UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 27, 2008
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
1823 Eastchester Drive, High Point, North Carolina 27265
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- ---------------------
Common Stock, par value $.05/ Share New York Stock Exchange
Rights for Purchase of Series A New York Stock Exchange
Participating Preferred Shares
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES |_| NO |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
YES |_| NO |X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days. YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definition of "large accelerated filer, accelerated filer, and smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Smaller Reporting Company |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). YES |_| NO |X|
As of April 27, 2008, 12,648,027 shares of common stock were outstanding.
As of October 28, 2007, the aggregate market value of the voting stock held by
non-affiliates of the registrant on that date was $98,121,298 based on the
closing sales price of such stock as quoted on the New York Stock Exchange
(NYSE), assuming, for purposes of this report, that all executive officers and
directors of the registrant are affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the company's Proxy Statement to be filed pursuant to Regulation 14A
of the Securities and Exchange Commission in connection with its Annual Meeting
of Shareholders to be held on September 23, 2008 are incorporated by reference
into Part III of this Form 10-K.
CULP, INC.
FORM 10-K REPORT
TABLE OF CONTENTS
Item No. Page
- -------- ----
PART I
1. Business
Overview......................................................................................2
General Information...........................................................................3
Segments......................................................................................4
Overview of Industry and Markets..............................................................6
Overview of Bedding Industry..................................................................6
Overview of Residential Furniture Industry....................................................8
Overview of Commercial Furniture Industry.....................................................9
Products......................................................................................9
Manufacturing and Sourcing...................................................................10
Product Design and Styling...................................................................11
Distribution.................................................................................12
Sources and Availability of Raw Materials....................................................12
Seasonality..................................................................................13
Competition..................................................................................13
Environmental and Other Regulations..........................................................14
Employees....................................................................................15
Customers and Sales..........................................................................15
Net Sales by Geographic Area.................................................................16
Backlog......................................................................................16
1A. Risk Factors....................................................................................17
1B. Unresolved Staff Comments.......................................................................21
2. Properties......................................................................................22
3. Legal Proceedings...............................................................................23
4. Submission of Matters to a Vote of Security Holders.............................................23
PART II
5. Market for the Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities..........................................................23
6. Selected Financial Data.........................................................................26
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........27
7A. Quantitative and Qualitative Disclosures About Market Risk......................................52
8. Consolidated Financial Statements and Supplementary Data........................................53
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............87
9A. Controls and Procedures.........................................................................87
9B. Other Information...............................................................................90
Item No. Page
- -------- ----
PART III
10. Directors, Executive Officers, and Corporate Governance.........................................90
11. Executive Compensation..........................................................................90
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters....................................................................90
13. Certain Relationships, Related Transactions, and Director Independence..........................90
14. Principal Accountant Fees and Services..........................................................90
PART IV
15. Exhibits, Financial Statement Schedules.........................................................91
Documents Filed as Part of this Report..........................................................91
Exhibits........................................................................................95
Financial Statement Schedules...................................................................95
Signatures......................................................................................96
Exhibit Index...................................................................................97
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Parts I and II of this report contain statements that may be deemed
"forward-looking statements" within the meaning of the federal securities laws,
including the Private Securities Litigation Reform Act of 1995 (Section 27A of
the Securities Act of 1933 and Section 27A of the Securities and Exchange Act of
1934). Such statements are inherently subject to risks and uncertainties.
Further, forward-looking statements are intended to speak only as of the date on
which they are made. Forward-looking statements are statements that include
projections, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often but not always
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives, and include but are not limited to
statements about expectations for the company's future operations or success,
sales, gross profit margins, operating income, SG&A or other expenses, and
earnings, as well as any statements regarding future economic or industry trends
or future developments. Factors that could influence the matters discussed in
such statements include the level of housing starts and sales of existing homes,
consumer confidence, trends in disposable income, and general economic
conditions. Decreases in these economic indicators could have a negative effect
on the company's business and prospects. Likewise, increases in interest rates,
particularly home mortgage rates, and increases in consumer debt or the general
rate of inflation, could affect the company adversely. In addition, changes in
consumer preferences for various categories of furniture coverings, as well as
changes in costs to produce such products (including import duties and quotas or
other import costs) can have significant effect on demand for the company's
products. Changes in the value of the U.S. dollar versus other currencies can
affect the company's financial results because a significant portion of the
company's operations are located outside the United States. Strengthening of the
U.S. dollar against other currencies could make the company's products less
competitive on the basis of price in markets outside the United States, and
strengthening of currencies in Canada and China can have a negative impact on
the company's sales of products produced in those countries. Further, economic
and political instability in international areas could affect the company's
operations or sources of goods in those areas, as well as demand for the
company's products in international markets. Finally, unanticipated delays or
costs in executing restructuring actions could cause the cumulative effect of
restructuring actions to fail to meet the objectives set forth by management.
Further information about these factors, as well as other factors that could
affect the company's future operations or financial results and the matters
discussed in forward-looking statements are included in the "Risk Factors"
section of this report in Item 1A.
1
PART I
ITEM 1. BUSINESS
Overview
Culp, Inc., manufactures, sources, and markets mattress fabrics (also known as
mattress ticking) used for covering mattresses and box springs, and upholstery
fabrics primarily for use in production of upholstered furniture (residential
and commercial).
Management believes that Culp is the largest producer of mattress fabrics in
North America, as measured by total sales, and one of the largest marketers of
upholstery fabrics for furniture in North America, again measured by total
sales. Our mattress fabrics are used primarily in the production of bedding
products, including mattresses, box springs, and mattress sets. Our upholstery
fabrics are used in the production of residential and commercial upholstered
furniture, sofas, recliners, chairs, loveseats, sectionals, sofa-beds, and
office seating. Culp primarily markets fabrics that have broad appeal in the
"good" and "better" priced categories of furniture and bedding.
The company has two operating segments - mattress fabrics and upholstery
fabrics. The mattress fabric business markets woven and knitted fabrics used by
bedding manufacturers. The upholstery fabrics segment markets a variety of
products in most categories of fabric used as coverings for furniture.
Total net sales in fiscal 2008 were $254 million. The mattress fabrics segment
had net sales of $138 million (54% of total net sales), while the upholstery
fabrics segment had net sales of $116 million (46% of total net sales). Mattress
fabric sales grew during fiscal 2008, while upholstery sales have declined
during a time of continuing rapid changes in the upholstery fabrics industry. In
the fourth quarter of fiscal 2007, our total sales of mattress fabrics exceeded
sales of upholstery fabrics for the first time, and this trend continued during
fiscal 2008. Fiscal 2008 represents the first year that mattress fabric sales
exceeded upholstery fabric sales for a full year. This was due in part to the
acquisition from International Textile Group completed by our mattress fabrics
segment late in fiscal 2007 (see further discussion below).
Culp markets a variety of fabrics in different categories, including fabrics
produced at our manufacturing facilities and fabrics produced by other
suppliers. The company had nine active manufacturing plants as of the end of
fiscal 2008, which are located in North and South Carolina, Quebec, Canada, and
Shanghai, China. We also source fabrics from other manufacturers, located
primarily in China, Turkey and in the U.S., with almost all of those fabrics
being produced specifically for the company and created by Culp designers. We
operate distribution centers in North Carolina and Shanghai, China to facilitate
distribution of our products. In recent years, the portion of total company
sales represented by fabrics produced outside of our U.S. and Canadian
facilities has increased significantly, while sales of goods produced in our
U.S. manufacturing plants have decreased. This trend is especially strong in the
upholstery fabrics segment, where more than half of our sales now consist of
fabrics produced in Asia and where we have recently closed a number of U.S.
manufacturing plants.
2
Fiscal 2008 reflected a continuation of many of the trends we identified at the
end of fiscal 2007. We have experienced dramatic changes in both our operating
segments since 2000. Significant demand has arisen for certain fabrics not
produced in our U.S. plants, and we have moved rapidly to develop sources for
the products being demanded by our customers. Seven years ago, we were a much
more vertically integrated manufacturer of fabrics, especially in upholstery
fabrics, with large amounts of capital committed to U.S.-based manufacturing
fixed assets. Today, the company is a more flexible fabric producer and
marketer, with a smaller fixed asset base, but also with significantly lower
overall sales. With the changes that have been made over the past seven years,
however, we believe we now have a platform upon which we can build to take
advantage of the opportunities in the bedding and furniture industries.
During fiscal 2008, we integrated the business and assets acquired by our
mattress fabrics segment in late fiscal 2007 from International Textile Group
(ITG), as ITG exited the mattress fabrics business. This acquisition has allowed
us to take advantage of recent capital investments at mattress fabrics
facilities that have improved our efficiency and production costs, and to add
significantly to the sales and profits of the mattress fabrics segment.
In the upholstery fabrics segment, a significant and growing portion of our
fabrics are now produced by other manufacturers, but in most cases the company
continues to control important components of the production process, such as
design, finishing, quality control and distribution. Microdenier suedes and a
variety of other fabrics are now sourced in China through our sourcing,
finishing and distribution operation located near Shanghai.
In mattress fabrics, knitted fabrics represent a growing portion of our sales,
as consumer demand for this type of mattress panel covering has risen
significantly. These fabrics, along with a portion of our damask product line,
are sourced from outside providers. We will continue to look to a variety of
sources for mattress fabric to remain flexible and preserve our ability to meet
our customers' needs by maintaining a proper balance between internally produced
and sourced items.
As these shifts in our business have continued, we have dramatically reduced the
size and scope of our U.S. upholstery fabrics manufacturing operations over the
past several years, with a substantial majority of our products now being
sourced in China. In the mattress fabrics business, there have been product
shifts to knitted fabrics for top panels of mattresses and woven fabrics for
common borders, which is the fabric on the side of the mattress and box spring.
These shifts are affecting demand for certain categories of our products. We
have made significant changes in our operating assets, product mix and business
model to address the challenges and opportunities facing the company. Additional
information about trends and developments in each of our business segments is
provided in the "Segments" discussion below.
General Information
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." Our fiscal year is
the 52 or 53 week period ending on the Sunday closest to April 30. Our executive
offices are located in High Point, North Carolina.
Culp maintains an Internet website at www.culpinc.com. We will make this annual
report and our other annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and amendments to these reports, available
free of charge on our Internet site as soon as reasonably practicable after such
material is electronically filed with, or furnished to, the Securities and
Exchange Commission. Information included on our website is not incorporated by
reference into this annual report.
3
Segments
Our two operating segments are mattress fabrics and upholstery fabrics. The
following table sets forth certain information for each of our segments.
Sales by Fiscal Year ($ in Millions) and
Percentage of Total Company Sales
----------------------------------------------------------------------
SEGMENT Fiscal 2008 Fiscal 2007 Fiscal 2006
--------------------- --------------------- ----------------------
Mattress Fabrics $ 138.1 (54%) $ 107.8 (43%) $ 93.7 (36%)
----------------------------------------------------------------------
Upholstery Fabrics
Non-U.S.-Produced $ 75.9 (30%) $ 82.4 (33%) $ 59.2 (23%)
U.S.-Produced $ 40.0 (16%) $ 60.3 (24%) $ 108.2 (41%)
----------------------------------------------------------------------
Total Upholstery $ 115.9 (46%) $ 142.7 (57%) $ 167.4 (64%)
----------------------------------------------------------------------
Total company $ 254.0 (100%) $ 250.5 (100%) $ 261.1 (100%)
----------------------------------------------------------------------
Additional financial information about the company's operating segments can be
found in footnote 18 to the Consolidated Financial Statements included in Item 8
of this report.
Mattress Fabrics. The mattress fabrics segment manufactures and markets mattress
fabric to bedding manufacturers. These fabrics encompass woven jacquard fabric,
knitted fabric and printed fabric to a lesser extent. Culp Home Fashions, as
this business is known in the trade, has manufacturing facilities located in
Stokesdale, North Carolina, and St. Jerome, Quebec, Canada. Both of these plants
manufacture and finish jacquard (damask) fabric, and the Stokesdale plant also
produces printed fabric. The Stokesdale plant houses the division offices and
finished goods distribution capabilities. Knitted fabric is primarily sourced
from two manufacturers who works closely with the company to produce fabrics
according to our proprietary design specifications and quality standards. All
woven jacquard and knitted fabrics are able to be produced in multiple
facilities, (internal or external to the company) providing us with mirrored,
reactive capacity.
In recent years, we have taken significant steps to further enhance our
competitive position in this segment by consolidating all of our mattress
fabrics manufacturing into the Stokesdale and St. Jerome facilities. The company
had capital expenditures during the period fiscal 2005 through 2007 totaling
approximately $11.0 million, of which $8.0 million was related to a capital
project involving the relocation of ticking looms from an upholstery fabric
plant to the existing facilities in the U.S. and Canada, along with the purchase
of new weaving machines that are faster and more efficient than the equipment
they replaced. Additionally, we had a $1.3 million capital project that
significantly enhanced our finishing capabilities in this segment. More
recently, we initiated a $5.0 million capital project to enhance our weaving and
finishing capabilities and further increase our capacity and service
performance. This project is expected to be substantially complete by the end of
the first quarter of fiscal 2009. These capital investments have enhanced our
capacity and capabilities in the mattress fabrics segment and played a
significant role in making feasible the ITG acquisition and its integration into
our operations, as described below.
4
In January 2007, we completed an acquisition in our mattress fabrics business,
purchasing certain assets from International Textile Group, Inc. (ITG) related
to the mattress fabrics product line of ITG's Burlington House division. ITG had
made a decision to exit the mattress fabric business, and we purchased ITG's
finished goods inventory, certain proprietary rights, and other assets related
to the product line. This acquisition has enhanced our competitive position in
the mattress fabrics industry and was a primary factor in the increases in our
mattress fabric sales during fiscal 2008.
Upholstery Fabrics. The upholstery fabrics segment markets fabrics
for residential and commercial furniture, including jacquard woven fabrics,
velvets, microdenier suedes, woven dobbies, knitted fabrics, and piece-dyed
woven products. Historically, all of our upholstery fabrics had been produced in
our U.S. manufacturing plants. In fiscal year 2007, however, sales of upholstery
fabrics made in non-U.S. locations, including our facilities in China, exceeded
U.S.-produced sales for the first time. This trend continued in fiscal 2008,
with non-U.S. produced upholstery accounting for almost 66% of our upholstery
sales for the year (68% in the fourth quarter).
The upholstery segment operates fabric manufacturing facilities in Anderson,
South Carolina, and Shanghai, China. We market fabrics produced in these two
locations, as well as a variety of upholstery fabrics sourced from third party
producers, mostly in China.
As demand for U.S.-produced upholstery significantly declined, we took
aggressive steps to reduce our U.S. manufacturing costs, capacity, and selling,
general and administrative expenses. Our restructuring actions over the past
several years have reduced our U.S. upholstery operations to the one
manufacturing plant in South Carolina and one upholstery distribution facility
in Burlington, North Carolina. The result of our restructuring actions over the
past several years has been a large reduction in capacity and related costs for
U.S. production of upholstery fabrics, accompanied by a reduction of 73% in
sales of U.S.-produced fabrics since fiscal 2005 (33% from fiscal 2007 to fiscal
2008).
The down-sizing of our U.S. upholstery operations represents the continuation of
a longer-term trend that has affected the company and the upholstery fabric
business for the past eight years. At the end of fiscal 2000, we had fourteen
manufacturing plants in the U.S. for upholstery fabrics, with total sales in the
segment of $382 million. The book value of these manufacturing assets in the
segment was $92 million at the end of fiscal 2000 and $52 million at the end of
fiscal 2004. By comparison, manufacturing assets currently operating in the
upholstery fabrics segment (in the U.S.) have a total book value of $1.7
million. Total segment sales for fiscal 2008 were $115.9 million, and of that
amount only $40 million represents sales of fabrics produced in the U.S. For
additional discussion of restructuring activities in the upholstery fabrics
segment, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
During the same time that we have been reducing our U.S. upholstery operations
in response to declining demand for U.S.-produced fabrics, we have been
aggressively expanding our operations located in China in response to increasing
demand for upholstery products produced in that country. In 2003, we began a
strategy to link our strong customer relationships, design expertise and
production technology with low cost fabric manufacturers in China in order to
deliver enhanced value to our customers throughout the world. The operations
near Shanghai began operations in 2004 with a finishing and inspection
operation, where goods woven in China by selected outside suppliers are treated
with finishing processes and subjected to U.S. quality control measures before
being distributed to customers. In subsequent years, a variety of finished goods
(with no further finishing needed) began to be sourced through our China
5
operations, and in fiscal 2006 the operation was expanded to include a facility
where upholstery fabrics are cut and sewn into "kits" that are made to the
specifications of furniture manufacturing customers in the U.S. Cut and sewn
"kit" operations have become an important method for furniture producers to
reduce production costs by moving a larger percentage of the labor component of
furniture manufacturing to lower cost environments. Other recent developments in
our China operations include the introduction of velvet fabric production,
expansion of our product development and design capabilities in China, further
strengthening of key strategic partnerships with mills, and expanded
distribution facilities. In addition, we are now expanding our marketing efforts
to sell our China products in countries other than the U.S., including the
Chinese local market. Our operations in China now include six facilities devoted
to manufacturing and distribution activities.
As our activities and opportunities in China have expanded, our strategy has not
changed. The company entered China with the view that we would take advantage of
the variety of products and lower cost environment available in China, while
still maintaining control of the "value-added" processes such as design,
finishing, quality control, and logistics. This strategic approach has allowed
us to limit our investment of capital in fixed assets and to lower the costs of
our products significantly, while continuing to leverage our design and
finishing expertise, industry knowledge and important relationships. In this
way, we maintain our ability to provide furniture manufacturers with products
from every category of fabric used to cover upholstered furniture, and to meet
continually changing consumer preferences.
Overview of Industry and Markets
Culp markets products primarily to manufacturers that operate in three principal
markets. The mattress fabrics segment supplies the bedding industry, which
produces mattress sets (mattresses, box springs, and foundations). The
upholstery fabrics segment supplies the residential and commercial furniture
industries. The residential furniture market includes upholstered furniture sold
to consumers for household use, including sofas, sleep sofas, chairs, recliners
and sectionals. The commercial furniture and fabrics market includes upholstered
office seating and modular office systems sold primarily for use in offices and
other institutional settings, and commercial textile wall covering. The
principal industries into which the company sells products are described below.
Overview of Bedding Industry
The bedding industry has experienced growth in sales in recent years, primarily
due to a relatively strong market during these years, as well as higher average
selling prices of mattresses. According to the International Sleep Products
Association (ISPA), a trade association, the U.S. wholesale bedding industry
accounted for an estimated $6.9 billion in sales in 2007, a 1.4% increase over
revised numbers for 2006. The industry is comprised of several hundred
manufacturers, but the largest four manufacturers accounted for more than 58% of
the total wholesale shipments in 2007, while the top fifteen accounted for
almost 81%. The bedding industry has averaged approximately 6% annual growth
over the past twenty years, with only one year experiencing a decline in revenue
(by 0.3% in 2001). It has proven to be a stable and mature industry. This
stability is partly due to replacement purchases, which account for an estimated
70% of bedding industry sales. During the first half of 2008, the U.S. mattress
retail environment has slowed due to weakened economic conditions brought on by
housing declines and higher energy costs.
6
Unlike the residential furniture industry, which has faced intense competition
from imports, the bedding industry has faced limited competition from imports.
The primary reasons for this fact include: 1) the short lead times demanded by
mattress retailers, 2) the limited inventories carried by retailers, 3) the
customized nature of each retailer's product lines, 4) high shipping costs, 5)
the relatively low direct labor content in mattresses, and 6) strong brand
recognition.
