock and restricted stock units, performance units, and other discretionary
awards as determined by the Compensation Committee. An aggregate of 1,200,000
shares of common stock were authorized for issuance under the 2007 Plan. In
conjunction with the approval of the 2007 Plan, the company's 2002 Stock Option
Plan was terminated (with the exception of currently outstanding options) and no
additional options will be granted under the 2002 Stock Plan.
Under the company's prior stock option plans (terminated with the approval of
the 2007 Plan) and the 2007 Plan, employees and directors were and may be
granted options to purchase shares of common stock at the fair market value on
the date of grant. Options granted to employees under these plans generally vest
over four to five years and expire five to ten years after the date of grant.
Options granted to outside directors under these plans vest immediately on the
date of grant and expire ten years after the date of grant. The fair value of
each option award was estimated on the date of grant using a Black-Scholes
option-pricing model. The fair value of stock options granted to employees at
each grant date under the 2002 stock option plan during the nine-month periods
ended January 27, 2008 and January 28, 2007 was $4.74 and $2.43 per share using
the following assumptions:
-------------------------------------------------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.92% - 5.09% 5.03%
Dividend yield 0.00% 0.00%
Expected volatility 38.59% - 65.74% 67.03%
Expected term (in years) 1.1 - 8.0 1.6
-------------------------------------------------------------------------------------------------------------------
The fair value of stock options granted to outside directors at each grant date
under the 2007 Plan for the nine-month period ended January 27, 2008 and the
2002 stock option plan for the nine-month period ended January 28, 2007 were
$7.19 and $3.68 per share using the following assumptions:
-------------------------------------------------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.56% 4.57%
Dividend yield 0.00% 0.00%
Expected volatility 66.28% 68.36%
Expected term (in years) 8.0 6.8
-------------------------------------------------------------------------------------------------------------------
The assumptions utilized in the model are evaluated and revised, as necessary,
to reflect market conditions, actual historical experience, and groups of
employees (executives and non-executives) 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 dividend yield was
calculated based on the company's annual dividend as of the option grant date.
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 options, expected employee exercise and
post-vesting employment termination trends.
I-7
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes the stock options (vested and unvested) as of
January 27, 2008 and option activity during the nine-month period then ended:
-------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
-------------------------------------------------------------------------------------------------------------------
Outstanding, April 29, 2007 926,000 $ 7.22
Granted 145,500 8.81
Expired/Cancelled (199,999) 13.04
Exercised (65,235) 6.10 $ 241,765
-------------------------------------------------------------------------------------------------------------------
Outstanding, January 27, 2008 806,266 $ 6.16 3.85 Years $ 1.3 million
-------------------------------------------------------------------------------------------------------------------
At January 27, 2008, there were 1,194,000 shares available for future grants
under the company's 2007 Plan. Outstanding options to purchase 395,393 shares
were exercisable and had a weighted average exercise price of $6.30 per share,
an aggregate intrinsic value of $564,000 and a weighted average contractual term
of 2.63 years.
Stock Option Modifications
On December 12, 2007, the compensation committee of the board of directors
approved a modification of the June 25, 2007 stock option grant to change the
vesting period from 2 to 5 years from the original date of grant. There were no
other changes to the original stock option grant and no inducements were given
to the participating employees in exchange for this modification. The option
modification agreements were agreed to by all of the participating employees (20
in total) and were effective January 22, 2008 (modification date). No
incremental compensation cost was recognized for this modification as the fair
value of the revised award was less than the fair value of the original award as
of the modification date.
Effective December 31, 2007, an executive officer resigned from the company and
agreed to a separation agreement. As part of the separation agreement, the
exercise period for vested stock options was extended from 90 days from the date
of resignation (terms stated in the original option agreements) to September 28,
2009. The incremental compensation cost recognized from this modification
approximated $54,000.
Other Share-Based Arrangements
The company has a stock-based compensation agreement with an individual that
requires the company to settle in cash and is indexed by shares of the company's
common stock as defined in the agreement. The cash settlement is based on a
30-day average closing price of the company's common stock at the time of
payment. At January 27, 2008, this agreement was indexed by approximately 85,000
shares of the company's common stock. The fair value of this agreement is
included in accrued expenses and was approximately $608,000 and $870,000 at
January 27, 2008 and April 29, 2007, respectively.
I-8
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Accounts Receivable
A summary of accounts receivable follows:
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands) January 27, 2008 April 29, 2007
-------------------------------------------------------------------------------------------------------------------
Customers $ 24,748 $ 31,192
Allowance for doubtful accounts (843) (1,332)
Reserve for returns and allowances and discounts (535) (570)
-------------------------------------------------------------------------------------------------------------------
$ 23,370 $ 29,290
-------------------------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
-------------------------------------------------------------------------------------------------------------------
Nine months ended
(dollars in thousands) January 27, 2008 January 28, 2007
-------------------------------------------------------------------------------------------------------------------
Beginning balance $ (1,332) $ (1,049)
(Provision) recovery of bad debt expense 320 (410)
Write-offs, net of recoveries 169 268
-------------------------------------------------------------------------------------------------------------------
Ending balance $ (843) $ (1,191)
-------------------------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for returns and allowances and
discounts accounts follows:
-------------------------------------------------------------------------------------------------------------------
Nine months ended
(dollars in thousands) January 27, 2008 January 28, 2007
-------------------------------------------------------------------------------------------------------------------
Beginning balance $ (570) $ (826)
Provision for returns and allowances
and discounts (1,937) (1,701)
Discounts taken 1,972 1,309
-------------------------------------------------------------------------------------------------------------------
Ending balance $ (535) $ (1,218)
-------------------------------------------------------------------------------------------------------------------
4. Inventories
Inventories are carried at the lower of cost or market. Cost is determined using
the FIFO (first-in, first-out) method.
A summary of inventories follows:
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands) January 27, 2008 April 29, 2007
-------------------------------------------------------------------------------------------------------------------
Raw materials $ 9,835 $ 10,200
Work-in-process 1,573 1,711
Finished goods 26,515 28,719
-------------------------------------------------------------------------------------------------------------------
$ 37,923 $ 40,630
-------------------------------------------------------------------------------------------------------------------
I-9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Other Assets
A summary of other assets follows:
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands) January 27, 2008 April 29, 2007
-------------------------------------------------------------------------------------------------------------------
Cash surrender value - life insurance $ 1,213 $ 1,154
Non-compete agreement, net 861 1,076
Other 368 358
-------------------------------------------------------------------------------------------------------------------
$ 2,442 $ 2,588
-------------------------------------------------------------------------------------------------------------------
At January 27, 2008 and April 29, 2007, the gross carrying amount of the
non-compete agreement was $1.1 million. At January 27, 2008 and April 29, 2007
accumulated amortization for the non-compete agreement was $287,000 and $72,000,
respectively. The non-compete agreement will be amortized on a straight-line
basis over the four year life of the agreement. Amortization expense for this
non-compete agreement for the three-month and nine month periods ended January
27, 2008 were $72,000 and $215,000, respectively. No amortization expense for
this non-compete agreement was incurred during the three-month and nine-month
periods ended January 28, 2007. The remaining amortization expense for the next
four fiscal years follows: FY 2008 - $72,000; FY 2009 - $287,000; FY 2010 -
$287,000; and FY 2011 - $215,000.
6. Accounts Payable
A summary of accounts payable follows:
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands) January 27, 2008 April 29, 2007
-------------------------------------------------------------------------------------------------------------------
Accounts payable-trade $ 18,312 $ 22,027
Accounts payable-capital expenditures 724 1,558
-------------------------------------------------------------------------------------------------------------------
$ 19,036 $ 23,585
-------------------------------------------------------------------------------------------------------------------
7. Accrued Expenses
A summary of accrued expenses follows:
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands) January 27, 2008 April 29, 2007
-------------------------------------------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 5,251 $ 4,941
Interest 766 314
Accrued rebates 1,921 1,013
Other 2,484 2,402
-------------------------------------------------------------------------------------------------------------------
$ 10,422 $ 8,670
-------------------------------------------------------------------------------------------------------------------
I-10
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. Long-Term Debt and Lines of Credit
A summary of long-term debt and lines of credit follows:
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands) January 27, 2008 April 29, 2007
-------------------------------------------------------------------------------------------------------------------
Unsecured term notes $ 23,420 $ 30,905
Real estate loan - I 3,882 4,039
Real estate loan - II 2,500 2,500
Canadian government loan 793 716
-------------------------------------------------------------------------------------------------------------------
30,595 38,160
Current maturities of long-term debt (8,569) (16,046)
-------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities $ 22,026 $ 22,114
-------------------------------------------------------------------------------------------------------------------
Lines of credit $ 2,783 $ 2,593
-------------------------------------------------------------------------------------------------------------------
Total borrowings $ 33,378 $ 40,753
-------------------------------------------------------------------------------------------------------------------
Term Notes
The company's 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 two years through March 2010. The principal payments are
required to be paid in annual installments as follows: March 2008 - $8.3
million; March 2009 - $7.5 million; and March 2010 - $7.5 million. The company
prepaid $2.2 million during the first quarter, $1.0 million in the second
quarter, and $4.3 million in the third quarter, all of which was scheduled to be
due in March 2008.
On February 19, 2008, the company entered into a fourth amendment. This
amendment provided greater flexibility by increasing the capital expenditure
limit on a cash basis from $4.0 million to $5.0 million for fiscal year 2008 and
$4.0 million plus an additional amount as defined in the agreement for any
fiscal year thereafter.
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, NC. This term loan bears
interest at the one-month LIBOR plus an adjustable margin (6.49% at January 27,
2008) based on the company's debt/EBITDA ratio, as defined in the agreement and
is payable in varying monthly installments through September 2010, with a final
payment of $3.3 million in October 2010.
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, NC and bears
interest at the one-month LIBOR plus an adjustable margin (7.87% at January 27,
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.
I-11
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 (6.49%
at January 27, 2008) based on the company's debt/EBITDA ratio, as defined in the
agreement. As of January 27, 2008, there were $1.3 million in outstanding
letters of credit (all of which related to workers compensation) and no
borrowings outstanding under the agreement.
On December 27, 2007, the company entered into a twelfth amendment. This
amendment extended the expiration date to December 31, 2008, provided greater
flexibility by increasing the capital expenditure limit on a cash basis from
$4.0 million to $5.0 million for fiscal year 2008, and amended certain other
financial covenants as defined in the agreement.
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
million, of which approximately $1 million includes letters of credit. The
company borrowed a total of $4.0 million in installments of $1.3 million in
February 2007, $1.3 million in March 2007, and $1.4 million in October 2007.
There were no borrowings in the third quarter of fiscal 2008. Each installment
is up for renewal one year from the date of borrowing and the bank is required
to provide an advance notice of one year for repayment of each respective
installment. The company paid off the $1.3 million February 2007 installment in
the third quarter of fiscal 2008. Interest is paid on a quarterly basis at a
rate determined by the Chinese government (with interest rates ranging from
6.07% to 6.53% at January 27, 2008). As of January 27, 2008, approximately $2.8
million was outstanding under the agreement.
Canadian Government Loan
The company has an agreement with the Canadian government to provide for a term
loan that is non-interest bearing and is payable in 48 equal monthly
installments commencing December 1, 2009. The proceeds are 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 January 27, 2008, the company was in compliance
with these financial covenants.
