===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 28, 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 JANUARY 28, 2007: 12,554,541
PAR VALUE: $0.05
===============================================================================
INDEX TO FORM 10-Q
FOR THE PERIOD ENDED JANUARY 28, 2007
PAGE
PART I - FINANCIAL STATEMENTS
ITEM 1. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Loss -- Three and Nine Months
Ended January 28, 2007 and January 29, 2006 I-1
Consolidated Balance Sheets -- January 28, 2007, January 29, 2006 and April 30, 2006 I-2
Consolidated Statements of Cash Flows -- Nine Months Ended January 28, 2007 and January 29, 2006 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Cautionary Statement Concerning Forward-Looking Information I-24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS I-24
- ------------------------------------------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK I-39
- ---------------------------------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES I-40
- ----------------------------------
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS II-1
- -----------------------
ITEM 5. OTHER INFORMATION II-4
- -------------------------
ITEM 6. EXHIBITS II-4
- ----------------
Signatures II-6
Item 1: FINANCIAL STATEMENTS
CULP, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 28, 2007 AND JANUARY 29, 2006
(UNAUDITED)
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
------------------------------------------------------------------------
Amounts Percent of Sales
-------------------------- ----------------------------
January 28, January 29, % Over January 28, January 29,
2007 2006 (Under) 2007 2006
------------ ------------ ------------ ------------- -------------
Net sales $ 55,712 61,035 (8.7)% 100.0 % 100.0 %
Cost of sales 51,001 56,858 (10.3)% 91.5 % 93.2 %
------------ ------------ ------------ ------------- -------------
Gross profit 4,711 4,177 12.8 % 8.5 % 6.8 %
Selling, general and
administrative expenses 6,394 6,098 4.9 % 11.5 % 10.0 %
Restructuring expense 1,275 343 271.7 % 2.3 % 0.6 %
------------ ------------ ------------ ------------- -------------
Loss from operations (2,958) (2,264) (30.7)% (5.3)% (3.7)%
Interest expense 952 1,063 (10.4)% 1.7 % 1.7 %
Interest income (50) (43) 16.3 % (0.1)% (0.1)%
Other (income) expense (157) 135 216.3 % (0.3)% 0.2 %
------------ ------------ ------------ ------------- -------------
Loss before income taxes (3,703) (3,419) (8.3)% (6.6)% (5.6)%
Income taxes* (1,482) (1,250) 18.6 % 40.0 % 36.6 %
------------ ------------ ------------ ------------- -------------
Net loss $ (2,221) (2,169) (2.4)% (4.0)% (3.6)%
============ ============ ============ ============= =============
Net loss per share-basic ($0.19) ($0.19) 0.0 %
Net loss per share-diluted ($0.19) ($0.19) 0.0 %
Average shares outstanding-basic 11,773 11,562 1.8 %
Average shares outstanding-diluted 11,773 11,562 1.8 %
NINE MONTHS ENDED
------------------------------------------------------------------------
Amounts Percent of Sales
-------------------------- ----------------------------
January 28, January 29, % Over January 28, January 29,
2007 2006 (Under) 2007 2006
------------ ------------ ------------ ------------- -------------
Net sales $ 177,337 190,383 (6.9)% 100.0 % 100.0 %
Cost of sales 156,575 174,098 (10.1)% 88.3 % 91.4 %
------------ ------------ ------------ ------------- -------------
Gross profit 20,762 16,285 27.5 % 11.7 % 8.6 %
Selling, general and
administrative expenses 19,240 22,480 (14.4)% 10.8 % 11.8 %
Restructuring expense 1,742 6,581 (73.5)% 1.0 % 3.5 %
------------ ------------ ------------ ------------- -------------
Loss from operations (220) (12,776) 98.3 % (0.1)% (6.7)%
Interest expense 2,841 2,955 (3.9)% 1.6 % 1.6 %
Interest income (147) (78) 88.5 % (0.1)% (0.0)%
Other (income) expense (98) 481 120.4 % (0.1)% 0.3 %
------------ ------------ ------------ ------------- -------------
Loss before income taxes (2,816) (16,134) 82.5 % (1.6)% (8.5)%
Income taxes* (1,540) (5,873) (73.8)% 54.7 % 36.4 %
------------ ------------ ------------ ------------- -------------
Net loss $ (1,276) (10,261) 87.6 % (0.7)% (5.4)%
============ ============ ========== ============ ===========
Net loss per share-basic ($0.11) ($0.89) 87.6 %
Net loss per share-diluted ($0.11) ($0.89) 87.6 %
Average shares outstanding-basic 11,710 11,557 1.3 %
Average shares outstanding-diluted 11,710 11,557 1.3 %
* Percent of sales column for income taxes is calculated as a % of loss before income taxes.
See accompanying notes to consolidated financial statements
I-1
CULP, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 28, 2007, JANUARY 29, 2006 AND APRIL 30, 2006
(UNAUDITED)
(Amounts in Thousands)
Amounts Increase
------------------------------------ (Decrease)
January 28, January 29, ------------------------------- * April 30,
2007 2006 Dollars Percent 2006
------------------- --------------- --------------- ------------ -----------
Current assets
Cash and cash equivalents $ 10,675 12,870 (2,195) (17.1)% 9,714
Accounts receivable 23,755 28,485 (4,730) (16.6)% 29,049
Inventories 42,717 42,099 618 1.5 % 36,693
Deferred income taxes 7,120 7,054 66 0.9 % 7,120
Assets held for sale 1,231 - 1,231 100.0 % 3,111
Other current assets 2,710 1,649 1,061 64.3 % 1,287
------------------- --------------- --------------- ------------ -----------
Total current assets 88,208 92,157 (3,949) (4.3)% 86,974
Property, plant & equipment, net 40,784 52,562 (11,778) (22.4)% 44,639
Goodwill 4,114 4,114 - 0.0 % 4,114
Deferred income taxes 23,232 15,731 7,501 47.7 % 20,176
Other assets 2,683 1,775 908 51.2 % 1,564
------------------- --------------- --------------- ------------ -----------
Total assets $ 159,021 166,339 (7,318) (4.4)% 157,467
=================== =============== =============== ============ ===========
Current liabilities
Current maturities of long-term debt $ 4,744 8,049 (3,305) (41.1)% 8,060
Accounts payable 18,051 20,669 (2,618) (12.7)% 20,835
Accrued expenses 7,704 9,751 (2,047) (21.0)% 7,845
Accrued restructuring 3,490 4,299 (809) (18.8)% 4,054
Income taxes payable 4,136 635 3,501 551.3 % 2,488
------------------- --------------- --------------- ------------ -----------
Total current liabilities 38,125 43,403 (5,278) (12.2)% 43,282
Long-term debt , less current maturities 41,965 47,229 (5,264) (11.1)% 39,662
------------------- --------------- --------------- ------------ -----------
Total liabilities 80,090 90,632 (10,542) (11.6)% 82,944
Shareholders' equity 78,931 75,707 3,224 4.3 % 74,523
------------------- --------------- --------------- ------------ -----------
Total liabilities and
shareholders' equity $ 159,021 166,339 (7,318) (4.4)% 157,467
=================== =============== =============== ============ ===========
Shares outstanding 12,555 11,566 989 8.6 % 11,655
=================== =============== =============== ============ ===========
* Derived from audited financial statements
See accompanying notes to consolidated financial statements
I-2
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 28, 2007 AND JANUARY 29, 2006
(UNAUDITED)
(Amounts in Thousands)
NINE MONTHS ENDED
Amounts
--------------------------------
January 28, January 29,
2007 2006
--------------- --------------
Cash flows from operating activities:
Net loss $ (1,276) (10,261)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 5,651 12,275
Amortization of other assets 59 70
Stock-based compensation 406 139
Deferred income taxes (3,056) (5,645)
Restructuring expenses, net of gain on sale of related assets (546) 3,057
Changes in assets and liabilities:
Accounts receivable 5,294 339
Inventories (1,270) 8,400
Other current assets 787 1,042
Other assets (46) (129)
Accounts payable (2,507) (1,695)
Accrued expenses (141) 195
Accrued restructuring (564) (1,551)
Income taxes payable 1,648 (909)
--------------- --------------
Net cash provided by operating activities 4,439 5,327
--------------- --------------
Cash flows from investing activities:
Capital expenditures (2,492) (5,428)
Acquisition of assets (2,500) -
Proceeds from the sale of buildings and equipment 3,260 3,950
--------------- --------------
Net cash used in investing activities (1,732) (1,478)
--------------- --------------
Cash flows from financing activities:
Payments on vendor-financed capital expenditures (927) (871)
Payments on long-term debt (3,513) (292)
Proceeds from issuance of long-term debt 2,500 5,020
Proceeds from common stock issued 194 57
--------------- --------------
Net cash (used in) provided by financing activities (1,746) 3,914
--------------- --------------
Increase in cash and cash equivalents 961 7,763
Cash and cash equivalents at beginning of period 9,714 5,107
--------------- --------------
Cash and cash equivalents at end of period $ 10,675 12,870
=============== ==============
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 Unearned Retained Comprehensive Shareholders'
Shares Amount of Par Value Compensation Earnings Income Equity
- -------------------------- ---------- ------------ ------------- ------------- -------- ------------- --------------
Balance, May 1, 2005 11,550,759 $ 579 39,964 (139) 45,367 - $ 85,771
- -------------------------- ---------- ------------ ------------- ------------- -------- ------------- --------------
Net loss - - - - (11,796) - (11,796)
Gain on cash flow hedge,
net of income taxes - - - - - 18 18
Stock-based compensation - - - 139 - - 139
Common stock issued in
connection with stock
option plans 104,200 5 386 - - - 391
- -------------------------- ---------- ------------ ------------- ------------- -------- ------------- --------------
Balance, April 30, 2006 11,654,959 $ 584 40,350 - 33,571 18 $ 74,523
- -------------------------- ---------- ------------ ------------- ------------- -------- ------------- --------------
Net loss - - - - (1,276) - (1,276)
Loss on cash flow hedge,
net of income taxes - - - - - (13) (13)
Stock-based compensation - - 406 - - - 406
Common stock issued in
connection with
acquisition of assets
(see Note 2) 798,582 40 5,057 - - - 5,097
Common stock issued in
connection with stock
option plans 101,000 5 189 - - - 194
- -------------------------- ---------- ------------ ------------- ------------- -------- ------------- --------------
Balance, January 28, 2007 12,554,541 $ 629 46,002 - 32,295 5 $ 78,931
========================== ========== ============ ============= ============= ======== ============= ==============
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 2 and 11 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 20, 2006 for the fiscal year ended April 30,
2006.
The company's nine months ended January 28, 2007 and January 29, 2006 represent
39 week periods.
................................................................................
2. ASSET ACQUISITION
In January 2007, the company closed on an Asset Purchase Agreement (the
"Agreement") for the purchase of certain assets from International Textile
Group, Inc. ("ITG") related to the mattress fabrics product line of ITG's
Burlington House division. The company purchased ITG's mattress fabrics finished
goods inventory, a credit on future purchases of inventory manufactured by ITG
during the transition period, along with certain proprietary rights (patterns,
copyrights, artwork, and the like) and other records that related to ITG's
mattress fabrics product line. The company did not purchase any accounts
receivable, property, plant, and equipment, and did not assume any liabilities
other than certain open purchase orders.
The consideration given for this transaction, after adjustments to the closing
date inventory as defined by the Agreement, was $8.1 million. Payment consisted
of $2.5 million in cash financed by a term loan (see Note 8), the issuance of
798,582 shares of the company's common stock with a fair value of $5.1 million,
and the company also incurred direct acquisition costs relating to legal,
accounting, and other professional fees of $515,000. The total transaction cost
allocation is not final based on the ultimate settlement of certain direct
acquisition costs. The final allocation may impact the ultimate valuation of the
assets acquired. This transaction did not constitute a business combination
within the criteria of EITF 98-3, DETERMINING WHETHER A NON-MONETARY TRANSACTION
INVOLVES RECEIPT OF PRODUCTIVE ASSETS OR OF A BUSINESS. The total transaction
cost was allocated as follows:
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Fair Value
- -------------------------------------------------------------------------------
Inventories $ 4,754
Other current assets (credit on future purchases of inventory) 2,210
Non-compete agreement 1,148
- -------------------------------------------------------------------------------
$ 8,112
- -------------------------------------------------------------------------------
The company recorded the non-compete agreement at its fair value based on
various valuation techniques, which is reflected in other assets in the
accompanying consolidated balance sheet. The non-compete agreement will be
amortized on a straight-line basis over the four year life of the agreement.
Amortization expense during the next five fiscal years follows: FY 2007 -
$72,000; FY 2008 - $287,000; FY 2009 - $287,000; FY 2010 - $287,000; and FY 2011
- - $215,000.
The Agreement requires ITG to provide certain transition services to the company
and will manufacture goods for the company for a limited period of time
(expected to be approximately 120 days) to support the company's efforts to
transition the former ITG mattress fabrics products into the company's
operations. The company does not plan to hire any of ITG's employees after the
transition period is completed. ITG has also agreed that it will not compete
with the company in the mattress fabrics business for a period of four years,
except for mattress fabrics production in China for final consumption in China
(meaning the mattress fabric and the mattress on which it is used is sold only
in China).
In connection with the Agreement, the company issued 798,582 shares of common
stock. As a result, the company entered into a Registration Rights and
Shareholder Agreement ("the Registration Agreement"), which relates to the
shares of the common stock issued by the company to ITG (the "Shares"). Under
the terms of the Registration Agreement, ITG may demand that the company
register the Shares with the Securities and Exchange Commission, which would
allow the Shares to be sold to the public after the registration statement
becomes effective. The Registration Agreement also contains provisions pursuant
to which ITG will agree not to purchase additional company shares or take
certain other actions to influence control of the company, and will agree to
vote the shares in accordance with recommendations of the company's board of
directors.
I-5
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. 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 recognized in the first
quarter of fiscal 2007 now includes amortization related to the remaining
unvested portion of all stock option awards granted prior to May 1, 2006, based
on their grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Prior to May 1, 2006, the company recognized compensation costs related to
employee stock option plans utilizing the intrinsic value-based method
prescribed by APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,"
and related interpretations. The company had also adopted the disclosure
requirements of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," as
amended by SFAS No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION TRANSITION AND
DISCLOSURE." SFAS No. 123 required disclosure of pro-forma net income, earnings
per share, and other information as if the fair value method of accounting for
stock options and other equity instruments described in SFAS No. 123 had been
adopted.
As a result of adopting SFAS No. 123R, the company recorded $119,000 and
$406,000 of compensation expense for stock options within selling, general, and
administrative expense for the three-month and nine-month periods ended January
28, 2007. In the prior year, the company recorded $35,000 and $139,000 of
compensation expense for stock options that were required to be accounted for
under the provisions of APB Opinion No. 25 for the three-month and nine-month
periods ended January 29, 2006.