We believe that several important demographic factors are helping to support the
bedding industry. In particular, the growth of the aging and affluent segments
of the population has a significant impact on the bedding industry. The
increasing size of homes and growth in the number of vacation and second homes
has played a major role in the demand for bedding in the United States. These
trends have been a factor in the size and average selling prices of mattresses
being sold in the United States. According to ISPA, while wholesale sales of
bedding increased 1.4% in 2007, the number of units sold decreased by 2.1%.
Premium and luxury mattresses have been the fastest growing category of bedding
in recent years, although there are signs that this trend has begun to slow
during the current economic slowdown.
While a majority of bedding sales is traditional innerspring bedding, several
specialty bedding producers (primarily foam and air-adjustable mattresses) have
recorded significant sales gains in recent years. According to industry
statistics, specialty bedding producers, which produce mattresses that do not
use inner spring construction, grew their sales by 10.2% in 2007. The specialty
bedding segment has provided new growth opportunities for bedding producers and
those companies that supply components, including fabric, to them.
Other key trends in the bedding industry include:
o Consumers have become increasingly aware of and are concerned with the
health benefits of better sleep. This has caused an increased focus on
the quality of bedding products and an apparent willingness on the
part of consumers to pay more for bedding. The average selling price
of mattress sets has increased in recent years, and the fastest
growing category of bedding products is premium priced mattresses.
o Mattress manufacturers are using common SKU's and less expensive
fabric for borders, which is the ticking that goes around the side of
the mattresses and box springs. Virtually all of these border fabrics
are woven damask ticking of the type we manufacture, and this trend
has caused significant pricing pressures in this category of mattress
fabric.
o The production of flame-resistant materials for bedding is an
increasingly important issue for bedding manufacturers. A national
standard for flame resistance in bedding became effective July 1,
2007.
o There is increasing popularity of knitted mattress tickings, as
opposed to woven and printed tickings. Knitted ticking was initially
used primarily on premium mattresses, but these products are now being
placed increasingly on mattresses at mid-range retail price points.
Knitted fabric is typically used on the top panel of a mattress, while
woven ticking remains the predominant fabric on the borders or sides
of mattress sets.
o Increasing raw material costs, especially related to steel and foam
have pressured mattress fabric profitability in 2008.
7
Overview of Residential Furniture Industry
The residential furniture industry is a mature industry, with long-term growth
rates that have been generally at or below the overall growth rate of the U.S.
economy. The American Home Furnishings Alliance (AHFA), a trade association,
recently released revised data regarding the size of the U.S. residential
furniture industry. This revised data shows a slight decline in the total value
of residential furniture shipments in the U.S. over the past five years, with
sales in the past four years remaining between $21.0 and $21.7 billion.
Currently, the residential furniture industry has been significantly affected by
slow economic conditions, weak housing market, high energy prices, and more
substantially by a structural shift to offshore sourcing, primarily from China,
which has led to deflation in retail furniture prices.
Key trends and issues facing the residential furniture industry include:
o The sourcing of components and fully assembled furniture from overseas
continues to play a major role in the residential furniture industry,
with sales of imported furniture growing at a faster rate than the
overall industry, although at a slowing pace. According to
Furniture/Today, an industry trade publication, imports of residential
furniture into the U.S. grew 2% in 2007, following an increase of 7%
from 2005 to 2006. By far, the largest source for these imports
continues to be China, which now accounts for approximately 55% of
total U.S. furniture imports. In past years, a large majority of
furniture imports from China were wooden "casegoods," but there has
been significant recent growth in imports of upholstered furniture
components, including upholstery fabric and "cut and sewn kits" for
furniture covers. This trend has been especially strong for leather
furniture, and it now extends to other coverings, including
microdenier suedes and the more traditional types of fabrics
manufactured by the company.
o Imports of upholstery fabric, both in roll and in "kit" form, have
increased rapidly in recent years. Fabrics entering the U.S. from
China and other low labor cost countries are resulting in increased
price competition in the upholstery fabric and upholstered furniture
markets.
o Leather and suede upholstered furniture has been gaining market share
over the last ten years. This trend has increased over the last five
years in large part because selling prices of leather furniture have
been declining significantly over this time period. We believe,
however, that the rate of increase appears to be leveling off and this
trend may be weakening.
o The residential furniture industry has been consolidating at the
manufacturing level for several years. The result of this trend is
fewer, but larger, customers for marketers of upholstery fabrics.
o In recent years, several of the nation's larger furniture
manufacturers have opened retail outlets of their own. As top
retailers shift floor space to private label imports, manufacturers
are focused on distributing their own products. In addition, furniture
marketing by "lifestyle" retailers has increased, which has increased
the number of retail outlets for residential furniture but has also
increased the reliance on private brands or private labels.
o Increasing raw material costs due to significantly higher energy
costs.
8
Overview of Commercial Furniture Industry
The market for commercial furniture - furniture used in offices and other
institutional settings - grew approximately 5.5% from 2006 to 2007, following a
7.4% increase the previous year. Growth during the past four years represents a
reversal of a significant decline that had occurred over the three years prior
to those. The commercial furniture industry declined significantly from 2001
through 2003, reflecting economic trends affecting businesses, which are the
ultimate customers in this industry. According to the Business and Institutional
Furniture Manufacturer's Association (BIFMA), a trade association, the
commercial furniture market in the U.S. totaled approximately $11.4 billion in
2007 in wholesale shipments by manufacturers. Although higher than 2006, this
total still represents a significant decrease from the industry's peak of $13.3
billion in 2000.
Products
As described above, our products include mattress fabrics and upholstery
fabrics, which are the company's identified operating segments.
Mattress Fabrics Segment
- ------------------------
Mattress fabrics segment sales constituted 54% of sales in fiscal 2008, and 43%
in fiscal 2007. The company has emphasized fabrics that have broad appeal at
prices generally ranging from $1.35 to $7.50 per yard. The average per yard
selling prices for fiscal 2008, 2007, and 2006 were $2.44, $2.35, and $2.26,
respectively.
Upholstery Fabrics Segment
- --------------------------
Upholstery fabrics segment sales totaled 46% of sales for fiscal 2008, and 57%
in fiscal 2007. The company has emphasized fabrics that have broad appeal at
"good" and "better" prices, generally ranging from $2.75 to $8.00 per yard. The
average per yard selling prices for fiscal 2008, 2007, and 2006 were $4.22,
$4.18, and $4.22, respectively.
We market products in all categories of fabric that manufacturers currently use
for bedding and furniture. The following table indicates the product lines
within each segment, and a brief description of their characteristics.
Culp Fabric Categories by Segment
---------------------------------
Mattress Fabrics
- ----------------
Woven jacquards Florals and other intricate designs. Woven on complex
looms using a variety of synthetic and natural yarns.
Prints Variety of designs produced economically by screen
printing onto a variety of base fabrics, including
jacquards, knits, poly/cotton sheeting and non-wovens.
Knitted Ticking Floral and other intricate designs produced on special-
width circular machines utilizing a variety of synthetic
and natural yarns. Knitted ticking has inherent
stretching properties and spongy softness, and conforms
well with layered foam packages.
9
Upholstery Fabrics
- ------------------
Woven jacquards Elaborate, complex designs such as florals and
tapestries in traditional, transitional and contemporary
styles. Woven on intricate looms using a wide variety of
synthetic and natural yarns.
Woven dobbies Fabrics that use straight lines to produce geometric
designs such as plaids, stripes and solids in
traditional and country styles. Woven on less
complicated looms using a variety of weaving
constructions and primarily synthetic yarns.
Velvets Soft fabrics with a plush feel. Produced with synthetic
yarns, either by weaving or by "tufting" yarn into a
base fabric. Basic designs such as plaids in both
traditional and contemporary styles.
Suede fabrics Fabrics woven or knitted using microdenier polyester
yarns, which are piece dyed and finished, usually by
sanding. The fabrics are typically plain or small
jacquard designs, with some being printed. These are
sometimes referred to as microdenier suedes, and some
are "leather look" fabrics.
Manufacturing and Sourcing
Mattress Fabrics Segment
- ------------------------
Our mattress fabrics segment operates two manufacturing plants, located in
Stokesdale, North Carolina and St. Jerome, Quebec, Canada. Over the past four
fiscal years, we made capital expenditures of approximately $16 million to
consolidate all of our production of woven jacquards, or damask ticking, to
these two plants and to modernize the equipment and expand capacity in these
facilities. The result has been an increase in manufacturing efficiency and a
substantial reduction in operating costs. With this new manufacturing
configuration, jacquard ticking is woven at both ticking plants, and printed
ticking is produced at the Stokesdale facility. Most finishing and inspection
processes for mattress fabrics are conducted at the Stokesdale plant.
In addition to the mattress fabrics we manufacture, the company has important
supply arrangements in place that allow us to source mattress fabric from
strategic suppliers. A sourcing arrangement with a supplier that has established
a manufacturing plant in North Carolina near our U.S. distribution facility
allows us to source knitted fabric based on designs created by Culp designers.
In addition, a portion of our woven jacquard fabric and knitted fabric is
obtained from a supplier located in Turkey, based on designs created by Culp
designers, and we are now sourcing certain specialty ticking products (such as
suedes and embroidered fabrics) through our China platform.
10
Upholstery Fabrics Segment
- --------------------------
We currently operate one upholstery manufacturing facility in the U.S. and six
in China. The U.S. plant is located in Anderson, South Carolina, and mainly
produces velvet upholstery fabrics with some production of certain decorative
fabrics.
Our upholstery manufacturing facilities in China are all located within the same
industrial area near Shanghai. At these plants, we apply strategic value-added
finishing processes to fabrics sourced from a limited number of strategic
suppliers in China, and we inspect sourced fabric there as well. In addition,
the Shanghai operations include facilities where sourced fabric is cut and sewn
to provide "kits" that are designed to be placed on specific furniture frames
designated by our customers, and we also produce velvet upholstery fabrics at
our China facilities.
A large portion of our upholstery fabric products, as well as certain elements
of our production processes, are now being sourced from outside suppliers. The
development of our facilities in China has provided a base from which to access
a variety of products, including some fabrics (such as microdenier suedes) that
are not produced anywhere within the U.S. We have found opportunities to develop
significant relationships with key overseas suppliers that allow us to source
products on a cost effective basis while at the same time limiting our
investment of capital in manufacturing assets. The company sources unfinished
and finished fabrics from a limited number of strategic suppliers in China who
are willing to work with the company to commit significant capacity to our needs
while working with our product development team to meet the demands of our
customers. We also source a substantial portion of our yarns, both for U.S. and
China upholstery operations, through our China facilities. The remainder of our
yarn is obtained from other suppliers around the world, as we have eliminated
our internal yarn production capabilities.
Over the past several years, we have outsourced in the U.S. our fabric finishing
operations, our yarn production, and certain weaving operations, allowing us to
obtain those services on a variable basis at a lower unit cost from outside
suppliers. As these developments have proceeded, we have reduced the carrying
value of our fixed assets committed to U.S. upholstery fabric manufacturing from
$32.5 million at the end of fiscal 2005 to $1.7 million at the end of fiscal
2008.
Product Design and Styling
Consumer tastes and preferences related to bedding and upholstered furniture
change over time. The use of new fabrics and designs remains an important
consideration for manufacturers to distinguish their products at retail and to
capitalize on changes in preferred colors, patterns and textures. Culp's success
is largely dependent on our ability to market fabrics with appealing designs and
patterns.
The process of developing new designs involves maintaining an awareness of broad
fashion and color trends both in the United States and internationally. The
company has developed an upholstery design and product development team (with
staff located in the U.S. and in China) that searches continually for new ideas
and for the best sources of raw materials, yarns and fabrics, both domestic and
international. The team then develops product offerings using these ideas and
materials, taking both fashion trends and cost considerations into account, to
offer products designed to meet the needs of furniture manufacturers and
ultimately the desires of consumers. Upholstery fabric designs are introduced at
major fabric trade conferences that occur twice a year in the United States
(June and December).
11
Mattress fabric designs are not introduced on a scheduled season. More
frequently, designs are introduced upon customer request as they plan
introduction to their retailers. Additionally, we work closely with our
customers on new design introductions around the major markets like High Point
and Las Vegas.
Distribution
Mattress Fabrics Segment
- ------------------------
All of our shipments of mattress fabrics originate from our manufacturing
facility in Stokesdale. Through arrangements with major customers and in
accordance with industry practice, we maintain a significant inventory of
mattress fabrics at our distribution facility in Stokesdale ("make to stock"),
so that products may be shipped to customers with short lead times and on a
"just in time" basis.
Upholstery Fabrics Segment
- --------------------------
The majority of our upholstery fabrics are marketed on a "make to order" basis
and are shipped directly from our distribution facilities in Burlington and
Shanghai. In addition, an inventory comprising a limited number of sourced
fabric patterns is held at our distribution facilities in Burlington and
Shanghai from which our customers can obtain fabrics on a "purchase from stock"
basis through a program known as "Culp Express." We have developed a revised
marketing strategy for our U.S.-produced upholstery products, providing
customers with very quick delivery on target products at key price points. This
program, known as "Store House," is aimed at driving higher sales volume per
fabric pattern and thus should result in improved manufacturing performance and
lower unit costs for our U.S. upholstery operations, while employing a smaller
fixed asset base.
Sources and Availability of Raw Materials
Mattress Fabrics Segment
- ------------------------
Raw materials account for approximately 70% of mattress ticking production
costs. The mattress fabrics segment purchases synthetic yarns (polypropylene,
polyester and rayon), rayon staple fiber, certain greige (unfinished) goods,
latex adhesives, laminates, dyes and other chemicals. Most of these materials
are available from several suppliers, and prices fluctuate based on supply and
demand, the general rate of inflation, and particularly on the price of
petrochemical products. The mattress fabrics segment has generally not had
significant difficulty in obtaining raw materials.
Upholstery Fabrics Segment
- --------------------------
Raw materials account for approximately 50%-60% of upholstery fabric
manufacturing costs for products the company manufactures. This segment
purchases synthetic yarns (polypropylene, polyester, acrylic and rayon), acrylic
staple fiber, latex adhesives, dyes and other chemicals from various suppliers.
12
The upholstery fabric segment has now outsourced all of its yarn requirements,
and thus it has become more dependent upon suppliers for components yarn. In
addition, we have outsourced a number of our U.S. upholstery fabric
manufacturing services to suppliers, such as extrusion of yarn and upholstery
fabric finishing. Most recently, we have outsourced a portion of our decorative
upholstery fabric weaving. Although U.S produced fabrics are a decreasing
portion of our upholstery business, increased reliance by both our U.S. and
China upholstery operations on outside suppliers for basic production needs such
as base fabrics, yarns, and finishing services has caused the upholstery fabrics
segment to become more vulnerable to price increases, delays, or production
interruptions caused by problems within businesses that we do not control.
Both Segments
- -------------
Many of our basic raw materials are petrochemical products or are produced from
such products. For this reason, our material costs are especially sensitive to
changes in prices for petrochemicals and the underlying price of oil. Recent
increases in market prices for oil have caused significant increases in the raw
materials costs for both of our segments.
In addition, the financial condition and performance of a number of U.S.-based
yarn suppliers has been severely impacted by the reductions in the overall size
of the U.S. textile industry over the last several years. These conditions have
increased the risk of business failures or further consolidations among the
suppliers to the North American-based portions of our business. We expect this
situation to cause additional disruptions and pricing pressures in our supply of
certain raw materials, yarns, and textile services obtained in the U.S. as
overall demand for textiles produced in the U.S. declines.
Seasonality
Mattress Fabrics Segment
- ------------------------
The mattress fabrics business and the bedding industry in general are slightly
seasonal, with sales being the highest in late spring and late summer, with
another peak in mid-winter.
Upholstery Fabrics Segment
- --------------------------
The upholstery fabrics business is somewhat seasonal, with increased sales
during our second and fourth fiscal quarters. This seasonality results from
one-week closings of our manufacturing facilities, and the facilities of most of
our customers in the United States, during our first and third fiscal quarters
for the holiday weeks of July 4th and Christmas. This effect is becoming less
pronounced as a larger portion of our fabrics are produced or sold in locations
outside the United States.
Competition
Competition for the company's products is high and is based primarily on price,
design, quality, timing of delivery and service.
Mattress Fabrics Segment
- ------------------------
The mattress fabrics market is concentrated in a few relatively large suppliers.
We believe our principal mattress fabric competitors are Bekaert Textiles B.V.,
Blumenthal Print Works, Inc., Global Textile Alliance and several smaller
companies producing knitted and other fabric.
13
Upholstery Fabrics Segment
- --------------------------
In the upholstery fabric market, we compete against a large number of companies,
ranging from a few large manufacturers comparable in size to the company to
small producers, and a growing number of "converters" of fabrics (companies who
buy and re-sell, but do not manufacture fabrics). We believe our principal
upholstery fabric competitors are Richloom Fabrics, Merrimack Fabrics and Morgan
Fabrics, and Specialty Textile, Inc. (or STI). Some of our largest competitors
(such as Quaker Fabrics and Joan Fabrics) have went out of business, but they
have been replaced by a large number of smaller competitors (both manufacturers
and converters).
Until approximately seven years ago, overseas producers of upholstery fabric had
not historically been a source of significant competition for the company.
Recent trends, however, have shown significant increased competition in U.S.
markets by foreign producers of upholstery fabric, furniture components and
finished upholstery furniture, as well as increased sales in the U.S. of leather
furniture produced overseas (which competes with upholstered furniture for
market share). Imports of upholstery fabric from China have dramatically
increased. Foreign manufacturers often are able to produce upholstery fabric and
other components of furniture with significantly lower raw material and
production costs (especially labor) than those of our U.S. operations and other
U.S.-based manufacturers. We compete with lower cost foreign goods on the basis
of design, quality, reliability and speed of delivery. In addition, as discussed
above, we have established operations in China to facilitate the sourcing and
marketing of goods produced in China.
The trend in the upholstery fabrics industry to greater overseas competition and
the entry of more converters has caused the upholstery fabrics industry to
become substantially more fragmented in recent years, with lower barriers to
entry. This has resulted in a larger number of competitors selling upholstery
fabrics, with an increase in competition based on price.
Environmental and Other Regulations
We are subject to various federal and state laws and regulations, including the
Occupational Safety and Health Act ("OSHA") and federal and state environmental
laws, as well as similar laws governing our manufacturing facilities in China
and Canada. We periodically review our compliance with these laws and
regulations in an attempt to minimize the risk of violations.
Our operations involve a variety of materials and processes that are subject to
environmental regulation. Under current law, environmental liability can arise
from previously owned properties, leased properties and properties owned by
third parties, as well as from properties currently owned and leased by the
company. Environmental liabilities can also be asserted by adjacent landowners
or other third parties in toxic tort litigation.
In addition, under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), and analogous state statutes,
liability can be imposed for the disposal of waste at sites targeted for cleanup
by federal and state regulatory authorities. Liability under CERCLA is strict as
well as joint and several.
14
We are periodically involved in environmental claims or litigation and requests
for information from environmental regulators. Each of these matters is
carefully evaluated, and the company provides for environmental matters based on
information presently available. Based on this information, we do not believe
that environmental matters will have a material adverse effect on either the
company's financial condition or results of operations. However, there can be no
assurance that the costs associated with environmental matters will not increase
in the future. See the discussion of a current environmental claim against the
company below in Item 3 - "Legal Proceedings."
