================================================================================
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 July 29, 2007
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. |X| YES NO |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one);
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
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 July 29, 2007: 12,634,526
Par Value: $0.05
================================================================================
INDEX TO FORM 10-Q
For the period ended July 29, 2007
Page
----
Part I - Financial Statements
-----------------------------
Item 1. Unaudited Interim Consolidated Financial Statements:
---------------------------------------------------------------
Consolidated Statements of Net Income -- Three Months Ended July 29, 2007 and July 30, 2006 I-1
Consolidated Balance Sheets -- July 29, 2007, July 30, 2006 and April 29, 2007 I-2
Consolidated Statements of Cash Flows -- Three Months Ended July 29, 2007 and July 30, 2006 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Cautionary Statement Concerning Forward-Looking Information I-20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations I-20
------------------------------------------------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk I-29
---------------------------------------------------------------------
Item 4. Controls and Procedures I-30
----------------------------------
Part II - Other Information
---------------------------
Item 1A. Risk Factors II-1
-----------------------
Item 5. Other Information II-1
----------------------------
Item 6. Exhibits II-1
-------------------
Signatures
Item 1: Financial Statements
-----------------------------
CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME
FOR THE THREE MONTHS ENDED JULY 29, 2007 AND JULY 30, 2006
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
------------------------------------------------------
Amounts Percent of Sales
-------------------- ------------------
July 29, July 30, % Over July 29, July 30,
2007 2006 (Under) 2007 2006
-------- -------- -------- -------- --------
Net sales $ 65,230 62,585 4.2 % 100.0 % 100.0 %
Cost of sales 56,174 54,525 3.0 % 86.1 % 87.1 %
-------- -------- -------- -------- --------
Gross profit 9,056 8,060 12.4 % 13.9 % 12.9 %
Selling, general and
administrative expenses 6,321 6,575 (3.9)% 9.7 % 10.5 %
Restructuring expense 432 423 2.1 % 0.7 % 0.7 %
-------- -------- -------- -------- --------
Income from operations 2,303 1,062 116.9 % 3.5 % 1.7 %
Interest expense 818 950 (13.9)% 1.3 % 1.5 %
Interest income (58) (46) 26.1 % (0.1)% (0.1)%
Other expense 232 29 700.0 % 0.4 % 0.0 %
-------- -------- -------- -------- --------
Income before income taxes 1,311 129 916.3 % 2.0 % 0.2 %
Income taxes * 460 (3) N.M. 35.1 % (2.3)%
-------- -------- -------- -------- --------
Net income $ 851 132 544.7 % 1.3 % 0.2 %
======== ======== ======== -------- --------
Net income per share, basic $ 0.07 0.01 600.0 %
Net income per share, diluted 0.07 0.01 600.0 %
Average shares outstanding, basic 12,583 11,672 7.8 %
Average shares outstanding, diluted 12,728 11,770 8.1 %
* Percent of sales column is calculated as a % of income before income taxes.
See accompanying notes to consolidated financial statements.
I-1
CULP, INC.
CONSOLIDATED BALANCE SHEETS
JULY 29, 2007, JULY 30, 2006 AND APRIL 29, 2007
UNAUDITED
(Amounts in Thousands)
Amounts Increase
------------------- (Decrease)
July 29, July 30, -------------------- *April 29,
2007 2006 Dollars Percent 2007
-------- -------- -------- -------- --------
Current assets:
Cash and cash equivalents $ 9,017 8,387 630 7.5 % 10,169
Accounts receivable 23,903 26,044 (2,141) (8.2)% 29,290
Inventories 42,159 43,055 (896) (2.1)% 40,630
Deferred income taxes 5,376 7,120 (1,744) (24.5)% 5,376
Assets held for sale 1,906 2,531 (625) (24.7)% 2,499
Other current assets 1,649 2,789 (1,140) (40.9)% 1,824
-------- -------- -------- -------- --------
Total current assets 84,010 89,926 (5,916) (6.6)% 89,788
Property, plant and equipment, net 36,901 42,835 (5,934) (13.9)% 37,773
Goodwill 4,114 4,114 -- 0.0 % 4,114
Deferred income taxes 26,220 21,513 4,707 21.9 % 25,683
Other assets 2,831 1,542 1,289 83.6 % 2,588
-------- -------- -------- -------- --------
Total assets $154,076 159,930 (5,854) (3.7)% 159,946
======== ======== ======== ======== ========
Current liabilities:
Current maturities of long-term debt $ 13,849 7,739 6,110 79.0 % 16,046
Lines of credit 2,641 -- 2,641 100.0 % 2,593
Accounts payable 17,995 21,247 (3,252) (15.3)% 23,585
Accrued expenses 8,484 9,130 (646) (7.1)% 8,670
Accrued restructuring costs 3,047 3,745 (698) (18.6)% 3,282
Income taxes payable - current 856 3,561 (2,705) (76.0)% 4,579
-------- -------- -------- -------- --------
Total current liabilities 46,872 45,422 1,450 3.2 % 58,755
Income taxes payable - long-term 3,765 -- 3,765 100.0 % --
Long-term debt, less current maturities 22,094 39,601 (17,507) (44.2)% 22,114
-------- -------- -------- -------- --------
Total liabilities 72,731 85,023 (12,292) (14.5)% 80,869
Shareholders' equity 81,345 74,907 6,438 8.6 % 79,077
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity $154,076 159,930 (5,854) (3.7)% 159,946
======== ======== ======== ======== ========
Shares outstanding 12,635 11,685 950 8.1 % 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 THREE MONTHS ENDED JULY 29, 2007 AND JULY 30, 2006
UNAUDITED
(Amounts in Thousands)
THREE MONTHS ENDED
----------------------
Amounts
----------------------
July 29, July 30,
2007 2006
--------- ---------
Cash flows from operating activities:
Net income $ 851 132
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 1,447 1,702
Amortization of other assets 90 23
Stock-based compensation 140 132
Excess tax benefit related to stock options exercised (21) --
Deferred income taxes (518) (1,337)
Restructuring expenses, net of gain on sale of related assets 160 (237)
Changes in assets and liabilities:
Accounts receivable 5,387 3,005
Inventories (1,529) (6,362)
Other current assets 175 (1,502)
Other assets (327) (6)
Accounts payable (5,251) 796
Accrued expenses (186) 1,285
Accrued restructuring (235) (309)
Income taxes payable 889 1,073
--------- ---------
Net cash provided by (used in) operating activities 1,072 (1,605)
--------- ---------
Cash flows from investing activities:
Capital expenditures (1,113) (637)
Proceeds from the sale of buildings and equipment 702 1,600
--------- ---------
Net cash (used in) provided by investing activities (411) 963
--------- ---------
Cash flows from financing activities:
Payments on vendor-financed capital expenditures (70) (428)
Payments on long-term debt (2,169) (382)
Proceeds from common stock issued 405 125
Excess tax benefit related to stock option exercises 21 --
--------- ---------
Net cash used in financing activities (1,813) (685)
--------- ---------
Decrease in cash and cash equivalents (1,152) (1,327)
Cash and cash equivalents at beginning of period 10,169 9,714
--------- ---------
Cash and cash equivalents at end of period $ 9,017 8,387
========= =========
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 -- -- -- 851 -- 851
Stock-based compensation -- -- 140 -- -- 140
Gain on cash flow hedge, net of taxes -- -- -- -- 4 4
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, July 29, 2007 12,634,526 $ 632 46,760 33,953 -- $ 81,345
=========== =========== ============ =========== ============= =============
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 and 14 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 three months ended July 29, 2007 and July 30, 2006 represent 13
week periods.