I-6
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prior to the adoption of SFAS No. 123R, the benefit of tax deductions in excess
of recognized compensation costs were reported as an operating cash flow. SFAS
No. 123R requires such benefits be recorded as financing cash flow rather than
as a reduction of taxes paid within operating cash flow. For the nine-month
period ended January 28, 2007, no tax benefits in excess of recognized
compensation costs were realized from option exercises.
The remaining unrecognized compensation costs related to unvested awards at
January 28, 2007, is $1.0 million which is expected to be recognized over a
weighted average period of 2.7 years.
The following table illustrates the effect on net loss and net loss per share if
the company had applied the fair value recognition provisions of SFAS No. 123 to
options granted under the company's stock option plan for three-month and
nine-month period ended January 29, 2006:
- ----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Three-Months Ended Nine-Months Ended
Net loss, as reported $ (2,169) $ (10,261)
Add: Total stock-based employee compensation expense
included in net loss, net of taxes 22 88
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of taxes (112) (355)
- ----------------------------------------------------------------------------------------------------------
Pro forma net loss $ (2,259) $ (10,528)
- ----------------------------------------------------------------------------------------------------------
Net loss per share:
Basic - as reported $ (0.19) $ (0.89)
Basic - pro forma (0.20) (0.91)
Diluted - as reported (0.19) (0.89)
Diluted - pro forma (0.20) (0.91)
- ----------------------------------------------------------------------------------------------------------
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 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 directors during the
nine-month period ended January 28, 2007 and January 29, 2006 were $3.68 and
$3.52 per share using the following assumptions:
2007 2006
- ------------------------------------------------------------------------------
Risk-free interest rate 4.57% 4.39%
Dividend yield 0.00% 0.00%
Expected volatility 68.36% 73.93%
Expected term (in years) 6.8 8.5
- ------------------------------------------------------------------------------
I-7
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair value of stock options granted to employees during the nine-month
period ended January 28, 2007 and January 29, 2006 were $2.43 and $2.47 per
share using the following assumptions:
2007 2006
- ---------------------------------------------------------------------------
Risk-free interest rate 5.03% 4.39%
Dividend yield 0.00% 0.00%
Expected volatility 67.03% 73.93%
Expected term (in years) 1.6 3.5
- ---------------------------------------------------------------------------
The assumptions utilized in the model are evaluated and revised, as necessary,
to reflect market conditions and actual historical experience. 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.
The following table summarizes the stock options (vested and unvested) as of
January 28, 2007, and option activity during the nine-month period then ended:
- -------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
- -------------------------------------------------------------------------------------------------------
Outstanding, April 30, 2006 993,875 $ 7.11
Granted 228,000 4.56
Expired (180,125) 6.38
Exercised (101,000) 1.92 $ 292,000
- -------------------------------------------------------------------------------------------------------
Outstanding, January 28, 2007 940,750 7.19 3.1 Years $ 820,075
- -------------------------------------------------------------------------------------------------------
At January 28, 2007, there were 254,750 shares available for future grants under
the company's incentive stock option plans and options to purchase 478,375
shares were exercisable which had a weighted average exercise price of $9.39 per
share, an aggregate intrinsic value of $166,130 and a weighted average
contractual term of 0.18 years. Cash received from stock options were $194,000
and $57,000 for the nine-month periods ended January 28, 2007 and January 29,
2006, respectively.
................................................................................
I-8
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 April 30, 2006
- -------------------------------------------------------------------------------------------------------------------------------
Customers $ 26,164 $ 30,924
Allowance for doubtful accounts (1,191) (1,049)
Reserve for returns and allowances and discounts (1,218) (826)
- -------------------------------------------------------------------------------------------------------------------------------
$ 23,755 $ 29,049
- -------------------------------------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for doubtful accounts follows:
- -------------------------------------------------------------------------------------------------------------------------------
Nine months ended
(DOLLARS IN THOUSANDS) January 28, 2007 January 29, 2006
- -------------------------------------------------------------------------------------------------------------------------------
Beginning balance $ (1,049) $ (1,142)
Provision for uncollectible accounts (410) 129
Net write-offs 268 36
- -------------------------------------------------------------------------------------------------------------------------------
Ending balance $ (1,191) $ (977)
- -------------------------------------------------------------------------------------------------------------------------------
A summary of the activity in the allowance for returns and allowances and
discounts accounts follows:
- -------------------------------------------------------------------------------------------------------------------------------
Nine months ended
(DOLLARS IN THOUSANDS) January 28, 2007 January 29, 2006
- -------------------------------------------------------------------------------------------------------------------------------
Beginning balance $ (826) $ (837)
Provision for returns and allowances
and discounts (1,701) (1,385)
Discounts taken 1,309 1,364
- -------------------------------------------------------------------------------------------------------------------------------
Ending balance $ (1,218) $ (858)
- -------------------------------------------------------------------------------------------------------------------------------
................................................................................
5. INVENTORIES
Inventories are carried at the lower of cost or market. Cost is determined using
the FIFO (first-in, first-out) method.
A summary of inventories follows:
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 April 30, 2006
- -------------------------------------------------------------------------------------------------------------------------------
Raw materials $ 11,609 $ 13,561
Work-in-process 1,746 2,020
Finished goods 29,362 21,112
- -------------------------------------------------------------------------------------------------------------------------------
$ 42,717 $ 36,693
- -------------------------------------------------------------------------------------------------------------------------------
................................................................................
I-9
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. ACCOUNTS PAYABLE
A summary of accounts payable follows:
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 April 30, 2006
- -----------------------------------------------------------------------------------------------------------------
Accounts payable-trade $ 16,392 $ 18,386
Accounts payable-capital expenditures 1,659 2,449
- -----------------------------------------------------------------------------------------------------------------
$ 18,051 $ 20,835
- -----------------------------------------------------------------------------------------------------------------
................................................................................
7. ACCRUED EXPENSES
A summary of accrued expenses follows:
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 April 30, 2006
- -----------------------------------------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 4,312 $ 4,757
Interest 742 433
Accrued rebates 403 705
Other 2,247 1,950
- -----------------------------------------------------------------------------------------------------------------
$ 7,704 $ 7,845
- -----------------------------------------------------------------------------------------------------------------
................................................................................
8. LONG-TERM DEBT
A summary of long-term debt follows:
- -----------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 April 30, 2006
- -----------------------------------------------------------------------------------------------------------------
Unsecured senior term notes $ 39,440 $ 42,440
Real estate loan - I 4,091 4,242
Real estate loan - II 2,500 -
Canadian government loans 678 1,040
- -----------------------------------------------------------------------------------------------------------------
46,709 47,722
Less current maturities (4,744) (8,060)
- -----------------------------------------------------------------------------------------------------------------
$ 41,965 $ 39,662
- -----------------------------------------------------------------------------------------------------------------
UNSECURED TERM NOTES
The company's unsecured term notes (the "Notes") are payable over an average
remaining term of 2.5 years beginning February 2007 through March 2010. As of
January 28, 2007, the principal payments that are required to be paid in
periodic installments over the next four years are as follows: Year 1 - $4.5
million; Year 2 - $19.9 million; Year 3 - $7.5 million; and Year 4 - $7.5
million.
I-10
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On December 6, 2006, the company entered into a Second Amendment to Note
Purchase Agreements (the "Amendment"). Upon execution of this amendment, the
company prepaid $3.0 million in principal amount and interest on the Notes,
without prepayment penalty or "make whole" premium. The Amendment raised the
interest rate from 7.76% to 8.80% on the remaining outstanding Notes and allows
for an increase in the amount of other debt to be incurred by the company,
including a provision that allows for debt of up to $5 million in the company's
China subsidiary. The Amendment changed the financial covenants applicable to
the company to provide additional flexibility to account for recent changes that
the company has made or could make to its business and the accounting
consequences of those changes. Beginning in the third quarter of fiscal 2007,
these changes exclude from the financial covenants, all restructuring and
related charges associated with the U.S. upholstery fabrics operations and any
valuation allowance, if needed, against the company's net deferred tax assets
from U.S. operations. The Amendment provides for prepayments of the Notes (at
the option of the noteholders and without prepayment penalty) to the extent that
the company's cash balances exceed $8 million at the end of each fiscal quarter.
The company paid the remaining $4.5 million due in March of 2007 on February 20,
2007, as part of this prepayment provision.
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 London Interbank Offered Rate plus an adjustable
margin based on the company's debt/EBITDA ratio, as defined in the agreement and
is payable in varying monthly installments through September 2010, with a final
payment of $3.3 million in October 2010.
REAL ESTATE LOAN - II
On January 22, 2007, the company entered into an agreement with a bank to
provide for a term loan in the amount of $2.5 million in connection with the ITG
asset purchase agreement (see Note 2). 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 London Interbank Offered Rate plus 3%. This agreement
requires the company to pay interest monthly with the entire principal amount of
$2.5 million due on June 30, 2010.
CANADIAN GOVERNMENT LOANS
In November 2005, the company entered into an agreement with the Canadian
government to provide for a term loan in the amount of $680,000. The proceeds
are to partially finance capital expenditures at the company's facility located
in Quebec, Canada. This loan is non-interest bearing and is payable in 48 equal
monthly installments commencing December 1, 2009. In addition to the term loan
entered into in November 2005, the company had an existing non-interest bearing
term loan with the Canadian government which was paid in May 2006.
I-11
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
REVOLVING CREDIT AGREEMENT -UNITED STATES
On January 22, 2007, the company entered into a Tenth Amendment to this
unsecured credit agreement dated August 23, 2002. This amendment reduced the
line of credit available from $8.0 million to $6.5 million, including letters of
credit up to $5.5 million and extended the term of the credit agreement from
August 31, 2007 to December 31, 2007. The amendment also removed the liquidity
provision that required the company to maintain collected deposit balances of at
least $2.0 million. It also amended certain other financial covenants as defined
in the agreement. Borrowings under the credit facility bear interest at the
one-month London Interbank Offered Rate plus an adjustable margin based on the
company's debt/EBITDA ratio, as defined in the agreement. As of January 28,
2007, there were $2.4 million in outstanding letters of credit (most of which
related to workers compensation) and no borrowings outstanding under the
agreement.
REVOLVING CREDIT AGREEMENT - CHINA
On February 1, 2007, the company's China subsidiary entered into an unsecured
credit agreement with a bank 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 fixed
annual rate of 5.8%. As of March 9, 2007, approximately $1.3 million was
outstanding under the agreement.
OVERALL
The company's loan agreements require that the company maintain compliance with
certain financial ratios. At January 28, 2007, the company was in compliance
with these financial covenants.
As of January 28, 2007, the principal payment requirements of long-term debt
during the next five years are: Year 1 - $4.7 million; Year 2 - $20.1 million;
Year 3 - $7.8 million; Year 4 - $13.5 million; Year 5 - $169,000; and thereafter
- - $480,000.
9. INTEREST RATE HEDGING
In connection with the company's first real estate loan with its bank, the
company was required to have an agreement to hedge the interest rate risk
exposure on the first 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 first real estate loan, that effectively converted the floating
rate LIBOR based payments to fixed payments at 4.99% plus the spread calculated
under the first real estate loan agreement. This agreement expires October 2010.
The company accounts for the interest rate swap as a cash flow hedge whereby the
fair value of this contract is reflected in other assets in the accompanying
consolidated balance sheets with the offset recorded as accumulated other
comprehensive income. The fair value of the interest rate swap at January 28,
2007 was $9,000 in the company's favor and was determined by quoted market
prices.
I-12
................................................................................
10. CASH FLOW INFORMATION
Payments for interest and income taxes follow:
- -------------------------------------------------------------------------------------------------------
Nine months ended
(DOLLARS IN THOUSANDS) January 28, 2007 January 29, 2006
- -------------------------------------------------------------------------------------------------------
Interest $ 2,532 $ 2,048
Income taxes (received) paid (156) 892
- -------------------------------------------------------------------------------------------------------
The company did not finance any of its capital expenditures for the nine months
ended January 28, 2007. The non-cash portion of capital expenditures
representing vendor financing totaled $1,699,000 for the nine months ended
January 29, 2006.
In connection with the ITG Asset Purchase Agreement (see Note 2), the company
issued 798,582 shares of common stock with a fair value of $5.1 million.
................................................................................
11. RESTRUCTURING AND RELATED CHARGES
A summary of accrued restructuring costs follows:
- ----------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 April 30, 2006
- ----------------------------------------------------------------------------------------------
December 2006 Upholstery Fabrics $ 1,284 $ -
September 2005 Upholstery Fabrics 313 439
August 2005 Upholstery Fabrics 59 134
April 2005 Upholstery Fabrics 289 1,000
October 2004 Upholstery Fabrics 6 64
Fiscal 2003 Culp Decorative Fabrics 1,539 2,412
Fiscal 2001 Culp Decorative Fabrics - 5
- ----------------------------------------------------------------------------------------------
$ 3,490 $ 4,054
- ----------------------------------------------------------------------------------------------
DECEMBER 2006 UPHOLSTERY FABRICS
On December 12, 2006, the company's board of directors approved a restructuring
plan within the upholstery fabrics segment to consolidate the company's U.S.
upholstery fabrics manufacturing facilities and outsource its specialty yarn
production. This process will involve closing the company's weaving plant
located in Graham, NC, and closing the yarn plant located in Lincolnton, NC. The
company will transfer certain production from the Graham, NC plant facility to
its Anderson, SC and Shanghai, China, plant facilities as well as a small
portion to contract weavers. The company will continue to operate one upholstery
fabrics plant in Anderson, SC, which will produce velvets and decorative
fabrics. As a result of these two plant closures, the company will reduce the
number of associates by approximately 185 people.
I-13
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the third quarter and the nine-month period of fiscal 2007, total
restructuring and related charges incurred were $4.1 million of which $2.2
million related to inventory markdowns, $1.3 million related to employee
termination benefits, and $665,000 related to accelerated depreciation. Of the
total charge, $2.8 million was recorded in cost of sales and $1.3 million was
recorded in restructuring expense in the 2007 Consolidated Statement of Loss.
The balance of $1.3 million in accrued restructuring costs represents the
employee termination benefits incurred. As of January 28, 2007, there were no
assets classified as held for sale.
SEPTEMBER 2005 UPHOLSTERY FABRICS
During the third quarter of fiscal 2007, a total restructuring and related net
credit of $20,000 was recorded, of which, a charge of $14,000 related to lease
termination costs, a charge of $3,000 related to asset movement costs, and a
credit of $37,000 related to employee termination benefits. The $20,000 net
credit was recorded in restructuring expense in the 2007 Consolidated Statement
of Loss.