The principal payment requirements of long-term debt during the next five years
are: Year 1 - $8.6 million; Year 2 - $7.8 million; Year 3 - $13.6 million; Year
4 - $198,000; Year 5 - $198,000; and thereafter - $165,000.
9. 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.
I-12
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The company accounts for the interest rate swap as a cash flow hedge whereby the
fair value of this contract is reflected in other assets if the contract is in
the company's favor or accrued expenses if the contract is in the bank's favor
in the accompanying consolidated balance sheets with the offset recorded as
accumulated other comprehensive income (loss). The fair value of the interest
rate swap at January 27, 2008, was $101,000 in the bank's favor and was
immaterial to the company's financial statements at April 29, 2007. The fair
value of the interest rate swap agreement was determined by quoted market
prices.
10. Cash Flow Information
Payments for interest and income taxes are as follows:
-------------------------------------------------------------------------------------------------------------------
Nine months ended
(dollars in thousands) January 27, 2008 January 28, 2007
-------------------------------------------------------------------------------------------------------------------
Interest $ 2,026 $ 2,532
Income taxes (received) paid 436 (156)
-------------------------------------------------------------------------------------------------------------------
The company did not utilize any vendor financing for its capital expenditures
for the nine months ended January 27, 2008 and January 28, 2007. Interest costs
totaling $98,000 were capitalized for the construction of qualifying fixed
assets for the nine-months ended January 27, 2008. No interest costs were
capitalized for the nine-months ending January 28, 2007.
11. Restructuring and Related Charges
The following summarizes the fiscal 2008 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 January 27,
(dollars in thousands) April 29, 2007 Adjustments Premiums Adjustments Payments 2008
-------------------------------------------------------------------------------------------------------------------------
December 2006 Upholstery fabrics (1) $ 1,545 $ 6 $ (465) $ 474 $ (324) $ 1,236
September 2005 Upholstery fabrics (2) 258 (34) 3 - (31) 196
August 2005 Upholstery fabrics (3) 18 (32) 14 100 (100) -
Fiscal 2005 Upholstery fabrics (4) 154 (87) 5 33 (85) 20
Fiscal 2003 Culp Decorative fabrics (5) 1,307 (13) (32) 5 (844) 423
-------------------------------------------------------------------------------------------------------------------------
Totals $ 3,282 $ (160) $ (475) $ 612 $(1,384) $ 1,875 (6)
-------------------------------------------------------------------------------------------------------------------------
(1) The restructuring accrual at January 27, 2008, represents employee
termination benefits and lease termination and exit costs of $847 and
$389, respectively. The restructuring accrual at April 29, 2007,
represents employee termination benefits and lease termination and
exit costs of $1,304 and $241, respectively.
(2) The restructuring accrual at January 27, 2008, represents other exit
costs of $196. The restructuring accrual at April 29, 2007,
represents employee termination benefits and lease termination and
exit costs of $31 and $227, respectively.
I-13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(3) The restructuring accrual at April 29, 2007, represents employee
termination benefits of $18.
(4) The restructuring accrual at January 27, 2008, represents employee
termination benefits and lease termination and exit costs of $18 and
$2, respectively. The restructuring accrual at April 29, 2007,
represents employee termination benefits and lease termination and
exit costs of $100 and $54, respectively.
(5) The restructuring accrual at January 27, 2008, represents and lease
termination and other exit costs of $423. The restructuring accrual
at April 29, 2007, represents employee termination benefits and lease
termination and exit costs of $43 and $1,264, respectively.
(6) The company's existing restructuring plans as of January 27, 2008,
will be substantially completed by the end of fiscal 2008.
The following summarizes restructuring and related charges incurred for the
nine-month period ending January 27, 2008 (dollars in thousands):
--------------------------------------------------------------------------------------------------------------------------------
Sales
Operating Lease Proceeds from
Costs on Termination Write-Downs Asset Employee Equipment
Closed and Other of Buildings Inventory Movement Termination With No
(dollars in thousands) Facilities Exit Costs and Equipment Markdowns Costs Benefits Carrying Value Total
--------------------------------------------------------------------------------------------------------------------------------
December 2006 Upholstery
fabrics (7) $ 953 $ 474 $ 482 $ 535 $ 184 $ 6 $ (359) $ 2,275
September 2005 Upholstery
fabrics (8) - - - - - (34) - (34)
August 2005 Upholstery
fabrics (9) - 100 - - - (32) - 68
Fiscal 2005 Upholstery
fabrics (10) - 33 - - - (87) - (54)
Fiscal 2003 Culp Decorative
fabrics (11) 32 5 - - - (13) - 24
--------------------------------------------------------------------------------------------------------------------------------
Totals $ 985 $ 612 $ 482 $ 535 $ 184 $ (160) $ (359) $ 2,279
--------------------------------------------------------------------------------------------------------------------------------
(7) Of this total charge, $1,423 was recorded in cost of sales, $65 was
recorded in selling, general and administrative expense, and $787 was
recorded in restructuring expense in the 2008 Consolidated Statement
of Net Income.
(8) This $34 credit was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
(9) This $68 charge was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
(10) This $54 credit was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
(11) Of this total charge, a credit of $8 was recorded in restructuring
expense and a charge of $32 was recorded in cost of sales in the 2008
Consolidated Statement of Net Income.
I-14
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following summarizes restructuring and related charges for the nine-month
period ending January 28, 2007. (dollars in thousands):
-----------------------------------------------------------------------------------------------------------------------------------
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 (12) $ - $ - $ - $ 2,161 $ 665 $ - $ 1,284 $ - $ 4,110
September 2005 Upholstery
fabrics (13) 450 273 (40) - - 212 (148) (235) 512
August 2005 Upholstery
fabrics (14) (19) 6 307 - - 49 2 (491) (146)
Fiscal 2005 Upholstery
fabrics (15) 321 138 67 238 - 653 (143) (164) 1,110
Fiscal 2003 Culp Decorative
fabrics (16) 24 (22) - - - - - - 2
Fiscal 2001 Culp Decorative
fabrics (17) 26 - - - - - (5) - 21
-----------------------------------------------------------------------------------------------------------------------------------
Totals $ 802 $ 395 $ 334 $ 2,399 $ 665 $ 914 $ 990 $ (890) $5,609
-----------------------------------------------------------------------------------------------------------------------------------
(12) Of this total charge, $2,826 was recorded in cost of sales and $1,284
was recorded in restructuring expense in the 2007 Consolidated
Statement of Net Loss. This restructuring plan was initiated in the
third quarter of fiscal 2007.
(13) Of this total charge, $450 was recorded in cost of sales and $62
was recorded in restructuring expense in the 2007 Consolidated
Statement of Net Loss.
(14) Of this total credit, a credit of $19 was recorded in cost of sales,
and a credit of $127 was recorded in restructuring expense in the
2007 Consolidated Statement of Net Loss.
(15) Of this total charge, $502 was recorded in cost of sales, $58 was
recorded in selling, general, and administrative expenses and $550
was recorded in restructuring expense in the 2007 Consolidated
Statement of Net Loss.
(16) Of this total charge, a credit of $22 was recorded in restructuring
expense and a charge of $24 was recorded in cost of sales in the 2007
Consolidated Statement of Net Loss.
(17) Of this total charge, $26 was recorded in cost of sales and a credit
of $5 was recorded in restructuring expense in the 2007 Consolidated
Statement of Net Loss.
The following summarizes restructuring and related charges incurred in the third
quarter of fiscal 2008 (dollars in thousands):
-------------------------------------------------------------------------------------------------------------------------------
Sales
Proceeds from
Operating Lease Equipment
Costs on Termination Write-Downs Asset Employee With No
Closed and Other of Buildings Inventory Movement Termination Carrying
(dollars in thousands) Facilities Exit Costs and Equipment Markdowns Costs Benefits Value Total
--------------------------------------------------------------------------------------------------------------------------------
December 2006 Upholstery
fabrics (18) $ 211 $ 57 $ 93 $ 131 $ 57 $ 267 $ (44) $ 772
September 2005 Upholstery
fabrics (19) - 1 - - - - - 1
August 2005 Upholstery
fabrics (20) - - - - - (4) - (4)
Fiscal 2005 Upholstery
fabrics (21) - 3 - - - (20) - (17)
Fiscal 2003 Culp Decorative
fabrics (22) 20 7 - - - (5) - 22
--------------------------------------------------------------------------------------------------------------------------------
Totals $ 231 $ 68 $ 93 $ 131 $ 57 $ 238 $ (44) $ 774
--------------------------------------------------------------------------------------------------------------------------------
I-15
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(18) Of this total charge, $329 was recorded in cost of sales, $13 was
recorded in selling, general, and administrative expenses, and $430
was recorded in restructuring expense in the 2008 Consolidated
Statement of Net Income.
(19) This $1 charge was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
(20) This $4 credit was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
(21) This $17 credit was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
(22) Of this total charge, $20 charge was recorded in cost of sales and $2
was recorded in restructuring expense in the 2008 Consolidated
Statement of Net Income.
The following summarizes restructuring and related charges incurred in the third
quarter of fiscal 2007 (dollars in thousands):
-----------------------------------------------------------------------------------------------------------------------------------
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 (23) $ - $ - $ - $ 2,161 $ 665 $ - $ 1,284 $ - $ 4,110
September 2005 Upholstery
fabrics (24) - 14 - - - 3 (37) - (20)
August 2005 Upholstery
fabrics (25) (68) 6 272 - - - (21) (434) (245)
Fiscal 2005 Upholstery
fabrics (26) 36 41 - - - 178 (11) (21) 223
Fiscal 2003 Culp Decorative
fabrics (27) 8 - - - - - - - 8
----------------------------------------------------------------------------------------------------------------------------------
Totals $ (24) $ 61 $ 272 $ 2,161 $ 665 $ 181 $ 1,215 $ (455) $ 4,076
----------------------------------------------------------------------------------------------------------------------------------
(23) Of this total charge, $2,826 was recorded in cost of sales and $1,284
was recorded in restructuring expense in the 2007 Consolidated
Statements of Net Loss. This restructuring plan was initiated in the
third quarter of fiscal 2007.
(24) This $20 credit was recorded in restructuring expense in the 2007
Consolidated Statement of Net Loss.
(25) Of this total credit, a credit of $68 was recorded in cost of sales
and a credit of $177 was recorded in restructuring expense in the
2007 Consolidated Statement of Net Loss.
(26) Of this total charge, $7 was recorded in cost of sales, $28 was
recorded in selling, general, and administrative expenses, and $188
was recorded in restructuring expense in the 2007 Consolidated
Statement of Net Loss.
(27) This $8 charge was recorded in cost of sales in the 2007 Consolidated
Statement of Net Loss.