Reclassifications
Certain prior year amounts have been corrected to conform to current year
presentation. A credit of $307,000 regarding sales proceeds received on
equipment with no carrying value, related to closed plant facilities, was
reclassified from other expense to restructuring expense to conform to current
year presentation.
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 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 with a corresponding decrease to income taxes payable. Refer to Note
14 for more information regarding the impact of adopting FIN 48.
2. Stock-Based Compensation
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."
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The company recorded $140,000 and $132,000 of compensation expense for stock
options within selling, general, and administrative expense for the three-month
periods ended July 29, 2007 and July 30, 2006, respectively.
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 three-month period ended July 29, 2007, the
company recognized $21,000 of excess tax benefits. There was no excess tax
benefit during the three-month period ended July 30, 2006.
The remaining unrecognized compensation costs related to unvested awards at July
29, 2007 is $1.4 million which is expected to be recognized over a weighted
average period of 2.1 years.
Under the company's stock option plans, employees and directors may be granted
options to purchase shares of common stock at the fair market value on the date
of grant. Options granted under these plans generally vest over two to four
years and expire five to 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 under
the 2002 stock option plan during the three-month period ended July 29, 2007 and
July 30, 2006 was $4.74 and $2.43 per share using the following assumptions:
2007 2006
--------------------------------------------------------------------------------
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 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 historical behavior
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 the contractual term
of the stock options and expected employee exercise and post-vesting employment
termination trends.
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table summarizes the stock options (vested and unvested) as of
July 29, 2007 and option activity during the three-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 139,500 8.75
Expired/Canceled (106,500) 11.53
Exercised (65,235) 6.10 $ 241,765
----------------------------------------------------------------------------------------------------------------
Outstanding, July 29, 2007 893,765 $ 7.03 4.0 Years $ 4.3 million
----------------------------------------------------------------------------------------------------------------
At July 29, 2007, there were 198,750 shares available for future grants under
the company's incentive stock option plans and options to purchase 390,893
shares were exercisable which had a weighted average exercise price of $8.56 per
share, an aggregate intrinsic value of $1.6 million and a weighted average
contractual term of 2.59 years.
3. Accounts Receivable
A summary of accounts receivable follows:
----------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 29, 2007 April 29, 2007
----------------------------------------------------------------------------------------------------------------
Customers $ 25,705 $ 31,192
Allowance for doubtful accounts (1,160) (1,332)
Reserve for returns and allowances and discounts (642) (570)
----------------------------------------------------------------------------------------------------------------
$ 23,903 $ 29,290
----------------------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
----------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 29, 2007 July 30, 2006
----------------------------------------------------------------------------------------------------------------
Beginning balance $ (1,332) $ (1,049)
Recovery of bad debt expense 17 8
Net write-offs 155 56
----------------------------------------------------------------------------------------------------------------
Ending balance $ (1,160) $ (985)
----------------------------------------------------------------------------------------------------------------
I-7
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of the activity in the allowance for returns and allowances and
discounts accounts follows:
----------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 29, 2007 July 30, 2006
----------------------------------------------------------------------------------------------------------------
Beginning balance $ (570) $ (826)
Provision for returns and allowances
and discounts (762) (701)
Discounts taken 690 439
----------------------------------------------------------------------------------------------------------------
Ending balance $ (642) $ (1,088)
----------------------------------------------------------------------------------------------------------------
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) July 29, 2007 April 29, 2007
----------------------------------------------------------------------------------------------------------------
Raw materials $ 12,078 $ 10,200
Work-in-process 1,722 1,711
Finished goods 28,359 28,719
----------------------------------------------------------------------------------------------------------------
$ 42,159 $ 40,630
----------------------------------------------------------------------------------------------------------------
5. Other Assets
A summary of other assets follows:
----------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 29, 2007 April 29, 2007
----------------------------------------------------------------------------------------------------------------
Cash surrender value - life insurance $ 1,154 $ 1,154
ITG non-compete agreement, net 1,004 1,076
Other 673 358
----------------------------------------------------------------------------------------------------------------
$ 2,831 $ 2,588
----------------------------------------------------------------------------------------------------------------
At July 29, 2007 and April 29, 2007, the gross carrying amount of the ITG
non-compete agreement was $1.1 million. At July 29, 2007 and April 29, 2007
accumulated amortization for the ITG non-compete agreement was $144,000 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 the ITG non-compete agreement for the three-month period ended July
29, 2007 was $72,000. No amortization expense for the ITG non-compete agreement
was incurred during the three-month period ended July 30, 2006. Amortization
expense during the next four fiscal years follows: FY 2008 - $215,000; FY 2009 -
$287,000; FY 2010 - $287,000; and FY 2011 - $215,000.
I-8
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Accounts Payable
A summary of accounts payable follows:
----------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 29, 2007 April 29, 2007
----------------------------------------------------------------------------------------------------------------
Accounts payable-trade $ 16,776 $ 22,027
Accounts payable-capital expenditures 1,219 1,558
----------------------------------------------------------------------------------------------------------------
$ 17,995 $ 23,585
----------------------------------------------------------------------------------------------------------------
7. Accrued Expenses
A summary of accrued expenses follows:
----------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 29, 2007 April 29, 2007
----------------------------------------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 3,509 $ 4,941
Interest 925 314
Accrued rebates 1,445 1,013
Other 2,605 2,402
----------------------------------------------------------------------------------------------------------------
$ 8,484 $ 8,670
----------------------------------------------------------------------------------------------------------------
8. Long-Term Debt and Lines of Credit
A summary of long-term debt and lines of credit follows:
----------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 29, 2007 April 29, 2007
----------------------------------------------------------------------------------------------------------------
Unsecured term notes $ 28,705 $ 30,905
Real estate loan - I 3,987 4,039
Real estate loan - II 2,500 2,500
Canadian government loan 751 716
----------------------------------------------------------------------------------------------------------------
35,943 38,160
Current maturities of long-term debt (13,849) (16,046)
----------------------------------------------------------------------------------------------------------------
Long-term debt, current maturities of long-term debt $ 22,094 $ 22,114
----------------------------------------------------------------------------------------------------------------
Lines of credit $ 2,641 $ 2,593
----------------------------------------------------------------------------------------------------------------
Total borrowings $ 38,584 $ 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 beginning August 2007 through March 2010. The
principal payments are required to be paid in annual installments over the next
three years as follows: Year 1 - $13.7 million; Year 2 - $7.5 million; and Year
3 - $7.5 million. The company prepaid $2.2 million during the first quarter and
an additional $1.0 million in August 2007, scheduled to be due in March 2008.