During the nine-month period of fiscal 2007, total restructuring and related net
charges incurred were $512,000, of which, a charge of $450,000 related to
operating costs associated with the closing of a plant facility, a charge of
$273,000 related to lease termination and other exit costs, a charge of $212,000
related to asset movement costs, a credit of $40,000 related to a write-down of
a building, a credit of $148,000 related to employee termination benefits, and a
credit of $235,000 for sales proceeds received on equipment with no carrying
value. Of the total net charge, a charge of $62,000 was recorded in
restructuring expense and a charge of $450,000 was recorded in cost of sales in
the 2007 Consolidated Statement of Loss.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- -----------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- -----------------------------------------------------------------------------
Balance, April 30, 2006 $ 439 - 439
Adjustments in fiscal 2007 (148) 2 (146)
Additions in fiscal 2007 - 271 271
Paid in fiscal 2007 (210) (41) (251)
- -----------------------------------------------------------------------------
Balance, January 28, 2007 $ 81 232 313
- -----------------------------------------------------------------------------
As of January 28, 2007, there were no assets classified as held for sale. At
April 30, 2006, assets classified as held for sale consisted of a building with
a carrying value of $641,000.
AUGUST 2005 UPHOLSTERY FABRICS
During the third quarter of fiscal 2007, a total restructuring and related net
credit of $245,000 was recorded, of which, a charge of $272,000 related to
write-downs of equipment, a charge of $6,000 related to lease termination costs,
a credit of $21,000 related to employee termination benefits, a credit of
$68,000 related to other operating costs associated with the closing of a plant
facility, and a credit of $434,000 for sales proceeds received on equipment with
no carrying value. Of the total net credit, a credit of $177,000 was recorded in
restructuring expense and a credit of $68,000 was recorded in cost of sales in
the 2007 Consolidated Statement of Loss.
I-14
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the nine month period of fiscal 2007, a total restructuring and related
net credit of $146,000 was recorded, of which, a charge of $307,000 related to
write-downs of a building and equipment, a charge of $49,000 related to asset
movement costs, a charge of $6,000 related to lease termination costs, a charge
of $2,000 related to employee termination benefits, a credit of $19,000 for
other operating costs associated with the closing of a plant facility, and a
credit of $491,000 for sales proceeds received on equipment with no carrying
value. Of the total net credit, a credit of $127,000 was recorded in
restructuring expense and a credit of $19,000 was recorded in cost of sales in
the 2007 Consolidated Statement of Loss.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Balance, April 30, 2006 $ 127 7 134
Adjustments in fiscal 2007 2 - 2
Addition in fiscal 2007 - 6 6
Paid in fiscal 2007 (70) (13) (83)
- --------------------------------------------------------------------------------
Balance, January 28, 2007 $ 59 - 59
- --------------------------------------------------------------------------------
As of January 28, 2007 and April 30, 2006, assets classified as held for sale
consisted of equipment with a carrying value of $360,000 and $700,000,
respectively. As of April 30, 2006, assets classified as held for sale also
included a building with a carrying value of $475,000, which was sold in May
2006.
APRIL 2005 UPHOLSTERY FABRICS
During the third quarter of fiscal 2007, total restructuring and related net
charges incurred were $223,000, of which, a charge of $171,000 related to asset
movement costs, a charge of $47,000 related to lease termination costs, a charge
of $35,000 related to operating costs associated with closing a plant facility,
a credit of $10,000 related to employee termination benefits, and a credit of
$20,000 for sales proceeds received on equipment with no carrying value. Of the
total net charge, a charge of $188,000 was recorded in restructuring expense and
a charge of $35,000 was recorded in cost of sales in the 2007 Consolidated
Statement of Loss.
During the first nine months of fiscal 2007, total restructuring and related net
charges incurred were $1.1 million, of which, a charge of $653,000 related to
asset movement costs, a charge of $321,000 related to operating costs associated
with the closing of a plant facility, a charge of $238,000 related to inventory
markdowns, a charge of $138,000 related to lease termination costs, a charge of
$67,000 related to write-downs of equipment, a credit of $112,000 related to
employee termination benefits, and a credit of $164,000 for sales proceeds
received on equipment with no carrying value. Of the total net charge, a charge
of $582,000 was recorded in restructuring expense; a charge of $501,000 was
recorded in cost of sales; and a charge of $58,000 was recorded in selling,
general, and administrative expenses in the 2007 Consolidated Statements of
Loss.
I-15
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Balance, April 30, 2006 $ 799 201 1,000
Adjustments in fiscal 2007 (112) 10 (102)
Additions in fiscal 2007 - 128 128
Paid in fiscal 2007 (477) (260) (737)
- --------------------------------------------------------------------------------
Balance, January 28, 2007 $ 210 79 289
- --------------------------------------------------------------------------------
As of January 28, 2007 and April 30, 2006, assets classified as held for sale
consisted of equipment with a carrying value of approximately $871,000 and $1.3
million, respectively.
OCTOBER 2004 UPHOLSTERY FABRICS
During the first nine months of fiscal 2007, as a result of management's
continual evaluation of the restructuring accrual, the reserve was decreased by
$30,000 to reflect current estimates of future health care claims. This $30,000
decrease in the reserve was recorded as a credit to restructuring expense in the
2007 Consolidated Statement of Loss.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Balance, April 30, 2006 $ 64 - 64
Adjustments in fiscal 2007 (30) - (30)
Paid in fiscal 2007 (28) - (28)
- --------------------------------------------------------------------------------
Balance, January 28, 2007 $ 6 - 6
- --------------------------------------------------------------------------------
As of January 28, 2007 and April 30, 2006, there were no assets classified as
held for sale.
FISCAL 2003 CULP DECORATIVE FABRICS RESTRUCTURING
During the third quarter of fiscal 2007, the company recorded a restructuring
related charge of $8,000 for operating costs associated with a closed plant
facility. This $8,000 restructuring related charge was recorded in cost of sales
in the 2007 Consolidated Statement of Loss.
During the first nine months 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 as a credit to
restructuring expense in the 2007 Consolidated Statement of Loss. Additionally,
the company recorded a restructuring related charge of $24,000 for operating
costs associated with a closed plant facility. This $24,000 restructuring
related charge was recorded in cost of sales in the 2007 Consolidated Statement
of Loss.
I-16
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- ------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ------------------------------------------------------------------------------
Balance, April 30, 2006 $ 88 2,324 2,412
Adjustments in fiscal 2007 - (22) (22)
Paid in fiscal 2007 (34) (817) (851)
- ------------------------------------------------------------------------------
Balance, January 28, 2007 $ 54 1,485 1,539
- ------------------------------------------------------------------------------
As of January 28, 2007 and April 30, 2006, there were no assets classified as
held for sale.
FISCAL 2001 CULP DECORATIVE FABRICS RESTRUCTURING
During the first nine months of fiscal 2007, as a result of management's
continual evaluation of the restructuring accrual, the reserve was decreased by
approximately $5,000 to reflect current estimates of future health care claims.
This $5,000 decrease in the reserve was recorded as a credit to restructuring
expense in the 2007 Consolidated Statement of Loss. Additionally, the company
recorded a restructuring related charge of $26,000 for other operating costs
associated with a closed plant facility. This $26,000 restructuring related
charge was recorded in cost of sales in the 2007 Consolidated Statement of Loss.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Balance, April 30, 2006 $ 5 - 5
Adjustments in fiscal 2007 (5) - (5)
Paid in fiscal 2007 - - -
- --------------------------------------------------------------------------------
Balance, January 28, 2007 $ - - -
- --------------------------------------------------------------------------------
As of January 28, 2007 and April 30, 2006, there were no assets classified as
held for sale.
................................................................................
12. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of shares
outstanding during the period. Diluted net loss per share uses the
weighted-average number of shares outstanding during the period plus the
dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted net income
loss per share follows:
I-17
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
Three months ended
(AMOUNTS IN THOUSANDS) January 28, 2007 January 29, 2006
- ---------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding, basic 11,773 11,562
Effect of dilutive stock options - -
- ---------------------------------------------------------------------------------------------------
Weighted-average common shares outstanding, diluted 11,773 11,562
- ---------------------------------------------------------------------------------------------------
Options to purchase 458,750 and 498,125 shares of common stock were not included
in the computation of diluted net loss per share for the three months ended
January 28, 2007, and January 29, 2006, respectively, because the exercise price
of the options was greater than the average market price of the common shares.
Options to purchase 2,847 and 74,129 shares of common stock were not included in
the computation of diluted net loss per share for the three months ended January
28, 2007, and January 29, 2006, because the company incurred a net loss for the
period.
- ---------------------------------------------------------------------------------------------------
Nine months ended
(AMOUNTS IN THOUSANDS) January 28, 2007 January 29, 2006
- ---------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,710 11,557
Effect of dilutive stock options - -
- ---------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,710 11,557
- ---------------------------------------------------------------------------------------------------
Options to purchase 452,792 and 506,542 shares of common stock were not included
in the computation of diluted net loss per share for the nine months ended
January 28, 2007, and January 29, 2006, respectively, because the exercise price
of the options was greater than the average market price of the common shares.
Options to purchase 3,168 and 52,824 shares of common stock were not included in
the computation of diluted net loss per share for the nine months ended January
28, 2007, and January 29, 2006, because the company incurred a net loss for the
period.
.................................................................................
13. SEGMENT INFORMATION
The company's operations are classified into two segments: mattress fabrics and
upholstery fabrics. The mattress fabrics segment principally manufactures,
sources, and sells fabrics to bedding manufacturers. The upholstery fabrics
segment principally manufactures, sources, and sells fabrics primarily to
residential and commercial (contract) furniture manufacturers.
I-18
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial information for the company's operating segments follow:
- --------------------------------------------------------------------------------------------------------
Three months ended
(DOLLARS IN THOUSANDS) January 28, 2007 January 29, 2006
- -------------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 24,396 $ 22,681
Upholstery Fabrics 31,316 38,354
- -------------------------------------------------------------------------------------------------------
$ 55,712 $ 61,035
- -------------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 4,215 $ 3,442
Upholstery Fabrics 3,269 2,070
- -------------------------------------------------------------------------------------------------------
Total segment gross profit 7,484 5,512
Restructuring related charges (2,773) (1) (1,335) (3)
- -------------------------------------------------------------------------------------------------------
$ 4,711 $ 4,177
- -------------------------------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 1,706 $ 1,643
Upholstery Fabrics 3,765 3,717
- -------------------------------------------------------------------------------------------------------
Total segment selling, general, and
administrative expenses 5,471 5,360
Unallocated corporate expenses 895 738
Restructuring related charges 28 (1) -
- -------------------------------------------------------------------------------------------------------
$ 6,394 $ 6,098
- -------------------------------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 2,509 $ 1,799
Upholstery Fabrics (496) (1,647)
- -------------------------------------------------------------------------------------------------------
Total segment operating income 2,013 152
Unallocated corporate expenses (895) (738)
Restructuring expense (1,275) (2) (343) (4)
Restructuring related charges (2,801) (1) (1,335) (3)
- -------------------------------------------------------------------------------------------------------
$ (2,958) $ (2,264)
- -------------------------------------------------------------------------------------------------------
(1) The $2.8 million represents restructuring related charges of $2.2 million
for inventory markdowns, $665,000 for accelerated depreciation, and a
credit of $24,000 for other operating costs associated with the closing
of plant facilities. These charges relate to the Upholstery Fabrics
segment.
(2) The $1.3 million represents restructuring expenses of $1.2 million for
employee termination benefits, $272,000 for write-downs of equipment,
$181,000 for asset movement costs, $61,000 for lease termination costs,
and a credit of $455,000 for sales proceeds received on equipment with no
carrying value. These charges relate to the Upholstery Fabrics segment.
(3) The $1.3 million represents restructuring related charges of $838,000 for
inventory markdowns, $389,000 for other operating costs associated with
the closing of plant facilities, and $108,000 for accelerated
depreciation. These charges relate to the Upholstery Fabrics segment.
(4) The $343,000 represents restructuring expenses of $371,000 for asset
movement costs, $133,000 for employee termination benefits, and $51,000
for lease termination costs, a credit of $77,000 for sales proceeds
received on equipment with no carrying value, and a credit of $135,000 to
reflect current estimates of sub-lease income. These charges relate to
the Upholstery Fabrics segment.
I-19
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
Nine months ended
(DOLLARS IN THOUSANDS) January 28, 2007 January 29, 2006
- -----------------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 69,734 $ 69,586
Upholstery Fabrics 107,603 120,797
- -----------------------------------------------------------------------------------------------------------
$ 177,337 $ 190,383
- -----------------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 11,880 $ 9,839
Upholstery Fabrics 12,691 10,027
- -----------------------------------------------------------------------------------------------------------
Total segment gross profit 24,571 19,866
Restructuring related charges (3,809) (5) (3,581) (7)
- -----------------------------------------------------------------------------------------------------------
$ 20,762 $ 16,285
- -----------------------------------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 5,043 $ 5,016
Upholstery Fabrics 11,219 12,120
- -----------------------------------------------------------------------------------------------------------
Total segment selling, general, and
administrative expenses 16,262 17,136
Unallocated corporate expenses 2,920 2,322
Restructuring related charges 58 (5) 3,022 (8)
- -----------------------------------------------------------------------------------------------------------
$ 19,240 $ 22,480
- -----------------------------------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 6,837 $ 4,823
Upholstery Fabrics 1,472 (2,093)
- -----------------------------------------------------------------------------------------------------------
Total segment operating income 8,309 2,730
Unallocated corporate expenses (2,920) (2,322)
Restructuring expense (1,742) (6) (6,581) (9)
Restructuring related charges (3,867) (5) (6,603) (10)
- -----------------------------------------------------------------------------------------------------------
$ (220) $ (12,776)
- -----------------------------------------------------------------------------------------------------------
(5) The $3.9 million represents restructuring related charges of $2.3
million for inventory markdowns, $802,000 for other operating costs
associated with the closing of plant facilities, and $665,000 for
accelerated depreciation. These charges relate to the Upholstery
Fabrics segment.
(6) The $1.7 million represents restructuring expenses of $990,000 for
employee termination benefits, $914,000 for asset movement costs,
$395,000 for lease termination and other exit costs, $334,000 for
write-downs of buildings and equipment, and a credit of $890,000 for
sales proceeds on equipment with no carrying value. These charges
relate to the Upholstery Fabrics segment.
(7) The $3.6 million represents restructuring related charges of $1.9
million for accelerated depreciation, $1.2 million for inventory
markdowns, and $455,000 for other operating costs associated with the
closing of plant facilities. These charges primarily relate to the
Upholstery Fabrics segment.