12. Assets Held for Sale and Related Impairments
At January 27, 2008, the company had assets held for sale with carrying values
totaling $5.0 million. These assets held for sale consist of the company's
corporate headquarters and certain equipment related to the mattress fabrics
segment with carrying values of $4.8 million and $189,000, respectively. The
carrying value of these assets held for sale are presented separately in the
2008 Consolidated Balance Sheet and are no longer being depreciated.
I-16
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Effective October 29, 2007, the company adopted a plan to sell its corporate
headquarters as the company is only utilizing one-half of the available space
and with the sale can lower costs and reduce debt. The company expects that the
final sale and disposal of the assets will be completed within a year from the
date the plan was adopted and the sales proceeds will be used to repay the
outstanding $6.4 million mortgage balance. In connection with the plan of
disposal, the company determined that the carrying value of their corporate
headquarters was less than its fair value. Consequently, no impairment loss was
recorded. The Company has entered into a contract dated March 11, 2008 providing
for the sale of its headquarters building in High Point, North Carolina to
Schwartz Properties, L.L.C., for a purchase price of $7,350,000. The contract
also contemplates that the Company would lease the building back from the
purchaser for an initial term of five years, at a rental rate of $56,800 per
month on a "triple net" basis. The contract is subject to the purchaser's
ability to obtain financing and is subject to a 90 day due diligence period,
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 closing is anticipated to occur during the first quarter of
the Company's 2009 fiscal year. Based on the current terms of the contract, any
gain realized from the final sale would be amortized over the life of the lease
agreement, in accordance with SFAS No. 13, "Accounting for Leases," SFAS No. 28,
"Accounting for Sales with Leasebacks (an amendment of SFAS No. 13), SFAS No.
66, "Accounting for Sales of Real Estate," and SFAS No. 98, "Accounting for
Leases."
Effective January 2, 2008, the company adopted a plan to sell certain older and
existing equipment related to its mattress fabrics segment that is being
replaced by newer and more efficient equipment. In connection with the plan of
disposal, the company determined that the carrying value of this equipment
exceeded its fair value. Consequently, the company recorded an impairment loss
of approximately $256,000, which represents the excess of the carrying value of
the assets over their values, less cost to sell. This impairment loss of
$256,000 was recorded in cost of sales in the 2008 Consolidated Statement of Net
Income. The company sold these assets held for sale subsequent to the end of the
third quarter of fiscal 2008 for $189,000.
At April 29, 2007, the company had assets held for sale with carrying values
totaling $2.5 million. These assets held for sale consisted of buildings and
certain equipment to be sold from the closure of the company's Lincolnton, NC
and Graham, NC plant facilities. At January 27, 2008, all buildings and
equipment classified as held for sale at April 29, 2007 have been sold. The
company received sales proceeds totaling $1.9 million and recorded impairment
losses of $482,000 in restructuring expense on these assets held sale in fiscal
2008. The carrying value of these assets held for sale are presented separately
in the 2007 Consolidated Balance Sheet and were not depreciated in fiscal 2008.
13. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number
of shares outstanding during the period. Diluted net income (loss) per share
uses the weighted-average number of shares outstanding during the period plus
the dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted net income
(loss) per share follows:
-------------------------------------------------------------------------------------------------------------------
Three months ended
(amounts in thousands) January 27, 2008 January 28, 2007
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 12,635 11,773
Effect of dilutive stock options 103 -
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 12,738 11,773
-------------------------------------------------------------------------------------------------------------------
Options to purchase 178,500 and 458,750 shares of common stock were not included
in the computation of diluted net income (loss) per share for the three months
ended January 27, 2008 and January 28, 2007, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
I-17
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Options to purchase 2,847 shares of common stock were not included in the
computation of diluted loss per share for the three months ended January 28,
2007, because the company incurred a net loss for the period.
-------------------------------------------------------------------------------------------------------------------
Nine months ended
(amounts in thousands) January 27, 2008 January 28, 2007
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 12,617 11,710
Effect of dilutive stock options 153 -
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 12,770 11,710
-------------------------------------------------------------------------------------------------------------------
Options to purchase 28,500 and 452,792 shares of common stock were not included
in the computation of diluted net income (loss) per share for the nine months
ended January 27, 2008 and January 28, 2007, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
Options to purchase 3,168 shares of common stock were not included in the
computation of diluted net loss per share for the nine months ended January 28,
2007, because the company incurred a net loss for the period.
14. Segment Information
The company's operations are classified into two 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, certain unallocated corporate expenses, and certain other non-recurring
items. Unallocated corporate expenses represent primarily compensation and
benefits for certain executive officers and all costs related to being a public
company. Segment assets include assets used in the 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 current and non-current assets
associated with the ITG acquisition. The upholstery fabrics segment also
includes assets held for sale in segment assets.
I-18
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Financial information for the company's operating segments is as follows:
-------------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) January 27, 2008 January 28, 2007
-------------------------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 30,880 $ 24,396
Upholstery Fabrics 29,602 31,316
-------------------------------------------------------------------------------------------------------------------
Total net sales $ 60,482 $ 55,712
-------------------------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 4,200 $ 4,215
Upholstery Fabrics 3,181 3,269
-------------------------------------------------------------------------------------------------------------------
Total segment gross profit 7,381 7,484
Loss on impairment of equipment (256) (1) -
Restructuring related charges (349) (2) (2,773) (4)
-------------------------------------------------------------------------------------------------------------------
Total gross profit $ 6,776 $ 4,711
-------------------------------------------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 1,571 $ 1,706
Upholstery Fabrics 2,787 3,765
-------------------------------------------------------------------------------------------------------------------
Total segment selling, general, and administrative
expenses 4,358 5,471
Unallocated corporate expenses 746 895
Restructuring related charges 13 (2) 28 (4)
-------------------------------------------------------------------------------------------------------------------
Total selling, general, and administrative expenses $ 5,117 $ 6,394
-------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Mattress Fabrics $ 2,628 $ 2,509
Upholstery Fabrics 395 (496)
-------------------------------------------------------------------------------------------------------------------
Total segment income from operations 3,023 2,013
Unallocated corporate expenses (746) (895)
Loss on impairment of equipment (256) (1) -
Restructuring and related charges (774) (3) (4,076) (5)
-------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations 1,247 (2,958)
Interest expense (753) (952)
Interest income 77 50
Other income 72 157
-------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 643 $ (3,703)
-------------------------------------------------------------------------------------------------------------------
(1) The $256 represents an impairment loss on older and existing equipment
that was sold after January 27, 2008 and is being replaced by newer and
more efficient equipment. This impairment loss pertains to the mattress
fabrics segment.
(2) The $349 restructuring related charge represents $218 for other operating
costs associated with closed plant facilities and $131 for inventory
markdowns. The $13 restructuring related charge represents other operating
costs associated with closed plant facilities.
(3) The $774 restructuring and related charges represents $238 for employee
termination benefits, $231 for other operating costs associated with
closed plant facilities, $131 for inventory markdowns, $93 for a
write-down of a building, $68 for lease termination and other exit costs,
$57 for asset movement costs, and a credit of $44 for sales proceeds
received on equipment with no carrying value. Of this total charge, $349
was recorded in cost of sales, $13 was recorded in selling, general, and
administrative expenses, and $412 was recorded in restructuring expense.
The total $774 restructuring and related charge pertains to the upholstery
fabrics segment.
I-19
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) The $2.8 million represents restructuring related charges of $2.2 million
for inventory markdowns, $665 for accelerated depreciation, and a credit
of $52 for other operating costs associated with closed plant facilities.
The $28 restructuring related charge represents other operating costs
associated with closed plant facilities.
(5) The $4.1 million restructuring and related charges represents $2.2 million
for inventory markdowns, $1.2 million for employee termination benefits,
$665 for accelerated depreciation, $272 for write-downs of equipment, $181
for asset movement costs, $61 for lease termination and other exit costs,
a credit of $24 for other operating costs associated with closed plant
facilities, and a credit of $455 for sales proceeds received on equipment
with no carrying value. Of this total charge, $2.8 million was recorded in
cost of sales, $28 was recorded in selling, general, and administrative
expenses, and $1.3 million was recorded in restructuring expense. The
total $4.1 million restructuring and related charge pertains to the
upholstery fabrics segment.
-------------------------------------------------------------------------------------------------------------------
Nine months ended
(dollars in thousands) January 27, 2008 January 28, 2007
-------------------------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 103,426 $ 69,734
Upholstery Fabrics 86,622 107,603
-------------------------------------------------------------------------------------------------------------------
Total net sales $ 190,048 $ 177,337
-------------------------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 16,043 $ 11,880
Upholstery Fabrics 9,922 12,691
-------------------------------------------------------------------------------------------------------------------
Total segment gross profit 25,965 24,571
Loss on impairment of equipment (256) (1) -
Restructuring related charges (1,455) (6) (3,809) (8)
-------------------------------------------------------------------------------------------------------------------
Total gross profit $ 24,254 $ 20,762
-------------------------------------------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 5,779 $ 5,043
Upholstery Fabrics 8,877 11,219
-------------------------------------------------------------------------------------------------------------------
Total segment selling, general, and
administrative expenses 14,656 16,262
Unallocated corporate expenses 2,554 2,920
Restructuring related charges 65 (6) 58 (8)
-------------------------------------------------------------------------------------------------------------------
Total selling, general, and administrative expenses $ 17,275 $ 19,240
-------------------------------------------------------------------------------------------------------------------
I-20
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Income (loss) from operations:
Mattress Fabrics $ 10,264 $ 6,837
Upholstery Fabrics 1,045 1,472
-------------------------------------------------------------------------------------------------------------------
Total segment income from operations 11,309 8,309
Unallocated corporate expenses (2,554) (2,920)
Loss on impairment of equipment (256) (1) -
Restructuring and related charges (2,279) (7) (5,609) (9)
-------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations 6,220 (220)
Interest expense (2,380) (2,841)
Interest income 197 147
Other expense (income) (625) 98
Income (loss) before income taxes $ 3,412 $ (2,816)
-------------------------------------------------------------------------------------------------------------------
(6) The $1.4 million restructuring related charge represents $920 for other
operating costs associated with closed plant facilities and $535 for
inventory markdowns. The $65 restructuring related charge represents other
operating costs associated with closed plant facilities.
(7) The $2.3 million restructuring and related charge represents $985 for
other operating costs associated with closed plant facilities, $612 for
lease termination and other exit costs, $535 for inventory markdowns, $482
for write-downs of buildings and equipment, $184 for asset movement costs,
a credit of $160 for employee termination benefits, and a credit of $359
for sales proceeds received on equipment with no carrying value. Of this
total charge, $1.4 million was recorded in cost of sales, $65 was recorded
in selling, general, and administrative expenses, and $759 was recorded in
restructuring expense. The total $2.3 million restructuring and related
charge pertains to the upholstery fabrics segment.
(8) The $3.8 million represents restructuring related charges of $2.3 million
for inventory markdowns, $744 for other operating costs associated with
the closed plant facilities, and $665 for accelerated depreciation. The
$58 restructuring related charge represents other operating costs
associated with closed plant facilities.
(9) The $5.6 million represents restructuring and related charges of $2.3
million for inventory markdowns, $990 for employee termination benefits,
$914 for asset movement costs, $802 for other operating costs associated
with closed plant facilities, $665 for accelerated depreciation, $395 for
lease termination and other exit costs, $334 for write-downs of buildings
and equipment, and a credit of $890 for sales proceeds received on
equipment with no carrying value. Of this total charge, $3.8 million was
recorded in cost of sales, $58 was recorded in selling, general, and
administrative expenses, and $1.7 million was recorded in restructuring
expense. The total $5.6 million restructuring and related charge pertains
to the upholstery fabrics segment.