I-9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 (8.32% at July 29,
2007) 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 (8.32% at July 29,
2007) 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 expires on December 31, 2007, and bears interest at the one-month
LIBOR plus an adjustable margin (8.32% at July 29, 2007) based on the company's
debt/EBITDA ratio, as defined in the agreement. As of July 29, 2007, there were
$2.3 million in outstanding letters of credit (all of which related to workers
compensation) and no borrowings outstanding under 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 $5.0
million, of which approximately $1.3 million includes letters of credit. The
credit agreement expires on February 1, 2008, with an annual renewal option and
requires interest to be paid on a quarterly basis at a rate determined by the
Chinese government (with interest rates ranging from 5.81% to 6.07% at July 29,
2007). As of July 29, 2007, approximately $2.6 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 July 29, 2007, the company was in compliance with
these financial covenants.
I-10
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The principal payment requirements of long-term debt during the next five years
are: Year 1 - $13.8 million; Year 2 - $7.8 million; Year 3 - $10.4 million; Year
4 - $3.5 million; Year 5 - $187,000; and thereafter - $250,000.
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.
The company accounts for the interest rate swap as a cash flow hedge whereby the
fair value of this contract is reflected in other assets in the accompanying
consolidated balance sheets with the offset recorded as accumulated other
comprehensive income (loss). The fair value of the interest rate swap was
approximately $1,000 in the company's favor and $6,000 in the bank's favor at
July 29, 2007 and April 29, 2007, respectively. 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 follows:
----------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 29, 2007 July 30, 2006
----------------------------------------------------------------------------------------------------------------
Interest $ 207 $ 168
Income tax payments 254 243
----------------------------------------------------------------------------------------------------------------
The company did not finance any of its capital expenditures for the three months
ended July 29, 2007 and July 30, 2006.
11. Restructuring and Asset Impairment Charges
A summary of accrued restructuring follows:
----------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 29, 2007 April 29, 2007
----------------------------------------------------------------------------------------------------------------
December 2006 Upholstery fabrics $ 1,593 $ 1,545
September 2005 Upholstery fabrics 225 258
August 2005 Upholstery fabrics 12 18
Fiscal 2005 Upholstery fabrics 87 154
Fiscal 2003 Culp Decorative fabrics 1,130 1,307
----------------------------------------------------------------------------------------------------------------
$ 3,047 $ 3,282
----------------------------------------------------------------------------------------------------------------
I-11
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 2006 Upholstery Fabrics
During the first quarter of fiscal 2008, total restructuring and related charges
incurred were $1.0 million of which $538,000 related to operating costs
associated with the closing of plant facilities, $361,000 related to write-downs
of a building and equipment, $332,000 related to lease termination costs,
$54,000 related to asset movement costs, a credit of $85,000 related to employee
termination benefits, and a credit of $202,000 for sales proceeds received on
equipment with no carrying value. Of this total charge, $512,000 was recorded in
cost of sales, $26,000 was recorded in selling, general, and administrative
expense, and $460,000 was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
The following summarizes the fiscal 2008 activity in the restructuring accrual
(dollars in thousands):
----------------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
----------------------------------------------------------------------------------------------------------------
Balance, April 29, 2007 $ 1,304 241 1,545
Adjustments in fiscal 2008 (85) - (85)
Additions in fiscal 2008 - 332 332
Paid in fiscal 2008 (97) (102) (199)
----------------------------------------------------------------------------------------------------------------
Balance, July 29, 2007 $ 1,122 471 1,593
----------------------------------------------------------------------------------------------------------------
As of July 29, 2007 and April 29, 2007, assets classified as held for sale
consisted of buildings and equipment with a carrying value of $1.7 million and
$2.2 million, respectively.
September 2005 Upholstery Fabrics
During the first quarter of fiscal 2008, as a result of management's continual
evaluation of the restructuring accrual, the reserve was decreased by
approximately $26,000 to reflect current estimates of employee termination
benefits. This $26,000 decrease in the reserve was recorded in restructuring
expense in the 2008 Consolidated Statement of Net Income.
During the first quarter of fiscal 2007, total restructuring and related charges
incurred were $310,000 of which $340,000 related to operating costs associated
with the closing of a plant facility, $169,000 related to asset movement costs,
$26,000 related to employee termination benefits, $9,000 related to lease
termination costs, and a credit of $234,000 for sales proceeds received on
equipment with no carrying value. Of the total charge, $340,000 was recorded in
cost of sales, and a credit of $30,000 was recorded in restructuring expense in
the 2007 Consolidated Statement of Net Income.
I-12
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following summarizes the fiscal 2008 activity in the restructuring accrual
(dollars in thousands):
----------------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
----------------------------------------------------------------------------------------------------------------
Balance, April 29, 2007 $ 31 227 258
Adjustments in fiscal 2008 (26) - (26)
Paid in fiscal 2008 - (7) (7)
----------------------------------------------------------------------------------------------------------------
Balance, July 29, 2007 $ 5 220 225
----------------------------------------------------------------------------------------------------------------
As of July 29, 2007 and April 29, 2007, there were no assets classified as held
for sale.
August 2005 Upholstery Fabrics
During the first quarter of fiscal 2008, as a result of management's continual
evaluation of the restructuring accrual, the reserve was decreased by
approximately $10,000 to reflect current estimates of employee termination
benefits. This $10,000 decrease in the reserve was recorded in restructuring
expense in the 2008 Consolidated Statement of Net Income.
During the first quarter of fiscal 2007, total restructuring and related charges
incurred were $157,000 of which $128,000 related to employee termination
benefits, $46,000 related to asset movement costs, $27,000 related to operating
costs associated with the closing of a plant facility, and a credit of $44,000
for sale proceeds received on equipment with no carrying value. Of the total
charge, $130,000 was recorded in restructuring expense and $27,000 was recorded
in cost of sales in the 2007 Consolidated Statement of Net Income.