Employees
As of April 27, 2008, we had 1,087 employees, compared to 1,140 at the end of
fiscal 2007, and 1,283 at the end of fiscal 2006. The number of employees has
been reduced substantially over the past several years in connection with our
restructuring initiatives and efforts to reduce U.S. upholstery fabrics
manufacturing costs, as well as initiatives to outsource certain operations. The
number of employees located in the U.S. has been reduced even more dramatically,
while the number of employees in China has increased (see table below).
The hourly employees at our manufacturing facility in Canada (approximately 15%
of the company's workforce) are represented by a local, unaffiliated union. The
collective bargaining agreement for these employees expires on February 1, 2011.
We are not aware of any efforts to organize any more of our employees, and we
believe our relations with our employees are good.
The following table illustrates the changes in the location of our workforce and
number of employees, as of year-end, over the past five years.
Number of Employees
---------------------------------------------------------------------------
Fiscal 2008 Fiscal 2007 Fiscal 2006 Fiscal 2005 Fiscal 2004
-------------- --------------- ------------- --------------- --------------
Mattress Fabrics Segment 373 361 351 372 362
---------------------------------------------------------------------------
Upholstery Fabrics Segment
United States 230 297 659 1,404 1,915
China 481 479 270 109 40
---------------------------------------------------------------------------
Total Upholstery Fabrics
Segment 711 776 929 1,513 1,955
---------------------------------------------------------------------------
Unallocated corporate 3 3 3 3 3
---------------------------------------------------------------------------
Total 1,087 1,140 1,283 1,888 2,320
---------------------------------------------------------------------------
Customers and Sales
Mattress Fabrics Segment
- ------------------------
Major customers for our mattress fabrics include the leading bedding
manufacturers: Sealy, Serta (National Bedding), and Simmons. The loss of one or
more of these customers would have a material adverse effect on the company. Our
largest customer in the mattress fabrics segment is Sealy Corporation,
accounting for approximately 11% of the company's overall sales in fiscal 2008.
Our mattress fabrics customers also include many small and medium-size bedding
manufacturers.
15
Upholstery Fabrics Segment
- --------------------------
Our major customers for upholstery fabrics are leading manufacturers of
upholstered furniture, including Ashley, Bassett, Berkline/Benchcraft, Best Home
Furnishings, Flexsteel, Furniture Brands International (Broyhill, Thomasville,
and Lane), Klaussner Furniture and La-Z-Boy (La-Z-Boy Residential, Bauhaus, and
England). Major customers for the company's fabrics for commercial furniture
includes HON Industries. Our largest customer in the upholstery fabrics segment
is La-Z-Boy Incorporated, the loss of which would have a material adverse effect
on the company. Our sales to La-Z-Boy accounted for approximately 11% of the
company's total net sales in fiscal 2008.
The following table sets forth the company's net sales by geographic area by
amount and percentage of total net sales for the three most recent fiscal years.
Net Sales by Geographic Area
(dollars in thousands)
----------------------------
Fiscal 2008 Fiscal 2007 Fiscal 2006
----------- ----------- -----------
United States $ 202,701 79.8% $ 197,748 78.9% $ 213,552 81.7%
----------- -------- ----------- -------- ----------- --------
North America 18,880 7.4 17,310 6.9 18,944 7.3
(Excluding USA)
Far East and Asia 28,465 11.2 32,683 13.1 28,104 10.8
All other areas 4,000 1.6 2,792 1.1 501 0.2
----------- -------- ----------- -------- ----------- --------
Subtotal (International) 51,345 20.2 52,785 21.1 47,549 18.3
----------- -------- ----------- -------- ----------- --------
Total $ 254,046 100.0% $ 250,533 100.0% $ 261,101 100.0%
=========== ======== =========== ======== =========== ========
For additional segment information, see note 18 in the consolidated financial
statements.
Backlog
Mattress Fabrics Segment
- ------------------------
The backlog for mattress fabric is not a reliable predictor of future shipments
because the majority of sales are on a just-in-time basis.
Upholstery Fabrics Segment
- --------------------------
Although it is difficult to predict the amount of backlog that is "firm," we
have reported the portion of the upholstery fabric backlog from customers with
confirmed shipping dates within five weeks of the end of the fiscal year. On
April 27, 2008, the portion of the upholstery fabric backlog with confirmed
shipping dates prior to June 1, 2008 was $8.8 million, all of which are expected
to be filled early during fiscal 2009, as compared to $10.9 million as of the
end of fiscal 2007 (for confirmed shipping dates prior to June 3, 2007).
16
ITEM 1A. RISK FACTORS
Our business is subject to risks and uncertainties. In addition to the matters
described above under "Cautionary Statement Concerning Forward-Looking
Information," set forth below are some of the risks and uncertainties that could
cause a material adverse change in our results of operations or financial
condition.
Restructuring initiatives create short-term costs that may not be offset by
increased savings or efficiencies.
Over the past several years, we have undertaken significant restructuring
activities, which have involved closing manufacturing plants, realigning
manufacturing assets, and changes in product strategy. These actions are
intended to lower manufacturing costs and increase efficiency, but they involve
significant costs, including inventory markdowns, the write-off or write-down of
assets, severance costs for terminated employees, contract termination costs,
equipment moving costs, and similar charges. These charges have caused a
decrease in earnings in the short-term. In addition, during the time that
restructuring activities are underway, manufacturing inefficiencies are caused
by moving equipment, realignment of assets, personnel changes, and by the
consolidation process for certain functions. Unanticipated difficulties in
restructuring activities or delays in accomplishing our goals could cause the
costs of our restructuring initiatives to be greater than anticipated and the
results achieved to be significantly lower, which would negatively impact our
results of operations and financial condition.
Our sales and profits have been declining in the upholstery fabrics segment.
We may not be able to restore the upholstery fabrics segment to consistent
profitability. In that 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) closing a number of U.S. manufacturing facilities, (ii)
establishing facilities in China to take advantage of a lower cost environment
and greater product diversity, and (iii) outsourcing certain production
functions in the U.S., including yarn production, finishing of decorative
fabrics, and some weaving. The success of our restructuring efforts depends on a
number of variables, including our ability to consolidate certain functions,
manage manufacturing processes with lower direct involvement, manage a longer
supply chain, and similar issues. Current market conditions in the furniture
industry are weak, and our sales of upholstery continue to decline. There is no
assurance that we will be able to manage our restructuring activities
successfully or restore the upholstery fabrics segment to consistent
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, we have expanded our operations in China, and in addition
we have been purchasing an increasing share of our products and raw materials
from offshore sources. 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, both of which are
inherently subject to greater risks of delay or disruption. In addition,
17
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. Changes in the value
of the U.S. dollar versus other currencies can affect the company's financial
results because a significant portion of the company's operations are located
outside the United States. Strengthening of the U.S. dollar against other
currencies can have a negative impact on the company's sales of products
produced in those countries. 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 our 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 yarn and other raw materials, 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.
Further write-offs or write-downs of assets would result in a decrease in our
earnings and shareholders' equity.
The company has long-lived assets, consisting mainly of property, plant and
equipment and goodwill. SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived," establishes an impairment accounting model for long-lived assets
such as property, plant, and equipment and requires the company to assess for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recovered. SFAS No. 142, "Goodwill and
Other Intangible Assets," requires that goodwill be tested at least annually for
impairment or whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recovered. 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 2008, the company
experienced asset write-downs of property, plant and equipment of $792,000, of
which $503,000 related to the upholstery fabrics segment and $289,000 related to
the mattress fabrics segment. In addition we reported a net deferred income tax
asset of $32.3 million as of April 27, 2008. The valuation of this asset must be
tested on a periodic basis against the likelihood of realizing its full value,
and our continued ability to carry this asset at its full value depends upon our
ability to generate taxable income in the future attributable to U.S.
operations.
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.
We depend upon outside suppliers for most of our 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
18
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 2008, energy prices increased significantly, in part
due to increases in the price of oil and other petrochemical products. 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.
Business difficulties or failures of large customers could result in a decrease
in our sales and earnings.
We currently have several customers that account for a substantial portion of
our sales. In the mattress fabric segment, several large bedding manufacturers
have large market shares and comprise a significant portion of our mattress
fabric sales, with Sealy Corporation accounting for approximately 11% of
consolidated net sales in fiscal 2008. In the upholstery fabrics segment,
La-Z-Boy Incorporated accounted for approximately 11% of consolidated net sales
during fiscal 2008, 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 difficulty in collection of our
trade accounts receivable.
If we are unable to manage our cash effectively, we will not have funds
available to repay debt and to maintain the flexibility necessary for successful
operation of our business.
Our ability to meet our cash obligations depends on our operating cash flow,
access to trade credit, and our ability to borrow under our debt agreements. In
addition to the cash needs of operating our business, we have substantial debt
repayments that are due over the next several years on our unsecured senior
notes (see note 12 to the consolidated financial statements). Our ability to
generate cash flow going forward will depend upon our ability to generate
profits from our business, and we have not been able to generate earnings on a
consistent basis in recent years. If we are not able to generate cash during the
coming year, we may not be able to provide the funds needed to operate and
maintain our business or to make payments on our debt as they become due.
19
Further loss of market share due to competition would result in further declines
in sales and could result in additional losses or decreases in earnings.
Our business is highly competitive, and in particular the upholstery fabric
industry is fragmented and is experiencing an increase in the number of
competitors. As a result, we face significant competition from a large number of
competitors, both foreign and domestic. We compete with many other manufacturers
of fabric, as well as converters who source fabrics from various producers and
market them to manufacturers of furniture and bedding. In many cases, these
fabrics are sourced from foreign suppliers who have a lower cost structure than
the company. The highly competitive nature of our business means we are
constantly subject to the risk of losing market share. Our sales have decreased
significantly over the past five years due in part to the increased number of
competitors in the marketplace, especially foreign sources of fabric. As a
result of increased competition, there have been deflationary pressures on the
prices for many of our products, which make 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 mark-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. The recent economic slowdown and increase in energy prices
have caused a decrease in consumer spending and demand for home furnishings,
including goods that incorporate our products.
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,
20
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.
We 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 adopted on
a nationwide basis. 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.
We must maintain market capitalization and shareholders equity limits for
continued listing on the New York Stock Exchange.
Our common stock is currently traded on the New York Stock Exchange (NYSE).
Under the NYSE's current listing standards, we are required to have market
capitalization or shareholders equity of more than $75 million to maintain
compliance with continued listing standards. The company's market capitalization
fell below $75 million during fiscal 2006 and parts of fiscal 2007. Our
shareholders' equity was below $75 million at the end of fiscal 2006 and during
the first half of fiscal 2007. As a result, we were listed during fiscal 2007 as
"below compliance" with NYSE listing standards, and we were required to submit a
plan regarding our ability to return to and maintain compliance with these
standards. If we are not able to maintain compliance with the NYSE standards,
our stock will be delisted from trading on the NYSE, resulting in the need to
find another market on which our stock can be listed or causing our stock to
cease to be traded on an active market, which could result in a reduction in the
liquidity for our stock and a reduction in demand for our stock. As of April 27,
2008, our market capitalization over a 30 trading-day period and shareholders'
equity exceeded the level required for continued listing on the NYSE. The
company was notified by the NYSE during fiscal 2008 that it had been removed
from the NYSE "watch list" and is now considered a company in good standing
under the NYSE's continuing listing standards.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
21
ITEM 2. PROPERTIES
The company's headquarters are located in High Point, North Carolina. As of the
end of fiscal 2008, the company owned or leased nine active manufacturing and
distribution facilities, a corporate headquarters, and a small inactive
distribution facility. The following is a list of the company's principal
administrative, manufacturing and distribution facilities. The manufacturing
facilities and distribution centers are organized by segment.
Approx.
Total Area Expiration
Location Principal Use (Sq. Ft.) of Lease (1)
- -------- ------------- -------- ------------
o Administrative:
High Point, North Carolina (5) Upholstery fabric division 55,000 Owned
offices and corporate
headquarters
o Mattress Fabrics:
Stokesdale, North Carolina Manufacturing, distribution, 230,000 Owned
and division offices
St. Jerome, Quebec, Canada Manufacturing 202,500 Owned
o Upholstery Fabrics:
Anderson, South Carolina Manufacturing 99,000 Owned
Burlington, North Carolina Finished goods distribution 132,000 2009
Shanghai, China Manufacturing and offices 69,000 2009
Shanghai, China Manufacturing and distribution 100,000 2010
Shanghai, China Manufacturing and warehousing 90,000 2012
Shanghai, China (3) Manufacturing and warehousing 139,000 2012
Shanghai, China (4) Manufacturing and warehousing 101,632 2010
o Inactive:
Tupelo, Mississippi (2) Idle 57,000 2008
- ----------------------------------------------------
(1) Includes all options to renew, except for inactive properties.
(2) Facility was closed in June 2007. Lease expires on December 31, 2008.
(3) Represents two separate facilities under one lease.
(4) Represents new facility dedicated to cut and sew operations.
(5) Effective October 29, 2007, the company adopted a plan to sell its corporate
headquarters as the company is only utilizing one-half of the available
space and with the sale can lower costs and reduce debt. The company expects
that the final sale and disposal of the assets will be completed within a
year from the date the plan was adopted and the sales proceeds will be
applied against the $6.3 million mortgage balance.
The company believes that its facilities are in good condition, well-maintained
and suitable and adequate for present utilization. Due to the continuation of
significant restructuring efforts in the upholstery fabrics segment during
fiscal 2008, including closing multiple plant locations, determining an accurate
measure of capacity in this segment is difficult. In the mattress fabrics
segment, however, management has estimated that the company has manufacturing
capacity to produce approximately 2% more products (measured in yards) than it
sold during fiscal 2008. In addition, the company has the ability to source
additional mattress ticking and upholstery fabrics from outside suppliers,
further increasing its ultimate output of finished goods.
22
ITEM 3. LEGAL PROCEEDINGS
A lawsuit was filed against the company and other defendants (Chromatex, Inc.,
Rossville Industries, Inc., Rossville Companies, Inc. and Rossville Investments,
Inc.) on February 5, 2008 in United States District Court for the Middle
District of Pennsylvania. The plaintiffs are Alan Shulman, Stanley Siegel, Ruth
Cherenson as Personal Representative of Estate of Alan Cherenson, and Adrienne
Rolla and M.F. Rolla as Executors of the Estate of Joseph Byrnes. The plaintiffs
were partners in a general partnership that formerly owned a manufacturing plant
in West Hazleton, Pennsylvania (the "Site"). Approximately two years after this
general partnership sold the Site to defendants Chromatex, Inc. and Rossville
Industries, Inc. the company leased and operated the Site as part of the
company's Rossville/Chromatex division. The lawsuit involves court judgments
that have been entered against the plaintiffs and against defendant Chromatex,
Inc. requiring them to pay costs incurred by the United States Environmental
Protection Agency ("USEPA") responding to environmental contamination at the
Site, in amounts approximating $8.6 million. Neither USEPA nor any other
governmental authority has asserted any claim against the company on account of
these matters. The plaintiffs seek contribution from the company and other
defendants and a declaration that the company and the other defendants are
responsible for environmental response costs under environmental laws and
certain agreements. The company does not believe it has any liability for the
matters described in this litigation and intends to defend itself vigorously. In
addition, the company has an indemnification agreement with certain other
defendants in the litigation pursuant to which the other defendants agreed to
indemnify the company for any damages it incurs as a result of the environmental
matters that are subject of this litigation and consequently no reserve has been
recorded.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter ended April 27, 2008.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Registrar and Transfer Agent
Computershare Trust Company, N.A.
c/o Computershare Investor Services
Post Office Box 43078
Providence, Rhode Island 02940-3078
(800) 254-5196
(781) 575-2879 (Foreign shareholders) www.computershare.com
Stock Listing
Culp, Inc. common stock is traded on the New York Stock Exchange ("NYSE") under
the symbol CFI. As of April 27, 2008, Culp, Inc. had approximately 1,550
shareholders based on the number of holders of record and an estimate of
individual participants represented by security position listings.
23
The company has received notification from the NYSE that it is now considered a
"company in good standing" under the NYSE's continued listing standards and will
be removed from its "Watch List." The NYSE's decision comes as a result of the
company's consistent positive performance with respect to its business plan
submitted to the NYSE in September 2006 and its compliance with the NYSE's
minimum market capitalization and shareholders' equity standard over the past
six quarters. After a twelve month follow up period to ensure continuing
compliance, the company will be subject to normal NYSE monitoring procedures.
Analyst Coverage
These analysts cover Culp, Inc.:
Morgan Keegan - Laura Champine, CFA
Raymond, James & Associates - Budd Bugatch, CFA
Value Line - Craig Sirois
Dividends and Share Repurchases
The company has not paid a cash dividend to its shareholders during the past two
years, and our current agreements with our lenders prohibit the payment of such
dividends. In addition, we have not repurchased any of our common stock during
the past two years, and our current agreements with our lenders prohibits such
share repurchases.
Performance Comparison
The following graph shows changes over the five-year period ended April 27, 2008
in the value of $100 invested in (1) the common stock of the company, (2) the
Hemscott Textile Manufacturing Group Index (formerly named Core Data Textile
Manufacturing Group Index) reported by Standard and Poor's, consisting of
twenty-nine companies (including the company) in the textile industry, and (3)
the Standard & Poor's 500 Index.
The graph assumes an initial investment of $100 at the end of fiscal 2003 and
the reinvestment of all dividends during the periods identified.
24
See attached table.
Market Information
See Item 6, Selected Financial Data, and Selected Quarterly Data in Item 8, for
market information regarding the company's common stock.
25
ITEM 6. SELECTED FINANCIAL DATA
percent
(amounts in thousands, fiscal fiscal fiscal fiscal fiscal change
except per share amounts) 2008 2007 2006 2005 2004 2008/2007
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) STATEMENT DATA
net sales $ 254,046 250,533 261,101 286,498 318,116 1.4%
cost of sales (6) 220,887 219,328 237,233 260,341 259,794 0.7
- ------------------------------------------------------------------------------------------------------------------------
gross profit 33,159 31,205 23,868 26,157 58,322 6.3
selling, general, and
administrative expenses (6) 23,973 27,030 28,954 35,357 41,019 (11.3)
goodwill impairment - - - 5,126 - -
restructuring (credit) expense
and asset impairment (6) 886 3,534 10,273 10,372 (1,047) (74.9)
- ------------------------------------------------------------------------------------------------------------------------
income (loss) from operations 8,300 641 (15,359) (24,698) 18,350 N.M.
interest expense 2,975 3,781 4,010 3,713 5,528 (21.3)
interest income (254) (207) (126) (134) (376) 22.7
early extinguishment of debt - - - - 1,672 -
other expense 736 68 634 517 750 982.4
- ------------------------------------------------------------------------------------------------------------------------
income (loss) before income N.M.
taxes 4,843 (3,001) (19,877) (28,794) 10,776
income taxes (542) (1,685) (8,081) (10,942) 3,556 (67.8)
- ------------------------------------------------------------------------------------------------------------------------
net income (loss) $ 5,385 (1,316) (11,796) (17,852) 7,220 N.M.
========================================================================================================================
depreciation (7) 5,548 7,849 14,362 18,884 13,642 (29.3)
========================================================================================================================
weighted average shares
outstanding 12,624 11,922 11,567 11,549 11,525 5.9
weighted average shares
outstanding, assuming dilution 12,765 11,922 11,567 11,549 11,777 7.1
========================================================================================================================
PER SHARE DATA
net income (loss) per share -
basic $ 0.43 (0.11) (1.02) (1.55) 0.63 N.M.
net income (loss) per share -
diluted $ 0.42 (0.11) (1.02) (1.55) 0.61 N.M.