(8) The $3.0 million represents accelerated depreciation. These charges
primarily relate to the Upholstery Fabrics segment.
(9) The $6.6 million represents restructuring expenses of $2.8 million for
write-downs of buildings and equipment, $1.9 million for asset movement
costs, $1.5 million for employee termination benefits, and $292,000 for
lease termination costs. These charges primarily relate to the
Upholstery Fabrics segment.
(10) The $6.6 million represents restructuring related charges of $4.9
million for accelerated deprecation, $1.2 million for inventory
markdowns, and $455,000 for other operating costs associated with the
closing of plant facilities. These charges primarily relate to the
Upholstery Fabrics segment. Balance sheet information for the company's
operating segments follow:
I-20
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- ------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 April 30, 2006
- ------------------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics
Current assets (13) $ 28,338 $ 21,179
Property, plant and equipment (11) 22,600 25,357
- ------------------------------------------------------------------------------------------
Total mattress fabrics assets 50,938 46,536
- ------------------------------------------------------------------------------------------
Upholstery Fabrics
Current assets (13) 38,134 44,563
Assets held for sale 1,231 3,111
Property, plant and equipment (12) 18,140 19,229
- ------------------------------------------------------------------------------------------
Total upholstery fabrics assets 57,505 66,903
- ------------------------------------------------------------------------------------------
Total segment assets 108,443 113,439
Non-segment assets:
Cash and cash equivalents 10,675 9,714
Deferred income taxes 30,352 27,296
Other current assets 2,710 1,287
Property, plant & equipment 44 53
Goodwill 4,114 4,114
Other assets 2,683 1,564
- ------------------------------------------------------------------------------------------
Total assets $ 159,021 $ 157,467
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Three months ended
- ------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 January 29, 2006
- ------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 78 $ 134
Upholstery Fabrics 506 256
- ------------------------------------------------------------------------------------------
$ 584 $ 390
- ------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 912 $ 965
Upholstery Fabrics 710 1,366
- ------------------------------------------------------------------------------------------
Total segment depreciation expense 1,622 2,331
Accelerated depreciation 665 108
- ------------------------------------------------------------------------------------------
$ 2,287 $ 2,439
- ------------------------------------------------------------------------------------------
I-21
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- -----------------------------------------------------------------------------------------
Nine months ended
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) January 28, 2007 January 29, 2006
- -----------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 132 $ 3,550
Upholstery Fabrics 2,497 2,263
- -----------------------------------------------------------------------------------------
$ 2,629 $ 5,813
- -----------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 2,771 $ 2,714
Upholstery Fabrics 2,215 4,582
- -----------------------------------------------------------------------------------------
Total segment depreciation expense 4,986 7,296
Accelerated depreciation 665 4,979
- -----------------------------------------------------------------------------------------
$ 5,651 $ 12,275
- -----------------------------------------------------------------------------------------
(11) Included in property, plant, and equipment are assets located in the
U.S. totaling $12.0 million and $12.9 million at January 28, 2007 and
April 30, 2006, respectively.
(12) Included in property, plant, and equipment are assets located in the
U.S. totaling $10.6 million and $13.8 million at January 28, 2007 and
April 30, 2006, respectively. Included in this U.S. property, plant,
and equipment are various other corporate allocations totaling $3.9
million and $4.1 million at January 28, 2007 and April 30, 2006,
respectively.
(13) Current assets represent accounts receivable and inventory for the
respective segment.
................................................................................
14. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No.
48") which clarifies the criteria for the recognition of tax benefits under SFAS
No. 109, "Accounting for Income Taxes." This Interpretation prescribes a
comprehensive model for financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken, or expected to be
taken, in income tax returns. FIN No. 48 is effective for fiscal years beginning
after December 15, 2006 and requires that the cumulative effect of applying its
provisions be disclosed as a one-time, non-cash charge or credit against the
opening balance of retained earnings in the year of adoption. This
Interpretation will be adopted by the company in the first quarter of fiscal
2008. The company is currently evaluating the potential impact of FIN No. 48 and
any impact on its financial position cannot be readily determined at this time.
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 consolidated financial statements.
I-22
CULP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
consolidated financial statements.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 was issued in
order to eliminate the diversity of practice surrounding how public companies
quantify financial statement misstatements. This SAB establishes a "dual
approach" methodology that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the company's
financial statements (both the statement of operations and statement of
financial position). The SEC has stated SAB No. 108 should be applied no later
than the annual financial statements for the first fiscal year ending after
November 15, 2006. SAB No. 108 permits a company to elect either a retrospective
or prospective application. Prospective application requires recording a
cumulative effect adjustment in the period of adoption, as well as detailed
disclosure of the nature and amount of each individual error being corrected
through the cumulative adjustment and how and when it arose. The company is
currently evaluating the impact, if any, the application of SAB No 108 will have
on the consolidated financial statements.
................................................................................
I-23
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report and the exhibits attached hereto contain statements that may be
deemed "forward-looking statements" within the meaning of the federal securities
laws, including the Private Securities Litigation Reform Act of 1995 (Section
27A of the Securities Act of 1933 and Section 27A of the Securities and Exchange
Act of 1934). Such statements are inherently subject to risks and uncertainties.
Further, forward looking statements are intended to speak only as of the date on
which they are made. Forward-looking statements are statements that include
projections, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often but not always
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives, and include but are not limited to
statements about expectations for the company's future operations or success,
sales, gross profit margins, operating income, SG&A or other expenses, and
earnings, as well as any statements regarding future economic or industry trends
or future developments. Factors that could influence the matters discussed in
such statements include the level of housing starts and sales of existing homes,
consumer confidence, trends in disposable income, and general economic
conditions. Decreases in these economic indicators could have a negative effect
on the company's business and prospects. Likewise, increases in interest rates,
particularly home mortgage rates, and increases in consumer debt or the general
rate of inflation, could affect the company adversely. In addition, changes in
consumer preferences for various categories of furniture coverings, as well as
changes in costs to produce such products (including import duties and quotas or
other import costs) can have significant effect on demand for the company's
products. Also, changes in the value of the U.S. dollar versus other currencies
can affect the company's financial results because a significant portion of the
company's operations are located outside the United States. Further, economic
and political instability in international areas could affect the company's
operations or sources of goods in those areas, as well as demand for the
company's products in international markets. The company's level of success in
integrating the acquisition of assets described in Item 2 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 are discussed
in Item 1A.
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. (or the "company") has two operating segments - mattress fabrics and
upholstery fabrics. The company manufactures, sources and markets fabrics that
are used primarily in the production of bedding products and residential and
commercial upholstered furniture, including mattresses, box springs, mattress
sets, sofas, recliners, chairs, loveseats, sectionals, sofa-beds, and office
seating. The company primarily markets fabrics that have broad appeal in the
"good" and "better" priced categories of furniture and bedding. Management
believes that Culp is the largest producer of mattress fabrics in North America,
as measured by total sales, and one of the two largest marketers of upholstery
fabrics for furniture in North America, again measured by total sales.
I-24
The company's executive offices are located in High Point, North Carolina. The
company was organized as a North Carolina corporation in 1972 and made its
initial public offering in 1983. Since 1997, the company has been listed on the
New York Stock Exchange and traded under the symbol "CFI." The company's fiscal
year is the 52 or 53 week period ending on the Sunday closest to April 30. The
company's nine months ended January 28, 2007, and January 29, 2006, represent 39
week periods.
The following tables set forth the company's net sales, gross profit, selling,
general and administrative expenses and operating income (loss) by segment for
the three and nine months ended January 28, 2007 and January 29, 2006.
I-25
CULP, INC. FINANCIAL INFORMATION RELEASE
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE THREE MONTHS ENDED JANUARY 28, 2007 AND JANUARY 29, 2006
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------------------------------------
Amounts Percent of Total Sales
--------------------------- ------------------------------
January 28, January 29, % Over January 28, January 29,
Net Sales by Segment 2007 2006 (Under) 2007 2006
- ------------------------------------------------ ------------- ----------- ---------- ------------- --------------
Mattress Fabrics $ 24,396 22,681 7.6 % 43.8 % 37.2 %
Upholstery Fabrics 31,316 38,354 (18.4)% 56.2 % 62.8 %
------------- ----------- ---------- ------------------------------
Net Sales $ 55,712 61,035 (8.7)% 100.0 % 100.0 %
============= =========== ========== ==============================
Gross Profit by Segment Gross Profit Margin
- ------------------------------------------------ ------------------------------
Mattress Fabrics $ 4,215 3,442 22.5 % 17.3 % 15.2 %
Upholstery Fabrics 3,269 2,070 57.9 % 10.4 % 5.4 %
------------- ----------- ---------- ------------------------------
Subtotal 7,484 5,512 35.8 % 13.4 % 9.0 %
Restructuring related charges (2,773)(1) (1,335)(3) 107.7 % (5.0)% (2.2)%
------------- ----------- ---------- ------------------------------
Gross Profit $ 4,711 4,177 12.8 % 8.5 % 6.8 %
============= =========== ========== ==============================
Selling, General and Administrative expenses
by Segment Percent of Sales
- ------------------------------------------------ ------------------------------
Mattress Fabrics $ 1,706 1,643 3.8 % 7.0 % 7.2 %
Upholstery Fabrics 3,765 3,717 1.3 % 12.0 % 9.7 %
Unallocated Corporate expenses 895 738 21.3 % 1.6 % 1.2 %
------------- ----------- ---------- ------------------------------
6,366 6,098 4.4 % 11.4 % 10.0 %
Restructuring related charges 28 (1) - 100.0 % 0.1 % 0.0 %
------------- ----------- ---------- ------------------------------
Selling, General and Administrative expenses $ 6,394 6,098 4.9 % 11.5 % 10.0 %
============= =========== ========== ==============================
Operating Income (loss) by Segment Operating Income (Loss) Margin
- ------------------------------------------------ ------------------------------
Mattress Fabrics $ 2,509 1,799 39.5 % 10.3 % 7.9 %
Upholstery Fabrics (496) (1,647) 69.9 % (1.6)% (4.3)%
Unallocated corporate expenses (895) (738) 21.3 % (1.6)% (1.2)%
------------- ----------- ---------- ------------------------------
Subtotal 1,118 (586) (290.8)% 2.0 % (1.0)%
Restructuring expense (1,275)(2) (343)(4) 271.7 % (2.3)% (0.6)%
Restructuring related charges (2,801)(1) (1,335)(3) 109.8 % (5.0)% (2.2)%
------------- ----------- ---------- ------------------------------
Loss from operations $ (2,958) (2,264) (30.7)% (5.3)% (3.7)%
============= =========== ========== ==============================
Depreciation by Segment
- ------------------------------------------------
Mattress Fabrics $ 912 965 (5.5)%
Upholstery Fabrics 710 1,366 (48.0)%
------------- ----------- ----------
Subtotal 1,622 2,331 (30.4)%
Accelerated Depreciation 665 108 515.7 %
------------- ----------- ----------
Total Depreciation $ 2,287 2,439 (6.2)%
============= =========== ==========
Notes:
(1) The $2.8 million represents restructuring related charges of $2.2 million
for inventory markdowns, $665,000 for accelerated deprecation, and a credit
of $24,000 for other operating costs associated with the closing of plant
facilities.
(2) The $1.3 million represents restructuring expenses of $1.2 million for
employee termination benefits, $272,000 for write-downs of equipment,
$181,000 for asset movement costs, $61,000 for lease termination costs, and
a credit of $455,000 for sales proceeds received on equipment with no
carrying value.
(3) The $1.3 million represents restructuring related charges of $838,000 for
inventory markdowns, $389,000 for other operating costs associated with the
closing of plant facilities, and $108,000 for accelerated depreciation.
(4) The $343,000 represents restructuring expenses of $371,000 for asset
movement costs, $133,000 for employee termination benefits, $51,000 for
lease termination costs, a credit of $77,000 for sales proceeds received on
equipment with no carrying value, and a credit of $135,000 to reflect
current estimates of sub-lease income.
I-26
CULP, INC. FINANCIAL INFORMATION RELEASE
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE NINE MONTHS ENDED JANUARY 28, 2007 AND JANUARY 29, 2006
(Amounts in thousands)
NINE MONTHS ENDED (UNAUDITED)
-------------------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- -----------------------------
January 28, January 29, % Over January 28, January 29,
Net Sales by Segment 2007 2006 (Under) 2007 2006
- ---------------------------------------------- ------------ ---------- ----------- ------------- -------------
Mattress Fabrics $ 69,734 69,586 0.2 % 39.3 % 36.6 %
Upholstery Fabrics 107,603 120,797 (10.9)% 60.7 % 63.4 %
------------ ---------- ----------- ------------- -------------
Net Sales $ 177,337 190,383 (6.9)% 100.0 % 100.0 %
============ ========== =========== ============= =============
Gross Profit by Segment Gross Profit Margin
- ---------------------------------------------- -----------------------------
Mattress Fabrics $ 11,880 9,839 20.7 % 17.0 % 14.1 %
Upholstery Fabrics 12,691 10,027 26.6 % 11.8 % 8.3 %
------------ ---------- ----------- ------------- -------------
Subtotal 24,571 19,866 23.7 % 13.9 % 10.4 %
Restructuring related charges (3,809)(1) (3,581) (3) 6.4 % (2.1)% (1.9)%
------------ ---------- ----------- ------------- -------------
Gross Profit $ 20,762 16,285 27.5 % 11.7 % 8.6 %
============ ========== =========== ============= =============
Selling, General and Administrative expenses
by Segment Percent of Sales
- ---------------------------------------------- ---------------------------
Mattress Fabrics $ 5,043 5,016 0.5 % 7.2 % 7.2 %
Upholstery Fabrics 11,219 12,120 (7.4)% 10.4 % 10.0 %
Unallocated Corporate expenses 2,920 2,322 25.8 % 1.6 % 1.2 %
------------ ---------- ----------- ------------- -------------
Subtotal 19,182 19,458 (1.4)% 10.8 % 10.2 %
Restructuring related charges 58 (1) 3,022 (4) (98.1)% 0.0 % 1.6 %
------------ ---------- ----------- ------------- -------------
Selling, General and Administrative expenses $ 19,240 22,480 (14.4)% 10.8 % 11.8 %
============ ========== =========== ============= =============
Operating Income (loss) by Segment Operating Income (Loss) Margin
- ---------------------------------------------- ------------------------------
Mattress Fabrics $ 6,837 4,823 41.8 % 9.8 % 6.9 %
Upholstery Fabrics 1,472 (2,093) 170.3 % 1.4 % (1.7)%
Unallocated corporate expenses (2,920) (2,322) 25.8 % (1.6)% (1.2)%
------------ ---------- ----------- ------------- -------------
Subtotal 5,389 408 1,220.8 % 3.0 % 0.2 %
Restructuring expense (1,742)(2) (6,581)(5) (73.5)% (1.0)% (3.5)%
Restructuring related charges (3,867)(1) (6,603)(3)(4) (41.4)% (2.2)% (3.5)%
------------ ---------- ----------- ------------- -------------
Loss from operations $ (220) (12,776) 98.3 % (0.1)% (6.7)%
============ ========== =========== ============= =============
Depreciation by Segment
- ----------------------------------------------
Mattress Fabrics $ 2,771 2,714 2.1 %
Upholstery Fabrics 2,215 4,582 (51.7)%
------------ ---------- -----------
Subtotal 4,986 7,296 (31.7)%
Accelerated Depreciation 665 4,979 (86.6)%
------------ ---------- -----------
Total Depreciation $ 5,651 12,275 (54.0)%
============ ========== ===========
Notes:
(1) The $3.9 million represents restructuring related charges of $2.3 million
for inventory markdowns, $802,000 for other operating costs associated with
the closing of plant facilities, and $665,000 for accelerated depreciation.