The following summarizes the fiscal 2008 activity in the restructuring accrual
(dollars in thousands):
----------------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
----------------------------------------------------------------------------------------------------------------
Balance, April 29, 2007 $ 18 - 18
Adjustments in fiscal 2008 (10) - (10)
Net premiums received in fiscal 2008 4 - 4
----------------------------------------------------------------------------------------------------------------
Balance, July 29, 2007 $ 12 - 12
----------------------------------------------------------------------------------------------------------------
As of July 29, 2007 and April 29, 2007, assets classified as held for sale
consisted of equipment with a carrying value of $255,000.
I-13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Fiscal 2005 Upholstery Fabrics
During the first quarter of fiscal 2008, the total restructuring and related
charges incurred were $16,000, of which approximately $34,000 related to lease
termination costs and a credit of $18,000 to reflect current estimates of
employee termination benefits. Of the total charge, $16,000 was recorded in
restructuring expense in the 2008 Consolidated Statement of Net Income.
During the first quarter of fiscal 2007, the total restructuring and related
charges incurred were $701,000, of which approximately $238,000 related to
inventory markdowns, $169,000 related to asset movement costs, $116,000 for
write-downs of equipment, $102,000 related to operating costs associated with
the closing of a plant facility, $86,000 related to employee termination
benefits, $8,000 for lease termination costs, and a credit of $26,000 for sale
proceeds received on equipment with no carrying value. Of this total charge,
$353,000 was recorded in restructuring expense and $340,000 was recorded in cost
of sales in the 2007 Consolidated Statement of Net Income.
The following summarizes the fiscal 2008 activity in the restructuring accrual
(dollars in thousands):
----------------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
----------------------------------------------------------------------------------------------------------------
Balance, April 29, 2007 $ 100 54 154
Adjustments in fiscal 2008 (18) 34 16
Paid in fiscal 2008 (5) (78) (83)
----------------------------------------------------------------------------------------------------------------
Balance, July 29, 2007 $ 77 10 87
----------------------------------------------------------------------------------------------------------------
As of July 29, 2007 and April 29, 2007, there were no assets classified as held
for sale.
Fiscal 2003 Culp Decorative Fabrics Restructuring
During the first quarter of fiscal 2008, a credit of $8,000 was recorded to
reflect current estimates of employee termination benefits. This $8,000 credit
was recorded in restructuring expense in the 2008 Consolidated Statement of Net
Income. Additionally, the company recorded a restructuring related charge of
$5,000 for other operating costs associated with a closed plant facility. This
$5,000 restructuring related charge was recorded in cost of sales in the 2008
Consolidated Statement of Net Income.
During the first quarter of fiscal 2007, as a result of management's continual
evaluation of the restructuring accrual, the reserve was decreased by
approximately $22,000 to reflect current estimates of sub-lease income and other
exit costs. This $22,000 decrease in the reserve was recorded in restructuring
expense in the 2007 Consolidated Statement of Net Income. Additionally, the
company recorded a restructuring related charge of $12,000 for other operating
costs associated with a closed plant facility. This $12,000 restructuring
related charge was recorded in cost of sales in the 2007 Consolidated Statement
of Net Income.
I-14
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following summarizes the fiscal 2008 activity in the restructuring accrual
(dollars in thousands):
----------------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
----------------------------------------------------------------------------------------------------------------
Balance, April 29, 2007 $ 43 1,264 1,307
Adjustments in fiscal 2008 (8) - (8)
Paid in fiscal 2008 (16) (153) (169)
----------------------------------------------------------------------------------------------------------------
Balance, July 29, 2007 $ 19 1,111 1,130
----------------------------------------------------------------------------------------------------------------
As of July 29, 2007 and April 29, 2007, there were no assets classified as held
for sale.
12. Net Income Per Share
Basic net income per share is computed using the weighted-average number of
shares outstanding during the period. Diluted net income per share uses the
weighted-average number of shares outstanding during the period plus the
dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted net income
per share follows:
----------------------------------------------------------------------------------------------------------------
Three months ended
(amounts in thousands) July 29, 2007 July 30, 2006
----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 12,583 11,672
Effect of dilutive stock options 145 98
----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 12,728 11,770
----------------------------------------------------------------------------------------------------------------
Options to purchase 79,750 and 466,125 shares of common stock were not included
in the computation of diluted net income per share for the three months ended
July 29, 2007 and July 30, 2006, respectively, because the exercise price of the
options was greater than the average market price of the common shares.
13. 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 and certain unallocated corporate expenses. Unallocated corporate
expenses represent primarily compensation and benefits for certain executive
officers and all costs related to being a public company. Segment assets include
assets used in the 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, 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-15
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Financial information for the company's operating segments as follows:
----------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 29, 2007 July 30, 2006
----------------------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 36,536 $ 21,845
Upholstery Fabrics 28,694 40,740
----------------------------------------------------------------------------------------------------------------
Total net sales $ 65,230 $ 62,585
----------------------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 5,805 $ 3,521
Upholstery Fabrics 3,768 5,285
----------------------------------------------------------------------------------------------------------------
Total segment gross profit 9,573 8,806
Restructuring related charges (517) (1) (746) (4)
----------------------------------------------------------------------------------------------------------------
Total gross profit $ 9,056 $ 8,060
----------------------------------------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 2,042 $ 1,663
Upholstery Fabrics 3,318 3,710
----------------------------------------------------------------------------------------------------------------
Total segment selling, general, and
administrative expenses 5,360 5,373
Unallocated corporate expenses 935 1,202
Restructuring related charges 26 (2) -
----------------------------------------------------------------------------------------------------------------
Total selling, general, and administrative expenses $ 6,321 $ 6,575
----------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Mattress Fabrics $ 3,763 $ 1,858
Upholstery Fabrics 450 1,575
----------------------------------------------------------------------------------------------------------------
Total segment income from operations 4,213 3,433
Unallocated corporate expenses (935) (1,202)
Restructuring and related charges (975) (3) (1,169) (5)
----------------------------------------------------------------------------------------------------------------
Total income from operations $ 2,303 $ 1,062
----------------------------------------------------------------------------------------------------------------
(1) The $517,000 represents restructuring related charges of $460,000 for
other operating costs associated with closed plant facilities and $57,000
for inventory markdowns. These charges relate to the Upholstery Fabrics
segment.
(2) The $26,000 represents other operating costs associated with a closed
plant facility. These charges relate to the Upholstery Fabrics segment.
(3) The $975,000 represents $486,000 for other operating costs associated with
a closed plant facilities, $367,000 for lease termination costs, $362,000
for write-downs of a building and equipment, $57,000 for inventory
markdowns, $54,000 for asset movement costs, a credit of $149,000 for
employee termination benefits, and a credit of $202,000 for sales proceeds
received on equipment with no carrying value. Of this total charge,
$517,000, $26,000, and $432,000 are included in cost of sales, selling,
general, and administrative expense, and restructuring expense,
respectively. These charges relate to the Upholstery Fabrics segment.