- ------------------------------------------------------------------------------------------------------------------------
book value 6.83 6.29 6.39 7.43 8.95 8.6
========================================================================================================================
BALANCE SHEET DATA
operating working capital (5) $ 38,368 46,335 44,907 56,471 64,441 (17.2)%
property, plant and equipment,
net 32,939 37,773 44,639 66,032 77,770 (12.8)
total assets 148,029 159,946 157,467 176,123 193,816 (7.5)
capital expenditures 6,928 4,227 6,470 14,360 6,747 63.9
long-term debt and lines of
credit (1) 21,423 40,753 47,722 50,550 51,030 (47.4)
shareholders' equity 86,359 79,077 74,523 85,771 103,391 9.2
capital employed (3) 102,868 109,661 112,531 131,214 139,853 (6.2)
========================================================================================================================
RATIOS & OTHER DATA
gross profit margin 13.1% 12.5% 9.1% 9.1% 18.3%
operating income (loss) margin 3.3% 0.3% (5.9)% (8.6)% 5.8%
net income (loss) margin 2.1% (0.5)% (4.5)% (6.2)% 2.3%
effective income tax rate (11.2)% 56.1% 40.7% 38.0% 33.0%
long-term debt to total capital
employed ratio (1) 20.8% 37.2% 42.4% 38.5% 36.5%
operating working capital
turnover (5) 5.8 5.3 5.0 4.8 5.2
days sales in receivables 37 41 39 35 34
inventory turnover 5.8 5.7 5.4 5.2 5.3
==============================================================================================================
STOCK DATA
stock price
high $ 12.30 8.52 5.23 9.10 12.28
low 6.12 4.24 3.83 4.20 5.05
close 7.53 8.50 4.64 4.70 8.61
P/E ratio (2)
high (4) 29 N.M. N.M. N.M. 20
low (4) 15 N.M. N.M. N.M. 8
daily average trading volume
(shares) 38.3 17.8 12.5 21.1 55.9
==============================================================================================================
(1) Long-term debt includes long-term and current maturities of long-term debt and lines of credit.
(2) P/E ratios based on trailing 12-month net income per share.
(3) Capital employed includes long-term and current maturities of long-term debt, lines of credit, and shareholders'
equity, offset by cash and cash equivalents.
(4) N.M - Not meaningful
(5) Operating working capital for this calculation is accounts receivable, inventories and offset by accounts payable.
(6) The company incurred restructuring and related charges in fiscal 2008, 2007, 2006 and 2005. See note 3 of the
company's consolidated financial statements
(7) Includes accelerated depreciation of $1.2, $5.0 and $6.0 million for fiscal 2007, 2006 and 2005, respectively.
No accelerated depreciation was recorded in fiscal 2008 and 2004.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
notes attached thereto.
Overview
The company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to April 30. The years ended April 27, 2008, and April 29, 2007, each
included 52 weeks. The company's operations are classified into two business
segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment
primarily manufactures, sources, and sells fabrics to bedding manufacturers. The
upholstery fabrics segment sources, manufacturers and sells fabrics primarily to
residential and commercial (contract) furniture manufacturers.
The company evaluates the operating performance of its segments based upon
income (loss) from operations before restructuring and related charges or
credits, certain unallocated corporate expenses, and certain other non-recurring
items. Unallocated corporate expenses represent primarily compensation and
benefits for certain executive officers and all costs related to being a public
company. Segment assets include assets used in the operation of each segment and
primarily consist of accounts receivable, inventories, and property, plant and
equipment. The mattress fabrics segment also includes in segment assets, assets
held for sale, goodwill, and other current and non-current assets associated
with the ITG acquisition. The upholstery fabrics segment also includes assets
held for sale in segment assets.
The company's net sales for fiscal 2008 increased 1% to $254.0 million, compared
with $250.5 million for fiscal 2007. The overall sales increase reflects an
increase in mattress fabric sales mostly offset by a decrease in upholstery
fabric sales in fiscal 2008. The sales increase in the mattress fabrics segment
reflects the incremental sales related to the company's acquisition of ITG's
mattress fabrics product line in January 2007 and a shift in the product mix
toward knitted fabrics, which have a higher selling price. The sales decline in
the upholstery fabrics segment reflects very weak demand industry wide, as well
as continued soft demand for U.S. produced upholstery fabrics driven by consumer
preference for leather and suede furniture and other imported furniture and
fabrics.
The company reported net income of $5.4 million, or $0.42 per share diluted,
compared with a net loss of $1.3 million, or $0.11 per share diluted in fiscal
2007. This overall improvement in net income reflects a significant decrease in
restructuring and related charges in fiscal 2008 to $2.9 million compared with
$8.4 million in fiscal 2007. Also, this overall improvement reflects an increase
in operating income in the mattress fabrics segment due to higher sales volume
and full plant utilization related to the company's acquisition of ITG' mattress
fabrics product line. The results also reflect a decrease in operating income in
the upholstery fabrics segment due to the very difficult operating environment
for the retail furniture industry, as discretionary consumer spending for
furniture continues to be very soft due to a slowing economy, weak housing
market and high energy prices.
Results of Operations
The following table sets forth certain items in the company's consolidated
statements of net income (loss) as a percentage of net sales.
27
2008 2007 2006
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 86.9 87.5 90.9
----- ----- -----
Gross profit 13.1 12.5 9.1
Selling, general and administrative expenses 9.4 10.8 11.1
Restructuring expense 0.3 1.4 3.9
----- ----- -----
Income (loss) from operations 3.3 0.3 (5.9)
Interest expense, net 1.1 1.4 1.5
Other expense 0.3 0.0 0.2
----- ----- -----
Income (loss) before income taxes 1.9 (1.2) (7.6)
Income taxes * (11.2) 56.1 40.7
----- ----- -----
Net income (loss) 2.1% (0.5)% (4.5)%
===== ===== =====
* Calculated as a percentage of income (loss) before income taxes.
The following tables set forth the company's sales, gross profit, selling,
general, and administrative expenses, and operating income (loss) by segment for
the fiscal years ended April 27, 2008, April 29, 2007, and April 30, 2006.
28
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE TWELVE MONTHS ENDED APRIL 27, 2008 AND APRIL 29, 2007
(Amounts in thousands)
YEARS ENDED
-------------------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- --------------------------------
April 27, April 29, % Over April 27, April 29,
Net Sales by Segment 2008 2007 (Under) 2008 2007
- --------------------------------------- ------------ ---------- ---------- -------------- --------------
Mattress Fabrics $ 138,064 107,797 28.1 % 54.3 % 43.0 %
Upholstery Fabrics 115,982 142,736 (18.7)% 45.7 % 57.0 %
------------ ---------- ---------- -------------- --------------
Net Sales $ 254,046 250,533 1.4 % 100.0 % 100.0 %
============ ========== ========== ============== ==============
Gross Profit by Segment Gross Profit Margin
- --------------------------------------- --------------------------------
Mattress Fabrics $ 22,576 18,610 21.3 % 16.4 % 17.3 %
Upholstery Fabrics 12,829 17,397 (26.3)% 11.1 % 12.2 %
------------ ---------- ---------- -------------- --------------
Subtotal 35,405 36,007 (1.7)% 13.9 % 14.4 %
Loss on impairment of equipment (289) (1) - (100.0)% (0.1)% 0.0 %
Restructuring related charges (1,957) (2) (4,802) (4) (59.2)% (0.8)% (1.9)%
------------ ---------- ---------- -------------- --------------
Gross Profit $ 33,159 31,205 6.3 % 13.1 % 12.5 %
============ ========== ========== ============== ==============
Selling, General and Administrative
expenses by Segment Percent of Sales
- --------------------------------------- --------------------------------
Mattress Fabrics $ 8,457 7,856 7.7 % 6.1 % 7.3 %
Upholstery Fabrics 11,650 15,065 (22.7)% 10.0 % 10.6 %
Unallocated Corporate expenses 3,797 4,051 (6.3)% 1.5 % 1.6 %
------------ ---------- ---------- -------------- --------------
Subtotal 23,904 26,972 (11.4)% 9.4 % 10.8 %
Restructuring related charges 69 (2) 58 (4) 19.0 % 0.0 % 0.0 %
------------ ---------- ---------- -------------- --------------
Selling, General and Administrative
expenses $ 23,973 27,030 (11.3)% 9.4 % 10.8 %
============ ========== ========== ============== ==============
Operating Income (loss) by Segment Operating Income (Loss) Margin
- --------------------------------------- --------------------------------
Mattress Fabrics $ 14,118 10,754 31.3 % 10.2 % 10.0 %
Upholstery Fabrics 1,180 2,332 (49.4)% 1.0 % 1.6 %
Unallocated corporate expenses (3,797) (4,051) (6.3)% (1.5)% (1.6)%
------------ ---------- ---------- -------------- --------------
Subtotal 11,501 9,035 27.3 % 4.5 % 3.6 %
Loss on impairment of equipment (289) (1) - (100.0)% (0.1)% 0.0 %
Restructuring expense and restructuring
related charges (2,912) (3) (8,394) (5) (65.3)% (1.1)% (3.4)%
------------ ---------- ---------- -------------- --------------
Operating income $ 8,300 641 N.M. 3.3 % 0.3 %
============ ========== ========== ============== ==============
Depreciation by Segment
- ---------------------------------------
Mattress Fabrics $ 3,443 3,679 (6.4)%
Upholstery Fabrics 2,105 2,923 (28.0)%
------------ ---------- ----------
Subtotal 5,548 6,602 (16.0)%
Accelerated Depreciation - 1,247 (100.0)%
------------ ---------- ----------
Total Depreciation $ 5,548 7,849 (29.3)%
============ ========== ==========
(1) The $289 represents impairment losses on older and existing equipment that
is being replaced by newer and more efficient equipment. This impairment
loss pertains to the mattress fabrics segment.
(2) The $1.9 million restructuring related charge represents $1.0 million for
inventory markdowns and $954 for other operating costs associated with
closed plant facilities. The $69 restructuring related charge represents
other operating costs associated with closed plant facilities.
(3) The $2.9 million represents $1.0 million for inventory markdowns, $1.0
million for other operating costs associated with closed plant facilities,
$533 for lease termination and other exit costs, $503 for write-downs of
buildings and equipment, $189 for asset movement costs, $23 for employee
termination benefits, and a credit of $362 for sales proceeds received on
equipment with no carrying value. Of this total charge, $1.9 million was
recorded in cost of sales, $69 was recorded in selling, general, and
administrative expenses, and $886 was recorded in restrucuturing expense.
The total $2.9 restructuring and related charge pertains to the upholstery
fabrics segment.
(4) The $4.8 million represents restructuring related charges of $2.4 million
for inventory markdowns, $1.2 million for accelerated depreciation, and
$1.2 million for other operating costs associated with closed plant
facilities. The $58 represents other operating costs associated with closed
plant facilities.
(5) The $8.4 million represents restructuring and related charges of $2.4
million for inventory markdowns, $1.5 million for write-downs and buildings
and equipment, $1.4 million for asset movement costs, $1.2 million for
accelerated depreciation, $1.2 million for other operating costs associated
with the closing of plant facilities, $909 for employee termination
benefits, $706 for lease termination and other exit costs, and a credit of
$930 for sales proceeds received on equipment with no carrying value. Of
this total charge, $4.8 million was recorded in cost of sales, $58 was
recorded in selling, general, and administrative expenses, and $3.5 million
was recorded in restructuring expense. The total $8.4 restructuring and
related charge pertains to the upholstery fabrics segment.
29
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE TWELVE MONTHS ENDED APRIL 29, 2007 AND APRIL 30, 2006
(Amounts in thousands)
YEARS ENDED
---------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------- -----------------------------
April 29, April 30, % Over April 29, April 30,
Net Sales by Segment 2007 2006 (Under) 2007 2006
- --------------------------------------- ----------- ---------- ---------- ----------- ----------------
Mattress Fabrics $ 107,797 93,688 15.1 % 43.0 % 35.9 %
Upholstery Fabrics 142,736 167,413 (14.7)% 57.0 % 64.1 %
----------- ---------- ---------- ----------- ----------------
Net Sales $ 250,533 261,101 (4.0)% 100.0 % 100.0 %
=========== ========== ========== =========== ================
Gross Profit by Segment Gross Profit Margin
- --------------------------------------- -----------------------------
Mattress Fabrics $ 18,610 13,579 37.0 % 17.3 % 14.5 %
Upholstery Fabrics 17,397 14,909 16.7 % 12.2 % 8.9 %
----------- ---------- ---------- ----------- ----------------
Subtotal 36,007 28,488 26.4 % 14.4 % 10.9 %
Restructuring related charges (4,802) (1) (4,620) (4) 3.9 % (1.9)% (1.8)%
----------- ---------- ---------- ----------- ----------------
Gross Profit $ 31,205 23,868 30.7 % 12.5 % 9.1 %
=========== ========== ========== =========== ================
Sales, General and Administrative
expenses by Segment Percent of Sales
- --------------------------------------- -----------------------------
Mattress Fabrics $ 7,856 6,724 16.8 % 7.3 % 7.2 %
Upholstery Fabrics 15,065 15,863 (5.0)% 10.6 % 9.5 %
Unallocated corporate expenses 4,051 3,345 21.1 % 1.6 % 1.3 %
----------- ---------- ---------- ----------- ----------------
Subtotal 26,972 25,932 4.0 % 10.8 % 9.9 %
Restructuring related charges 58 (2) 3,022 (5) (98.1)% 0.0 % 1.2 %
----------- ---------- ---------- ----------- ----------------
Selling, General and
Administrative expenses $ 27,030 28,954 (6.6)% 10.8 % 11.1 %
=========== ========== ========== =========== ================
Operating Income (loss) by Segment Operating Income (Loss) Margin
- --------------------------------------- ------------------------------
Mattress Fabrics $ 10,754 6,855 56.9 % 10.0 % 7.3 %
Upholstery Fabrics 2,332 (954) 344.4 % 1.6 % (0.6)%
Unallocated corporate expenses (4,051) (3,345) (21.1)% (1.6)% (1.3)%
----------- ---------- ---------- ----------- ----------------
Subtotal 9,035 2,556 253.5 % 3.6 % 1.0 %
Restructuring expense and restructuring
related charges (8,394) (3) (17,915) (6) (53.1)% (3.4)% (6.9)%
----------- ---------- ---------- ----------- ----------------
Operating Income (loss) $ 641 (15,359) 104.2 % 0.3 % (5.9)%
=========== ========== ========== =========== ================
Depreciation by Segment
- ---------------------------------------
Mattress Fabrics $ 3,679 3,662 0.5 %
Upholstery Fabrics 2,923 5,740 (49.1)%
----------- ---------- ----------
Subtotal 6,602 9,402 (29.8)%
Accelerated Depreciation 1,247 4,960 (74.9)%
----------- ---------- ----------
Total Depreciation $ 7,849 14,362 (45.3)%
=========== ========== ==========
(1) The $4.8 million represents restructuring related charges of $2.4 million
for inventory markdowns, $1.2 million for accelerated depreciation, $1.2
million for operating costs associated with the closing of plant
facilities.
(2) The $58 represents operating costs associated with the closing of plant
facilities.
(3) The $8.4 million represents restructuring and related charges of $2.4
million for inventory markdowns, $1.5 million for write-downs of buildings
and equipment, $1.4 million for asset movement costs, $1.2 million for
accelerated depreciation, $1.2 million for operating costs associated with
the closing of plant facilities, $909 for employee termination benefits,
$706 for lease termination and other exit costs, and a credit of $930 for
sales proceeds received on equipment with no carrying value. Of this total
charge, $4.8 million, $58, and $3.5 million were included in cost of sales,
selling, general, and administrative expenses, and restructuring expense,
respectively.
(4) The $4.6 million represents restructuring related charges of $2.0 million
for inventory markdowns, $1.9 million for accelerated depreciation and $665
for operating costs associated with closing of plant facilities.
(5) The $3.0 million represents accelerated depreciation.
(6) The $17.9 million represents restructuring and related charges of $6.0
million for write-downs of buildings and equipment, $5.0 million for
accelerated depreciation, $2.2 million for asset movement costs, $2.0
million for inventory markdowns, $1.7 million for employee termination
benefits, $665 for operating costs associated with the closing of plant
facilities, and $316 for lease termination and other exit costs. Of this
total charge $4.6 million, $3.0 million, and $10.3 million were included in
cost of sales, selling, general, and administrative expenses, and
restructuring expense, respectively.
30
2008 compared with 2007
Restructuring and Related Charges
During fiscal 2008, total restructuring and related charges incurred were $2.9
million, of which $1.0 million related to inventory markdowns, $1.0 million for
other operating costs associated with closed plant facilities, $533,000 for
lease termination and other exit costs, $503,000 for write-downs of buildings
and equipment, $189,000 for asset movement costs, $23,000 for employee
termination benefits, and a credit of $362,000 for sales proceeds received on
equipment with no carrying value. Of this total charge, $1.9 million was
recorded in cost of sales, $69,000 was recorded in selling, general, and
administrative expenses, and $866,000 was recorded in restructuring expense in
the 2008 Consolidated Statement of Net Income. Of this total charge, $1.4
million and $1.5 million represent cash and non-cash charges, respectively.
During fiscal 2007, total restructuring and related charges incurred were $8.4
million, of which $2.4 million related to inventory markdowns, $1.5 million for
write-downs of buildings and equipment, $1.4 million for asset movement costs,
$1.2 million for accelerated depreciation, $1.2 million for operating costs
associated with closed plant facilities, $909,000 for employee termination
benefits, $706,000 for lease termination and other exit costs, and a credit of
$930,000 for sales proceeds received on equipment with no carrying value. Of
this total charge, $4.8 million was recorded in cost of sales, $58,000 was
recorded in selling, general, and administrative expenses, and $3.5 million was
recorded in restructuring expense in the 2007 Consolidated Statement of Loss. Of
this total charge, $3.3 million and $5.1 million represent cash and non-cash
charges, respectively.
A detailed explanation of each of the company's significant restructuring plans
for fiscal 2008 and 2007 are presented below.
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 involved closing the company's weaving plant located in
Graham, NC, and closing the yarn plant located in Lincolnton, NC. The company
has transferred certain production from the Graham plant to its Anderson, SC and
Shanghai, China plant facilities as well as a small portion to contract weavers.
As a result of these two plant closures, the company reduced the number of
associates by approximately 185 people.
During fiscal 2008, total restructuring and related charges incurred for this
restructuring plan were $2.9 million of which $1.0 million related to inventory
markdowns, $978,000 related to other operating costs associated with closed
plant facilities, $503,000 related to write-downs of buildings and equipment,
$467,000 related to lease termination and other exit costs, $189,000 related to
asset movement costs, $171,000 related to employee termination benefits, and a
credit of $362,000 related to sales proceeds received on equipment with no
carrying value. Of this total charge, $1.9 million was recorded in cost of
sales, $69,000 was recorded in selling, general, and administrative expenses,
and $968,000 was recorded in restructuring expense in the 2008 Consolidated
Statement of Net Income.
During fiscal 2007, total restructuring and related charges incurred for this
restructuring plan were $6.7 million of which $2.2 million related to inventory
markdowns, $1.3 million related to employee termination benefits, $1.2 million
related to accelerated depreciation, $1.0 million related to write-downs of
equipment, $461,000 related to asset movement costs, $241,000 related to lease
termination and other exit costs, and $212,000 related to operating costs
associated with the closed plant facilities. Of this total charge, $3.6 million
was recorded in cost of sales and $3.1 million was recorded in restructuring
expense in the 2007 Consolidated Statement of Loss.