(2) The $1.7 million represents restructuring expenses of $990,000 for employee
termination benefits, $914,000 for asset movement costs, $395,000 for lease
termination and other exit costs, $334,000 for write-downs of buildings and
equipment, and a credit of $890,000 for sales proceeds on equipment with no
carrying value.
(3) The $3.6 million represents restructuring related charges of $1.9 million
for accelerated depreciation, $1.2 million for inventory markdowns, and
$455,000 other operating costs associated with the closing of plant
facilities.
(4) The $3.0 million represents accelerated depreciation.
(5) The $6.6 million represents restructuring charges of $2.8 million for
write-downs of buildings and equipment, $1.9 million for asset movement
costs, $1.5 million for employee termination benefits, and $292,000 for
lease termination costs.
I-27
THREE AND NINE MONTHS ENDED JANUARY 28, 2007 COMPARED WITH THE THREE AND NINE
MONTHS ENDED JANUARY 29, 2006
For the third quarter of fiscal 2007, net sales were $55.7 million compared to
$61.0 million for the third quarter of fiscal 2006. The company reported a net
loss of $2.2 million or $0.19 per share diluted, in the third quarter of fiscal
2007, which included restructuring and related pre-tax charges of $4.1 million.
Also, included in these results is a non-cash income tax charge of $452,000 or
$0.04 per diluted share, related to the exercise of non-qualified stock options.
The company reported a net loss of $2.2 million, or $0.19 per share diluted, in
the third quarter of fiscal 2006, which included restructuring and related
pre-tax charges of $1.7 million.
For the first nine months of fiscal 2007, net sales were $177.3 million compared
to $190.4 million for the first nine months of fiscal 2006. The company reported
a net loss of $1.3 million or $0.11 per share diluted, for the first nine months
of fiscal 2007, which included restructuring and related pre-tax charges of $5.6
million. The company reported a net loss of $10.3 million, or $0.89 per share
diluted, for the first nine months of fiscal 2006, which included restructuring
and related pre-tax charges of $13.2 million.
RESTRUCTURING AND RELATED CHARGES
During the third quarter of fiscal 2007, total restructuring and related net
charges incurred were $4.1 million, of which, $2.2 million related to inventory
markdowns, $1.2 million related to employee termination benefits, $665,000
related to accelerated depreciation, $272,000 for write-downs of equipment,
$181,000 for asset movement costs, $61,000 for lease termination costs, a net
credit of $24,000 for other operating costs associated with the closing of plant
facilities, and a credit of $455,000 for sales proceeds received on equipment
with no carrying value. Of the total net charge, $2.8 million was recorded in
cost of sales, $28,000 was recorded in selling, general, and administrative
expenses, and $1.3 million was recorded in restructuring expense in the 2007
Consolidated Statement of Net Loss. These charges relate to the Upholstery
Fabrics segment. During the third quarter of fiscal 2006, total restructuring
and related net charges incurred were $1.7 million, of which, $838,000 related
to inventory markdowns, $389,000 for other operating costs associated with the
closing of plant facilities, $371,000 for asset movement costs, $133,000 for
employee termination benefits, $108,000 for accelerated depreciation, $51,000
for lease termination costs, a credit of $77,000 for sales proceeds received on
equipment with no carrying value, and a credit of $135,000 to reflect current
estimates of sub-lease income. Of this total net charge, $1.3 million was
recorded in cost of sales, and $343,000 was recorded in restructuring expense in
the 2006 Consolidated Statement of Net Loss. These charges relate to the
Upholstery Fabrics segment.
During the first nine months of fiscal 2007, total restructuring and related net
charges incurred were $5.6 million, of which, $2.3 million related to inventory
markdowns, $990,000 related to employee termination benefits, $914,000 related
to asset movement costs, $802,000 represents operating costs associated with the
closing of plant facilities, $665,000 for accelerated depreciation, $395,000 for
lease termination and other exit costs, $334,000 for write-downs of buildings
and equipment, and a credit of $890,000 for sales proceeds received on equipment
with no carrying value associated with closed plant facilities. Of the total net
charge, $3.8 million was recorded in cost of sales, $58,000 was recorded in
selling, general, and administrative expenses, and $1.7 million was recorded in
restructuring expense in the 2007 Consolidated Statement of Net Loss. These
charges relate to the Upholstery Fabrics segment. During the first nine months
of fiscal 2006, total restructuring and related net charges incurred were $13.2
million, of which, $4.9 million related to accelerated depreciation, $2.8
million related to write-downs of buildings and equipment, $1.9 million related
to asset movement costs, $1.5 million related to employee termination benefits,
$1.2 million related to inventory markdowns, $455,000 related to other operating
costs associated with the closing of plant facilities, and $292,000 for lease
termination costs. Of the total net charge, $3.6 million was recorded in cost of
sales, $3.0 million was recorded in selling, general, and administrative
expenses, and $6.6 million was recorded in restructuring expense in the 2006
Consolidated Statement of Net Loss. These charges primarily relate to the
Upholstery Fabrics segment.
I-28
MATTRESS FABRICS SEGMENT
ASSET ACQUISITION
In January 2007, the company closed on an Asset Purchase Agreement (the
"Agreement") for the purchase of certain assets from International Textile
Group, Inc. ("ITG") related to the mattress fabrics product line of ITG's
Burlington House division. The company purchased ITG's mattress fabrics finished
goods inventory, a credit on future purchases of inventory manufactured by ITG
during the transition period, along with certain proprietary rights (patterns,
copyrights, artwork, and the like) and other records that relate to ITG's
mattress fabrics product line. The company did not purchase any accounts
receivable, property, plant, and equipment, and did not assume any liabilities
other than certain purchase orders.
The consideration given for this transaction after adjustments to the closing
date inventory as defined by the Agreement, was $8.1 million. Payment consisted
of $2.5 million in cash financed by a term loan, the issuance of 798,582 shares
of the company's common stock with a fair value of $5.1 million, and the company
also incurred direct acquisition costs relating to legal, accounting, and other
professional fees of $515,000. The total transaction cost allocation allocation
is not final based on the ultimate settlement of certain direct acquisition
costs. The final allocation may impact the ultimate valuation of the assets
acquired. The total transaction cost was allocated as follows:
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) Fair Value
- ------------------------------------------------------------------------------
Inventories $ 4,754
Other current assets (credit on future purchases of inventory) 2,210
Non-compete agreement 1,148
- ------------------------------------------------------------------------------
$ 8,112
- ------------------------------------------------------------------------------
The company recorded the non-compete agreement at its fair value based on
various valuation techniques, which is reflected in other assets in the
accompanying consolidated balance sheet. The non-compete agreement will be
amortized on a straight-line basis over the four year life of the agreement.
Amortization expense during the next five fiscal years follows: FY 2007 -
$72,000; FY 2008 - $287,000; FY 2009 - $287,000; FY 2010 - $287,000; and FY 2011
- - $215,000.
The Agreement requires ITG to provide certain transition services to the company
and will manufacture goods for the company for a limited period of time
(expected to be approximately 120 days) to support the company's efforts to
transition the former ITG mattress fabrics products into the company's
operations. The company does not plan to hire any of ITG's employees after the
transition is completed. ITG has also agreed that it will not compete with the
company in the mattress fabrics business for a period of four years, except for
mattress fabrics production in China for final consumption in China (meaning the
mattress fabric and the mattress on which it is used is sold only in China).
In connection with the Agreement, the company issued 798,582 shares of common
stock. As a result, the company entered into a Registration Rights and
Shareholder Agreement ("the Registration Agreement"), which relates to the
shares of the common stock issued by the company to ITG (the "Shares"). Under
the terms of the Registration Agreement, ITG may demand that the company
register the Shares with the Securities and Exchange Commission, which would
allow the Shares to be sold to the public after the registration statement
becomes effective. The Registration Agreement also contains provisions pursuant
to which ITG will agree not to purchase additional company shares or take
certain other actions to influence control of the company, and will agree to
vote the shares in accordance with recommendations of the company's board of
directors.
I-29
The acquisition of ITG's mattress fabrics product line enhances the company's
competitive position in the mattress ticking industry. Management believes this
transaction provides the opportunity to increase the company's annual sales by
approximately $30 to $40 million, with only a modest investment in fixed assets.
The company will be transitioning the ITG production to the company's facilities
and suppliers over the next several months. The company estimates that one-time
transition costs related to the acquisition will be approximately $750,000, of
which approximately $650,000 will be incurred in the fourth quarter of fiscal
2007 and approximately $100,000 will be incurred in the first quarter of fiscal
2008. The company has the necessary capacity in place to absorb the additional
business volume resulting from this transaction.
NET SALES -- Mattress fabric (known as mattress ticking) sales for the third
quarter of fiscal 2007 increased 7.6% to $24.4 million compared to $22.7 million
for the third quarter of fiscal 2006. These results include $1.0 million in
incremental sales related to the company's acquisition of ITG's mattress fabrics
product line. Mattress fabric sales accounted for approximately 44% of total net
sales for the third quarter of fiscal 2007 compared to 37% for the third quarter
of fiscal 2006. Mattress ticking yards sold during the third quarter of fiscal
2007 were 10.5 million compared to 9.6 million yards in the third quarter of
fiscal 2006, an increase of 9%. The average selling price at the end of the
third quarter of fiscal 2007 was $2.32 per yard and was essentially unchanged
for the third quarter of fiscal 2007 compared to fiscal 2006. For the first nine
months of fiscal 2007, net sales were $69.7 million compared to $69.6 million
for the first nine months of fiscal 2006. Mattress ticking yards sold during the
first nine months of fiscal 2007 were 30.2 million compared to 30.8 million for
the first nine months of fiscal 2006, a decrease of 2%. For the first nine
months of fiscal 2007, the average selling price for mattress fabrics was $2.31
per yard compared to $2.26 per yard for the first nine months of fiscal 2006, an
increase of 2%. This increase is due to the shift in product mix to increased
sales of substantially higher priced knitted ticking.
OPERATING INCOME -- For the third quarter of fiscal 2007, the mattress fabrics
segment reported operating income of $2.5 million, or 10.3% of net sales,
compared to $1.8 million, or 7.9% of net sales, for the third quarter of fiscal
2006. The company showed significant improvement in operating performance in
mattress fabrics over the same period a year ago, with operating income up
nearly 40% and operating margins over 10% for the second consecutive quarter.
Operating margins improved due to productivity gains from the $10.0 million
capital project implemented over the past 2 years. The company continues to see
higher sales and gross margins in knitted ticking and expects this product line
to represent a higher percentage of our mattress ticking business in the future.
The company is experiencing a growing trend with our customers to use more knits
on the top of the mattress and woven jacquards on the sides. For the first nine
months of fiscal 2007, operating income was $6.8 million, or 9.8% of net sales,
compared to $4.8 million, or 6.9% of net sales, for the first nine months of
fiscal 2006. The trends (and the factors causing those trends) for the first
nine months of fiscal 2007 compared with the first nine months of fiscal 2006
parallel those for the third quarter of fiscal 2007 compared with the third
quarter of fiscal 2006.
SEGMENT ASSETS -- Segment assets consist of accounts receivable, inventory, and
property, plant, and equipment. As of January 28, 2007, accounts receivable and
inventory totaled $28.3 million compared to $21.2 million at April 30, 2006.
This increase is primarily attributable to the purchase of finished goods
inventories from ITG. Also as of January 28, 2007, property, plant and equipment
totaled $22.6 million compared to $25.4 million at April 30, 2006. Included in
property, plant, and equipment are assets located in the U.S. totaling $12.0
million and $12.9 million at January 28, 2007, and April 30, 2006, respectively.
I-30
UPHOLSTERY FABRICS SEGMENT
NET SALES -- Upholstery fabric sales for the third quarter of fiscal 2007
decreased 18.4% to $31.3 million compared with $38.4 million in the third
quarter of fiscal 2006. Upholstery fabric yards sold during the third quarter of
fiscal 2007 were 7.6 million compared to 9.2 million in the third quarter of
fiscal 2006, a decline of 17%. The average selling price was $4.10 per yard for
the third quarter of fiscal 2007, compared to $4.16 per yard in the third
quarter of fiscal 2006, a decrease of 1%. Sales of upholstery fabrics reflect
higher sales of non-U.S. produced fabrics, and continued very weak demand
industry wide for U.S. produced fabrics, driven by consumer preference for
leather and suede furniture and other imported fabrics, including an increasing
amount of cut and sewn kits. While the company continues to see growth in sales
of non-U.S. produced upholstery fabrics, the pace of growth has slowed down.
Sales of non-U.S. produced fabrics were $17.4 million in the third quarter of
fiscal 2007 compared with $14.7 million in the third quarter of fiscal 2006, an
increase of 18%. Sales of U.S. produced fabrics decreased 41% to $14.0 million
in the third quarter of fiscal 2007 compared to $23.6 million in the third
quarter of fiscal 2006.
For the first nine months of fiscal 2007, net sales decreased 10.9% to $107.6
million compared to $120.8 million for the first nine months of fiscal 2006.
Upholstery fabric yards sold during the first nine months of fiscal 2007 were
25.8 million compared to 28.5 million for the first nine months of fiscal 2006,
a decline of 9%.The average selling price for the first nine months of fiscal
2007 was $4.17 per yard compared to $4.24 per yard for the first nine months of
fiscal 2006, a decrease of 2%. Sales of non-U.S. produced fabrics were $61.5
million for the first nine months of fiscal 2007 compared with $38.9 million for
the first nine months of fiscal 2006, an increase of 58% over the same period
last year. Sales of U.S. produced fabrics decreased 44% to $46.1 million for the
first nine months of fiscal 2007 compared with $81.9 million for the first nine
months of fiscal 2006. The trends (and the factors causing those trends) for the
first nine months of fiscal 2007 compared with the first nine months of fiscal
2006 parallel those for the third quarter of fiscal 2007 compared with the third
quarter of fiscal 2006.