I-21
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Balance sheet information for the company's operating segments follow:
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands) January 27, 2008 April 29, 2007
-------------------------------------------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics
Current assets (10) $ 27,574 $ 32,990
Assets held for sale 189 -
Non-compete agreement, net 861 1,076
Goodwill 4,114 4,114
Property, plant and equipment (11) 19,763 22,849
-------------------------------------------------------------------------------------------------------------------
Total mattress fabrics assets 52,501 61,029
-------------------------------------------------------------------------------------------------------------------
Upholstery Fabrics
Current assets (12) 33,719 37,457
Assets held for sale - 2,499
Property, plant and equipment (13) 12,415 14,880
-------------------------------------------------------------------------------------------------------------------
Total upholstery fabrics assets 46,134 54,836
-------------------------------------------------------------------------------------------------------------------
Total segment assets 98,635 115,865
Non-segment assets:
Cash and cash equivalents 15,500 10,169
Assets held for sale 4,783 -
Deferred income taxes 31,369 31,059
Other current assets 995 1,297
Income taxes receivable 423 -
Property, plant and equipment 40 44
Other assets 1,581 1,512
-------------------------------------------------------------------------------------------------------------------
Total assets $ 153,326 $ 159,946
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Nine months ended
(dollars in thousands) January 27, 2008 January 28, 2007
-------------------------------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 1,680 $ 132
Upholstery Fabrics 2,361 2,497
-------------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 4,041 $ 2,629
-------------------------------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 2,668 $ 2,771
Upholstery Fabrics 1,596 2,215
-------------------------------------------------------------------------------------------------------------------
Total segment depreciation expense 4,264 4,986
Accelerated depreciation - 665
$ 4,264 $ 5,651
-------------------------------------------------------------------------------------------------------------------
I-22
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(10) Current assets represent accounts receivable and inventory. At April 29,
2007 current assets also included a credit of future purchases of
inventory associated with the ITG acquisition of $527,000. This credit of
future purchases of inventory was fully utilized at January 27, 2008.
(11) The $19.8 million at January 27, 2008, represents property, plant and
equipment located in the U.S. of $10.2 million, located in Canada at $9.4
million, and various corporate allocations of $177,000. The $22.8 million
at April 29, 2007, represents property, plant and equipment located in the
U.S. of $10.9 million, located in Canada at $10.0 million, and various
corporate allocations of $1.9 million. The corporate allocation of $1.9
million at April 29, 2007 primarily related to the corporate headquarters
which is classified in assets held for sale at January 27, 2008.
(12) Current assets represent accounts receivable and inventory for the
respective segment.
(13) The $12.4 million at January 27, 2008, represents property, plant and
equipment located in China of $9.2 million, located in the U.S. of $2.7
million, and various corporate allocations of $532,000. The $14.9 million
at April 29, 2007, represents property, plant and equipment located in
China of $7.7 million, located in the U.S. of $3.4 million, and various
corporate allocations of $3.8 million. The corporate allocation of $3.8
million at April 29, 2007 primarily related to the company's corporate
headquarters which is classified in assets held for sale at January 27,
2008.
15. Income Taxes
Uncertainty In Income Taxes
During the first quarter of fiscal 2008, the company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48) which supplements SFAS No. 109,
"Accounting for Income Taxes", by defining the confidence level that a tax
position must meet in order to be recognized in the financial statements. FIN 48
requires that the tax effects of a position to be recognized only if it is
"more-likely-than-not" to be sustained based solely on its technical merits as
of the reporting date. The more-likely-than-not threshold represents a positive
assertion by management that a company is entitled to the economic benefits of a
tax position. If a tax position is not considered more-likely-than-not to be
sustained based solely on its technical merits, no benefits of the tax position
are to be recognized. Moreover, the more-likely-than-not threshold must continue
to be met in each reporting period to support continued recognition of the
benefit. With the adoption of FIN 48, entities are required to adjust their
financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained. Any necessary adjustment would be recorded
directly to retained earnings and reported as a change in accounting principle.
The company adopted FIN 48 as of April 30, 2007, and recorded an increase in
retained earnings of $847,000 as a cumulative effect of a change in accounting
principle.
In May 2007, FASB issued FASB Staff Position FIN 48-1, "Definition of Settlement
in FASB Interpretation No.48" ("FSP FIN 48-1"). FSP FIN 48-1 provides guidance
on whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. No adjustment was made upon adoption of
FSP FIN 48-1.
Upon adoption of FIN 48 as of April 30, 2007, the company had approximately $3.4
million of total gross unrecognized tax benefits, of which $3.1 million
represents the amount of gross unrecognized tax benefits that, if recognized,
would favorably affect the income tax rate in future periods. At January 27,
2008, the company had approximately $4.5 million of total gross unrecognized tax
benefits, of which $4.2 million represents the amount of gross unrecognized tax
benefits that, if recognized, would favorably affect the income tax rate in
future periods. The total gross unrecognized tax benefits of $4.5 million as of
January 27, 2008, are classified as income taxes payable - long-term in the
accompanying consolidated balance sheets.
I-23
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The company has elected to classify interest and penalties, accrued as required
by FIN 48, as part of income tax expense. Upon adoption of FIN 48 as of April
30, 2007 and at January 27, 2008, the gross amount of interest and penalties due
to unrecognized tax benefits was $98,000 and $88,000, respectively. We
anticipate that the amount of unrecognized tax benefits will increase by
approximately $1.4 million by the end of the fiscal year. This increase
primarily relates to double taxation under applicable tax treaties with foreign
tax jurisdictions. United States federal and state tax returns filed by the
company remain subject to examination for tax years 2002 and subsequent due to
loss carryforwards. Canadian federal and provincial returns remain subject to
examination of tax years 2003 and subsequent.
Deferred Income Taxes
In making the judgment about the realization of the deferred tax assets,
management has considered both the negative and positive evidence, and concluded
that sufficient positive evidence exists to overcome the cumulative losses
experienced in recent years. Specifically, management considered the following,
among other factors: nature of the company's products; history of positive
earnings in the mattress fabrics segment; capital projects in progress to
further enhance the company's globally competitive cost structure in the
mattress fabrics segment; recent restructuring actions in the U.S. upholstery
fabrics business to adjust the U.S. cost structure and bring U.S. manufacturing
capacity in line with demand; development of offshore manufacturing and sourcing
programs to meet changing demands of upholstery fabric customers in the U.S.;
and the incremental sales volume from the purchase of certain assets from ITG
related to the mattress fabric product line of ITG's Burlington House Division.
Management's analysis of taxable income also included the following
considerations: none of the company's net operating loss carryforwards have
previously expired unused; the U.S. federal carryforward period is 20 years; and
the company's current income tax loss carryforwards principally expire in 16-20
years; fiscal 2022 through 2027. The amount of the deferred tax assets is
considered realizable, however, could be reduced if estimates of future taxable
income during the carryforward period are reduced.
U.S. Federal and state net operating loss carryforwards with related future tax
benefits on a gross basis were approximately $72.0 million at January 27, 2008.
Effective Income Tax Rate
The effective income rate (income taxes as a percentage of income before income
taxes) for the nine month period ended January 27, 2008, was 3.1% compared to an
income tax benefit of 54.7% for the nine month period ended January 28, 2007.
This effective income tax rate of 3.1% primarily reflects higher taxable income
from the company's U.S. operations in fiscal 2008 compared to fiscal 2007,
offset by the projected income tax effects related to the fiscal 2008 foreign
exchange loss on Canadian income taxes, and an income tax refund of $470,000 in
the third quarter of fiscal 2008 related to income tax incentives in China. This
higher taxable income from the company's U.S. operations reflects increased
profitability in the mattress fabrics segment and lower estimated restructuring
and related charges for fiscal 2008 compared to fiscal 2007. The income tax
benefit of 54.7% for the nine month period ended January 28, 2007, primarily
reflected pre-tax losses from the company's U.S. operations due to restructuring
activities and lower income tax rates on income from foreign sources.
I-24
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The company's income tax expense and effective income tax rate for the nine
month periods ended January 27, 2008 and January 28, 2007, were based upon the
estimated effective income tax rate applicable for the full years 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 the foreign currency in relation to the
U.S. dollar.
16. 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 distribution of any dividend to
shareholders. As of January 27, 2008, the company's statutory surplus reserve
was $1.1 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.
17. Commitments and Contingencies
At January 27, 2008, the company had commitments to acquire equipment with
regards to its mattress fabrics segment for approximately $4.0 million.
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 the United States District Court for the Middle
District of Pennsylvania. The plaintiffs are Alan Shulman, Stanley Siegel, Ruth
Cherenson as Personal Representative of the 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 totaling approximately $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 the 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. 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 the subject
of this litigation and consequently no reserve has been recorded.
I-25
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
18. Recently Issued Accounting Pronouncements
In September 2006, The FASB issued SFAS No. 157, "Fair Value of Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 establishes as common definition of fair value,
provides a framework for measuring fair value under accounting principles
generally accepted in the United States and expands disclosure requirements
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and is effective for the company in the first
quarter of fiscal 2009. The company is currently evaluating the impact, if any,
the adoption of SFAS No. 157 will have on its 2009 consolidated financial
statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This statement, which is expected
to expand fair value measurement, permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007 and is effective
for the company in the first quarter of fiscal 2009. The company is currently
evaluating the impact, if any, the adoption of SFAS No. 159 will have on its
2009 consolidated financial statements.
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 the 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 that we do not enter into
business combinations subsequent to adoption.
I-26
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, increases in utility and
energy costs, and general economic conditions. Decreases in these economic
indicators could have a negative effect on the company's business and prospects.
Likewise, increases in interest rates, particularly home mortgage rates, and
increases in consumer debt or the general rate of inflation, could affect the
company adversely. In addition, changes in consumer preferences for various
categories of furniture 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. 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 Item 1A "Risk Factors" section in the
company's Form 10-K filed with the Securities and Exchange Commission on July
19, 2007 for the fiscal year ended April 29, 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Results of Operations
The following analysis of financial condition and results of operations should
be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
Overview
Culp, Inc. has operations classified into two business segments: mattress
fabrics and upholstery fabrics. The mattress fabrics segment manufacturers,
sources, and sells fabrics to bedding manufacturers. The upholstery fabrics
segment sources, manufactures, and sells fabrics 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.
I-27
The company evaluates the operating performance of its segments based upon
income (loss) from operations before restructuring and related charges or
credits, certain unallocated corporate expenses, and certain other non-recurring
items. 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 current and non-current assets associated with
the ITG acquisition. The upholstery fabrics segment also includes assets held
for sale in 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 nine months ended January 27, 2008, and January 28, 2007.