31
April 2005-Upholstery Fabrics
In April 2005, the board of directors approved a restructuring plan within the
upholstery fabrics segment designed to reduce costs, increase asset utilization,
and improve profitability. The restructuring plan included consolidation of the
company's velvet fabrics manufacturing operations, fixed manufacturing cost
reductions in the decorative fabrics operation, and significant reductions in
selling, general, and administrative expenses within the upholstery fabrics
segment. Also, the company combined its sales, design, and customer service
activities within the upholstery fabrics segment. As a result, on June 30, 2005
the company sold two buildings, both located in Burlington, NC, consisting of
approximately 140,000 square feet for proceeds of $2,850,000. Overall, these
restructuring actions reduced the number of associates by 350 people.
During fiscal 2008, the company recorded a restructuring credit of $35,000, of
which a charge of $32,000 related to lease termination and other exit costs and
a credit of $67,000 related to employee termination benefits. This credit of
$35,000 was recorded in restructuring expense in the 2008 Consolidated Statement
of Net Income.
During fiscal 2007, the total restructuring and related charges incurred for
this restructuring plan were $1.1 million, of which approximately $671,000
related to asset movement costs, $321,000 related to operating costs associated
with closed plant facilities, $238,000 related to inventory markdowns, $194,000
related to lease termination costs, $59,000 related to write-downs of equipment,
a credit of $165,000 related to sales proceeds received on equipment with no
carrying value, and a credit of $195,000 related to employee termination
benefits. Of this total net charge, $564,000 was recorded in restructuring
expense, $501,000 was recorded in cost of sales, and $58,000 was recorded in
selling, general, and administrative expenses in the 2007 Consolidated Statement
of Loss.
Segment Analysis
Mattress Fabrics Segment
Net Sales - For fiscal 2008, the mattress fabrics segment reported net sales of
$138.1 million compared with $107.8 million for fiscal 2007, an increase of 28%.
Mattress fabrics sales represented approximately 54% of total net sales for
fiscal 2008, up from 43% in fiscal 2007. Mattress ticking yards sold during
fiscal 2008 were 56.6 million compared with 45.8 million yards sold in fiscal
2007, an increase of 24%. These results primarily reflect the incremental sales
related to the company's acquisition of ITG's mattress fabrics product line in
January 2007. The average selling price for fiscal 2008 was $2.44 per yard
compared with $2.35 in fiscal 2007, an increase of 4%. This trend reflects a
shift in the product mix toward knitted fabrics, which have a higher average
selling price. For the fourth quarter of fiscal 2008, the mattress fabrics
segment reported net sales of $34.6 million compared with $38.1 million in the
fourth quarter fiscal 2007, a decrease of 9%. This trend reflects the planned
discontinuance of certain ITG products that did not fit Culp's business model
and softer consumer bedding demand in the fourth quarter of fiscal 2008.
Operating Income - For fiscal 2008, the mattress fabrics segment reported
operating income of $14.1 million, or 10.2% of net sales, compared with $10.8
million, or 10.0% of net sales, for fiscal 2007. The increase in operating
income was primarily attributable to the incremental sales related to the ITG
acquisition. This acquisition added approximately $35 million in sales with
minimal additions to staffing and fixed assets. These results reflect higher raw
material costs, increased Canadian operating expenses due to the strengthening
of the Canadian currency as compared to fiscal 2007, the planned discontinuance
of certain ITG products that did not fit Culp's business model, and softer
consumer bedding demand in the fourth quarter of fiscal 2008.
32
To offset some of these higher costs, the company implemented a price increase,
effective March 2008. In addition, the company is making strategic investments
to enhance its manufacturing platform and provide additional reactive capacity
in mattress fabrics. During the fourth quarter, the company began implementing a
$5 million capital project that includes expansion of the weaving and finishing
operations in the Stokesdale, NC facility. This project is expected to be
completed during the first quarter of fiscal 2009. This equipment and additional
capacity is expected to allow this segment to operate more efficiently on lower
inventories and provide even faster response time to our customers.
Additionally, this capital project should effectively position the company to
pursue additional growth opportunities.
Selling, general, and administrative expenses as a percentage of net sales were
6.1% in fiscal 2008 compared with 7.3% in fiscal 2007. This trend primarily
reflects the incremental sales from the ITG acquisition, without a corresponding
increase to selling, general, and administrative expenses.
Segment Assets- Segment assets consist of accounts receivable, inventory, a
non-compete agreement associated with the ITG acquisition, goodwill, assets held
for sale, and property, plant and equipment. As of April 27, 2008, accounts
receivable and inventory totaled $27.8 million, compared to $32.5 million at
April 29, 2007. This decrease is primarily due to lower sales volume in the
fourth quarter of fiscal 2008 compared with fiscal 2007 and improved inventory
management. The decrease in sales volume in the fourth quarter of fiscal 2008
compared with fiscal 2007 is attributable to the planned discontinuance of
certain ITG products that did not fit the company's business model. At April 29,
2007, other current assets for this segment also include a credit for future
purchases of inventory associated with the ITG acquisition of $527,000. This
credit for future purchases of inventory was fully utilized at April 27, 2008.
As of April 27, 2008 and April 29, 2007 the carrying values of the ITG
non-compete agreement were $789,000 and $1.1 million, respectively. As of April
27, 2008 and April 29, 2007, the carrying value of the segment's goodwill was
$4.1 million.
At April 27, 2008, this segment had assets held for sale with carrying values
totaling $35,000. The company adopted a plan to sell certain older equipment
related to its mattress fabrics segment that is being replaced by newer and more
efficient equipment. In connection with this plan of disposal, the company
determined that the carrying value of this equipment of $513,000 exceeded its
fair value of $224,000. Consequently, the company recorded an impairment loss of
$289,000. This impairment loss of $289,000 was recorded in cost of sales in the
2008 Consolidated Statement of Net Income. The company received sales proceeds
totaling $189,000 in fiscal 2008.
At April 27, 2008, property, plant and equipment totaled $21.7 million, compared
with $22.8 million at April 29, 2007. The $21.7 million at April 27, 2008
represents property, plant, and equipment located in the U.S. of $13.1 million,
located in Canada of $8.4 million, and various corporate allocations of
$168,000. The $22.8 million represents property, plant, and equipment located in
the U.S. of $10.9 million, located in Canada of $10.0 million, and various
corporate allocations of $1.9 million. The corporate allocation of $1.9 million
at April 29, 2007 primarily related to the corporate headquarters, which is
classified in assets held for sale at April 27, 2008. (The plan to sell the
corporate headquarters is discussed in more detail below under `Liquidity and
Capital Resources.")
33
Upholstery Fabrics Segment
Net Sales - Upholstery fabric net sales (which include both fabric and cut and
sewn kits) for fiscal 2008 were $115.9 million compared with $142.7 million in
fiscal 2007, a decrease of 19%. Upholstery fabrics sales represented
approximately 46% of total net sales for fiscal 2008, down from 57% in fiscal
2007. On a unit volume basis, total yards sold for fiscal 2008 decreased by 24%
compared with fiscal 2007. Average selling price was $4.22 per yard for fiscal
2008 compared with $4.18 per yard in fiscal 2007. Upholstery fabric sales
reflect very weak demand industry wide, as well as continued soft demand for
U.S. produced upholstery fabrics driven by consumer preference for leather and
suede furniture and other imported furniture and fabrics. Discretionary consumer
spending for furniture continues to be very soft due to a slowing economy, weak
housing market, and high energy prices.
Operating Income (Loss) - Operating income for fiscal 2008 was $1.2 million, or
1.0%, of net sales compared to operating income for fiscal 2007 of $2.3 million,
or 1.6% of net sales. The company was able to report a profitable performance in
this segment based on a significantly improved cost structure with its China
platform and substantially reduced selling, general, and administrative
expenses. While this segment has reported an operating profit in fiscal 2008 and
2007, the company believes it will be very challenging to report an operating
profit in fiscal 2009 due to extremely weak consumer spending for furniture.
Selling, general, and administrative expenses in fiscal 2008 decreased 23%
compared with fiscal 2007. This reduction is due to the company's restructuring
activities regarding its U.S. upholstery fabric operations.
Non-U.S. Produced Sales - Net sales of upholstery fabrics produced outside the
company's U.S. manufacturing operations were $75.9 million in fiscal 2008, a
decrease of 8% from $82.4 million in fiscal 2007. Net sales of upholstery
fabrics produced outside the company's U.S. operations accounted for
approximately 66% of total upholstery fabric net sales in fiscal 2008 compared
with 58% in fiscal 2007. Sales of cut and sewn kits increased 92% for fiscal
2008 compared with fiscal 2007. This trend toward higher non-U.S. produced sales
in relation to U.S. produced net sales is expected to continue as the company's
U.S. customers and furniture retailers have continued to move an increasing
amount of their fabric and furniture purchases, including cut and sewn kits, to
Asia. As a result, the company has moved with them and responded with an
operation designed to meet their fabric needs.
The company's offshore upholstery fabric business is its China operation, which
began manufacturing operations during the fourth quarter of fiscal 2004. This
initiative involved a strategy to link the company's existing customer
relationships, design expertise, and production technology with low-cost fabric
manufacturing in China, while continuing to maintain high quality standards. The
company is currently leasing six facilities in the Shanghai region of China,
where fabrics sourced in China are inspected and tested to assure compliance
with the company's quality standards before shipment to its customers. In many
cases, additional value-added finishing steps are applied to the fabrics in
China before shipment.
U.S. Produced Sales - Net sales of U.S. produced upholstery fabrics were $40.0
million in fiscal 2008, a decrease of 34% compared with $60.3 million in fiscal
2007. Net sales of upholstery fabrics produced in the U.S. were 34% of total
upholstery fabric net sales in fiscal 2008 compared with 42% in fiscal 2007. In
an attempt to offset this reduction in net sales, the company implemented a
revised marketing strategy that provides customers with very quick delivery on
targeted products at key price points. This strategy allows the company to drive
more business on fewer products. These products are constructed primarily with
Chinese sourced yarns. The company also implemented a significant price increase
on its U.S. produced products during the fourth quarter of fiscal 2008.
34
In addition, management has continued to take very aggressive actions over the
past several years to bring U.S. manufacturing costs and capacity in line with
current and expected demand trends. As a result of these activities, the company
now has one U.S. manufacturing facility operating in the upholstery fabrics
segment compared with fourteen in fiscal 2001. As of April 27, 2008, the
carrying value of the company's U.S. based upholstery fabrics fixed assets was
$1.7 million, compared with approximately $3.4 million at the end of fiscal 2007
and $9.8 million at the end of fiscal 2006. Total U.S. employment in the
company's upholstery fabric operations was 230 at the end of fiscal 2008
compared with 297 at the end of fiscal 2007 and 660 at the end of fiscal 2006.
Management believes it is strategically important to keep its one remaining U.S.
upholstery fabrics facility operational, considering it is the sole manufacturer
of velvet upholstery fabrics in the U.S., management remains committed to take
additional steps if necessary to address the profitability of the company's U.S.
upholstery fabric operations. The company could experience additional inventory
markdowns, write-downs of its property, plant, and equipment, and further
restructuring charges in the U.S. upholstery operations if sales and
profitability continue to decline and further restructuring actions become
necessary.
Segment Assets -- Segment assets consist of accounts receivable, inventory,
property, plant and equipment, and assets held for sale. As of April 27, 2008,
accounts receivable and inventory totaled $34.9 million, compared to $37.5
million at April 29, 2007. This decline reflects lower sales and improved
working capital management. At April 27, 2008, property, plant and equipment
totaled $11.2 million, compared with $14.9 million at April 29, 2007. The $11.2
million at April 27, 2008, represents property, plant, and equipment located in
China of $9.0 million, located in the U.S. of $1.7 million, and various
corporate allocations of $501,000. The $14.9 million at April 29, 2007,
represents property, plant, and equipment located in China of $7.7 million,
located in the U.S. of $3.4 million, and various corporate allocations of $3.8
million. The corporate allocation of $3.8 million at April 29, 2007, primarily
relates to the corporate headquarters, which is classified in assets held for
sale at April 27, 2008.
At April 27, 2008, this segment had assets held for sale with a carrying value
of $792,000 for certain equipment related to the company's U.S. upholstery
fabric operations. In connection with the plan of disposal, the company
determined that the carrying value of this equipment of $812,000 exceeded its
fair value of $792,000. Consequently, the company recorded an impairment loss of
$20,000 in restructuring expense in the 2008 Consolidated Statement of Net
Income.
At April 29, 2007, this segment had assets held for sale with carrying values
totaling $2.5 million. These assets held for sale consisted of buildings and
certain equipment to be sold from the closure of the company's Lincolnton, NC
and Graham, NC plant facilities. At April 27, 2008, all buildings and equipment
classified as held for sale at April 29, 2007 had been sold. The company
received sales proceeds totaling $1.9 million and recorded impairment losses of
$482,000 in restructuring expense on these assets held for sale in fiscal 2008.
Other Income Statement Categories
Selling, General and Administrative Expenses - Selling, general, and
administrative expenses (SG&A) for the company as a whole were $24.0 million for
fiscal 2008 compared with $27.0 million for fiscal 2007, a decrease of 11.3%.
This trend primarily reflects the company's restructuring efforts associated
with its U.S. upholstery fabric operations and decrease in bad debt expense of
$438,000 in fiscal 2008 compared with 10.8% fiscal 2007. SG&A expenses were 9.4%
of net sales in fiscal 2008 compared with 11% in fiscal 2007. This trend
primarily reflects the company's restructuring efforts associated with its U.S.
upholstery fabric operations, increased mattress fabric sales associated with
the ITG acquisition, and a decrease in bad debt expense of $438,000 in fiscal
2008 compared with fiscal 2007.
35
The company adopted SFAS No. 123R in fiscal 2007, which requires all share-based
payments to be recognized as costs 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 $618,000 for fiscal 2008 and $525,000 for
fiscal 2007.
Interest Expense (Income) -- Interest expense for fiscal 2008 decreased to $3.0
million from $3.8 million in fiscal 2007. This trend primarily reflects lower
outstanding balances on the company's unsecured senior term notes. Interest
income for fiscal 2008 increased to $254,000 from $207,000 in fiscal 2007. This
trend primarily reflects higher balances invested in money market funds
throughout fiscal 2008.
Other Expense - Other expense for fiscal 2008 was $736,000 compared with $68,000
in fiscal 2007. This change primarily reflects fluctuations in foreign currency
exchange rates for subsidiaries domiciled in China and Canada.
Income Taxes - The effective income tax rate (taxes as a percentage of income
(loss) before income taxes) was a benefit of 11.2% and 56.1% in fiscal 2008 and
2007, respectively. The income tax benefit of 11.2% in fiscal 2008 primarily
reflects pre-tax losses from the company's U.S. operations (which are taxed at
higher income tax rates), lower income tax expense from foreign sources due to
foreign currency fluctuations and taxable income subject to lower income tax
rates, research and development credits with regards to the company's Canadian
subsidiary of $593,000, and income tax incentives granted by the Chinese
government of $592,000.
The income tax benefit of 56.1% in fiscal 2007 primarily reflects pre-tax losses
from the company's U.S. operations (which are taxed at higher income tax rates)
due to restructuring activities in its U.S. upholstery fabric operations, and
taxable income from foreign sources taxed at lower income tax rates, offset by
non-deductible stock option expenses.
Significant judgment is required in determining the provision for income taxes.
During the ordinary course of business, there are many transactions and
calculations for which the ultimate tax determination is uncertain. We account
for income taxes using the asset and liability approach as prescribed by SFAS
No. 109, "Accounting for Income Taxes." This approach requires recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the consolidated financial statements or
income tax returns. Using the enacted tax rates in effect for the year in which
the differences are expected to reverse, deferred tax assets and liabilities are
determined based on the differences between the financial reporting and tax
basis of an asset or liability. If a change in the effective tax rate to be
applied to a timing difference is determined to be appropriate, it will affect
the provision for income taxes during the period that the determination is made.
As of April 27, 2008, the company had net U.S. deferred income tax assets of
$33.6 million. U.S. federal and state net operating loss carryforwards with
related future tax benefits on a gross basis was approximately $75.3 million at
April 27, 2008. These carryforwards principally expire in 14-20 years, fiscal
2022 through fiscal 2028. The company also has an alternative minimum tax credit
carryforward of approximately $1.3 million for federal income tax purposes,
which does not expire.
36
In making the judgment about the realization of the U.S. net deferred tax
assets, management has considered both the negative and positive evidence, and
concluded that sufficient positive evidence exists to overcome the cumulative
losses experienced in recent years. Specifically, management considered the
following, among other factors: nature of the company's products; history of
positive earnings in the mattress fabrics segment; capital projects in progress
to further enhance the company's globally competitive cost structure in the
mattress fabrics segment; recent restructuring actions in the U.S. upholstery
fabrics business to adjust the U.S. cost structure and bring U.S. manufacturing
capacity in line with demand; development of offshore manufacturing and sourcing
programs to meet changing demands of upholstery fabric customers in the U.S.;
inter-company agreements with the company's China subsidiaries expected to be in
place in fiscal 2009 for various consulting services and intellectual property;
and the incremental sales volume from the purchase of certain assets from ITG
related to the mattress fabric product line of ITG's Burlington House Division.
Management's analysis of taxable income also included the following
considerations: none of the company's net operating loss carryforwards have
previously expired unused; the U.S. federal carryforward period is 20 years; and
the company's current income tax loss carryforwards principally expire in 14-20
years, in fiscal 2022 through 2028. The amount of the deferred tax assets
considered realizable, however, could be reduced if estimates of future U.S.
taxable income during the carryforward period are reduced.
No provision is made for income taxes which may be payable if undistributed
income of the company's foreign subsidiaries were to be paid as dividends to the
company, since the company intends that such earnings will continue to be
invested. At April 27, 2008, the amount of such undistributed income was $56.1
million. Foreign tax credits may be available as a reduction of United States
income taxes in the event of such distributions.
We adopted the provisions of FIN 48 on April 30, 2007. As a result of the
implementation of FIN 48, we recognized an increase of $847,000 to the April 30,
2007 balance of retained earnings. The total amount of unrecognized tax benefits
as of April 30, 2007, the date of adoption, was $3.4 million, of which $3.1
million represents the amount of unrecognized tax benefits that if recognized,
would favorably affect the income tax rate in future periods. As of the date of
adoption, the total amount of interest and penalties due to unrecognized tax
benefits was $98,000.
The following table sets forth the change to the company's unrecognized tax
benefit:
(dollars in thousands) 2008
- --------------------------------------------------------------------------------
balance at April 30, 2007 $ 3,409
increases from prior period tax positions 1,329
decreases from prior period tax positions (92)
increases from current period tax positions 156
- --------------------------------------------------------------------------------
balance at April 27, 2008 $ 4,802
- --------------------------------------------------------------------------------
At April 27, 2008, the company had $4.8 million of unrecognized tax benefits, of
which $4.4 million represents the amount of gross unrecognized tax benefits
that, if recognized, would favorably affect the income tax rate in future
periods. At April 27, 2008, the total amount of interest and penalties due to
unrecognized tax benefits was $115,000.
The liability for uncertain tax positions includes $4.0 million related to tax
positions for which significant change is reasonably possible in fiscal 2009.