I-16
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) The $746,000 represents restructuring related charges of $507,000 for
other operating costs associated with closed plant facilities and $239,000
for inventory markdowns. These charges relate to the Upholstery Fabrics
segment.
(5) The $1.2 million represents $507,000 for other operating costs associated
with closed plant facilities, $385,000 for asset movement costs, $239,000
for inventory markdowns, $235,000 for employee termination benefits,
$116,000 for write-downs of equipment, a credit of $6,000 for lease
termination costs, and a credit of $307,000 for proceeds received on
equipment with no carrying value. Of this total charge, $746,000 and
$423,000 are included in cost of sales and restructuring expense,
respectively. These charges relate to the Upholstery Fabrics segment.
Balance sheet information for the company's operating segments follow:
----------------------------------------------------------------------------------------------------------------
(dollars in thousands) July 29, 2007 April 29, 2007
----------------------------------------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics
Current assets (6) $ 35,184 $ 32,990
ITG non-compete agreement, net 1,004 1,076
Goodwill 4,114 4,114
Property, plant and equipment (7) 22,305 22,849
----------------------------------------------------------------------------------------------------------------
Total mattress fabrics assets 62,607 61,029
----------------------------------------------------------------------------------------------------------------
Upholstery Fabrics
Current assets (8) 30,878 37,457
Assets held for sale 1,906 2,499
Property, plant and equipment (9) 14,554 14,880
----------------------------------------------------------------------------------------------------------------
Total upholstery fabrics assets 47,338 54,836
----------------------------------------------------------------------------------------------------------------
Total segment assets 109,945 115,865
Non-segment assets:
Cash and cash equivalents 9,017 10,169
Deferred income taxes 31,596 31,059
Other current assets 1,649 1,297
Property, plant and equipment 42 44
Other assets 1,827 1,512
----------------------------------------------------------------------------------------------------------------
Total assets $ 154,076 $ 159,946
----------------------------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) July 29, 2007 July 30, 2006
----------------------------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 339 $ 26
Upholstery Fabrics 507 654
----------------------------------------------------------------------------------------------------------------
Total capital expenditures $ 846 $ 680
----------------------------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 897 $ 942
Upholstery Fabrics 550 760
----------------------------------------------------------------------------------------------------------------
Total segment depreciation expense $ 1,447 $ 1,702
----------------------------------------------------------------------------------------------------------------
I-17
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Current assets primarily 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 July 29, 2007.
(7) Included in property, plant, and equipment are assets located in the U.S.
totaling $12.6 million and $12.8 million at July 29, 2007 and April 29,
2007, respectively. The remaining property, plant, and equipment are
located in Canada.
(8) Current assets represent accounts receivable and inventory for the
respective segment.
(9) Included in property, plant, and equipment are assets located in the U.S.
totaling $6.6 million and $7.2 million at July 29, 2007 and April 29,
2007, respectively. Included in this U.S. property, plant, and equipment
are various other corporate allocations totaling $3.7 million and $3.8
million at July 29, 2007 and April 29, 2007, respectively. As of July 29,
2007 and April 29, 2007, the company's U.S. based upholstery fabrics
property, plant, and equipment excluding corporate allocations was $2.9
million and $3.4 million, respectively. The remaining property, plant, and
equipment are located in China.
14. 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 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 with a corresponding decrease to income taxes payable.
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 July 29, 2007
the company had approximately $3.8 million of total gross unrecognized tax
benefits, of which $3.4 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 $3.8 million as of
July 29, 2007 are classified as income taxes payable - long-term in the
accompanying consolidated balance sheets.
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, the gross amount of interest and penalties due to unrecognized tax
benefits was $98,000. We anticipate that the amount of unrecognized tax benefits
will increase by approximately $700,000 by the end of the current 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.
I-18
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
15. 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.
I-19
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 significant effect on demand for the company's products. Also, changes
in the value of the U.S. dollar versus other currencies can affect the company's
financial results because a significant portion of the company's operations are
located outside the United States. Further, economic and political instability
in international areas could affect the company's operations or sources of goods
in those areas, as well as demand for the company's products in international
markets. Also, the level of success in integrating the acquisition of assets
from International Textile Group, Inc. ("ITG") and in capturing and retaining
sales to customers related to the acquisition will affect the company's ability
to meet its sales goals. Finally, unanticipated delays or costs in executing
restructuring actions could cause the cumulative effect of restructuring actions
to fail to meet the objectives set forth by management. Further information
about these factors, as well as other factors that could affect the company's
future operations or financial results and the matters discussed in
forward-looking statements are included in 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., which we also refer to as the company, 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-20
The company evaluates the operating performance of its segments based upon
income (loss) from operations before restructuring and related charges or
credits and certain unallocated corporate expenses. Unallocated corporate
expenses represent primarily compensation and benefits for certain executive
officers and all costs related to being a public company. Segment assets include
assets used in operations of each segment and primarily consist of accounts
receivable, inventories, and property, plant, and equipment. The mattress
fabrics segment also includes in segment assets, 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 ended July 29, 2007 and July 30, 2006.