I-28
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE THREE MONTHS ENDED JANUARY 27, 2008 AND JANUARY 28, 2007
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- --------------------------------
January 27, January 28, % Over January 27, January 28,
Net Sales by Segment 2008 2007 (Under) 2008 2007
--------------------------------------------- ------------ ----------- -------- --------------- ----------------
Mattress Fabrics $ 30,880 24,396 26.6 % 51.1 % 43.8 %
Upholstery Fabrics 29,602 31,316 (5.5)% 48.9 % 56.2 %
------------ ----------- -------- --------------- ----------------
Net Sales $ 60,482 55,712 8.6 % 100.0 % 100.0 %
============ =========== ======== =============== ================
Gross Profit by Segment Gross Profit Margin
----------------------- --------------------------------
Mattress Fabrics $ 4,200 4,215 (0.4)% 13.6 % 17.3 %
Upholstery Fabrics 3,181 3,269 (2.7)% 10.7 % 10.4 %
------------ ----------- -------- --------------- ----------------
Subtotal 7,381 7,484 (1.4)% 12.2 % 13.4 %
Loss on impairment of equipment (256)(1) - (100.0)% (0.4)% 0.0 %
Restructuring related charges (349)(2) (2,773) (4) (87.4)% (0.6)% (5.0)%
------------ ----------- -------- --------------- ----------------
Gross Profit $ 6,776 4,711 43.8 % 11.2 % 8.5 %
============ =========== ======== =============== ================
Selling, General and Administrative expenses by Segment Percent of Sales
----------------------------------------------------------- --------------------------------
Mattress Fabrics $ 1,571 1,706 (7.9)% 5.1 % 7.0 %
Upholstery Fabrics 2,787 3,765 (26.0)% 9.4 % 12.0 %
Unallocated Corporate expenses 746 895 (16.6)% 1.2 % 1.6 %
------------ ----------- -------- --------------- ----------------
5,104 6,366 (19.8)% 8.4 % 11.4 %
Restructuring related charges 13 (2) 28 (4) (53.6)% 0.0 % 0.1 %
------------ ----------- -------- --------------- ----------------
Selling, General and Administrative
expenses $ 5,117 6,394 (20.0)% 8.5 % 11.5 %
============ =========== ======== =============== ================
Operating Income (loss) by Segment Operating Income (Loss) Margin
--------------------------------------------- --------------------------------
Mattress Fabrics $ 2,628 2,509 4.7 % 8.5 % 10.3 %
Upholstery Fabrics 395 (496) 179.6 % 1.3 % (1.6)%
Unallocated corporate expenses (746) (895) (16.6)% (1.2)% (1.6)%
------------ ----------- -------- --------------- ----------------
Subtotal 2,277 1,118 103.7 % 3.8 % 2.0 %
Loss on impairment of equipment (256)(1) - (100.0)% (0.4)% 0.0 %
Restructuring expense and restructuring related
charges (774)(3) (4,076) (5) (81.0)% (1.3)% (7.3)%
------------ ----------- -------- --------------- ----------------
Operating income (loss) $ 1,247 (2,958) 142.2 % 2.1 % (5.3)%
============ =========== ======== =============== ================
Depreciation by Segment
---------------------------------------------
Mattress Fabrics $ 874 912 (4.2)%
Upholstery Fabrics 497 710 (30.0)%
------------ ----------- --------
Subtotal 1,371 1,622 (15.5)%
Accelerated Depreciation - 665 (100.0)%
------------ ----------- --------
Total Depreciation 1,371 2,287 (40.1)%
============ =========== ========
Notes:
(1) The $256 represents an impairment loss on older and existing equipment that was sold after January 27, 2008 and
is being replaced by newer and more efficient equipment. This impairment loss pertains to the mattress fabrics
segment.
(2) The $349 restructuring related charge represents $218 for other operating costs associated with closed plant
facilities and $131 for inventory markdowns. The $13 restructuring related charge represents other operating costs
associated with closed plant facilities.
(3) The $774 restructuring and related charges represents $238 for employee termination benefits, $231 for other
operating costs associated with closed plant facilities, $131 for inventory markdowns, $93 for a write-down of a
building, $68 for lease termination and other exit costs, $57 for asset movement costs, and a credit of $44 for
sales proceeds received on equipment with no carrying value. Of this total charge, $349 was recorded in cost of
sales, $13 was recorded in selling, general, and administrative expenses, and $412 was recorded in restructuring
expense. The total $774 restructuring and related charge pertains to the upholstery fabrics segment.
(4) The $2.8 million represents restructuring related charges of $2.2 million for inventory markdowns, $665 for
accelerated depreciation, and a credit of $52 for other operating costs associated with closed plant facilities. The
$28 restructuring related charge represents other operating costs associated with closed plant facilities.
(5) The $4.1 million restructuring and related charges represents $2.2 million for inventory markdowns, $1.2 million
for employee termination benefits, $665 for accelerated depreciation, $272 for write-downs of equipment, $181 for
asset movement costs, $61 for lease termination and other exit costs, a credit of $24 for other operating costs
associated with closed plant facilities, and a credit of $455 for sales proceeds received on equipment with no
carrying value. Of this total charge, $2.8 million was recorded in cost of sales, $28 was recorded in selling,
general, and administrative expenses and $1.3 million was recorded in restructuring expense. The total $4.1 million
restructuring and related charge pertains to the upholstery fabrics segment.
I-29
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE NINE MONTHS ENDED JANUARY 27, 2008 AND JANUARY 28, 2007
(Amounts in thousands)
NINE MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------------ ----------------------------------
January 27, January 28, % Over January 27, January 28,
Net Sales by Segment 2008 2007 (Under) 2008 2007
----------------------------------------- --------------- ------------ -------- ---------------- -----------------
Mattress Fabrics $ 103,426 69,734 48.3 % 54.4 % 39.3 %
Upholstery Fabrics 86,622 107,603 (19.5)% 45.6 % 60.7 %
--------------- ------------ -------- ---------------- -----------------
Net Sales $ 190,048 177,337 7.2 % 100.0 % 100.0 %
=============== ============ ======== ================ =================
Gross Profit by Segment Gross Profit Margin
----------------------------------------- ----------------------------------
Mattress Fabrics $ 16,043 11,880 35.0 % 15.5 % 17.0 %
Upholstery Fabrics 9,922 12,691 (21.8)% 11.5 % 11.8 %
--------------- ------------ -------- ---------------- -----------------
Subtotal 25,965 24,571 5.7 % 13.7 % 13.9 %
Loss on impairment of equipment (256)(1) - (100.0)% (0.1)% 0.0 %
Restructuring related charges (1,455)(2) (3,809)(4) (61.8)% (0.8)% (2.1)%
--------------- ------------ -------- ---------------- -----------------
Gross Profit $ 24,254 20,762 16.8 % 12.8 % 11.7 %
=============== ============ ======== ================ =================
Selling, General and Administrative expenses by Segment Percent of Sales
---------------------------------------------------------- ----------------------------------
Mattress Fabrics $ 5,779 5,043 14.6 % 5.6 % 7.2 %
Upholstery Fabrics 8,877 11,219 (20.9)% 10.2 % 10.4 %
Unallocated Corporate expenses 2,554 2,920 (12.5)% 1.3 % 1.6 %
--------------- ------------ -------- ---------------- -----------------
Subtotal 17,210 19,182 (10.3)% 9.1 % 10.8 %
Restructuring related charges 65 (2) 58 (4) 12.1 % 0.0 % 0.0 %
--------------- ------------ -------- ---------------- -----------------
Selling, General and Administrative
expenses $ 17,275 19,240 (10.2)% 9.1 % 10.8 %
=============== ============ ======== ================ =================
Operating Income (loss) by Segment Operating Income (Loss) Margin
----------------------------------------- ----------------------------------
Mattress Fabrics $ 10,264 6,837 50.1 % 9.9 % 9.8 %
Upholstery Fabrics 1,045 1,472 (29.0)% 1.2 % 1.4 %
Unallocated corporate expenses (2,554) (2,920) (12.5)% (1.3)% (1.6)%
--------------- ------------ -------- ---------------- -----------------
Subtotal 8,755 5,389 62.5 % 4.6 % 3.0 %
Loss on impairment of equipment (256)(1) - (100.0)% (0.1)% 0.0 %
Restructuring expense and restructuring
related charges (2,279)(3) (5,609)(5) (59.4)% (1.2)% (3.2)%
--------------- ------------ -------- ---------------- -----------------
Operating income (loss) $ 6,220 (220) N.M. 3.3 % (0.1)%
=============== ============ ======== ================ =================
Depreciation by Segment
-----------------------------------------
Mattress Fabrics $ 2,668 2,771 (3.7)%
Upholstery Fabrics 1,596 2,215 (27.9)%
--------------- ------------ --------
Subtotal 4,264 4,986 (14.5)%
Accelerated Depreciation - 665 (100.0)%
--------------- ------------ --------
Total Depreciation 4,264 5,651 (24.5)%
=============== ============ ========
Notes:
(1) The $256 represents an impairment loss on older and existing equipment that was sold after January 27, 2008 and is
being replaced by newer and more efficient equipment. This impairment loss pertains to the mattress fabrics segment.
(2) The $1.4 million restructuring related charge represents $920 for other operating costs associated with closed
plant facilities and $535 for inventory markdowns. The $65 restructuring related charge represents other operating
costs associated with plant facilities.
(3) The $2.3 million represents $985 for other operating costs associated with closed plant facilities, $612 for lease
termination and other exit costs, $535 for inventory markdowns, $482 for write-downs of buildings and equipment, $184
for asset movement costs, a credit of $160 for employee termination benefits, and a credit of $359 for sales proceeds
received on equipment with no carrying value. Of this total charge, $1.4 million was recorded in cost of sales, $65
was recorded in selling, general, and administrative expenses, and $759 was recorded in restructuring expense. The
total $2.3 million restructuring and related charge pertains to the upholstery fabrics segment.
(4) The $3.8 million represents restructuring related charges of $2.3 million for inventory markdowns, $744 for other
operating costs associated with the closed plant facilities, and $665 for accelerated depreciation. The $58
restructuring related charge represents other operating costs associated with closed plant facilities.
(5) The $5.6 million represents restructuring and related charges of $2.3 million for inventory markdowns, $990 for
employee termination benefits, $914 for asset movement costs, $802 for other operating costs associated with closed
plant facilities, $665 for accelerated deprecation, $395 for lease termination and other exit costs, $334 for write-
downs of buildings and equipment, and a credit of $890 for sales proceeds received on equipment with no carrying
value. Of this total charge, $3.8 million was recorded in cost of sales, $58 was recorded in selling, general, and
administrative expenses, and $1.7 million was recorded in restructuring expense. The total $5.6 million restructuring
and related charge pertains to the upholstery fabrics segment.
I-30
Three and Nine Months ended January 27, 2008 compared with the Three and Nine
Months ended January 28, 2007
Overview
For the three months ended January 27, 2008, net sales were $60.5 million, up 9%
compared with $55.7 million for the third quarter of fiscal 2007. The company
reported net income of $903,000, or $0.07 per diluted share, for the third
quarter of fiscal 2008, which included restructuring and related pre-tax charges
of $774,000. The company reported a net loss of $2.2 million, or $0.19 per
diluted share, for the third quarter of fiscal 2007, which included
restructuring and related pre-tax charges of $4.1 million.
For the nine months ended January 27, 2008, net sales were $190.0 million, up 7%
compared with $177.3 million for the nine months ended January 28, 2007. The
company reported net income of $3.3 million, or $0.26 per diluted share, for the
nine months ended January 27, 2008, which included restructuring and related
pre-tax charges of $2.3 million. The company reported a net loss of $1.3
million, or $0.11 per diluted share for the nine months ended January 28, 2007,
which included restructuring and related pre-tax charges of $5.6 million.