This amount relates to double taxation under applicable tax treaties with
foreign jurisdictions. The company files income tax returns in the U.S. federal
and various state jurisdictions and foreign jurisdictions including Canada and
China. United States federal and state income tax returns filed by the company
remain subject to examination for tax years 2002 and subsequent due to loss
carryforwards. Canadian federal returns remain subject to examination for tax
years 2004 and subsequent. Canadian provincial returns remain subject to
examination for tax years 2005 and subsequent. Income tax returns for the
company's China subsidiaries are subject to examination for tax years 2006 and
subsequent.
37
See Notes 1 and 11 in the Notes to the Consolidated Financial Statements for
further details.
2007 compared with 2006
Restructuring and Related Charges
During fiscal 2007, total restructuring and related charges incurred were $8.4
million, of which $2.4 million related to inventory markdowns, $1.5 million for
write-downs of buildings and equipment, $1.4 million for asset movement costs,
$1.2 million for accelerated depreciation, $1.2 million for operating costs
associated with closed plant facilities, $909,000 for employee termination
benefits, $706,000 for lease termination and other exit costs, and a credit of
$930,000 for sales proceeds received on equipment with no carrying value. Of
this total charge, $4.8 million was recorded in cost of sales, $58,000 was
recorded in selling, general, and administrative expenses, and $3.5 million was
recorded in restructuring expense in the 2007 Consolidated Statement of Loss. Of
this total charge, $3.3 million and $5.1 million represent cash and non-cash
charges, respectively.
During fiscal 2006, total restructuring and related charges incurred were $17.9
million, of which $6.0 million related to write-downs of buildings and
equipment, $5.0 million for accelerated depreciation, $2.2 million for asset
movement costs, $2.0 million for inventory markdowns, $1.7 million for employee
termination benefits, $665,000 for operating costs associated with closed plant
facilities, $316,000 for lease termination and other exit costs. Of this total
charge, $4.6 million was recorded in cost of sales, $3.0 million was recorded in
selling, general, and administrative expenses, and $10.3 million was recorded in
restructuring expense in the 2006 Consolidated Statement of Loss. Of this total
charge, $4.9 million and $13 million represent cash and non-cash charges,
respectively.
A detailed explanation of each of the company's significant restructuring plans
for fiscal 2007 and 2006 are presented below.
December 2006-Upholstery Fabrics:
During fiscal 2007, total restructuring and related charges incurred for this
restructuring plan were $6.7 million, of which $2.2 million related to inventory
markdowns, $1.3 million related to employee termination benefits, $1.2 million
related to accelerated depreciation, $1.0 million related to write-downs of
equipment, $461,000 related to asset movement costs, $241,000 related to lease
termination and other exit costs, and $212,000 related to operating costs
associated with the closing of plant facilities. Of this total charge, $3.6
million was recorded in cost of sales and $3.1 million was recorded in
restructuring expense in the 2007 Consolidated Statement of Loss.
September 2005-Upholstery Fabrics
On September 27, 2005, the company's board of directors approved a strategic
alliance with Synthetics Finishing, a division of TSG Incorporated, to provide
finishing services to the company for its domestically produced decorative
upholstery fabrics. As a result, the company closed its finishing plant in
Burlington, NC, thereby reducing the number of associates by approximately 100
people.
During fiscal 2007, total restructuring and related charges incurred for this
restructuring plan were $494,000 of which $450,000 related to other operating
costs associated with a closed plant facility, $284,000 related to lease
termination and other exit costs, $212,000 related to asset movement costs, a
credit of $177,000 related to employee termination benefits, and a credit of
38
$275,000 related to sales proceeds received on equipment with no carrying value.
Of the total net charge, $44,000 was recorded in restructuring expense and
$450,000 was recorded in cost of sales in the 2007 Consolidated Statement of
Loss.
During fiscal 2006, total restructuring and related charges incurred for this
restructuring plan were $1.4 million, of which $533,000 related to employee
termination benefits, $419,000 related to asset movement costs, $238,000 related
to accelerated depreciation, $177,000 related to write-downs of equipment, and
$10,000 related to operating costs associated with a closed plant facility. Of
the total charge, $1.1 million was recorded in restructuring expense and
$245,000 was recorded in cost of sales in the 2006 Consolidated Statement of
Loss.
August 2005-Upholstery Fabrics
In August 2005, the company's board of directors approved a restructuring plan
within the upholstery fabrics segment designed to reduce the company's U.S. yarn
manufacturing operations. The company sold its polypropylene yarn extrusion
equipment (with a carrying value of $2.3 million) located in Graham, NC to the
company's supplier for polypropylene yarn, for $1.1 million payable in cash.
Pursuant to terms of the sale agreement, the company has a long-term supply
contract with the supplier to continue to provide the company with polypropylene
yarn at prices tied to a published index.
The company's board of directors also approved further reductions in the
company's yarn operations by closing the company's facility in Shelby, NC and
consolidating the yarn operations into the Lincolnton, NC facility. The company
is outsourcing the open-end yarns previously produced at the Shelby, NC
facility. Overall, these actions reduced the number of associates by
approximately 100 people.
During fiscal 2007, total restructuring and related charges incurred for this
restructuring plan were $63,000, of which $412,000 related to write-downs of a
building and equipment, $167,000 related to operating costs associated with a
closed plant facility, $49,000 related to asset movement costs, $6,000 related
to lease termination costs, a credit of $40,000 related to employee termination
benefits, and a credit of $531,000 related to sales proceeds on equipment with
no carrying value. Of this total net charge, a credit of $104,000 was recorded
in restructuring expense and a charge of $167,000 was recorded in cost of sales
in the 2007 Consolidated Statement of Loss.
During fiscal 2006, total restructuring and related charges incurred for this
restructuring plan were $5.5 million, of which $2.6 million related to
write-downs of a building and equipment, $1.2 million related to accelerated
depreciation, $567,000 related to employee termination benefits, $565,000
related to inventory markdowns, $394,000 related to operating costs associated
with a closed plant facility, $175,000 related to asset movement costs, and
$11,000 related to lease termination costs. Of this total charge, $3.4 million
was recorded in restructuring expense and $2.1 million was recorded in cost of
sales in the 2006 Consolidated Statement of Loss.
April 2005-Upholstery Fabrics
During fiscal 2007, the total restructuring and related charges incurred for
this restructuring plan were $1.1 million, of which approximately $671,000
related to asset movement costs, $321,000 related to operating costs associated
with the closing of plant facilities, $238,000 related to inventory markdowns,
$194,000 related to lease termination costs, $59,000 related to write-downs of
equipment, a credit of $165,000 related to sales proceeds received on equipment
with no carrying value, and a credit of $195,000 related to employee termination
benefits. Of this total net charge, $564,000 was recorded in restructuring
expense, $501,000 was recorded in cost of sales, and $58,000 was recorded in
selling, general, and administrative expenses in the 2007 Consolidated Statement
of Loss.
39
During fiscal 2006, the total restructuring and related charges incurred for
this restructuring plan were $8.8 million, of which approximately $3.5 million
related to accelerated depreciation, $2.3 million related to write-downs of
equipment, $1.5 million related to inventory markdowns, $557,000 related to
asset movement costs, $529,000 related to employee termination benefits,
$435,000 related to lease termination costs. Of this total charge, $3.7 million
was recorded in restructuring expense, $2.1 million was recorded in cost of
sales, and $3.0 million was recorded in selling, general, and administrative
expenses in the 2006 Consolidated Statement of Loss.
Segment Analysis
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 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 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 and the issuance of 798,582
shares of the company's common stock with a fair value of $5.1 million. The
company also incurred direct acquisition costs relating to legal, accounting,
and other professional fees of $515,000. 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 a non-compete agreement related to the transaction at its
fair value based on various valuation techniques, which is reflected in other
assets in the accompanying consolidated balance sheet. At April 27, 2008 and
April 29, 2007, the gross carrying amount for this non-compete agreement was
$1.1 million. At April 27, 2008 and April 29, 2007, accumulated amortization was
$359,000 and $72,000, respectively. Amortization expense for this non-compete
agreement was $287,000 and $72,000 for fiscal 2008 and 2007, respectively. The
remaining amortization expense for the next three fiscal years follows: FY 2009
- - $287,000; FY 2010 - $287,000; and FY 2011 - $215,000.
The Agreement required ITG to provide certain transition services to the company
and manufacture goods for the company for a limited period of time to support
the company's efforts to transition the former ITG mattress fabrics products
into the company's operations. The company hired only one of ITG's employees
after the transition was 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).
40
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 required the company to register
the Shares with the Securities and Exchange Commission, allowing 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. Pursuant to
a registration request by ITG, a registration statement was filed and became
effective April 10, 2007.
Net Sales - For fiscal 2007, the mattress fabrics segment reported net sales of
$107.8 million compared with $93.7 million for fiscal 2006, an increase of 15%.
Mattress fabrics net sales represented approximately 43% of total net sales for
fiscal 2007, up from 36% in fiscal 2006. In the fourth quarter of fiscal 2007,
mattress fabrics sales represented 52% of overall sales, accounting for more
than half of the total company sales for the first time in the company's
history. Mattress ticking yards sold during fiscal 2007 were 45.8 million
compared with 41.5 million yards sold in fiscal 2006, an increase of 10%. These
results reflect the incremental sales related to the company's acquisition of
ITG's mattress fabrics product line in January 2007. The average selling price
for fiscal 2007 was $2.35 per yard compared with $2.26 in fiscal 2006, an
increase of 4%. This trend reflects a shift in the product mix toward knitted
fabrics, which have a higher selling pricing.
Operating Income -- For fiscal 2007, the mattress fabrics segment reported
operating income of $10.8 million, or 10% of sales, compared with $6.9 million,
or 7% of sales, for fiscal 2006. These operating results reflect higher sales
volume and full plant utilization as a result of the acquisition of ITG's
mattress fabrics product line and a shift in the product mix to increased sales
of substantially higher priced knitted ticking. These results also include ITG
transition costs of $812,000 incurred during fiscal 2007.
Segment Assets-- Segment assets consist of accounts receivable, inventory,
certain current assets associated with the ITG acquisition, a non-compete
agreement associated with the ITG acquisition, goodwill, and property, plant and
equipment. As of April 29, 2007, accounts receivable and inventory totaled $32.5
million, compared to $21.2 million at April 30, 2006. This increase is primarily
due to the acquisition of ITG's mattress fabrics product line in January 2007.
At April 29, 2007, other current assets for this segment included a credit of
future purchases of inventory related to the ITG acquisition of $527,000. As of
April 29, 2007, the carrying value of the ITG non-compete agreement was $1.1
million.
At April 29, 2007, property, plant and equipment totaled $22.8 million, compared
to $25.4 million at April 30, 2006. The $22.8 million represented property,
plant, and, equipment located in the U.S. of $10.9 million, located in Canada of
$10.0 million, and various corporate allocations of $1.9 million. The $25.4
million represented property, plant, and equipment located in the U.S. of $11.0
million, located in Canada of $12.4 million, and various corporate allocations
of $2.0 million. The corporate allocations of $1.9 million at April 29, 2007 and
$2.0 million at April 30, 2006, primarily related to the corporate headquarters
which is classified in assets held for sale at April 27, 2008.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric net sales (which include both fabric and cut and
sewn kits) for fiscal 2007 were $142.7 million compared with $167.4 million in
fiscal 2006, a decrease of 15%. Upholstery fabrics sales represented
approximately 57% of total net sales for fiscal 2007, down from 64% in fiscal
2006. On a unit volume basis, total yards sold for fiscal 2007 decreased by 14%
compared with fiscal 2006. Average selling price was $4.18 per yard for fiscal
41
2007 compared with $4.22 per yard in fiscal 2006. The lower sales reflect
continued soft demand industry-wide for U.S. produced fabrics, driven by
consumer preference for leather and suede furniture and other imported fabrics,
including an increasing amount of cut and sewn kits. Sales of U.S. produced
fabrics for fiscal 2007 were $60.3 million compared with $108.2 million for
fiscal 2006, a decrease of 44%. However, as a result of the company's production
and offshore sourcing efforts, including its China platform, the company
experienced higher sales of upholstery fabric products produced outside the
company's U.S. manufacturing operations. Net sales of upholstery fabrics
produced outside the company's U.S. manufacturing operations increased 39% from
fiscal 2006 and totaled $82.4 million, or 58% of upholstery fabric net sales in
fiscal 2007. Net sales of upholstery fabrics produced outside the company's U.S.
manufacturing operations were $59.2 million or 35% of upholstery fabric net
sales in fiscal 2006.
Operating Income (Loss) - Operating income for fiscal 2007 was $2.3 million, or
1.6%, of net sales compared to an operating loss for fiscal 2006 of $954,000, or
0.6% of net sales. These results reflect continued growth in sales and profits
of non-U.S. produced fabrics, lower U.S. manufacturing fixed costs and
variances, and lower selling, general, and administrative expenses from the
company's restructuring activities.
Segment Assets -- Segment assets consist of accounts receivable, inventory,
property, plant and equipment, and assets held for sale. As of April 29, 2007,
accounts receivable and inventory totaled $37.5 million, compared to $44.6
million at April 30, 2006. This decline primarily reflects lower sales volume.
At April 29, 2007, property, plant and equipment totaled $14.9 million, compared
to $19.2 million at April 30, 2006. The $14.9 million at April 29, 2007,
represented property, plant, and equipment located in China of $7.7 million,
located in the U.S. of $3.4 million, and various corporate allocations of $3.8
million. The $19.2 million at April 30, 2006, represented property, plant, and
equipment located in China of $5.4 million, located in the U.S. of $9.8 million,
and various corporate allocations of $4.0 million. The corporate allocations of
$3.8 million at April 29, 2007 and $4.0 million at April 30, 2006, primarily
related to the corporate headquarters which is classified in assets held for
sale at April 27, 2008.
This segment had assets held for sale with carrying values totaling $2.5 million
and $3.1 million at April 29, 2007 and April 30, 2006, respectively. These
assets held for sale consisted of buildings and certain equipment to be sold
from the closure of the company's finishing facility located in Burlington, NC,
its Lincolnton, NC, Graham, NC, and Shelby, NC, plant facilities. At April 27,
2008, all buildings and equipment classified as held for sale at April 29, 2007
and April 30, 2006 had been sold. In fiscal 2007, the company received sales
proceeds totaling $2.4 million and recorded impairment losses of $323,000 in
restructuring expense in the 2007 Consolidated Statement of Loss.
Other Income Statement Categories
Selling, General and Administrative Expenses - Selling, general, and
administrative expenses (SG&A) were $27.0 million for fiscal 2007 compared with
$29.0 million for fiscal 2006, a decrease of 6.6%. As a percent of net sales,
SG&A expenses were 10.8% in fiscal 2007 compared with 11.1% in fiscal 2006.
Included in the $29.0 million was $3.0 million in accelerated depreciation
associated with the company's design and distribution centers sold in June 2005.
The 4.0% increase to the remaining $27.0 million for fiscal 2007 compared to the
remaining $26.0 million for fiscal 2006 was primarily due to transition costs
relating to the addition of ITG's mattress fabrics product line, an increase in
bad debt expense of $613,000 in fiscal 2007 compared to fiscal 2006, increased
professional fees, and the adoption of SFAS No. 123R for stock-based
compensation expense.
42
The company adopted SFAS No. 123R in fiscal 2007, which requires all share-based
payments to be recognized as costs 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 $525,000 for fiscal 2007. The company
recorded $139,000 of stock-based compensation expense for stock options
accounted for under the provisions of APB Opinion No. 25 for fiscal 2006.
Interest Expense (Income) -- Interest expense for fiscal 2007 decreased to $3.8
million from $4.0 million in fiscal 2006. The lower interest expense for fiscal
2007 primarily reflected lower outstanding balances on the company's unsecured
senior term notes. Interest income for fiscal 2007 increased to $207,000 from
$126,000 in fiscal 2006. The increase in interest income for fiscal 2007
reflected higher balances invested in money market funds.
Other Expense - Other expense for fiscal 2007 was $68,000 compared with $634,000
in fiscal 2006. This change primarily reflected fluctuations in foreign currency
exchange rates for subsidiaries domiciled in China and Canada.
Income Taxes - The effective income tax rate (taxes as a percentage of loss
before income taxes) was 56.1% in fiscal 2007 compared with 40.7% for fiscal
2006. The effective income tax rate of 56.1% in fiscal 2007 primarily reflected
pre-tax losses from the company's U.S. operations (which are taxed at higher
income tax rates) due to its restructuring activities over its U.S. upholstery
fabric operations, taxable income from foreign sources taxed at lower income tax
rates, offset by non-deductible stock option expenses.
The effective income tax rate of 40.7% in fiscal 2006 primarily reflected
pre-tax losses from the company's U.S. operations (which are taxed at higher
income tax rates) due to its restructuring activities over its U.S. upholstery
fabric operations and taxable income from foreign sources taxed at lower income
tax rates.
Handling Costs
The company records warehousing costs in selling, general and administrative
expenses. These costs were $3.0 million, $3.7 million and $4.2 million in fiscal
2008, fiscal 2007 and fiscal 2006, respectively. Warehousing costs include the
operating expenses of the company's various finished goods distribution centers,
such as personnel costs, utilities, building rent and material handling
equipment lease expense. Had these costs been included in cost of sales, gross
profit would have been $30.2 million, or 11.9%, in fiscal 2008, $27.5 million,
or 11.0%, in fiscal 2007, and $19.7 million, or 7.5%, in fiscal 2005.
Liquidity and Capital Resources
Liquidity - The company's sources of liquidity include cash and cash
equivalents, cash flow from operations, assets held for sale, and amounts
available under its unsecured revolving credit lines. These sources have been
adequate for day-to-day operations, and the company believes its sources of
liquidity continue to be adequate to meet its needs. At April 27, 2008, there
are no outstanding borrowings on the company's unsecured revolving credit lines
described below.
Cash and cash equivalents at April 27, 2008 were $4.9 million compared to $10.2
million as of April 29, 2007. The company's cash position reflects cash flow
from operations of $16.4 million for fiscal 2008 compared with $11.5 million for
fiscal 2007. This improvement reflects increased profitability in the mattress
fabrics segment and significant improvement in working capital management. The
company's cash position also reflects total long-term debt payments of $16.7
million, cash outlays for capital expenditures of $4.8 million, net payments on
its lines of credit of $2.6 million. Additionally, the company received proceeds
of $2.7 million from the sale of buildings and equipment from its restructuring
activities in its U.S. upholstery fabric operations.
43
The cash flow from operations allowed the company to substantially reduce its
total borrowings during the fiscal year. The company reduced total borrowings by
$19.4 million in fiscal 2008. Total borrowings were $21.4 million at April 27,
2008 compared to $40.8 million at April 29, 2007 and $47.7 million at April 30,
2006.
The company is taking further steps to support its liquidity, including ongoing
efforts to improve operating working capital turnover, sell certain assets,
reduce further selling, general, and administrative expenses in its upholstery
fabrics segment, and reduce debt. Effective October 29, 2007, the company
adopted a plan to sell its corporate headquarters, as the company is only
utilizing one-half of the available space and with the sale can lower costs and
reduce debt. The carrying value of the company's headquarters is approximately
$4.8 million and is recorded in assets held for sale in the 2008 Consolidated
Balance Sheet. The company expects the final sale and disposal of the assets
will be completed within one year from the date of plan was adopted and the
sales proceeds will be applied against the outstanding $6.3 million mortgage
balance.