OPERATING INCOME (LOSS) - Operating loss for the third quarter of fiscal 2007
was $496,000 a significant improvement compared with an operating loss of $1.6
million for the third quarter of fiscal 2006. These results reflect higher gross
profit on non-U.S. produced fabrics but continued low gross profit levels
related to U.S. produced fabrics. Operating income for the first nine months of
fiscal 2007 was $1.5 million compared with an operating loss of $2.1 million for
the first nine months of fiscal 2006. The trends (and the factors causing those
trends) for the first nine months of fiscal 2007 compared with the first nine
months of fiscal 2006 parallel those for the third quarter of fiscal 2007
compared with the third quarter of fiscal 2006.
NON-U.S. PRODUCED SALES - Net sales of upholstery fabrics produced outside the
company's U.S. manufacturing operations accounted for approximately 55% of total
upholstery fabric sales in the third quarter of 2007, compared to 38% for the
third quarter of fiscal 2006. Net sales of upholstery fabrics produced outside
the company's U.S. manufacturing operations accounted for approximately 57% of
total upholstery fabric sales for the first nine months of fiscal 2007, compared
to 32% for the first nine months of fiscal 2006. The company has established an
operation near Shanghai, China, designed to accommodate the growing customer
demand for products sourced outside the U.S. The company is aggressively
expanding its capabilities in China with a strong focus on product innovation,
quality, and global logistics. During fiscal 2007, this operation has
significantly increased its output of cut and sewn kits, started up its own
velvet manufacturing, and built a 130,000 square foot fabric distribution
center. The company now employs approximately 450 people in China and has five
buildings approximating a total of 300,000 square feet.
U.S. PRODUCED SALES - Since the beginning of fiscal 2007, the company has made
considerable progress in changing its product strategy, reducing manufacturing
complexities, and improving its cost structure. However, the declining sales
volume has continued to affect the profitability of the company's overall
upholstery fabrics business. In December 2006, the company's board of directors
approved a restructuring plan to further consolidate its U.S. upholstery fabrics
manufacturing facilities and outsource its specialty yarn production. This
process involves closing the company's weaving plant located in Graham, North
Carolina, and closing its yarn plant located in Lincolnton, North Carolina, and
transferring certain production from the Graham plant to the company's Anderson,
South Carolina, and Shanghai, China, facilities, as well as a small portion to
contract weavers. Once this restructuring initiative is complete, which is
expected to be the end of fiscal 2007, the company will have one U.S. upholstery
fabrics plant in Anderson, which will produce velvets and a limited amount
decorative fabrics. This facility has a book value of fixed assets of
approximately $2.2 million. In addition, the company intends to sell certain
real estate and equipment associated with its plants in Graham and Lincolnton
after production at those plants has ended. At that time, these assets will be
classified as held for sale and are estimated to have a fair value of
approximately $1 million. The company continues to consolidate its U.S.
manufacturing operations and make greater use of lower-cost manufacturing
alternatives, with the goal of reducing operating costs and improving domestic
capacity utilization.
I-31
As a result of the continuing sharp declines in demand for U.S. produced
fabrics, management will continue to evaluate its domestic strategy and
production requirements. Management remains committed to take whatever
additional steps are necessary to achieve profitable U.S. upholstery fabric
operations, and the company could take additional restructuring actions. The
company could experience additional markdowns of its inventory and write-downs
of its property, plant, and equipment from any new restructuring initiatives.
SEGMENT ASSETS -- Segment assets consist of accounts receivable, inventory, and
property, plant, and equipment. As of January 28, 2007, accounts receivable and
inventory totaled $38.1 million compared to $44.6 million at April 30, 2006. As
of January 28, 2007, assets held for sale totaled $1.2 million compared to $3.1
million at April 30, 2006. The company received sales proceeds of $2.4 million
on assets held for sale during the nine month period ended January 28, 2007. The
company expects these assets held for sale as of January 28, 2007, to be sold
over the next twelve months. As of January 28, 2007, property, plant, and
equipment totaled $18.1 million compared to $19.2 million at April 30, 2006.
Included in property, plant, and equipment are assets located in the U.S.
totaling $10.6 million and $13.8 million at January 28, 2007, and April 30,
2006, respectively. Included in this U.S. property, plant, and equipment are
corporate allocations totaling $3.9 million and $4.1 million at January 28,
2007, and April 30, 2006, respectively.
OTHER (INCOME) EXPENSE CATEGORIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general, and
administrative expenses were $6.4 million for the third quarter of fiscal 2007
compared with $6.1 million for the third quarter of fiscal 2006. Selling,
general, and administrative expenses were $19.2 million for the first nine
months of fiscal 2007 compared with $22.5 million for the first nine months of
fiscal 2006. Included in the $22.5 million for the first nine months of fiscal
2006 was $3.0 million in accelerated depreciation associated with the company's
design and distribution centers sold in June of 2005.
The company adopted SFAS No. 123R as of the beginning of the current fiscal
year, which requires all share-based payments to be recognized as expense over
the requisite service period based upon values as of the grant dates. Under the
provisions of SFAS No. 123R, total stock-based compensation expense was $406,000
and $119,000 for the nine-month and three-month periods ended January 28, 2007.
The company recorded $139,000 and $35,000 of stock-based compensation expense
for stock options accounted for under the provisions of APB Opinion No.25 for
the nine-month and three-month periods ended January 29, 2006.
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INTEREST EXPENSE (INCOME) -- Interest expense for the third quarter of fiscal
2007 was $952,000 compared to $1.1 million for the third quarter of fiscal 2006.
Interest expense for the first nine months of fiscal 2007 was $2.8 million
compared to $3.0 million for the first nine months of fiscal 2006. The lower
interest expense for fiscal 2007 primarily reflects lower outstanding balances
on the company's unsecured senior term notes. Interest income for the third
quarter of fiscal 2007 was $50,000 compared with $43,000 for the third quarter
of fiscal 2006. Interest income for the first nine months of fiscal 2007 was
$147,000 compared with $78,000 for the first nine months of fiscal 2006. The
increase in interest income for fiscal 2007 reflects higher balances invested in
money market funds.
OTHER (INCOME) EXPENSE - Other income for the third quarter of fiscal 2007 was
$157,000 compared to other expense of $135,000 for the third quarter of fiscal
2006. Other income for the first nine months of fiscal 2007 was $98,000 compared
to other expense of $481,000 for the first nine months of fiscal 2006. 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 (loss)
before income taxes) for the third quarter of fiscal 2007 was an income tax
benefit of 40.0% compared with 36.6% for the third quarter of fiscal 2006. The
effective tax rate for the first nine months of fiscal 2007 was an income tax
benefit of 54.7% compared with 36.4% for the first nine months of fiscal 2006.
Changes in the effective income tax rate reflect losses from the company's U.S.
operations due to its restructuring activities, lower income tax rates on income
from foreign sources, and income tax expense of $452,000 or $0.04 per diluted
share for the exercise of share options relating to the company's non-qualified
stock option plan in the third quarter of fiscal 2007.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY -- The company's sources of liquidity include cash and cash
equivalents, cash flow from operations, proceeds from the sale of buildings and
equipment related to closed plant facilities, and amounts available under its
revolving credit line. These sources have been adequate for day-to-day
operations and capital expenditures. Cash and cash equivalents were $10.7
million and $12.9 million at January 28, 2007 and April 30, 2006, respectively.
Cash flow provided by operating activities for the first nine months of fiscal
2007 was $4.4 million. Capital expenditures were $2.5 million, most of which
related to the company's China operations. Payments on vendor-financed capital
expenditures were $927,000 and payments on long-term debt were $3.5 million.
Proceeds from the sale of buildings and equipment as part of the company's
restructuring activities were $3.3 million, and proceeds from common stock
issued in connection with stock option exercises were $194,000. The company paid
the remaining $4.5 million due in March of 2007 on February 20, 2007.
WORKING CAPITAL -- Accounts receivable as of January 28, 2007, decreased 16.6%
in comparison to January 29, 2006. Days sales outstanding totaled 36 days at
January 28, 2007, compared with 39 days at January 29, 2006. Inventories at
January 28, 2007, increased 1.5% from January 29, 2006. Inventory turns for the
third quarter of fiscal 2007 were 5.3 versus 5.0 for the third quarter of fiscal
2006. Operating working capital (comprised of accounts receivable and
inventories, less trade accounts payable) was $48.4 million at January 28, 2007,
down from $49.9 million at January 29, 2006.
I-33
FINANCING ARRANGEMENTS
UNSECURED TERM NOTES
The company's unsecured term notes (the "Notes") have an outstanding balance of
$39.4 million as of January 28, 2007 and are payable over an average remaining
term of 2.5 years beginning February 2007 through March 2010. As of January 28,
2007, the principal payments that are required to be paid in periodic
installments over the next four years are as follows: Year 1 - $4.5 million;
Year 2 - $19.9 million; Year 3 - $7.5 million; and Year 4 - $7.5 million.
On December 6, 2006, the company entered into a Second Amendment to Note
Purchase Agreements (the "Amendment"). Upon execution of this amendment, the
company prepaid $3.0 million in principal amount and interest on the Notes,
without prepayment penalty or "make whole" premium. The Amendment raised the
interest rate from 7.76% to 8.80% on the remaining outstanding Notes and allows
for an increase in the amount of other debt to be incurred by the company,
including a provision that allows for debt of up to $5 million in the company's
China subsidiary. The Amendment changed the financial covenants applicable to
the company to provide additional flexibility to account for recent changes that
the company has made or could make to its business and the accounting
consequences of those changes. Beginning with the third quarter of fiscal 2007,
these changes exclude from the financial covenants, all restructuring and
related charges associated with the U.S. upholstery fabrics' operations, and any
valuation allowance, if needed, against the company's net deferred tax assets
from U.S. operations. The Amendment also provides for prepayments of the Notes
(at the option of the noteholders and without prepayment penalty) to the extent
that the company's cash balances exceed $8 million at the end of each fiscal
quarter. The company paid the remaining $4.5 million due in March of 2007 on
February 20, 2007, as part of this prepayment provision.
REAL ESTATE LOAN - I
The company has a real estate loan with an outstanding balance of $4.1 million
as of January 28, 2007. This loan agreement 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 London Interbank Offered Rate plus an
adjustable margin based on the company's debt/EBITDA ratio, as defined in the
agreement, and is payable in varying monthly installments through September
2010, with a final payment of $3.3 million in October 2010.
REAL ESTATE LOAN - II
On January 22, 2007, the company entered into an agreement with a bank to
provide for 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 London Interbank Offered Rate plus 3%. This agreement requires the
company to pay interest monthly with the entire principal amount of $2.5 million
due on June 30, 2010.
CANADIAN GOVERNMENT LOANS
In November 2005, the company entered into an agreement with the Canadian
government to provide for a term loan in the amount of $680,000. The proceeds
are to partially finance capital expenditures at the company's facility located
in Quebec, Canada. This loan is non-interest bearing and is payable in 48 equal
monthly installments commencing December 1, 2009. In addition to the term loan
entered into in November 2005, the company had an existing non-interest bearing
term loan with the Canadian government which was paid in May 2006.
I-34
REVOLVING CREDIT AGREEMENT -UNITED STATES
On January 22, 2007, the company entered into a Tenth Amendment to this
unsecured credit agreement dated August 23, 2002. This amendment reduced the
line of credit available from $8.0 million to $6.5 million, including letters of
credit up to $5.5 million and extended the term of the credit agreement from
August 31, 2007 to December 31, 2007. The amendment also removed the liquidity
provision that required the company to maintain collected deposit balances of at
least $2.0 million. It also amended certain other financial covenants as defined
in the agreement. Borrowings under the credit facility bear interest at the
one-month London Interbank Offered Rate plus an adjustable margin based on the
company's debt/EBITDA ratio, as defined in the agreement. As of January 28,
2007, there were $2.4 million in outstanding letters of credit (almost all of
which related to workers compensation) and no borrowings outstanding under the
agreement.
REVOLVING CREDIT AGREEMENT - CHINA
On February 1, 2007, the company's China subsidiary entered into an unsecured
credit agreement with a bank 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 fixed
annual rate of 5.8%. As of March 13, 2007, approximately $1.3 million was
outstanding under the agreement.
OVERALL
The company's loan agreements require that the company maintain compliance with
certain financial ratios. At January 28, 2007, the company was in compliance
with these financial covenants.
As of January 28, 2007, the principal payment requirements of long-term debt
during the next five years are: Year 1 - $4.7 million; Year 2 - $20.1 million;
Year 3 - $7.8 million; Year 4 - $13.5 million; Year 5 - $169,000; and thereafter
- - $480,000.
CAPITAL EXPENDITURES -- Capital spending for the first nine months of fiscal
2007 was $2.5 million, most of which related to the company's China operations.
The company expects capital spending not to exceed $3.0 million in fiscal 2007.
The company's capital budget for fiscal 2008 is $4.0 million, of which
approximately $2.5 million and $1.5 million is for the mattress fabrics and
upholstery fabrics segments, respectively. Depreciation for the first nine
months of fiscal 2007 was $5.7 million, of which, $665,000 relates to
accelerated depreciation. The company estimates depreciation for all of fiscal
2007 to be $8.5 million, which includes, $2.0 million for accelerated
depreciation. The company estimates depreciation for all of fiscal 2008 to be
approximately $6.0 million of which slightly more than half is attributable to
the mattress fabric segment. The company expects that the availability of funds
under the revolving credit line and cash flow from operations will be sufficient
to fund its capital needs.
LIQUIDITY REQUIREMENTS -- As indicated earlier, the company's sources of
liquidity include cash and cash equivalents, cash flow from operations, proceeds
from the sale of buildings and equipment related to closed plant facilities and
amounts available under its revolving credit line. The company believes its
sources of liquidity continue to be adequate to meet its current operating
needs. In addition, the company is taking further steps to improve its
liquidity, including ongoing efforts to reduce inventories and operating
expenses. However, the company's cash position could be adversely affected by
factors beyond its control, such as weakening industry demand, delays in receipt
of payment on accounts receivable and the availability of trade credit.
I-35
CRITICAL ACCOUNTING POLICIES AND RECENT ACCOUNTING DEVELOPMENTS
U.S. generally accepted accounting principles require the company to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Some of these estimates require
difficult, subjective and/or complex judgments about matters that are inherently
uncertain, and as a result actual results could differ significantly from those
estimates. Due to the estimation processes involved, management considers the
following summarized accounting policies and their application to be critical to
understanding the company's business operations, financial condition and results
of operations.