Restructuring and Related Charges
During the third quarter of fiscal 2008, total restructuring and related charges
were $774,000, of which $238,000 related to employee termination benefits,
$231,000 for other operating costs associated with closed plant facilities,
$131,000 for inventory markdowns, $93,000 for a write-down of a building,
$68,000 for lease termination and other exit costs, $57,000 for asset movement
costs, and a credit of $44,000 for sales proceeds received on equipment with no
carrying value. Of this total charge, $349,000 was recorded in cost of sales,
$13,000 was recorded in selling, general, and administrative expense, and
$412,000 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.
During the third quarter of fiscal 2007, total restructuring and related charges
were $4.1 million, of which $2.2 million related to inventory markdowns, $1.2
million for employee termination benefits, $665,000 for accelerated
depreciation, $272,000 for write-downs of equipment, $181,000 for asset movement
costs, $61,000 for lease termination and other exit costs, a credit of $24,000
for other operating costs associated with closed plant facilities, and a credit
of $455,000 for sales proceeds received on equipment with no carrying value. Of
this total charge, $2.8 million was recorded in cost of sales, $28,000 was
recorded in selling, general, and administrative expense, and $1.3 million was
recorded in restructuring expense in the 2007 Consolidated Statement of Net
Loss. These charges primarily relate to the December 2006 Upholstery Fabrics
restructuring plan.
During the nine months ended January 27, 2008, total restructuring and related
charges were $2.3 million, of which $985,000 related to other operating costs
associated with closed plant facilities, $612,000 for lease termination and
other exit costs, $535,000 for inventory markdowns, $482,000 for write-downs of
buildings and equipment, $184,000 for asset movement costs, a credit of $160,000
for employee termination benefits, and a credit of $359,000 for sales proceeds
received on equipment with no carrying value. Of this total charge, $1.4 million
was recorded in cost of sales, $65,000 was recorded in selling, general, and
administrative expense, and $759,000 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.
During the nine months ended January 28, 2007, total restructuring and related
charges were $5.6 million, of which $2.3 million related to inventory markdowns,
$990,000 for employee termination benefits, $914,000 for asset movement costs,
$802,000 for other operating costs associated with closed plant facilities,
$665,000 for accelerated depreciation, $395,000 for lease termination and other
exit costs, $334,000 for write-downs of buildings and equipment, and a credit of
$890,000 for sales proceeds received on equipment with no carrying value. Of
this total charge, $3.8 million was recorded in cost of sales, $58,000 was
recorded in selling, general, and administrative expense, and $1.7 million was
recorded in restructuring expense in the 2007 Consolidated Statement of Net
Loss. These charges primarily relate to the December 2006, September 2005, and
Fiscal 2005 Upholstery Fabrics restructuring plans.
I-31
Mattress Fabrics Segment
Net Sales -- Mattress fabrics (known as mattress ticking) net sales for the
third quarter of fiscal 2008 were $30.9 million, a 27% increase compared with
$24.4 million for the third quarter of fiscal 2007. Mattress fabric sales
represented 51% of total company sales for the third quarter of fiscal 2008,
compared with 44% for the third quarter of fiscal 2007. On a unit volume basis,
total yards sold for the third quarter of fiscal 2008 increased by 21% compared
with the third quarter of fiscal 2007. This trend primarily reflects the
incremental sales related to the company's acquisition of ITG's mattress fabrics
product line in January 2007. The increase in net sales for the third quarter of
fiscal 2008 of 27% compared to the third quarter of fiscal 2007 is lower than
the previous quarters since the acquisition due to the planned discontinuance of
certain ITG products that did not fit the company's business model.
For the nine months ended January 27, 2008, net sales were $103.4 million, a 48%
increase compared with $69.7 million for the nine months ended January 28, 2007.
On a unit volume basis, total yards sold for the nine months ended January 27,
2008, increased by 42% compared with the nine months ended January 28, 2007.
Mattress fabric sales represented 54% of total company sales for the nine-month
period ending January 27, 2008, compared with 39% for the nine-month period
ending January 28, 2007. These trends primarily reflect the incremental sales
related to the company's acquisition of ITG's mattress fabrics product line in
January 2007.
The average selling price of $2.42 for the third quarter of fiscal 2008
increased 4% over the same period a year ago. The average selling price of $2.42
for the nine months ended January 27, 2008, increased 5% over the same period a
year ago. This trend reflects a shift in product mix toward more knitted
fabrics, which have a higher average selling price.
Operating Income -- For the third quarter of fiscal 2008, the mattress fabrics
segment reported operating income of $2.6 million, or 9% of net sales, compared
to $2.5 million, or 10% of net sales, for the third quarter of fiscal 2007. For
the nine months ended January 27, 2008, the mattress fabrics segment reported
operating income of $10.3 million, or 10% of net sales, compared to $6.8
million, or 10% of net sales for the nine months ended January 28, 2007. The
increase in operating income attributed to the incremental sales related to the
company's acquisition of ITG's mattress fabrics product line was offset by
higher raw material costs, increased Canadian operating expenses due to the
strengthening of the Canadian currency as compared to the same period last year,
transition costs associated with the ITG acquisition of approximately $500,000
in the first quarter of fiscal 2008, and the sale of some excess inventory
related to the ITG acquisition at reduced margins.
To offset these higher costs, the company has implemented a price increase,
effective in March 2008. In addition, the company is making strategic
investments to enhance its manufacturing platform and provide additional
reactive capacity in mattress fabrics. During the next few months, the company
will be implementing a $5 million capital project that includes expansion of the
weaving and finishing operations in the Stokesdale, NC facility. This project is
expected to be completed during the first quarter of fiscal 2009. This
state-of-the-art equipment and additional capacity will allow this segment to
operate more efficiently on lower inventories and provide even faster response
time to our customers. Additionally, this capital project will more effectively
position the company to pursue additional growth opportunities and further
extend our leadership position in mattress fabrics.
I-32
Selling, general, and administrative expenses as a percentage of net sales were
5.1% in the third quarter of fiscal 2008 compared with 7.0% in the third quarter
of fiscal 2007. Selling, general, and administrative expenses were 5.6% and 7.2%
for the nine months ended January 27, 2008 and January 28, 2007, respectively.
This trend primarily reflects the additional sales from the ITG acquisition.
Segment assets -- Segment assets consist of accounts receivable, inventory,
a non-compete agreement associated with the ITG acquisition, goodwill, assets
held for sale, and property, plant, and equipment. As of January 27, 2008,
accounts receivable and inventory totaled $27.6 million compared with $32.9
million at April 29, 2007. At April 29, 2007, current assets for this segment
also included a credit for future purchases of inventory associated with the ITG
acquisition of $527,000. This credit for future purchases of inventory was fully
utilized at January 27, 2008. As of January 27, 2008 and April 29, 2007, the
carrying values of the non-compete agreement were $861,000 and $1.1 million,
respectively. As of January 27, 2008 and April 29, 2007, the carrying value of
the segment's goodwill was $4.1 million.
As of January 27, 2008, this segment had assets held for sale with carrying
values totaling $189,000. The company adopted a plan to sell certain older and
existing equipment related to its mattress fabrics segment that is being
replaced by newer and more efficient equipment. The company sold these assets
held for sale subsequent to third quarter of fiscal 2008 for $189,000.
Also as of January 27, 2008, property, plant and equipment totaled $19.8 million
compared with $22.8 million at April 29, 2007. The $19.8 million at January 27,
2008 represents property plant and equipment located in the U.S. of $10.2
million, located in Canada at $9.4 million, and various corporate allocations of
$177,000. The $22.8 million at April 29, 2007 represents property, plant, and
equipment located in the U.S of $10.9 million, located in Canada at $10.0
million, and various corporate allocations of $1.9 million. The corporate
allocation of $1.9 million at April 29, 2007 primarily related to the corporate
headquarters which is classified in assets held for sale at January 27, 2008.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric net sales (which includes both fabric and cut and
sewn kits) for the third quarter of fiscal 2008 were $29.6 million, a 6% decline
compared with $31.3 million in the third quarter of fiscal 2007. On a unit
volume basis, total yards sold for the third quarter of fiscal 2008 decreased by
12% compared with the third quarter of fiscal 2007. Average selling prices of
$4.23 increased 5% for the third quarter of fiscal 2008 compared with the third
quarter of fiscal 2007. Upholstery fabric net sales for the nine months ended
January 27, 2008 were $86.6 million, a 20% decline compared to $107.6 million
for the nine months ended January 28, 2007. On a unit volume basis, total yards
sold for the nine months ended January 27, 2008 decreased by 26% compared with
the nine months ended January 28, 2007. Average selling prices of $4.23
increased 2% for the nine months ended January 27, 2008 compared to the nine
months ended January 28, 2007. Upholstery fabric 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.
Operating Income - Operating income for the third quarter of fiscal 2008 was
$395,000 compared with an operating loss of $496,000 for the third quarter of
fiscal 2007. Operating income for the nine months ended January 27, 2008 was
$1.0 million compared with operating income of $1.5 million for the nine months
ended January 28, 2007. These results reflect the very difficult operating
environment for the retail furniture industry. Discretionary consumer spending
for furniture continues to be very soft due to a slowing economy, weak housing
market and high energy prices. Considering the unfavorable market conditions,
the company was able to report a profitable performance in this segment based on
a significantly improved cost structure with its China platform and
substantially reduced selling, general, and administrative expenses.
I-33
Selling, general and administrative expenses for third quarter of fiscal 2008
were down 26% from the third quarter of fiscal 2007. For the nine months ended
January 27, 2008, selling, general, and administrative expenses were down 21%
compared with the nine months ended January 28, 2007. This reduction is due to
the company's restructuring activities, and this year over year improvement is
expected to continue throughout fiscal 2008.
Non-U.S. Produced Sales - Net sales of upholstery fabrics produced outside the
company's U.S. manufacturing operations were $20.2 million in the third quarter
of fiscal 2008, an increase of 17% from $17.4 million in the third quarter of
fiscal 2007. The year over year growth in non-U.S. produced fabrics reverses a
trend reflected in the results for the previous two fiscal quarters of 2008. The
results reflected in the third quarter of fiscal 2008 represent the company's
strategic focus on product development, innovation, and improved supply chain
performance. Net sales of upholstery fabrics produced outside the company's U.S.
manufacturing operations were $56.0 million for the nine months ended January
27, 2008, a decrease of 9% from $61.5 million for the nine months ended January
28, 2007. This decline reflects the overall very weak demand industry wide.
Net sales of upholstery fabrics produced outside the company's U.S.
manufacturing operations accounted for approximately 68% of upholstery fabric
sales for the third quarter of fiscal 2008 compared to 55% for the third quarter
of fiscal 2007. Net sales of upholstery fabrics produced outside the company's
U.S. manufacturing operations accounted for approximately 65% for the nine
months ended January 27, 2008 compared to 57% for the nine months ended January
28, 2007. Sales of cut and sewn kits increased 33% for the third quarter of
fiscal 2008 compared with the third quarter of fiscal 2007. Sales of cut and
sewn kits increased 151% for the nine months ended January 27, 2008 compared
with the nine months ended January 28, 2007. This trend toward higher non-U.S.
produced sales in relation to U.S. produced sales is expected to continue as the
company's U.S. customers and U.S. furniture retailers have continued to move an
increasing amount of their fabric and furniture purchases to Asia and the
company has moved with them and responded with an operation designed to meet
their fabric needs.