I-21
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE THREE MONTHS ENDED JULY 29, 2007 AND JULY 30, 2006
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------
Amounts Percent of Sales
--------------------- ---------------------
July 29, July 30, % Over July 29, July 30,
Net Sales by Segment 2007 2006 (Under) 2007 2006
------------------------------------------------------- -------- -------- -------- -------- --------
Mattress Fabrics $ 36,536 21,845 67.3 % 56.0 % 34.9 %
Upholstery Fabrics 28,694 40,740 (29.6)% 44.0 % 65.1 %
-------- -------- -------- -------- --------
Net Sales $ 65,230 62,585 4.2 % 100.0 % 100.0 %
======== ======== ======== ======== ========
Gross Profit by Segment Gross Profit Margin
------------------------------------------------------- ---------------------
Mattress Fabrics $ 5,805 3,521 64.9 % 15.9 % 16.1 %
Upholstery Fabrics 3,768 5,285 (28.7)% 13.1 % 13.0 %
-------- -------- -------- -------- --------
Subtotal 9,573 8,806 8.7 % 14.7 % 14.1 %
Restructuring related charges (517)(1) (746)(4) -30.7 % (0.8)% (1.2)%
-------- -------- -------- -------- --------
Gross Profit $ 9,056 8,060 12.4 % 13.9 % 12.9 %
======== ======== ======== ======== ========
Sales, General and Administrative expenses by Segment Percent of Sales
------------------------------------------------------- ---------------------
Mattress Fabrics $ 2,042 1,663 22.8 % 5.6 % 7.6 %
Upholstery Fabrics 3,318 3,710 (10.6)% 11.6 % 9.1 %
Unallocated Corporate expenses 935 1,202 (22.2)% 1.4 % 1.9 %
-------- -------- -------- -------- --------
Subtotal 6,295 6,575 (4.3)% 9.7 % 10.5 %
Restructuring related charges 26 -- 0.0 % 0.0 % 0.0 %
-------- -------- -------- -------- --------
Selling, General and Administrative expenses $ 6,321 6,575 (3.9)% 9.7 % 10.5 %
======== ======== ======== ======== ========
Operating Income
Operating income (loss) by Segment (Loss) Margin
----------------------------------------------- ---------------------
Mattress Fabrics $ 3,763 1,858 102.5 % 10.3 % 8.5 %
Upholstery Fabrics 450 1,575 (71.4)% 1.6 % 3.9 %
Unallocated corporate expenses (935) (1,202) 22.2 % (1.4)% (1.9)%
-------- -------- -------- -------- --------
Subtotal 3,278 2,231 46.9 % 5.0 % 3.6 %
Restructuring expense and restructuring related charges (975)(3) (1,169)(5) (16.6)% (1.5)% (1.9)%
-------- -------- -------- -------- --------
Operating income $ 2,303 1,062 116.9 % 3.5 % 1.7 %
======== ======== ======== ======== ========
Depreciation by Segment
-------------------------------------------------------
Mattress Fabrics $ 897 942 (4.8)%
Upholstery Fabrics 550 760 (27.6)%
-------- -------- --------
Total Depreciation $ 1,447 1,702 (15.0)%
======== ======== ========
(1) The $517,000 represents restructuring related charges of $460,000 for
other operating costs associated with closed plant facilities and $57,000
for inventory markdowns.
(2) The $26,000 represents other operating costs associated with a closed
plant facility.
(3) The $975,000 represents $486,000 for other operating costs associated with
closed plant facilities, $367,000 for lease termination costs, $362,000
for write-downs of a building and equipment, $57,000 for inventory
markdowns, $54,000 for asset movement costs, a credit of $149,000 for
employee termination benefits, and a credit of $202,000 for sales proceeds
received on equipment with no carrying value. Of this total charge,
$517,000, $26,000, and $432,000 are included in cost of sales, selling,
general, and administrative expense and restructuring expense,
respectively.
(4) The $746,000 represents restructuring related charges of $507,000 for
other operating costs associated with closed plant facilities and $239,000
for inventory markdowns.
(5) The $1.2 million represents $507,000 for other operating costs associated
with closed plant facilities, $385,000 for asset movement costs, $239,000
for inventory markdowns, $235,000 for employee termination benefits,
$116,000 for write-downs of equipment, a credit of $6,000 for lease
termination costs, and a credit of $307,000 for proceeds received on
equipment with no carrying value. Certain prior year amounts have been
corrected to conform to current year presentation. A credit of $307,000
regarding sales proceeds received on equipment with no carrying value was
reclassified from other expense to restructuring expense to conform to
current year presentation. Of this total charge, $746,000 and $423,000 are
included in cost of sales and restructuring expense, respectively.
I-22
Three Months ended July 29, 2007 compared with Three Months ended July 30, 2006
For the three months ended July 29, 2007, net sales were $65.2 million, up 4.2%
compared with $62.6 million for the first quarter of fiscal 2007. The company
reported net income of $851,000, or $0.07 per diluted share for the first
quarter of fiscal 2008, which included restructuring and related pre-tax charges
of $975,000. The company reported net income of $132,000, or $0.01 per diluted
share, in the first quarter of fiscal 2007, which included restructuring and
related pre-tax charges of $1.2 million. The company's effective tax rate was
35.1% first quarter of fiscal 2008 compared to an income tax benefit of 2.3% in
the first quarter of fiscal 2007, reflecting higher taxable income from the
company's U.S. operations compared to the first quarter of fiscal 2007.
Restructuring and Related Charges
During the first quarter of fiscal 2008, total restructuring and related charges
were $975,000, of which $486,000 related to operating costs associated with
closed plant facilities, $367,000 for lease termination costs, $362,000 for
write-downs of a building and equipment, $57,000 for inventory markdowns,
$54,000 for asset movement costs, a credit of $149,000 for employee termination
benefits, and a credit of $202,000 for sales proceeds received on equipment with
no carrying value. Of this total charge, $517,000 was recorded in cost of sales,
$26,000 was recorded in selling, general, and administrative expense, and
$432,000 was recorded in restructuring expense in the 2008 Consolidated
Statement of Net Income.
During the first quarter of fiscal 2007, total restructuring and related charges
incurred were $1.2 million, of which $507,000 related to operating costs
associated with closed plant facilities, $385,000 for asset movement costs,
$239,000 for inventory markdowns, $235,000 for termination benefits, $116,000
for write-downs of equipment, a credit of $6,000 for lease termination costs,
and a credit of $307,000 for sale proceeds received on equipment with no
carrying value. Of this total charge, $746,000 was recorded in cost of sales and
$423,000 was recorded restructuring expense in the 2007 Consolidated Statement
of Net Income.
Mattress Fabrics Segment
Net Sales -- Mattress fabrics (known as mattress ticking) net sales for the
first quarter of fiscal 2008 were $36.5 million, a 67% increase compared to
$21.8 million for the first quarter of fiscal 2007. On a unit volume basis,
total yards sold increased by 58% compared with the first quarter of fiscal
2007. This trend reflects the incremental sales related to the company's
acquisition of ITG's mattress fabrics product line in the third quarter of
fiscal 2007 and organic growth. The average selling price was $2.44 for the
first quarter of fiscal 2008, a 6% increase compared to $2.30 in the first
quarter of fiscal 2007. This trend reflects a shift in product mix toward
knitted fabrics.
Operating Income -- For the first quarter of fiscal 2008, the mattress fabrics
segment reported operating income of $3.8 million, or 10.3% of net sales,
compared to $1.9 million, or 8.5% of net sales, for the first quarter of fiscal
2007. Operating margins improved in the first quarter of fiscal 2008 compared to
the first quarter of fiscal 2007 due to the integration of the additional
production and sales from the ITG acquisition and organic growth, especially
within knitted ticking, which is a growing product category and has a higher
average selling price. These results improved despite modestly higher raw
material costs, the strengthening of the Canadian currency as compared to the
same period last year, and transition costs associated with the ITG acquisition
of approximately $500,000. Additionally, selling, general, and administrative
expenses were $2.0 million in the first quarter of fiscal 2008 compared with
$1.7 million in the first quarter of fiscal 2007, an increase of 23%. However,
as a percent to net sales, selling, general, and administrative expenses were
5.6% and 7.6% in the first quarter of fiscal 2008, and 2007, respectively. These
trends in selling, general, and administrative expenses reflect the additional
sales from the ITG acquisition.