Working Capital
Accounts receivable as of April 27, 2008, decreased $2.2 million or 8% from
April 29, 2007. This trend primarily reflects lower sales volume in the fourth
quarter of fiscal 2008 compared with fiscal 2007. Net sales were $64.0 million
in the fourth quarter of fiscal 2008 compared with $73.2 million in the fourth
quarter of fiscal 2007. Days sales outstanding for fiscal 2008 totaled 37 days
compared with 41 days for fiscal 2007. This improvement primarily reflects the
shift in net sales from the upholstery fabrics to the mattress fabrics segment,
in which customers associated with the mattress fabrics segment more frequently
take advantage of cash discounts, as well as tighter management of accounts
receivable.
Inventories at April 27, 2008, decreased $5.2 million or 13% from April 29,
2007. This decrease relates to improved inventory management. The decrease in
upholstery fabric inventory primarily relates to lower sales volume. Inventory
turns for fiscal 2008 were 5.8 versus 5.7 for fiscal 2007.
The accounts payable balance as of April 27, 2008 decreased $924,000 or 4% from
April 29, 2007. Operating working capital (comprised of accounts receivable and
inventories, less accounts payable) was $38.4 million at April 27, 2008, down
from $46.3 million at April 29, 2007. This decrease in operating working capital
is primarily due to the decreases in accounts receivable and inventory in fiscal
2008 compared with fiscal 2007.
Financing Arrangements
Unsecured Term Notes
The company's unsecured senior term notes have a fixed interest rate of 8.80%
(payable semi-annually in March and September and subject to prepayment
provisions each fiscal quarter as defined in the agreement) and are payable over
an average remaining term of 1.9 years through March 2010. As of April 27, 2008,
the principal payments that are required to be paid in periodic installments
over the next two fiscal years are as follows: March 2009 - $7.2 million; and
March 2010 - $7.1 million.
44
On February 19, 2008, the company entered into a fourth amendment to its senior
note agreement. This amendment provided greater flexibility by increasing the
capital expenditure limit on a cash basis from $4.0 million to $5.0 million for
fiscal year 2008 and $4.0 million plus an additional amount as defined in the
agreement for any fiscal year thereafter.
Real Estate Loan - I
The company has a real estate loan that is secured by a lien on the company's
corporate headquarters office located in High Point, NC. This term loan bears
interest at the one-month LIBOR plus an adjustable margin (all in rate of 5.23%
at April 27, 2008) based on the company's debt/EBITDA ratio, as defined in the
agreement and is payable in varying monthly installments through September 2010,
with a final payment of $3.3 million in October 2010.
Real Estate Loan - II
The company has a term loan in the amount of $2.5 million in connection with the
ITG asset purchase agreement. This term loan is secured by a lien on the
company's corporate headquarters office located in High Point, NC and bears
interest at the one-month LIBOR plus an adjustable margin (all in rate of 5.59%
at April 27, 2008) based on the company's debt/EBITDA ratio, as defined in the
agreement. This agreement requires the company to pay interest monthly with the
entire principal amount due on June 30, 2010.
Canadian Government Loan
The company has an agreement with the Canadian government for a term loan of
$788,000 at April 27, 2008, that is non-interest bearing and is payable in 48
equal monthly installments commencing December 1, 2009. The proceeds are to
partially finance capital expenditures at the company's Rayonese facility
located in Quebec, Canada.
Revolving Credit Agreement -United States
The company has an unsecured credit agreement that provides for a revolving loan
commitment of $6.5 million, including letters of credit up to $5.5 million. This
agreement bears interest at the one-month LIBOR plus an adjustable margin (all
in rate of 5.23% at April 27, 2008) based on the company's debt/EBITDA ratio, as
defined in the agreement. As of April 27, 2008, there were $1.3 million in
outstanding letters of credit (all of which related to workers compensation)
under the agreement. At April 27, 2008 and April 29, 2007, there were no
borrowings outstanding under the agreement.
On December 27, 2007, the company entered into a twelfth amendment to the
revolving credit agreement. This amendment extended the expiration date to
December 31, 2008, provided greater flexibility by increasing the capital
expenditure limit on a cash basis from $4.0 million to $5.0 million for fiscal
year 2008, and amended certain other financial covenants as defined in the
agreement.
Revolving Credit Agreement - China
The company's China subsidiary has an unsecured revolving credit agreement with
a bank in China to provide a line of credit of up to approximately $5 million,
of which approximately $1 million includes letters of credit. This agreement
bears interest at a rate determined by the Chinese government. There were no
borrowings outstanding under the agreement as of April 27, 2008. At April 29,
2007, outstanding borrowings under the agreement were $2.6 million.
45
Overall
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At April 27, 2008, the
company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five fiscal
years are: 2009 - $7.4 million; 2010 - $7.5 million; 2011 - $6.1 million; 2012 -
$197,000; 2013 - $197,000; and thereafter - $66,000.
Commitments
The following table summarizes the company's contractual payment obligations and
commitments (in thousands):
2009 2010 2011 2012 2013 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
Capital expenditure
commitments (1) 894 688 - - - - 1,582
Accounts payable - capital
expenditures 1,547 725 724 - - - 2,996
Operating leases (2) 2,286 1,053 176 67 49 23 3,654
Interest Expense (3) 1,698 1,020 143 - - - 2,861
Long-term debt - principal 7,375 7,520 6,068 197 197 66 21,423
- ----------------------------------------------------------------------------------------------------
Total (4) 13,800 11,006 7,111 264 246 89 32,516
- ----------------------------------------------------------------------------------------------------
Note: Payment Obligations by Fiscal Year Ending April
(1) At April 27, 2008, the company had a commitment to acquire equipment with
regards to its mattress fabrics segment. This equipment is expected to be
installed in the first quarter of fiscal 2009. The above amounts represent
the future fiscal year payment requirements for this commitment.
(2) Includes accrued restructuring expenses for the company's inactive
Chattanooga manufacturing facility of $121 for fiscal 2009, the company's
inactive Mississippi distribution warehouse of $98 for fiscal 2009, and
other equipment leases of $44, and $8 for fiscal 2009, and 2010,
respectively.
(3) Interest expense includes interest incurred on accounts payable-capital
expenditures and long-term debt.
(4) As more fully disclosed in Notes 1 and 11 of the Notes to the Consolidated
Financial Statements, the company adopted FIN 48, "Accounting for
Uncertainty in Income Taxes"- an interpretation of FASB Statement No. 109,
"Accounting for Income Taxes." At April 27, 2008, the company recognized
$4.8 million of liabilities for unrecognized tax benefits. The final
outcome of these tax uncertainties is dependent upon various matters
including tax examinations, legal proceedings, competent authority
proceedings, changes in regulatory tax laws, or interpretations of those
tax laws, or expiration of statutes of limitation. At April 27, 2008, the
company classified the $4.8 million of liabilities for unrecognized tax
benefits as income taxes payable- long-term. While the company cannot
reasonably predict the timing of the cash flows associated with its
liabilities for unrecognized tax benefits, it believes that no significant
cash payments will be made within the next five years due to its U.S.
federal and state net operating loss carryforwards.
46
Capital Expenditures
Capital expenditures for fiscal 2008 was $6.9 million, of which $4.8 million was
paid in cash and $2.1 million was vendor financed. The capital spending of $6.9
million consisted of $4.4 million from the mattress fabrics segment and $2.5
million from the upholstery fabrics segment (primarily China). Depreciation for
fiscal 2008 was $5.5 million, of which $3.4 million related to the mattress
fabrics segment and $2.1 million related to the upholstery fabrics segment.
The company currently expects total capital expenditures to be $4.1 million in
fiscal 2009, of which $2.5 million will be paid in cash and $1.6 million will be
vendor financed on a project initiated prior to the end of fiscal 2008. The
capital spending of $4.1 million primarily relates to the mattress fabrics
segment. The company currently estimates depreciation to be $6.0 million for
fiscal 2009, of which $4.0 million relates to the mattress fabrics segment and
$2.0 million relates to the upholstery fabrics segment. The company expects that
the availability of funds from cash flow from operations, vendor financing, and
its revolving credit lines are sufficient to fund its capital needs.
The payment requirements for accounts payable-capital expenditures (both
vendor-financed and non vendor-financed) during the next three fiscal years are:
2009 - $2.4 million; 2010 - $1.4 million; and 2011 - $724,000.
Inflation
The cost of certain raw materials, principally fibers from petroleum
derivatives, and utility/energy costs, continued to increase during fiscal 2008
as oil and other energy prices increased and had an impact on the company's
financial results. Any significant increase in the company's raw material costs,
utility/energy costs and general economic inflation could have a material
adverse impact on the company, because competitive conditions have limited the
company's ability to pass significant operating cost increases on to its
customers. See "Risk Factors" at Item 1A.
Critical Accounting Policies
U.S. generally accepted accounting principles require the company to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Some of these estimates require
difficult, subjective and/or complex judgments about matters that are inherently
uncertain, and as a result actual results could differ significantly from those
estimates. Due to the estimation processes involved, management considers the
following summarized accounting policies and their application to be critical to
understanding the company's business operations, financial condition and results
of operations.
Accounts Receivable - Allowance for Doubtful Accounts. Substantially all of the
company's accounts receivable are due from residential and commercial furniture
and bedding manufacturers. Ownership of these manufacturers is increasingly
concentrated and certain bedding manufacturers have a high degree of leverage.
As of April 27, 2008, accounts receivable from furniture manufacturers totaled
approximately $14.2 million, and accounts receivable from bedding manufacturers
totaled approximately $12.9 million. Additionally, as of April 27, 2008, the
aggregate accounts receivable balance of the company's ten largest customers was
$12.5 million, or 46.2% of trade accounts receivable. Lastly, a single customer
within the upholstery fabrics segment and another within the mattress fabrics
segment represented 10% and 11%, respectively, of accounts receivable at April
27, 2008.
47
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.
The reserve balance for doubtful accounts was $1.3 million at April 27, 2008 and
April 29, 2007, respectively.
Inventory Valuation. The company operates as a "make-to-order" and
"make-to-stock" business. Although management closely monitors demand in each
product area to decide which patterns and styles to hold in inventory, the
increasing availability of low cost imports and the gradual shifts in consumer
preferences expose the company to markdowns of inventory.
Management continually examines inventory to determine if there are indicators
that the carrying value exceeds its net realizable value. Experience has shown
that the most significant indicator of the need for inventory markdowns is the
age of the inventory. As a result, the company provides inventory valuation
markdowns based upon set percentages for inventory aging categories, generally
using six, nine, twelve and fifteen month categories. While management believes
that adequate markdowns for excess and obsolete inventory have been made in the
consolidated financial statements, significant unanticipated changes in demand
or changes in consumer tastes and preferences could result in additional excess
and obsolete inventory in the future.
The reserve for inventory markdowns was $4.2 million and $5.3 million at April
27, 2008 and April 29, 2007, respectively.
Long-lived Assets. The company follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes an impairment accounting model for long-lived assets to be held and
used, disposed of by sale, or disposed of by abandonment or other means.
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Unforeseen events and
changes in circumstances and market conditions could negatively affect the value
of assets and result in an impairment charge.
In fiscal 2008, the company prepared an impairment evaluation on its upholstery
fabrics segment due to continued adverse business results for U.S. produced
products, requiring further restructuring actions. The company's assessment
indicated that the net undiscounted future operating cash flows of this segment
were sufficient to recover the carrying amount of the long-lived assets to be
held and used for the upholstery fabrics segment.
The determination of future operating cash flows involves considerable
estimation and judgment about future market conditions, future sales and
profitability, and future asset utilization. Although the company believes it
has based the impairment testing on reasonable estimates and assumptions, the
use of different estimates and assumptions, or a decision to dispose of
substantial portions of these assets, could result in materially different
results.
48
Goodwill. The company applies the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets," which requires goodwill to no longer be amortized and
that goodwill be tested annually for impairment by comparing each reporting
unit's carrying value to its fair value.
As of April 27, 2008, the company's remaining $4.1 million of goodwill relates
to the mattress fabrics segment.
The company performed its goodwill impairment test as of April 27, 2008 for its
mattress fabrics segment. This impairment test did not indicate any impairment
of goodwill for fiscal 2008. The determination of fair value involves
considerable estimation and judgment. In particular, determining the fair value
of a business unit involves, among other things, developing forecasts of future
cash flows and appropriate discount rates. Although the company believes it has
based the impairment testing on reasonable estimates and assumptions, the use of
different estimates and assumptions could result in materially different
results.
Restructuring Charges. In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS No. 146, a liability for a cost associated with an exit or disposal
activity must be recognized and measured initially at its fair value in the
period in which the liability is incurred, except for certain employee
termination benefits that qualify under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
The upholstery fabric segment continues to be under significant pressure from a
variety of external forces, such as the current consumer preference for leather
and suede furniture and the growing competition from imported fabrics and cut
and sewn kits. In an effort to reduce operating expenses and scale U.S.
productive capacity in line with current and expected demand trends, the company
has undertaken restructuring initiatives during the past several years. These
restructuring initiatives have resulted in restructuring charges related to the
remaining lease costs of the closed facilities, the write-down of property,
plant and equipment, workforce reduction and elimination of facilities.
Severance and related charges are accrued at the date the restructuring is
approved by the board of directors based on an estimate of amounts that will be
paid to affected employees, in accordance with SFAS No. 112. Under SFAS No. 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 No. 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
3 to the consolidated financial statements.
Income Taxes. The company is required to estimate its income tax exposure and to
assess temporary differences resulting from differing treatment of items for tax
and accounting purposes. At April 27, 2008, the company had U.S. deferred tax
assets of $34.6 million and U.S. deferred tax liabilities (all of which reverse
in the carryforward period) of $1.0 million, resulting in net U.S. deferred tax
assets of $33.6 million. No valuation allowance has been recorded to reduce the
company's net U.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 its net
U.S. deferred tax assets.
49
In making the judgment about the realization of the U.S. net deferred tax
assets, management has considered both the negative and positive evidence, and
concluded that sufficient positive evidence exists to overcome the cumulative
losses experienced in recent years. Specifically, management considered the
following, among other factors: nature of the company's products; history of
positive earnings in the mattress fabrics segment; capital projects in progress
to further enhance the company's globally competitive cost structure in the
mattress fabrics segment; recent restructuring actions in the U.S. upholstery
fabrics business to adjust the U.S. cost structure and bring U.S. manufacturing
capacity in line with demand; development of offshore manufacturing and sourcing
programs to meet changing demands of upholstery fabric customers in the U.S.;
inter-company agreements with the company's China subsidiaries expected to be in
place in fiscal 2009 for various consulting services and intellectual property,
and the incremental sales volume from the purchase of certain assets from the
ITG related to the mattress fabric product line of ITG's Burlington House
Division. Management's analysis of taxable income also included the following
considerations: none of the company's net operating loss carryforwards have
previously expired unused; the U.S. federal carryforward period is 20 years; and
the company's current income tax loss carryforwards principally expire in 14-20
years; fiscal 2022 through 2028. The amount of the deferred tax assets
considered realizable, however could be reduced if estimates of future U.S.
taxable income during the carryforward period are reduced.
Considerable judgment is involved in this process as the ultimate realization of
benefits is dependent on the generation of taxable income from future U.S.
operations.
We adopted FASB Interpretation No. 48,"Accounting for Uncertainty in Income
Taxes- an interpretation of FASB Statement No. 109, Accounting for Income
Taxes," (FIN 48) on April 30, 2007. Under FIN 48 we must recognize the tax
impact from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax impact recognized in the
financial statements from such a position is measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate
resolution. Penalties and interest related to uncertain tax positions are
recorded as tax expense. Significant judgment is required in the identification
of uncertain tax positions and in the estimation of penalties and interest on
uncertain tax positions.
Recently Issued Accounting Standards
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 establishes as common definition of fair value,
provides a framework for measuring fair value under accounting principles
generally accepted in the United States and expands disclosure requirements
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and is effective for the company in the first
quarter of fiscal 2009. In February 2008, the FASB issued FASB Staff Position
FAS 157-2,"Effective Date of FASB Statement No. 157," referred to as FSP 157-2.
FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets
and non-financial liabilities, that are not remeasured at fair value on a
recurring basis until years beginning after November 15, 2008, and interim
periods within those years. FSP 157-2 is effective for the company in the first
quarter of fiscal 2010. The company does not expect there to be a material
effect on the consolidated financial statements upon adoption of this new
standard.
50
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 does not expect
there to be a material effect on the consolidated financial statements upon
adoption of this new standard.
In March 2007, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, An Amendment of FASB Statement No. 133."
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
does not provide adequate information about how derivative and hedging
activities affect an entity's financial position, financial performance, and
cash flows. Accordingly, SFAS No. 161 requires enhanced disclosures about an
entity's derivative and hedging activities and thereby improves transparency of
financial reporting. SFAS No. 161 is effective for fiscal and interim periods
beginning after November 15, 2008 and is effective for the company in the third
quarter of fiscal 2009. The adoption of the provisions of SFAS No. 161 is not
expected to have a material effect on the company's financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007) "Business
Combinations." SFAS No. 141 requires the acquiring entity in a business
combination to recognize all the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose all information required to evaluate and understand the
nature and financial effect of the business combination. This statement is
effective for acquisition dates on or after the beginning of the first annual
reporting period beginning after December 15, 2008. This statement is effective
for the company in fiscal 2010 and is not expected to have a material effect on
our consolidated financial statements to the extent we do not enter into a
business acquisition subsequent to adoption.
51
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company's exposure to interest
rate risk consists of floating rate debt based on the London Interbank Offered
Rate (LIBOR) plus an adjustable margin under the company's revolving credit
agreement in the United States and its real estate term loans. As of April 27,
2008, there were $6.3 million in borrowings outstanding under the company's real
estate term loans and no borrowings outstanding under the 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 original principal amount on the first real estate term
loan, and effectively converts the floating rate LIBOR based payments to fixed
payments at 4.99% plus the spread calculated under the real estate term loan
agreement. The company's unsecured senior term notes have a fixed interest rate
of 8.80% and the Canadian government loan is non-interest bearing. The company's
revolving credit agreement associated with its China subsidiary bears interest
at a rate determined by the Chinese government. There were no borrowings
outstanding under this agreement as of April 27, 2008. Also, $17.0 million of
the company's total borrowings of $21.4 million are at a fixed rate or were
non-interest bearing. Thus, the company would not expect any foreseeable change
in the interest rates would not expect to have a material effect on the company.
The company is exposed to market risk from changes in the value of foreign
currencies for their subsidiaries domiciled in China and Canada. The company
generally does not use financial derivative instruments to hedge foreign
currency exchange rate risks associated with its foreign subsidiaries. At April
27, 2008, the company did not have any foreign currency contracts outstanding.
The company's foreign subsidiaries use the United States dollar as their
functional currency. A substantial portion of the company's imports purchased
outside the United States are denominated in U.S. dollars. A 10% change in
either exchange rate at April 27, 2008, would not have a significant impact on
the company's results of operations or financial position.
52
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
To the Board of Directors and Shareholders
Culp, Inc.:
We have audited the accompanying consolidated balance sheet of Culp, Inc. (a
North Carolina corporation) and Subsidiaries as of April 27, 2008, and the
related consolidated statements of net income, shareholders' equity and cash
flows for the fiscal year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Culp, Inc. and
subsidiaries as of April 27, 2008, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 11 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Statement (FASB) Interpretation No.
48, "Accounting for Uncertainty in Income Taxes", as of April 30, 2007.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Culp, Inc. and subsidiaries'
internal control over financial reporting as of April 27, 2008, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated July 7, 2008 expressed an unqualified opinion on the effectiveness
of the Company's internal control over financial reporting.