ACCOUNTS RECEIVABLE - ALLOWANCE FOR DOUBTFUL ACCOUNTS. Substantially all of the
company's accounts receivable are due from residential and commercial furniture
and bedding manufacturers. Ownership of these manufacturers is increasingly
concentrated and certain bedding manufacturers have a high degree of leverage.
As of January 28, 2007, accounts receivable from furniture manufacturers totaled
approximately $13.4 million, and from bedding manufacturers approximately $10.3
million. Additionally, as of January 28, 2007, the aggregate accounts receivable
balance of the company's ten largest customers was $9.9 million, or 42% of trade
accounts receivable.
The company continuously performs credit evaluations of its customers,
considering numerous inputs including customers' financial position, past
payment history, cash flows and management capability; historical loss
experience; and economic conditions and prospects. Once evaluated, each customer
is assigned a credit grade. Credit grades are adjusted as warranted. Significant
management judgment and estimates must be used in connection with establishing
the reserve for allowance for doubtful accounts. While management believes that
adequate allowances for doubtful accounts have been provided in the consolidated
financial statements, it is possible that the company could experience
additional unexpected credit losses.
INVENTORY VALUATION. The company operates as a "make-to-order" and
"make-to-stock" business. Although management closely monitors demand in each
product area to decide which patterns and styles to hold in inventory, the
increasing availability of low cost imports and the gradual shifts in consumer
preferences expose the company to write-downs of inventory.
Management continually examines inventory to determine if there are indicators
that the carrying value exceeds its net realizable value. Experience has shown
that the most significant indicator of the need for inventory write-downs is the
age of the inventory. As a result, the company provides inventory valuation
write-downs based upon set percentages for inventory aging categories, generally
using six, nine, twelve and fifteen month categories. While management believes
that adequate write-downs for excess and obsolete inventory have been made in
the consolidated financial statements, significant unanticipated changes in
demand or changes in consumer tastes and preferences could result in additional
excess and obsolete inventory in the future.
LONG-LIVED ASSETS. The company follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes an impairment accounting model for long-lived assets to be held and
used, disposed of by sale, or disposed of by abandonment or other means.
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. During the first nine
months of fiscal 2007, no events or changes in circumstances occurred that would
require the company to test for impairment. Unforeseen events and changes in
circumstances and market conditions could negatively affect the value of assets
and result in an impairment charge.
I-36
The determination of future operating cash flows involves considerable
estimation and judgment about future market conditions, future sales and
profitability, and future asset utilization. Although the company believes it
bases its impairment testing as required by SFAS No. 144 on reasonable estimates
and assumptions, the use of different estimates and assumptions, or a decision
to dispose of substantial portions of these assets, could result in materially
different results.
GOODWILL. As of January 28, 2007, the company's remaining $4.1 million of
goodwill relates to the mattress fabrics segment. The determination of fair
value involves considerable estimation and judgment. In particular, determining
the fair value of a business unit involves, among other things, developing
forecasts of future cash flows and appropriate discount rates. During the first
nine months of fiscal 2007, no events or changes in circumstances occurred that
would require the company to test for impairment.
RESTRUCTURING CHARGES. In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS 146, a liability for a cost associated with an exit or disposal
activity shall be recognized and measured initially at its fair value in the
period in which the liability is incurred, except for certain employee
termination benefits that qualify under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
The upholstery fabric industry continues to be under significant pressure from a
variety of external forces, such as the current consumer preference for leather
and suede furniture and the growing competition from imported fabrics and cut
and sewn kits, primarily from China. In an effort to reduce operating expenses
and scale U.S. productive capacity in line with demand, the company has
undertaken restructuring initiatives during the past several years. These
restructuring initiatives have resulted in restructuring charges related to the
remaining lease costs of the closed facilities, the write-down of property,
plant and equipment, workforce reduction and elimination of facilities.
As a result of the continuing sharp declines in demand for U.S. produced
fabrics, management will continue to evaluate its domestic strategy and
production requirements. Management remains committed to take whatever
additional steps are necessary to achieve profitable U.S. upholstery fabric
operations, and the company could take additional restructuring actions in the
near future. The company could experience additional markdowns of its inventory
and write-downs of its property, plant, and equipment from any new restructuring
initiatives.
Severance and related charges are accrued at the date the restructuring was
approved by the board of directors based on an estimate of amounts that will be
paid to affected employees, in accordance with SFAS 112. Under SFAS 144, asset
impairment charges related to the consolidation or closure of manufacturing
facilities are based on an estimate of expected sales prices for the real estate
and equipment. Other exit costs, which principally consist of charges for lease
termination and losses from termination of existing contracts, equipment
relocation costs and inventory markdowns that are related to the restructuring
are accounted for in accordance with SFAS 146.
The company reassesses the individual accrual requirements at the end of each
reporting period. If circumstances change, causing current estimates to differ
from original estimates, adjustments are recorded in the period of change.
Restructuring charges, and adjustments of those charges, are summarized in note
11 to the consolidated financial statements.
I-37
INCOME TAXES. The company is required to estimate its tax exposure and to assess
temporary differences resulting from differing treatment of items for tax and
accounting purposes. At April 30, 2006, the company had deferred tax assets of
$31.4 million (all of which relate to U.S. operations) and U.S. deferred tax
liabilities of $2.2 million (all of which reverse in the carryforward period),
resulting in net U.S. deferred tax assets of $29.2 million. Total deferred tax
liabilities at April 30, 2006 were $4.1 million, resulting in total net deferred
tax assets of $27.3 million. As of January 28, 2007, the company's net deferred
tax assets total $30.4 million, an increase of $3.1 million from the end of
fiscal 2006, primarily reflecting the federal and state tax benefits recorded
for the loss from U.S. operations during the first nine months of fiscal 2007.
No valuation allowance has been recorded to reduce the company's deferred tax
assets. Management has concluded that it is more likely than not that the
company will be able to realize the benefit of the deferred tax assets.
In making the judgment about the realization of the deferred tax assets,
management has considered both negative and positive evidence, and concluded
that sufficient positive evidence exists to overcome the cumulative losses
experienced in recent years. Specifically, management considered the following,
among other factors: nature of the company's products; history of positive
earnings in the mattress fabrics segment; capital projects in progress to
further enhance the company's globally competitive cost structure in the
mattress fabrics segment; recent significant restructuring actions in the
domestic upholstery fabrics business to adjust the domestic cost structure and
bring U.S. manufacturing capacity in line with demand; development of offshore
manufacturing and sourcing programs to meet changing demands of upholstery
fabric customers in the U.S; and the incremental sales volume from the purchase
of certain assets from ITG related to the mattress fabric product line of ITG's
Burlington House Division. Management's analysis of taxable income also included
the following considerations: none of the company's net operating loss
carryforwards has previously expired unused; the U.S. federal carryforward
period is 20 years; and the company's current losses principally expire in 16-20
years, fiscal 2022 through 2026.
Considerable judgment is involved in this process as ultimate realization of
benefits is dependent on the generation of income from future operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No.48, "Accounting for Uncertainty in Income Taxes" ("FIN No.
48") which clarifies the criteria for the recognition of tax benefits under SFAS
No. 109, "Accounting for Income Taxes." This Interpretation prescribes a
comprehensive model for financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken, or expected to be
taken, in income tax returns. FIN No.48 is effective for fiscal years beginning
after December 15, 2006 and requires that the cumulative effect of applying its
provisions be disclosed as a one-time, non-cash charge or credit against the
opening balance of retained earnings in the year of adoption. This
Interpretation will be adopted by the company in the first quarter of fiscal
2008. The company is currently evaluating the potential impact of FIN No. 48 and
any impact on its financial position cannot be readily determined at this time.
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 consolidated financial statements.
I-38
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
consolidated financial statements.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 was issued in
order to eliminate the diversity of practice surrounding how public companies
quantify financial statement misstatements. This SAB establishes a "dual
approach" methodology that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the company's
financial statements (both the statement of operations and statement of
financial position). The SEC has stated SAB No. 108 should be applied no later
than the annual financial statements for the first fiscal year ending after
November 15, 2006. SAB No. 108 permits a company to elect either a retrospective
or prospective application. Prospective application requires recording a
cumulative effect adjustment in the period of adoption, as well as detailed
disclosure of the nature and amount of each individual error being corrected
through the cumulative adjustment and how and when it arose. The company is
currently evaluating the impact, if any, the application of SAB No 108 will have
on the consolidated financial statements.
INFLATION
The cost of certain company's raw materials, principally fibers from petroleum
derivatives, and utility/energy costs, increased during the first nine months of
fiscal 2007 as oil and energy prices increased and had an impact on the
company's financial results. These increases, however, are often not directly
related to general economic inflation, which has not been a material factor in
the company's recent financial results. Any significant increase in the
company's raw material costs, utility/energy costs and general economic
inflation could have a material adverse impact on the company, because
competitive conditions have limited the company's ability to pass significant
operating cost increases on to its customers.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company's exposure to interest
rate risk consists of floating rate debt based on the London Interbank Offered
Rate plus an adjustable margin under the company's revolving credit agreement
and real estate term loans. As of January 28, 2007, there were $6.6 million in
borrowings outstanding under the real estate term loans and no borrowings under
the company's revolving credit agreement. 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 first real estate loan, and effectively converts the floating rate LIBOR
based payments to fixed payments at 4.99% plus the spread calculated under the
first 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. Additionally, approximately 90% of the company's long-term debt is at a
fixed rate or is non-interest bearing. Thus, any foreseeable change in interest
rates would have a minimal material effect on the company's interest expense.
I-39
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 January 28, 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 January 28,
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-40
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
Our business is subject to risks and uncertainties. In addition to the matters
described in the "Cautionary Statement Concerning Forward-Looking Information,"
set forth below are some of the risks and uncertainties that could cause a
material adverse change in our results of operations or financial condition.
RESTRUCTURING INITIATIVES CREATE SHORT-TERM COSTS THAT MAY NOT BE OFFSET BY
INCREASED SAVINGS OR EFFICIENCIES.
Over the past seven years, we have undertaken significant restructuring
activities, which have involved closing manufacturing plants, realigning
manufacturing assets, reducing selling general and administrative (SG&A)
expenses, and changing our upholstery product strategy. These actions have been
intended to lower manufacturing costs and increase efficiency, but they involve
significant costs, including the write-off or write-down of assets, severance
costs for terminated employees, contract termination costs, equipment moving
costs, and similar charges. These charges have caused a decrease in earnings
over this time period. In addition, during the time that restructuring
activities are underway, manufacturing inefficiencies are caused by moving
equipment, realignment of assets, personnel changes, and by the consolidation
process for certain functions. Unanticipated difficulties in restructuring
activities or delays in accomplishing our goals could cause the costs of our
restructuring initiatives to be greater than anticipated and the results
achieved to be significantly lower, which would negatively impact our results of
operations and financial condition.
OUR SALES HAVE BEEN DECLINING, AND WE HAVE REPORTED NET LOSSES IN NINE OF THE
PAST ELEVEN FISCAL QUARTERS.
We may not be able to restore the upholstery fabrics segment to consistent
profitability. In the upholstery fabrics segment, sales are down significantly,
and they have been declining rapidly for U.S. produced fabrics. We have
undertaken a number of significant restructuring actions in recent years to
address our profitability, including (i) consolidating production assets and
purchasing more efficient equipment in the mattress fabrics segment, (ii)
closing a number of U.S. manufacturing facilities in the upholstery fabrics
segment, (iii) establishing upholstery fabrics facilities in China to take
advantage of a lower cost environment and greater product diversity, (iv)
reducing SG&A expenses substantially, and (v) outsourcing certain production
functions, in the U.S., including yarn production, some weaving, and finishing
of decorative fabrics. Successful completion of our restructuring plans depends
on a number of variables, including our ability to consolidate certain
functions, manage manufacturing processes with lower direct involvement,
managing a longer supply chain, and similar issues. There is no assurance that
we will be able to manage our restructuring activities successfully to restore
the company, especially the upholstery fabrics segment, to profitability.
INCREASED RELIANCE ON OFFSHORE OPERATIONS AND FOREIGN SOURCES OF PRODUCTS OR RAW
MATERIALS INCREASES THE LIKELIHOOD OF DISRUPTIONS TO OUR SUPPLY CHAIN OR OUR
ABILITY TO DELIVER PRODUCTS TO OUR CUSTOMERS ON A TIMELY BASIS.
During recent years, the company has established operations in China, and in
addition we have been purchasing an increasing share of our products and raw
materials from offshore sources, primarily in China. At the same time, our
domestic manufacturing capacity for the upholstery fabrics segment has been
greatly reduced. These changes have caused the company to place greater reliance
on a much longer supply chain and on a larger number of suppliers that we do not
control, which are inherently subject to greater risks of delay or disruption.
In addition, operations and sourcing in foreign areas are subject to the risk of
changing local governmental rules, taxes, changes in import rules or customs,
potential political unrest, or other threats that could disrupt or increase the
costs of operating in foreign areas or sourcing products overseas. Also, changes
in relative values of currencies could increase our costs. Any of the risks
associated with foreign operations and sources could cause unanticipated
increases in operating costs or disruptions in business, which could negatively
impact the company's ultimate financial results.
WE MAY HAVE DIFFICULTY MANAGING THE OUTSOURCING ARRANGEMENTS INCREASINGLY BEING
USED BY THE COMPANY FOR PRODUCTS AND SERVICES.
The company is relying more on outside sources for various products and
services, including raw material, greige (unfinished) fabrics, finished fabrics,
and services such as weaving and finishing. Increased reliance on outsourcing
lowers our capital investment and fixed costs, but it decreases the amount of
control that we have over certain elements of our production capacity.
Interruptions in our ability to obtain raw materials, other required products or
services from our outside suppliers on a timely and cost effective basis,
especially if alternative suppliers cannot be immediately obtained, could
disrupt our production and damage our financial results.
II-1
FURTHER WRITE-OFFS OR WRITE-DOWNS OF UPHOLSTERY FABRICS SEGMENT ASSETS WOULD
RESULT IN A DECREASE IN OUR EARNINGS.
The company has long-lived assets, consisting mainly of property, plant and
equipment. Accounting rules require that these assets be tested for impairment
of their valuation at least annually, as well as upon the occurrence of certain
events. When assets are taken out of service, which has occurred recently on
several occasions in connection with our restructuring activities, they must be
tested for impairment, which can result in significant write-downs in the value
of those assets. Restructuring activities and other tests for impairment have
resulted and could in the future result in the write-down of a portion of our
long-lived assets and a corresponding reduction in earnings and net worth. In
fiscal 2006, the company experienced asset write-downs of approximately $6.0
million, all in the upholstery fabrics segment. The company has announced
restructuring actions in the upholstery fabrics segment during fiscal 2007 that
are expected to result in further net asset write downs of approximately $1.5
million during the fiscal year.