I-23
Segment assets -- Segment assets consist of accounts receivable, inventory,
property, plant, and equipment, goodwill, and a non-compete agreement associated
with the ITG acquisition. As of July 29, 2007, accounts receivable and inventory
totaled $35.2 million compared to $32.5 million at April 29, 2007. This increase
is primarily due to the increased business volume of ITG's mattress fabric
product line. At April 29, 2007, current assets for this segment 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
July 29, 2007. Also as of July 29, 2007, property, plant and equipment totaled
$22.3 million compared to $22.8 million at April 29, 2007. Included in property,
plant, and equipment are assets located in the U.S. totaling $12.6 million and
$12.8 million at July 29, 2007 and April 29, 2007, respectively. The remaining
property, plant, and equipment are located in Canada. As of July 29, 2007 and
April 29, 2007, the carrying value of the ITG non-compete agreement was $1.0
million and $1.1 million, respectively. As of July 29, 2007 and April 29, 2007,
the carrying value of the segment's goodwill was $4.1 million.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric net sales for the first quarter of fiscal 2008
were $28.7 million, a 30% decline compared to $40.7 million in the first quarter
of fiscal 2007. Total yards sold decreased by 38%, while average selling prices
were the same as for the first quarter of fiscal 2007. Sales of cut and sewn
kits were up significantly over the same period last year. Upholstery fabrics
sales reflect very weak demand industry wide, as well as continued soft demand
for U.S. produced upholstery fabrics driven by consumer preference for leather
and suede furniture and other imported fabrics, including and increasing amount
of imported cut and sewn kits.
Operating Income - Operating income for the first quarter of fiscal 2008
was $450,000 compared with operating income of $1.6 million for the first
quarter of fiscal 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 substantially lower U.S.
manufacturing costs. Additionally, selling, general and administrative expenses
for the first quarter of fiscal 2008 were down 11% from the first quarter of
fiscal 2007 and down 14% from the fourth quarter of fiscal 2007. This trend 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 $18.9 million in the first quarter
of fiscal 2008, a decrease of 20% from $23.5 million in the first quarter of
fiscal 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 65% of upholstery fabric
sales for the first quarter of fiscal 2008 compared to 58% for the first quarter
of 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 have
continued to move an increasing amount of their fabric purchases to Asia and the
company has moved with them and responded with an operation designed to meet
their needs.
U.S .Produced Sales - Net sales of U.S. produced upholstery fabrics were $9.8
million in the first quarter of fiscal 2008, a decrease of 43% from $17.2
million in the first quarter of fiscal 2007. 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 one U.S. manufacturing facility operating
in the upholstery fabrics segment. As of July 29, 2007, and April 29, 2007, the
carrying value of the company's U.S. based upholstery fabrics fixed assets was
$2.9 million and $3.4 million, respectively.
I-24
While management believes it is important to produce some level of upholstery
fabric in the U.S. to support its customers' domestic fabric requirements,
management remains committed to taking additional steps if necessary to address
the profitability of the company's U.S. upholstery fabric operations. The
company could experience additional write-downs of its property, plant, and
equipment in this business if sales and/or profitability continue to decline and
further restructuring actions become necessary.
Segment Assets -- Segment assets consist of accounts receivable, inventory,
assets held for sale, and property, plant, and equipment. As of July 29, 2007,
accounts receivable and inventory totaled $30.9 million compared to $37.5
million at April 29, 2007. This decline reflects the overall very weak demand
industry wide, the seasonality of the upholstery fabrics business, and the
company's restructuring activities associated with its U.S. upholstery fabric
operations. As of July 29, 2007, assets held for sale totaled $1.9 million
compared to $2.5 million as of April 29, 2007. The company received sale
proceeds of $500,000 on assets held for sale in the first quarter of fiscal
2008. The company expects the assets held for sale as of July 29, 2007 to be
sold in fiscal 2008. As of July 29, 2007, property, plant, and equipment totaled
$14.6 million compared to $14.9 million at April 29, 2007. These balances
include various other corporate allocations totaling $3.7 million and $3.8
million at July 29, 2007, and April 29, 2007, respectively. Included in
property, plant, and equipment are assets located in the U.S. totaling $2.9
million and $3.4 million at July 29, 2007, and April 29, 2007, respectively,
with the remaining property, plant, and equipment located in China.
Other Expense Categories
Selling, General and Administrative Expenses - Selling, general, and
administrative expenses (SG&A) were $6.3 million for the first quarter of fiscal
2008 compared with $6.6 million for the first quarter of fiscal 2007, a decrease
of 3.9%. As a percent to net sales, SG&A expenses were 9.7% in the first quarter
of fiscal 2008 compared with 10.5% in the first quarter of fiscal 2007. This
decrease reflects the company's restructuring efforts associated with its U.S.
upholstery fabric operations partially offset by increased SG&A expenses from
its mattress fabric segment resulting from increased sales associated with the
ITG acquisition. Under the provisions of SFAS No. 123R, total stock-based
compensation expense was $140,000 and $132,000 for the three month period ended
July 29, 2007 and July 30, 2006, respectively (see note 2 in the Notes to
Consolidated Financial Statements).
Interest Expense (Income) -- Interest expense for the first quarter of fiscal
2008 was $818,000 compared to $950,000 for the first quarter of fiscal 2007. The
lower interest expense primarily reflects lower outstanding balances on the
company's unsecured term notes. Interest income was $58,000 in the first quarter
of fiscal 2008 compared to $46,000 for the first quarter of fiscal 2007,
reflecting higher invested balances in money market funds.
Other Expense - Other expense for the first quarter of fiscal 2008 was $232,000
compared to $29,000 for the first quarter of fiscal 2007. This change primarily
reflects fluctuations in foreign currency exchange rates for subsidiaries
domiciled in China and Canada.
Income Taxes -- The effective tax rate (taxes as a percentage of income before
income taxes) for the first quarter of fiscal 2008 was 35.1% compared to an
income tax benefit of 2.3% in the first quarter of fiscal 2007. The change in
the effective income tax rate reflects higher taxable income from the company's
U.S. operations in the first quarter of fiscal 2008 compared to the first
quarter of fiscal 2007. This trend reflects increased profitability in the
mattress fabrics segment and lower estimated restructuring and related charges
for fiscal 2008. The 2.3% income tax benefit in the first quarter of fiscal 2007
reflected losses from the company's U.S. operations due to restructuring
activities and lower income tax rates on income from foreign sources.