U.S .Produced Sales - Net sales of U.S. produced upholstery fabrics were $9.4
million in the third quarter of fiscal 2008, a decrease of 33% from $14.0
million in the third quarter of fiscal 2007. Net sales of U.S. produced
upholstery fabrics were $30.6 million for the nine months ending January 27,
2008, a decrease of 34% from $46.1 million for the nine months ending January
28, 2007. As a result of higher costs related to raw materials and lower volume,
the company will be implementing a price increase on U.S. produced products
during the fourth quarter of fiscal 2008. Management has continued to take
aggressive actions over the past several years to bring U.S. manufacturing costs
and capacity in line with current and expected demand trends. As a result of
these activities, the company now has only one U.S. manufacturing facility
operating in the upholstery fabrics segment. As of January 27, 2008, the
carrying value of the company's U.S. based upholstery fabrics fixed assets was
$2.7 million.
While management believes it is strategically important to produce some level of
upholstery fabrics in the U.S. to support its customers' domestic fabric
requirements, management remains committed to taking additional steps if
necessary to address the low profitability of the company's U.S. upholstery
operations. The company could experience additional inventory markdowns,
write-downs of its property, plant, and equipment, and further restructuring
charges in the U.S. upholstery 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 January 27,
2008, accounts receivable and inventory totaled $33.7 million compared to $37.5
million at April 29, 2007. This decline reflects lower sales and improved
working capital management. As of January 27, 2008, property, plant, and
equipment totaled $12.4 million compared to $14.9 million at April 29, 2007. The
$12.4 million at January 27, 2008, represents property, plant, and equipment
located in China of $9.2 million, located in the U.S. of $2.7 million, and
various corporate allocations of $532,000. The $14.9 million at April 29, 2007,
represents property, plant, and equipment located in China of $7.7 million,
located in the U.S. of $3.4 million, and various corporate allocations of $3.8
million. The corporate allocation of $3.8 million at April 29, 2007 primarily
related to the company's corporate headquarters which is classified in assets
held for sale at January 27, 2008.
I-34
At April 29, 2007, the company had assets held for sale with carrying values
totaling $2.5 million. These assets held for sale consisted of buildings and
certain equipment to be sold from the closure of the company's Lincolnton, NC
and Graham, NC plant facilities. At January 27, 2008, all buildings and
equipment classified as held for sale at April 29, 2007 have been sold. The
company received sales proceeds totaling $1.9 million and recorded impairment
losses of $482,000 in restructuring expense on these assets held for sale in
fiscal 2008.
Other Expense Categories
Selling, General and Administrative Expenses - Selling, general, and
administrative expenses (SG&A) for the company as a whole were $5.1 million for
the third quarter of fiscal 2008 compared with $6.4 million for the third
quarter of fiscal 2007, a decrease of 20%. As a percent of net sales, SG&A
expenses were 8.5% in the third quarter of fiscal 2008 compared with 11.5% in
the third quarter of fiscal 2007. SG&A expenses for the nine months ended
January 27, 2008 were $17.3 million compared with $19.2 million for the nine
months ended January 28, 2007, a decrease of 10%. As a percent of net sales,
SG&A expenses were 9.1% for the nine months ended January 27, 2008 and 10.8% for
the nine months ended January 28, 2007. These trends primarily reflect the
company's restructuring efforts associated with its U.S. upholstery fabric
operations, increased mattress fabric sales associated with the ITG acquisition,
and a reduction in bad debt expense compared to same period a year ago.
Interest Expense (Income) -- Interest expense for the third quarter of fiscal
2008 was $753,000 compared to $952,000 for the third quarter of fiscal 2007.
Interest expense for the nine months ended January 27, 2008 was $2.4 million
compared to $2.8 million for the nine months ended January 28, 2007. This trend
primarily reflects lower outstanding balances on the company's unsecured term
notes. Interest income was $77,000 for the third quarter of fiscal 2008 compared
to $50,000 for the third quarter of fiscal 2007. Interest income was $197,000
for the nine months ended January 27, 2008 and $147,000 for the nine months
ended January 28, 2007. This trend reflects higher cash and cash equivalent
balances, which were invested in money market funds.
Other Expense (Income) - Other income for the third quarter of fiscal 2008 was
$72,000 compared with other income of $157,000 for the third quarter of fiscal
2007. Other expense for the nine months ended January 27, 2008 was $625,000
compared to other income of $98,000 for the nine months ended January 28, 2007.
Other expense for the nine months ended January 27, 2008 reflects foreign
exchange remeasurement losses primarily related to an 11% decline in value of
the U.S. dollar relative to the Canadian dollar. Other income for the nine
months ended January 28, 2007 reflects foreign exchange remeasurement gains
primarily related the U.S. dollar strengthening by 5% relative to the Canadian
dollar.
Income Taxes - The effective income tax rate (income taxes as a percentage of
income before income taxes) for the nine month period ended January 27, 2008,
was 3.1% compared to an income tax benefit of 54.7% for the nine month period
ended January 28, 2007. This effective income tax rate of 3.1% primarily
reflects higher taxable income from the company's U.S. operations in fiscal 2008
compared to fiscal 2007, offset by the projected income tax effects related to
the fiscal 2008 foreign exchange loss on Canadian income taxes, and an income
tax refund of $470,000 in the third quarter of fiscal 2008 related to income tax
incentives in China. This higher taxable income from the company's U.S.
operations reflects increased profitability in the mattress fabrics segment and
lower estimated restructuring and related charges for fiscal 2008 compared to
fiscal 2007. The income tax benefit of 54.7% for the nine month period ended
January 28, 2007, primarily reflected pre-tax losses from the company's U.S.
operations due to restructuring activities and lower income tax rates on income
from foreign sources.
I-35
The company's income tax expense and effective income tax rate, for the nine
month periods ended January 27, 2008 and January 28, 2007, were based upon the
estimated effective income tax rate applicable for full years 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 the foreign currency in relation to the
U.S. dollar.
In making a judgment about the realization of the deferred tax assets,
management has considered both negative and positive evidence, and concluded
that sufficient positive evidence exists to overcome the cumulative losses
experienced in recent years. Specifically, management considered the following,
among other factors: nature of the company's products; history of positive
earnings in the mattress fabrics segment; capital projects in progress to
further enhance the company's globally competitive cost structure in the
mattress fabrics segment; recent restructuring actions in the U.S. upholstery
fabrics business to adjust the U.S. cost structure and bring U.S. manufacturing
capacity in line with demand; development of offshore manufacturing and sourcing
programs to meet changing demands of upholstery fabric customers in the U.S.;
and the incremental sales volume from the purchase of certain assets from ITG
related to the mattress fabric product line of ITG's Burlington House Division.
Management's analysis of taxable income also included the following
considerations: none of the company's net operating loss carryforwards have
previously expired unused; the U.S. federal carryforward period is 20 years; and
the company's current income tax loss carryforwards principally expire in 16-20
years; fiscal 2022 through 2027. The amount of the deferred tax assets
considered realizable, however, could be reduced if estimates of future taxable
income during the carryforward period are reduced.
U.S. federal and state net operating loss carryforwards with related future tax
benefits on a gross basis were approximately $72.0 million at January 27, 2008.
Liquidity and Capital Resources
Liquidity - The company's 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. The company believes its sources of
liquidity continue to be adequate to meets its current needs.
Cash and cash equivalents as of January 27, 2008, were $15.5 million compared
with $10.2 million as of April 29, 2007. The company's cash position reflects
improvement in cash flow from operations of $14.8 million for the nine months
ended January 27, 2008 compared with $4.4 million for the nine months ended
January 28, 2007. This improvement reflects increased profitability and
significant improvement in working capital management. The company's cash
position also reflects total debt payments of $7.6 million, cash outlays for
capital expenditures of $4.3 million, and proceeds of $2.3 million primarily
from the sale of buildings and equipment for the nine month period ended January
27, 2008.
The strong cash flow is allowing the company to substantially reduce its total
debt during the fiscal year. During the third quarter, the company reduced total
borrowings by $5.6 million, which brings the total debt reduction to $7.6
million through the third quarter of fiscal 2008. With the scheduled repayment
of $8.3 million on the company's unsecured term notes in March 2008, the company
expects to have reduced total debt by almost $16 million by the end of fiscal
2008. Total debt was $33.4 million at January 27, 2008 compared to $46.7 million
at January 28, 2007. Currently, the company has sufficient funds available to
make the remaining principal payment due in March 2008.
I-36
The company is taking further steps to support its liquidity, including ongoing
efforts to improve operating working capital turnover, sell certain assets,
reduce further selling, general, and administrative expenses in its upholstery
fabrics segment, and debt reduction. Effective October 29, 2007, the company
adopted a plan to sell its corporate headquarters as the company is only
utilizing one-half of the available space and with the sale can lower costs and
reduce debt. The carrying value of the company's headquarters is approximately
$4.8 million and is recorded in assets held for sale in the 2008 Consolidated
Balance Sheet. The company expects that the final sale and disposal of the
assets will be completed within a year from the date the plan was adopted and
the sales proceeds will be used to repay the outstanding $6.4 million mortgage
balance. The Company has entered into a contract dated March 11, 2008 providing
for the sale of its headquarters building in High Point, North Carolina to
Schwartz Properties, L.L.C., for a purchase price of $7,350,000. The contract
also contemplates that the Company would lease the building back from the
purchaser for an initial term of five years, at a rental rate of $56,800 per
month on a "triple net" basis. The contract is subject to the purchaser's
ability to obtain financing and is subject to a 90 day due diligence period,
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 closing is anticipated to occur during the first quarter of
the Company's 2009 fiscal year. Based on the current terms of the contract, any
gain realized from the final sale would be amortized over the life of the lease
agreement, in accordance with SFAS No. 13, "Accounting for Leases," SFAS No. 28,
"Accounting for Sales with Leasebacks (an amendment of SFAS No. 13), SFAS No.
66, "Accounting for Sales of Real Estate," and SFAS No. 98, "Accounting for
Leases."
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 January 27, 2008 decreased 20% in
comparison to April 29, 2007. Days sales outstanding totaled 32 days at January
27, 2008, compared with 36 days at April 29, 2007 and January 28, 2007,
respectively. This improvement primarily reflects the shift in net sales from
the upholstery fabrics to the mattress fabrics segment, in which customers
associated with the mattress fabrics segment more frequently take advantage of
cash discounts, as well as tighter management of accounts receivable.
Inventories as of January 27, 2008, decreased $5 million or 11% in comparison to
January 28, 2007. This decrease primarily represents a decrease in inventories
in the upholstery fabrics segment primarily due to lower sales and improved
inventory management. Inventory turns for the third quarter of fiscal 2008 were
5.6 versus 5.3 for the third quarter of fiscal 2007. Operating working capital
(comprised of accounts receivable and inventories, less trade accounts payable)
was $42.3 million at January 27, 2008, down from $48.4 million at January 28,
2007. Working capital turnover was 5.8 and 5.2 at January 27, 2008 and January
28, 2007, respectively.
Financing Arrangements
Term Notes
The company's 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 two years through March 2010. The principal payments are
required to be paid in annual installments as follows: March 2008 - $8.3
million; March 2009 - $7.5 million; and March 2010 - $7.5 million. The company
prepaid $2.2 million during the first quarter, $1.0 million in the second
quarter, and $4.3 million in the third quarter all of which was scheduled to be
due in March 2008.