WRITE-OFFS OF ASSETS OR WEAK FINANCIAL PERFORMANCE COULD CAUSE US TO BREACH
FINANCIAL COVENANTS IN OUR DEBT AGREEMENTS.
At the end of the third quarter of fiscal 2007, the company had $46.7 million of
long-term debt, of which approximately $39.4 million was owed on unsecured
senior notes issued in 1998. Under the debt agreements that govern our long-term
debt, we are required to maintain compliance with certain financial covenants,
including minimum tangible net worth, debt to tangible capitalization, debt to
capital, minimum earnings before interest, taxes, depreciation and amortization,
and interest and lease payment coverage. The company has been able to maintain
compliance with these financial covenants. However, in some cases the "cushion"
between the required financial covenants and our actual financial performance
has been shrinking. For example, our tangible net worth has decreased
significantly in recent years due to asset write offs and operating losses.
Additional write-offs of assets or continued operating losses could lead to a
breach of financial covenants and a default under our loan agreements. A breach
of our debt covenants would give the lenders under our long-term debt agreements
the right to declare all of the debt immediately due and payable and to
terminate our right to obtain further borrowings. If such an event occurred, it
is unlikely that we would be able to repay all of our debt from current
resources, and there is no assurance that we would be able to find alternative
sources of financing.
CHANGES IN THE PRICE, AVAILABILITY AND QUALITY OF RAW MATERIALS COULD INCREASE
OUR COSTS OR CAUSE PRODUCTION DELAYS AND SALES INTERRUPTIONS, WHICH WOULD RESULT
IN DECREASED EARNINGS.
The company depends upon outside suppliers for most of its raw material needs,
and increasingly we rely upon outside suppliers for component materials such as
yarn and unfinished fabrics, as well as for certain services such as finishing
and weaving. Fluctuations in the price, availability and quality of these goods
and services could have a negative effect on our production costs and ability to
meet the demands of our customers, which would affect our ability to generate
sales and earnings. In many cases, we are not able to pass through increased
costs of raw materials or increased production costs to our customers through
price increases. In particular, many of our basic raw materials are
petrochemical products or are produced from such products. For this reason, our
material costs are especially sensitive to changes in prices for petrochemicals
and the underlying price of oil. Increases in prices for oil, petrochemical
products or other raw materials and services provided by outside suppliers could
significantly increase our costs and negatively affect earnings.
INCREASES IN ENERGY COSTS WOULD INCREASE OUR OPERATING COSTS AND COULD ADVERSELY
AFFECT EARNINGS.
Higher prices for electricity, natural gas and fuel increase our production and
shipping costs. A significant shortage, increased prices, or interruptions in
the availability of these energy sources would increase the costs of producing
and delivering products to our customers, and would be likely to adversely
affect our earnings. In many cases, we are not able to pass along the full
extent of increases in our production costs to customers through price
increases. During fiscal 2006, energy prices increased significantly, in part
due to supply disruptions caused by hurricanes. Although some price increases
were implemented to offset the effect of these increased costs, we were not able
to fully recoup these costs, and operating margins were negatively affected.
Further increases in energy costs could have a negative effect on our earnings.
II-2
BUSINESS DIFFICULTIES OR FAILURES OF LARGE CUSTOMERS COULD RESULT IN A DECREASE
IN OUR SALES AND EARNINGS.
The company currently has several customers that account for a substantial
portion of its sales. In the mattress fabric segment, several large bedding
manufacturers have large market shares and comprise a significant portion of our
mattress fabric sales. In the upholstery fabrics segment, La-Z-Boy Inc.
accounted for 13% of consolidated net sales during fiscal 2006, and several
other large furniture manufacturers comprised a significant portion of sales. A
business failure or other significant financial difficulty by one or more of our
major customers could cause a significant loss in sales, an adverse effect on
our earnings, and collection of our trade accounts receivable.
IF WE ARE UNABLE TO MANAGE OUR CASH EFFECTIVELY, WE WILL NOT HAVE FUNDS
AVAILABLE TO REPAY DEBT AND TO MAINTAIN THE FLEXIBILITY NECESSARY FOR SUCCESSFUL
OPERATION OF OUR BUSINESS.
Our ability to meet our cash obligations depends on our operating cash flow,
access to trade credit, and our ability to borrow under our debt agreements. In
addition to the cash needs of operating our business, we have substantial debt
repayments that are due over the next several years on our unsecured senior
notes. During fiscal 2006, in spite of incurring losses, we were able to
generate substantial cash flow through reductions of working capital. Our
ability to generate cash flow going forward will rely to a heavier degree on our
ability to generate profits from our business, and we have not been able to
generate earnings on a consistent basis in recent quarters. If we are not able
to generate cash during upcoming fiscal periods, we may not be able to provide
the funds needed to operate and maintain our business or to make payments on our
debt as they become due.
FURTHER LOSS OF MARKET SHARE DUE TO COMPETITION WOULD RESULT IN FURTHER DECLINES
IN SALES AND COULD RESULT IN ADDITIONAL LOSSES OR DECREASES IN EARNINGS.
Our business is highly competitive, and in particular the upholstery fabric
industry is fragmented and is experiencing an increase in the number of
competitors. As a result, we face significant competition from a large number of
competitors, both foreign and domestic. We compete with many other manufacturers
of fabric, as well as converters who source fabrics from various producers and
market them to manufacturers of furniture and bedding. In many cases, these
fabrics are sourced from foreign suppliers who have a lower cost structure than
the company. The highly competitive nature of our business means we are
constantly subject to the risk of losing market share. Our sales have decreased
significantly over the past six years due in part to the increased number of
competitors in the marketplace, especially foreign sources of fabric. As a
result of increased competition, there have been deflationary pressures on the
prices for many of our products, which makes it more difficult to pass along
increased operating costs such as raw materials, energy or labor in the form of
price increases and puts downward pressure on our profit margins. Also, the
large number of competitors and wide range of product offerings in our business
can make it more difficult to differentiate our products through design,
styling, finish and other techniques.
IF WE FAIL TO ANTICIPATE AND RESPOND TO CHANGES IN CONSUMER TASTES AND FASHION
TRENDS, OUR SALES AND EARNINGS MAY DECLINE.
Demand for various types of upholstery fabrics and mattress coverings change
over time due to fashion trends and changing consumer tastes for furniture and
bedding. Our success in marketing our fabrics depends upon our ability to
anticipate and respond in a timely manner to fashion trends in home furnishings.
If we fail to identify and respond to these changes, our sales of these products
may decline. In addition, incorrect projections about the demand for certain
products could cause the accumulation of excess raw material or finished goods
inventory, which could lead to inventory write-downs and further decreases in
earnings.
AN ECONOMIC DOWNTURN COULD RESULT IN A DECREASE IN OUR SALES AND EARNINGS.
Overall demand for our products depends upon consumer demand for furniture and
bedding, which is subject to variations in the general economy. Because
purchases of furniture or bedding are discretionary purchases for most
individuals and businesses, demand for these products is sometimes more easily
influenced by economic trends than demand for other products. Economic downturns
can affect consumer spending habits and demand for home furnishings, which
reduces the demand for our products and therefore could cause a decrease in our
sales and earnings.
II-3
WE ARE SUBJECT TO LITIGATION AND ENVIRONMENTAL REGULATIONS THAT COULD ADVERSELY
IMPACT OUR SALES AND EARNINGS.
We are, and in the future may be, a party to legal proceedings and claims,
including environmental matters, product liability and employment disputes, some
of which claim significant damages. We face the continual business risk of
exposure to claims that our business operations have caused personal injury or
property damage. We maintain insurance against product liability claims and in
some cases have indemnification agreements with regard to environmental claims,
but there can be no assurance that these arrangements will continue to be
available on acceptable terms or that such arrangements will be adequate for
liabilities actually incurred. Given the inherent uncertainty of litigation,
there can be no assurance that claims against the company will not have a
material adverse impact on our earnings or financial condition. We are also
subject to various laws and regulations in our business, including those
relating to environmental protection and the discharge of materials into the
environment. We could incur substantial costs as a result of noncompliance with
or liability for cleanup or other costs or damages under environmental laws or
other regulations.
THE COMPANY MUST COMPLY WITH A NUMBER OF GOVERNMENTAL REGULATIONS APPLICABLE TO
OUR BUSINESS, AND CHANGES IN THOSE REGULATIONS COULD ADVERSELY AFFECT OUR
BUSINESS.
Our products and raw materials are and will continue to be subject to regulation
in the United States by various federal, state and local regulatory authorities.
In addition, other governments and agencies in other jurisdictions regulate the
manufacture, sale and distribution of our products and raw materials. For
example, standards for flame resistance of fabrics have been recently introduced
in the state of California, and additional standards are scheduled to apply on a
nationwide basis beginning July 1, 2007. Also, rules and restrictions regarding
the importation of fabrics and other materials, including custom duties, quotas
and other regulations, are continually changing. Environmental laws, labor laws,
tax regulations and other regulations also continually affect our business. All
of these rules and regulations can and do change from time to time, which can
increase our costs or require us to make changes in our manufacturing processes,
product mix, sources of products and raw materials, or distribution. Changes in
the rules and regulations applicable to our business may negatively impact our
sales and earnings.
THE COMPANY'S MARKET CAPITALIZATION AND SHAREHOLDERS' EQUITY HAVE FALLEN BELOW
THE LEVEL REQUIRED FOR CONTINUED LISTING ON THE NEW YORK STOCK EXCHANGE.
Our common stock is currently traded on the New York Stock Exchange (NYSE).
Under the NYSE's current listing standards, we are required to have market
capitalization or shareholders' equity of more than $75 million to maintain
compliance with continued listing standards. During the past year, the company
was below the NYSE required minimum for both of these listing standards. As a
result, we have been listed as "below compliance" with NYSE listing standards.
In accordance with NYSE rules, we submitted a plan for returning to compliance
with the listing standards, and this plan has been accepted by the NYSE. As of
the end of the third quarter of fiscal 2007, our shareholders' equity was
approximately $78.9 million. If the company is not able to return to and
maintain compliance with NYSE listing standards, our stock will be delisted from
trading on the NYSE, resulting in the need to find another market on which our
stock can be listed or causing our stock to cease to be traded on an active
market, which could result in a reduction in the liquidity for our stock and a
reduction in demand for our stock.
DIFFICULTIES IN INTEGRATING OUR RECENT ACQUISITION COULD NEGATIVELY AFFECT THE
SALES AND PROFITS OF OUR MATTRESS FABRICS BUSINESS.
On January 22, 2007, we completed an asset purchase from International Textile
Group, Inc. (ITG) in our mattress fabrics business. In order to realize the
benefits of that transaction, we must successfully integrate the products and
fabric patterns acquired into our business. We are making substantial changes to
the mattress fabric product line formerly offered by ITG. We expect the asset
acquisition to increase the sales and profits of our mattress fabrics business,
but our success will depend upon our ability to retain a substantial portion of
the sales to mattress manufacturers formerly served by ITG. If we are not able
to retain this business and to maintain service levels, our sales and profits
will be adversely affected. In addition, integration activities will place
substantial demands on our management, operational resources, and service
capabilities. If we experience customer dissatisfaction or operational problems
as a result of integrating the additional business acquired, our mattress
fabrics business could be negatively affected.
ITEM 5. OTHER INFORMATION.
In a letter dated October 27, 2006, the New York Stock Exchange (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. The
company previously announced that the NYSE notified the company that it was
considered "below criteria" because the company's average total market
capitalization was less than $75 million over a consecutive 30 trading-day
period and its shareholders' equity was less than $75 million. As of January 28,
2007, the end of the company's most recent fiscal quarter, the company's
shareholders' equity was approximately $78.9 million.
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.
II-4
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 Second Amendment to Note Purchase Agreement by and between Culp, Inc.
and the holders of its Senior Notes dated December 6, 2006, filed as
Exhibit 99(c) to the Company's Form 8-K dated December 7, 2006, and
incorporated herein by reference.
10.2 Written Summary of Culp Home Fashions Division Management Incentive
Plan, filed as Exhibit 10(a) to the Company's Form 8-K dated December
13, 2006, and incorporated herein by reference.
10.3 Asset Purchase Agreement between Culp, Inc. and International Textile
Group, Inc. dated as of January 11, 2007, filed Exhibit 10.1 to the
Company's Form 8-K dated January 26, 2007, and incorporated herein by
reference.
10.4 Registration Rights and Shareholder Agreement between Culp, Inc. and
International Textile Group, Inc. dated as of January 22, 2007, filed
Exhibit 10.1 to the Company's Form 8-K dated January 26, 2007, and
incorporated herein by reference.
10.5 Promissory Note to Wachovia Bank, National Association dated January
22, 2007, filed as Exhibit 10.2 to the Company's Form 8-K dated January
26, 2007, and incorporated herein by reference.
10.6 Tenth Amendment to Amended and Restated Credit Agreement dated January
22, 2007, filed as Exhibit 10.3 to the Company's Form 8-K dated January
26, 2007, and incorporated herein by reference.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CULP, INC.
(REGISTRANT)
Date: March 14, 2007 By: /S/ FRANKLIN N. SAXON
--------------------------------------------------
Franklin N. Saxon
President
(Authorized to sign on behalf of the registrant
and also signing as principal financial officer)
By: /S/ KENNETH R. BOWLING
--------------------------------------------------
Kenneth R. Bowling
Vice President-Finance, Treasurer
(Authorized to sign on behalf of the registrant
and also signing as principal accounting officer)
II-6
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
Exhibit 31.1
CERTIFICATIONS
I, Robert G. Culp, III, Chairman and Chief Executive Officer (principal
executive officer) of Culp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ Robert G. Culp, III
----------------------------------------------
Robert G. Culp, III
Chairman and Chief Executive Officer
(principal executive officer)
Date: March 14, 2007
EXHIBIT 31.2
CERTIFICATIONS
I, Franklin N. Saxon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
/S/ FRANKLIN N. SAXON
-----------------------------------------------
Franklin N. Saxon
President and Chief Operating Officer
(principal financial officer)
Date: March 14, 2007
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Culp, Inc. (the "Company")
on Form 10-Q for the quarterly period ended January 28, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Robert
G. Culp, III, Chairman of the Board and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/S/ ROBERT G. CULP, III
- -----------------------
Robert G. Culp, III
Chairman of the Board and
Chief Executive Officer
March 14, 2007
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Culp, Inc. (the "Company")
on Form 10-Q for the quarterly period ended January 28, 2007 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Franklin N. Saxon, President and Chief Operating Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/S/ FRANKLIN N. SAXON
- ---------------------
Franklin N. Saxon
President
March 14, 2007
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.