I-25
The company's income tax expense and effective tax rate, for both the three
month periods ending July 29, 2007 and July 30, 2006, were based upon the
estimated effective tax rate applicable for the full years after giving effect
to any significant items related specifically to interim periods. The effective
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.
Federal and state net operating loss carryforwards with related future tax
benefits on a gross basis was approximately $72.0 million at July 29, 2007.
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 and capital expenditures. The company
believes its sources of liquidity continue to be adequate to meets its current
needs. As of July 29, 2007, the company has principal payments totaling $13.8
million due in fiscal 2008, of which approximately $13.7 million represents the
company's unsecured term notes scheduled to be due in March 2008. The company
has prepaid a total of $7.2 million scheduled to be due in March 2008, including
$2.2 million prepaid during the first quarter and an additional $1.0 million
prepaid in August 2007. After the $1.0 million prepayment in August 2007, the
company has $12.7 million due in March 2008 on its unsecured term notes. The
company believes it is likely that it will renegotiate one or more of its
current financing arrangements during fiscal 2008.
Cash and cash equivalents as of July 29, 2007, were $9.0 million compared with
$10.2 million as of April 29, 2007. The company's cash position reflects $2.2
million in prepayments made on the company's unsecured term notes and capital
expenditures of $1.1 million primarily related to the company's China and
mattress fabric operations. Also, the company's cash position includes net cash
provided by operating activities of $1.1 million in the first quarter of fiscal
2008, an improvement of $2.7 million compared with the first quarter of fiscal
2007, proceeds from the sale of equipment as part of the company's restructuring
activities of $702,000, and proceeds from common stock issued in connection with
stock option exercises of $405,000.
The company is taking further steps to support its liquidity, including ongoing
efforts to improve operating working capital turnover and reduce selling,
general, and administrative expenses in its upholstery fabrics segment. However,
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 July 29, 2007, decreased 8.2% in
comparison to July 30, 2006. Days sales outstanding totaled 31 days at July 29,
2007 compared with 35 days at July 30, 2006. Inventories as of July 29, 2007
decreased 2.1% in comparison to July 30, 2006. This decrease represents a
decrease in inventories of 31%, or $9.4 million for the upholstery fabrics
segment, primarily due to very weak industry wide demand, the seasonality of the
upholstery fabrics business, and the company's restructuring efforts. The
decrease in inventories associated with the upholstery fabrics segment was
mostly offset by an increase of 66%, or $8.5 million, for the mattress fabrics
segment, primarily due to increased production and sales from the ITG
acquisition. Inventory turns for the first quarter of fiscal 2008 were 5.4
versus 5.5 for the first quarter of fiscal 2007. Operating working capital
(comprised of accounts receivable and inventories, less trade accounts payable)
was $40.1 million at July 29, 2007, down from $47.9 million at July 30, 2006.
I-26
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 beginning August 2007 through March 2010. The
principal payments are required to be paid in annual installments over the next
three years as follows: Year 1 - $13.7 million; Year 2 - $7.5 million; and Year
3 - $7.5 million. The company prepaid $2.2 million during the first quarter and
an additional $1.0 million in August 2007, scheduled to be due in March 2008.
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 (8.32% at July 29,
2007) 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 (8.32% at July 29,
2007) 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 expires on December 31, 2007, and bears interest at the one-month
LIBOR plus an adjustable margin (8.32% at July 29, 2007) based on the company's
debt/EBITDA ratio, as defined in the agreement. As of July 29, 2007, there were
$2.3 million in outstanding letters of credit (all of which related to workers
compensation) and no borrowings outstanding under 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 $5.0
million, of which approximately $1.3 million includes letters of credit. The
credit agreement expires on February 1, 2008, with an annual renewal option and
requires interest to be paid on a quarterly basis at a rate determined by the
Chinese government (with interest rates ranging from 5.81% to 6.07% at July 29,
2007). As of July 29, 2007, approximately $2.6 million was outstanding under the
agreement.
I-27
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 July 29, 2007, 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 - $13.8 million; Year 2 - $7.8 million; Year 3 - $10.4 million; Year
4 - $3.5 million; Year 5 - $187,000; and thereafter - $250,000.
Capital Expenditures - Cash expenditures for capital spending in the first
quarter of fiscal 2008 were $1.1 million, primarily for our China and mattress
fabric operations. The company did not finance any of its capital expenditures
for the three month period ending July 29, 2007. The company's current capital
spending budget for fiscal 2008 is $4.0 million. Depreciation for the first
quarter of fiscal 2008 was approximately $1.5 million and is estimated to be
$6.0 million for fiscal 2008. The company expects that the availability of funds
under cash flow from operations, proceeds from the sale of buildings and
equipment, and its revolving credit lines will be sufficient to fund its planned
capital needs.
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 14 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.
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.
I-28
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.
Contractual Obligations
As more fully disclosed in Notes 1 and 14 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 July
29, 2007, the company has recognized $3.8 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 July 29, 2007 the company classified the $3.8 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.
Inflation
The cost of certain of the company's raw materials, principally fibers from
petroleum derivatives, and utility/energy costs, increased during the first
quarter 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 July 29,
2007, there were $6.5 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 5.8% to 6.1%. Additionally, approximately 88% of the
company's borrowings are at a fixed rate or is non-interest bearing. Thus, any
foreseeable change in interest rates would not have a material effect on the
company's interest expense.
I-29
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 either
exchange rate at July 29, 2007 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 July 29, 2007,
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-30
Part II - Other Information
---------------------------
Item 1A. Risk Factors
There have been no material changes to our risk factors during the first quarter
of fiscal 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.
At April 30, 2006, the company's market capitalization and shareholders' equity
fell below the level required for continued listing on the NYSE. Under the
NYSE's current listing standards, the company is required to have market
capitalization over a consecutive 30 trading-day period or shareholders' equity
of more than $75 million to maintain compliance with continued listing
standards. In a letter dated October 27, 2006, the NYSE notified the company
that the NYSE has accepted the company's plan for continued listing on the NYSE.
As a result of the acceptance, the company's common stock will continue to be
listed on the NYSE pending quarterly reviews by the NYSE's Listing and
Compliance Committee to ensure progress against the plan. Since April 29, 2007,
both of the company's market capitalization over a 30 trading-day period and
shareholders' equity exceeded the level required for continued listing on the
NYSE.
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.
10.1 Form of stock option agreement for options granted to executive
officers on June 25, 2007 pursuant to the 2002 Stock Option
Plan.
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-1
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: September 11, 2007 By: /s/ Kenneth R. Bowling
-----------------------------
Kenneth R. Bowling
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-2
EXHIBIT INDEX
Exhibit Number Exhibit
-------------- -------
10.1 Form of stock option agreement for options granted
to executive officers on June 25, 2007 pursuant to
2002 Stock Option Plan.
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.