On February 19, 2008, the company entered into a fourth amendment. This
amendment provided greater flexibility by increasing the capital expenditure
limit on a cash basis from $4.0 million to $5.0 million for fiscal year 2008 and
$4.0 million plus an additional amount as defined in the agreement for any
fiscal year thereafter.
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, NC. This term loan bears
interest at the one-month LIBOR plus an adjustable margin (6.49% at January 27,
2008) based on the company's debt/EBITDA ratio, as defined in the agreement and
is payable in varying monthly installments through September 2010, with a final
payment of $3.3 million in October 2010.
I-37
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, NC and bears
interest at the one-month LIBOR plus an adjustable margin (7.87% at January 27,
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 (6.49%
at January 27, 2008) based on the company's debt/EBITDA ratio, as defined in the
agreement. As of January 27, 2008, there were $1.3 million in outstanding
letters of credit (all of which related to workers compensation) and no
borrowings outstanding under the agreement.
On December 27, 2007, the company entered into a twelfth amendment. This
amendment extended the expiration date to December 31, 2008, provided greater
flexibility by increasing the capital expenditure limit on a cash basis from
$4.0 million to $5.0 million for fiscal year 2008, and amended certain other
financial covenants as defined in the agreement.
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
million, of which approximately $1 million includes letters of credit. The
company borrowed a total of $4.0 million in installments of $1.3 million in
February 2007, $1.3 million in March 2007, and $1.4 million in October 2007.
There were no borrowings in the third quarter of fiscal 2008. Each installment
is up for renewal one year from the date of borrowing and the bank is required
to provide an advance notice of one year for repayment of each respective
installment. The company paid off the $1.3 million February 2007 installment in
the third quarter of fiscal 2008. Interest is paid on a quarterly basis at a
rate determined by the Chinese government (with interest rates ranging from
6.07% to 6.53% at January 27, 2008). As of January 27, 2008, approximately $2.8
million was outstanding under the agreement.
I-38
Canadian Government Loan
The company has an agreement with the Canadian government to provide for a term
loan that is non-interest bearing and is payable in 48 equal monthly
installments commencing December 1, 2009. The proceeds are 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 January 27, 2008, the company was in compliance
with these financial covenants.
The principal payment requirements of long-term debt during the next five years
are: Year 1 - $8.6 million; Year 2 - $7.8 million; Year 3 - $13.6 million; Year
4 - $198,000; Year 5 - $198,000; and thereafter - $165,000.
Capital Expenditures - Cash outlays for capital expenditures during the nine
months ended January 27, 2008 were $4.3 million, for the company's China and
mattress fabric operations. The company did not utilize any vendor financing for
any of its capital expenditures for the nine months ending January 27, 2008. The
company expects total capital expenditures to be approximately $7.3 million for
fiscal 2008, of which $5 million represents cash outlays with the remaining $2.3
million to be provided by vendor financing to be repaid in fiscal 2009 through
2011.
The company's current estimate of cash outlays for capital projects initiated in
fiscal 2009 (not provided by vendor-financing) is $2 million to $3 million. The
company will have an additional capital expenditure of $1.6 million that will be
vendor-financed on a project initiated in fiscal 2008. The company expects that
the availability of funds from cash flow from operations, vendor financing, and
its revolving credit lines will be sufficient to fund its planned capital needs.
Vendor-financed capital expenditures totaling $4.6 million on projects initiated
prior to the end of fiscal 2008 are expected to be repaid over the next three
fiscal as follows: Fiscal 2009 - $2.5 million; Fiscal 2010 - $1.6 million; and
Fiscal 2011 - $500,000.
Depreciation for the nine months ended January 27, 2008, was $4.3 million and is
estimated to be $6 million for fiscal 2008. The company's current estimate of
depreciation is estimated to be $6 million for fiscal 2009.
Critical Accounting Policies and Recent Accounting Developments
As more fully described in Item 7 of the company's annual report on Form 10-K
for the year ended April 29, 2007 (filed July 19, 2007), the preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions about
future events that affect the amounts reported in the financial statements and
accompanying notes. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires exercise
of judgment.
As more fully disclosed in Notes 1 and 15 of the Notes to Consolidated Financial
Statements, the company adopted FIN 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109, on April 30, 2007. The
company considers many factors when evaluating and estimating income tax
uncertainties. These factors include an evaluation of the technical merits of
the tax position as well as the amounts and probabilities of the outcomes that
could be realized upon ultimate settlement. The actual resolution of those
uncertainties will inevitably differ from those estimates, and such differences
may be material to the financial statements.
I-39
Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 establishes a common definition of fair value,
provides a framework for measuring fair value under accounting principles
generally accepted in the United States and expands disclosure requirements
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007, and is effective for the company in the first
quarter of fiscal 2009. The company is currently evaluating the impact, if any,
the adoption of SFAS No. 157 will have on its 2009 consolidated financial
statements.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." This statement, which is expected
to expand fair value measurement, permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007, and is effective
for the company in the first quarter of fiscal 2009. The company is currently
evaluating the impact, if any, the adoption of SFAS No. 159 will have on its
2009 consolidated financial statements.
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 the 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 that we do not enter into
business combinations subsequent to adoption.
Contractual Obligations
Capital Expenditures
At January 27, 2008, the company had commitments to acquire equipment with
regards to its mattress fabrics segment for approximately $4.0 million. Of this
total commitment of $4.0 million, $3.6 million is to be provided by
vendor-financing. This $3.6 million is projected to be repaid as follows: Fiscal
2009 - $1.7 million; Fiscal 2010 $1.4 million; and Fiscal 2011 - $500,000.
At January 27, 2008, the company had total contractual obligations from capital
projects initiated prior to fiscal 2008 totaling $724,000. This amount is to be
repaid in Fiscal 2009.
Uncertainty In Income Taxes
As more fully disclosed in Notes 1 and 15 of Notes to the Consolidated Financial
Statements, the company adopted FIN 48, Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109, on April 30, 2007. At
January 27, 2008, the company has recognized $4.5 million of liabilities for
unrecognized tax benefits. The final outcome of these tax uncertainties is
dependent upon various matters including tax examinations, legal proceedings,
competent authority proceedings, changes in regulatory tax laws, or
interpretations of those tax laws, or expiration of statutes of limitation. As
of January 27, 2008, the company classified the $4.5 million of liabilities for
unrecognized tax benefits as income taxes payable - long-term. While the company
cannot reasonably predict the timing of the cash flows associated with its
liabilities for unrecognized tax benefits, it believes that no significant cash
payments will be made within the next five years due to its federal and state
net operating loss carryforwards.
I-40
Inflation
The cost of certain of the company's raw materials, principally yarn from
petroleum derivatives, and utility/energy costs, increased during the first
three quarters of fiscal 2008 as oil and energy prices increased and had an
impact on the company's financial results. Any significant increase in the
company's raw material costs, utility/energy costs and general economic
inflation could have a material adverse impact on the company, because
competitive conditions have limited the company's ability to pass significant
operating cost increases on to its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company's exposure to interest
rate risk consists of floating rate debt based on the London Interbank Offered
Rate (LIBOR) plus an adjustable margin under the company's revolving credit
agreement in the United States and its real estate term loans. As of January 27,
2008, there were $6.4 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 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 has fixed
interest rates ranging from 6.07% to 6.53% at January 27, 2008. Additionally,
$28.9 million on the company's total borrowings of $33.4 million (approximately
87%) are at a fixed rate or non-interest bearing. Thus, any foreseeable change
in interest rates would not have a material effect on the company's interest
expense.
The company's exposure to fluctuations in foreign currency exchange rates are
due to foreign subsidiaries domiciled in China and Canada. These subsidiaries
use the United States dollar as their functional currency. The company generally
does not use financial derivative instruments to hedge foreign currency exchange
rate risks associated with its foreign subsidiaries. A 10% change in the
Canadian exchange rate at January 27, 2008, would impact the company's
consolidated income before income taxes by approximately $350,000. This impact
on the company's consolidated income before income taxes would be offset by
approximately $1.0 million for the income tax effects of a 10% change in the
Canadian exchange rate on Canadian income taxes. A 10% change in the Chinese
exchange rate at January 27, 2008, would not have a significant impact on the
company's results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
--------------------------------
The company conducted a review and evaluation of its disclosure controls and
procedures, under the supervision and with the participation of the company's
principal executive officer and principal financial officer as of January 27,
2008, and the principal executive officer and principal financial officer have
concluded that the company's disclosure controls and procedures are adequate and
effective. In addition, no change in the company's internal control over
financial reporting has occurred during, or subsequent to, the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
I-41
Part II - Other Information
---------------------------
Item 1. Legal Proceedings
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 the United States District Court for the Middle
District of Pennsylvania. The plaintiffs are Alan Shulman, Stanley Siegel, Ruth
Cherenson as Personal Representative of the 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 totaling approximately $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 the 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. 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 the subject
of this litigation and consequently no reserve has been recorded.
Item 1A. Risk Factors
There have been no material changes to our risk factors during the nine months
ended January 27, 2008. Our risk factors are disclosed in the company's annual
report on Form 10-K filed with the Securities and Exchange Commission on July
19, 2007 for the fiscal year ended April 29, 2007.
Item 5. Other Information.
The company has received notification from the New York Stock Exchange ("NYSE")
that it is now considered a "company in good standing" under the NYSE's
continued listing standards and will be removed from its "Watch List." The
NYSE's decision comes as a result of the company's consistent positive
performance with respect to its business plan submitted to the NYSE in September
2006 and its compliance with the NYSE's minimum market capitalization and
shareholders' equity standard over the past six quarters. After a twelve month
follow up period to ensure continuing compliance, the company will be subject to
normal NYSE monitoring procedures.
The Company has entered into a contract dated March 11, 2008 providing for the
sale of its headquarters building in High Point, North Carolina to Schwartz
Properties, L.L.C., for a purchase price of $7,350,000. The contract also
contemplates that the Company would lease the building back from the purchaser
for an initial term of five years, at a rental rate of $56,800 per month on a
"triple net" basis. The contract is subject to the purchaser's ability to obtain
financing and is subject to a 90 day due diligence period, 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
closing is anticipated to occur during the first quarter of the Company's 2009
fiscal year. Based on the current terms of the contract, any
gain realized from the final sale would be amortized over the life of the lease
agreement, in accordance with SFAS No. 13, "Accounting for Leases," SFAS No. 28,
"Accounting for Sales with Leasebacks (an amendment of SFAS No. 13), SFAS No.
66, "Accounting for Sales of Real Estate," and SFAS No. 98, "Accounting for
Leases."
II-1
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 June 12,
2001, were filed as Exhibit 3(ii) to the company's Form 10-Q for
the quarter ended July 29, 2001, filed September 12, 2001, and
are incorporated herein by reference. 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 filed on November 13,
2007, and are incorporated herein by reference.
3 (iii) 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 Separation agreement and Waiver of Claims between the company
and Kenneth M. Ludwig dated December 11, 2007, filed as Exhibit
10.1 to the company's Form 10-Q for the quarter ended October
28, 2007, and incorporate herein by reference.
10.2 Twelfth Amendment to Amended and Restated Credit Agreement dated
as of December 27, 2007 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 December 27, 2007, 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-2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CULP, INC.
(Registrant)
Date: March 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-3
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.