Greensboro, North Carolina
July 7, 2008
/s/ GRANT THORNTON LLP
53
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Culp, Inc.:
We have audited the accompanying consolidated balance sheet of Culp, Inc. and
subsidiaries as of April 29, 2007, and the related consolidated statements of
loss, shareholders' equity, and cash flows for each of the years in the two-year
period ended April 29, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Culp, Inc. and
subsidiaries as of April 29, 2007, and the results of their operations and their
cash flows for each of the years in the two-year period ended April 29, 2007, in
conformity with U.S. generally accepted accounting principles.
As discussed in the Summary of Significant Accounting Policies, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-Based Payment" effective May 1, 2006.
/s/ KPMG LLP
Charlotte, North Carolina
July 19, 2007
54
CONSOLIDATED BALANCE SHEETS
April 27, 2008 and April 29, 2007 (dollars in thousands) 2008 2007
- -----------------------------------------------------------------------------------------------
ASSETS
current assets:
cash and cash equivalents $ 4,914 $ 10,169
accounts receivable, net 27,073 29,290
inventories 35,394 40,630
deferred income taxes 4,380 5,376
assets held for sale 5,610 2,499
income taxes receivable 438 -
other current assets 1,328 1,824
- -----------------------------------------------------------------------------------------------
total current assets 79,137 89,788
property, plant and equipment, net 32,939 37,773
goodwill 4,114 4,114
deferred income taxes 29,430 25,683
other assets 2,409 2,588
- -----------------------------------------------------------------------------------------------
total assets $ 148,029 $ 159,946
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt $ 7,375 $ 16,046
lines of credit - 2,593
accounts payable - trade 21,103 22,027
accounts payable - capital expenditures 1,547 1,558
accrued expenses 8,300 8,670
accrued restructuring costs 1,432 3,282
income taxes payable 150 4,579
- -----------------------------------------------------------------------------------------------
total current liabilities 39,907 58,755
accounts payable - capital expenditures 1,449 -
income taxes payable - long-term 4,802 -
deferred income taxes 1,464 -
long-term debt, less current maturities 14,048 22,114
- -----------------------------------------------------------------------------------------------
total liabilities 61,670 80,869
- -----------------------------------------------------------------------------------------------
commitments and contingencies (notes 7, 12, and 13)
shareholders' equity:
preferred stock, $.05 par value, authorized 10,000,000
shares - -
common stock, $.05 par value, authorized 40,000,000
shares, issued and outstanding 12,648,027 at
April 27, 2008 and 12,569,291 at April 29, 2007 632 629
capital contributed in excess of par value 47,288 46,197
retained earnings 38,487 32,255
accumulated other comprehensive loss (48) (4)
- -----------------------------------------------------------------------------------------------
total shareholders' equity 86,359 79,077
- -----------------------------------------------------------------------------------------------
total liabilities and shareholders' equity $ 148,029 $ 159,946
===============================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
55
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
For the years ended April 27, 2008, April 29, 2007 and April 30, 2006
(dollars in thousands, except per share data) 2008 2007 2006
- -------------------------------------------------------------------------------------------------
net sales $ 254,046 $ 250,533 $ 261,101
cost of sales 220,887 219,328 237,233
- -------------------------------------------------------------------------------------------------
gross profit 33,159 31,205 23,868
selling, general and administrative expenses 23,973 27,030 28,954
restructuring expense (note 3) 886 3,534 10,273
- -------------------------------------------------------------------------------------------------
income (loss) from operations 8,300 641 (15,359)
interest expense 2,975 3,781 4,010
interest income (254) (207) (126)
other expense, net 736 68 634
- -------------------------------------------------------------------------------------------------
income (loss) before income taxes 4,843 (3,001) (19,877)
income tax benefit (note 11) (542) (1,685) (8,081)
- -------------------------------------------------------------------------------------------------
net income (loss) $ 5,385 $ (1,316) $ (11,796)
=================================================================================================
net income (loss) per share-basic $ 0.43 $ (0.11) $ (1.02)
net income (loss) per share-diluted $ 0.42 $ (0.11) $ (1.02)
The accompanying notes are an integral part of these consolidated financial statements.
56
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended April 27, 2008, capital accumulated
common common contributed other total
April 29, 2007 and April 30, 2006 stock stock in excess of unearned retained comprehensive shareholders'
shares amount par value compensation earnings income (loss) equity
- ----------------------------------------------------------------------------------------------------------------------------
balance, May 1, 2005 11,550,759 $ 579 $ 39,964 $ (139) $45,367 $ - $ 85,771
net loss - - - - (11,796) - (11,796)
stock-based compensation - - - 139 - - 139
gain on cash flow hedge, net of taxes - - - - - 18 18
common stock issued in connection
with stock option plans 104,200 5 386 - - - 391
- ----------------------------------------------------------------------------------------------------------------------------
balance, April 30, 2006 11,654,959 584 40,350 - 33,571 18 74,523
net loss - - - - (1,316) - (1,316)
stock-based compensation - - 525 - - - 525
loss on cash flow hedge, net of taxes - - - - - (22) (22)
common stock issued in connection
with the acquisition of assets (note 2) 798,582 40 5,043 - - - 5,083
common stock issued in connection
with stock option plans 115,750 5 279 - - - 284
- ----------------------------------------------------------------------------------------------------------------------------
balance, April 29, 2007 12,569,291 629 46,197 - 32,255 (4) 79,077
cumulative effect of adopting FASB
interpretation No. 48 - - - - 847 - 847
net income - - - - 5,385 - 5,385
stock-based compensation - - 618 - - - 618
loss on cash flow hedge, net of taxes - - - - - (44) (44)
excess tax benefit related to stock options
exercised - - 17 - - - 17
common stock issued in connection
with stock option plans 78,736 3 456 - - - 459
- ----------------------------------------------------------------------------------------------------------------------------
balance, April 27, 2008 12,648,027 $ 632 $ 47,288 $ - $38,487 $ (48) $ 86,359
============================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
57
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 27, 2008, April 29, 2007 and April 30, 2006
(dollars in thousands) 2008 2007 2006
- ---------------------------------------------------------------------------------------------------
cash flows from operating activities:
net income (loss) $ 5,385 (1,316) (11,796)
adjustments to reconcile net income (loss) to net cash
provided by operating activities:
depreciation 5,548 7,849 14,362
amortization of other assets 373 150 93
stock-based compensation 618 525 139
excess tax benefit related to stock options exercised (17) - -
deferred income taxes (919) (3,763) (10,156)
loss on impairment of equipment 289 - -
restructuring expenses, net of gain on sale of
related assets 140 536 6,582
changes in assets and liabilities, net of effects of
acquisition of assets:
accounts receivable 2,242 (241) (225)
inventories 5,236 817 13,806
other current assets 496 1,673 1,404
other assets (188) (42) (44)
accounts payable-trade (924) 3,133 (1,302)
accrued expenses (445) 825 (1,711)
accrued restructuring (1,926) (772) (1,796)
income taxes 456 2,091 944
- ---------------------------------------------------------------------------------------------------
net cash provided by operating activities 16,364 11,465 10,300
- ---------------------------------------------------------------------------------------------------
cash flows from investing activities:
capital expenditures (4,846) (3,762) (6,242)
acquisition of assets (note 2) - (2,500) -
proceeds from the sale of buildings and equipment 2,723 3,315 3,950
- ---------------------------------------------------------------------------------------------------
net cash used in investing activities (2,123) (2,947) (2,292)
- ---------------------------------------------------------------------------------------------------
cash flows from financing activities:
payments on vendor-financed capital expenditures (642) (1,356) (942)
proceeds from lines of credit 1,339 2,593 -
payments on lines of credit (3,932) - -
payments on long-term debt (16,737) (12,062) (7,848)
proceeds from the issuance of long-term debt (notes 2
and 12) - 2,500 5,020
proceeds from common stock issued 459 262 369
excess tax benefit related to stock options exercised 17 - -
- ---------------------------------------------------------------------------------------------------
net cash used in financing activities (19,496) (8,063) (3,401)
- ---------------------------------------------------------------------------------------------------
(decrease) increase in cash and cash equivalents (5,255) 455 4,607
cash and cash equivalents at beginning of year 10,169 9,714 5,107
- ---------------------------------------------------------------------------------------------------
cash and cash equivalents at end of year $ 4,914 10,169 9,714
===================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The company manufactures and markets mattress
fabrics and upholstery fabrics primarily for the furniture and bedding
industries, with the majority of its revenues derived in North America. The
company has upholstery fabric manufacturing operations located in Shanghai,
China.
Basis of Presentation - The consolidated financial statements of the
company have been prepared in accordance with U.S. generally accepted
accounting principles.
Principles of Consolidation - The consolidated financial statements include
the accounts of the company and its subsidiaries, which are wholly-owned.
All significant intercompany balances and transactions have been eliminated
in consolidation. The accounts of the company's subsidiaries located in
Shanghai, China are consolidated as of April 30 (calendar month end), as
required by the Chinese government. No events occurred related to the
difference between the company's fiscal year end on the Sunday closest to
April 30 and the company's China subsidiaries year end of April 30 that
materially affected the company's financial position, results of
operations, or cash flows for fiscal years 2008, 2007, and 2006.
Fiscal Year - The company's fiscal year is the 52 or 53 week period ending
on the Sunday closest to April 30. Fiscal 2008, 2007 and 2006 each included
52 weeks.
Use of Estimates - The preparation of financial statements in conformity
with U.S. generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents - Cash and cash equivalents include demand
deposit and money market accounts. The company considers all highly liquid
instruments with original maturities of three months or less to be cash
equivalents. The company's Chinese subsidiaries had cash and cash
equivalents of $1.7 million at April 27, 2008. The company's Canadian
subsidiary had cash and cash equivalents of $475,000 at April 27, 2008.
Accounts Receivable - Substantially all of the company's accounts
receivable are due from manufacturers in the bedding and furniture
industries. The company grants credit to customers, a substantial number of
which are located in North America and generally does not require
collateral. The company records an allowance for doubtful accounts that
reflects estimates of probable credit losses. Management continuously
performs credit evaluations of its customers, considering numerous inputs
including financial position, past payment history, cash flows, management
ability, historical loss experience and economic conditions and prospects.
The company does not have any off-balance sheet credit exposure related to
its customers.
Inventories - The company accounts for inventories at the lower of
first-in, first-out (FIFO) cost or market. Management continually examines
inventory to determine if there are indicators that the carrying value
exceeds its net realizable value. Experience has shown that the most
significant indicator of the need for inventory markdowns is the age of the
inventory. As a result, the company provides inventory valuation
write-downs based upon established percentages that are continually
evaluated as events and market conditions require. The inventory aging
categories, generally using six, nine, twelve, and fifteen month
categories.
Property, Plant and Equipment - Property, plant and equipment are recorded
at cost and depreciated over their estimated useful lives using the
straight-line method. Major renewals and betterments are capitalized.
Maintenance, repairs and minor renewals are expensed as incurred. When
properties are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts. Amounts received on
disposal less the book value of assets sold are charged or credited to
income (loss).
59
Management reviews long-lived assets, which consist principally of
property, plant and equipment, for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recovered. Recoverability of long-lived assets to be held and used is
measured by a comparison of the carrying amount of the asset to future net
undiscounted cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized for the excess of the carrying amount over
the fair value of the asset. Assets to be disposed of by sale are reported
at the lower of the carrying value or fair value less cost to sell when the
company has committed to a disposal plan, and are reported separately as
assets held for sale in the consolidated balance sheets.
Interest costs of $139,000 and $62,000 for the construction of qualifying
fixed assets were capitalized and are being amortized over the related
assets' estimated useful lives for the years ended April 27, 2008 and April
29, 2006, respectively. No interest was capitalized for the year ended
April 29, 2007.
Foreign Operations - The company's future operations and earnings will
depend on the results of the company's operations in China and Canada.
There can be no assurance that the company will be able to successfully
conduct such operations, and a failure to do so could have a material
adverse effect on the company's financial position, results of operations,
and cash flows. Also, the success of the company's operations will be
subject to numerous contingencies, some of which may be beyond management's
control. These contingencies include general and regional economic
conditions, prices for the company's products, competition, changes in
regulation, and various additional political, economic, governmental, and
other uncertainties. Among other risks, the company's operations will be
subject to the risks of restrictions on transfer of funds, export duties,
quotas and embargoes, domestic and international customs and tariffs,
changing taxation policies, and foreign exchange fluctuations and
restrictions.
Foreign Currency Adjustments - The United States dollar is the functional
currency for the company's Canadian and Chinese subsidiaries. All foreign
currency asset and liability accounts are remeasured into the U.S. dollars
at year-end exchange rates, except for inventory and property, plant, and
equipment, which are remeasured at historical rates. Foreign currency
revenues and expenses are remeasured at average exchange rates in effect
during the year, except for certain expenses related to balance sheet
amounts remeasured at historical exchange rates. Exchange gains and losses
from remeasurement of foreign currency denominated monetary assets and
liabilities are recorded in the other expense, net line item in the
Consolidated Statements of Net Income (Loss) in the period in which they
occur. Foreign currency remeasurement losses for the Canadian subsidiary
were $381,000, $105,000, and $460,000 for the fiscal years ended April 27,
2008, April 29, 2007 and April 30, 2006, respectively. The company's
Chinese subsidiaries had a remeasurement loss of $51,000 for the fiscal
year ended April 27, 2008. Foreign currency remeasurement gains for the
Chinese subsidiaries were $286,000 and $96,000 for the fiscal years ended
April 29, 2007 and April 30, 2006, respectively.
Goodwill - The company applies the provisions of SFAS No. 142, Goodwill and
Other Intangible Assets, which requires that goodwill no longer be
amortized and that goodwill be tested for impairment by comparing each
reporting unit's carrying value to its fair value. SFAS No. 142 also
requires that, at least annually, goodwill be retested for impairment. No
impairment of goodwill resulted in fiscal years 2008, 2007, and 2006. The
company's remaining goodwill of $4.1 million relates to the mattress
fabrics segment.
Income Taxes - Income taxes are accounted for under the asset and liability
method. Deferred income taxes are recognized for temporary differences
between the financial statement carrying amounts and the tax bases of the
company's assets and liabilities and operating loss and tax credit
carryforwards at income tax rates expected to be in effect when such
amounts are realized or settled. The effect on deferred income taxes of a
change in tax rates is recognized in income (loss) in the period that
includes the enactment date.
No provision is made for income taxes which may be payable if undistributed
income of the company's foreign subsidiaries were to be paid as dividends
to the company, since the company intends that such earnings will continue
to be invested. At April 27, 2008, the amount of such undistributed income
was $56.1 million. Foreign tax credits may be available as a reduction of
United States income taxes in the event of such distributions.
60
On April 30, 2007, the company adopted Financial Accounting Standards Board
(FASB) Interpretation No.48 "Accounting for Uncertainty in Income Taxes"
(FIN 48) which supplements SFAS No. 109, "Accounting for Income Taxes", by
defining the confidence level that a tax position must meet in order to be
recognized in the financial statements. FIN 48 requires that the tax
effects of a position to be recognized only if it is "more-likely-than-not"
to be sustained based solely on its technical merits as of the reporting
date. The more-likely-than-not threshold represents a positive assertion by
management that a company is entitled to the economic benefits of a tax
position. If a tax position is not considered more-likely-than-not to be
sustained based solely on its technical merits, no benefits of the tax
position are to be recognized. Moreover, the more-likely-than-not threshold
must continue to be met in each reporting period to support continued
recognition of the benefit. With the adoption of FIN 48, entities are
required to adjust their financial statements to reflect only those tax
positions that are more-likely-than-not to be sustained. Any necessary
adjustment would be recorded directly to retained earnings and reported as
a change in accounting principle. Upon adoption, the company recorded an
increase to retained earnings of $847,000 as a cumulative effect of a
change in accounting principle. Refer to Note 11 for more information
regarding the impact of adopting FIN 48. Adjustments subsequent to initial
adoption are reflected within the company's income tax benefit.
In May 2007, FASB issued FASB Staff Position FIN 48-1, "Definition of
Settlement in FASB Interpretation No. 48" ("FSP FIN 48-1). FSP FIN 48-1
provides guidance on whether a tax position is effectively settled for the
purpose of recognizing previously unrecognized tax benefits. No adjustment
was made upon adoption of FSP FIN 48-1.
Revenue Recognition - Revenue is recognized upon shipment, when title and
risk of loss pass to the customer. Provision is made currently for
estimated product returns, claims and allowances. Management considers
historical claims and return experience, among other things, when
establishing the allowance for returns and allowances.
Shipping and Handling Costs - Revenue received for shipping and handling
costs, which is immaterial for all periods presented, are included in net
sales. Shipping costs, principally freight, that comprise payments to
third-party shippers are classified as cost of sales. Handling costs, which
consist principally of finished goods warehousing costs in the company's
various distribution facilities, were $3.0 million, $3.7 million and $4.2
million in 2008, 2007 and 2006, respectively, and are included in selling,
general and administrative expenses.
Sales and Other Taxes - Sales and other taxes collected from customers and
remitted to governmental authorities are presented on a net basis and, as
such, are excluded from revenues.
Stock-Based Compensation - Effective May 1, 2006, the company started to
record 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 did not retroactively
adjust results from prior periods. Under this transition method,
compensation expense associated with stock options recognized in fiscal
2008 and 2007 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."
In fiscal 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 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.
61
In accordance with the provisions of SFAS No. 123R, the company recorded
$618,000 and $525,000 of compensation expense for stock options within
selling, general, and administrative expense for fiscal 2008 and 2007,
respectively. In fiscal 2006, the company recorded $139,000 of compensation
expense for stock options that were required to be accounted for under the
provisions of APB Opinion No. 25.
Prior to the adoption of SFAS 123R, the benefit of tax deductions in excess
of recognized compensation costs were reported as an operating cash flow.
SFAS 123R requires such benefits to be recorded as a financing cash flow
rather than a reduction of income taxes paid within operating cash flow.
The company adopted the short-cut method provided in SFAS No. 123R to use
for calculating the beginning balance of the additional paid-in capital
pool ("APIC pool") related to the tax effects of employee stock-based
compensation, and to determine the subsequent impact on the APIC pool and
Statement of Cash Flows of the tax effects of employee stock-based
compensation awards that are outstanding upon adoption of SFAS No. 123R.
The company recognized $17,000 in excess tax benefits related to employee
stock-based compensation in fiscal 2008. No tax benefits in excess of
recognized compensation costs were realized from option exercises in fiscal
2007.
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
fiscal 2006:
(dollars in thousands, except per share data) 2006
------------------------------------------------------------------------
Net loss, as reported (11,796)
Add: Total stock-based employee compensation expense
included in net loss, net of taxes 83
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of taxes (413)
------------------------------------------------------------------------
Pro forma net loss (12,126)
------------------------------------------------------------------------
Net loss per share:
Basic - as reported (1.02)
Basic - pro forma (1.05)
Diluted - as reported (1.02)
Diluted - pro forma (1.05)
------------------------------------------------------------------------
Fair Value of Financial Instruments - The carrying amount of cash and cash
equivalents, accounts receivable, other current assets, accounts payable
and accrued expenses approximates fair value because of the short maturity
of these financial instruments.
The fair value of the company's long-term debt is estimated by discounting
the future cash flows at rates currently offered to the company for similar
debt instruments of comparable maturities. At April 27, 2008, the carrying
value of the company's long-term debt and lines of credit was $21.4 million
and the fair value was $21.0 million. At April 29, 2007, the carrying value
of the company's long-term debt was $40.8 million and the fair value was
$38.3 million.
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.
62
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
12), 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. 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 Agreement required ITG to provide certain transition services to the
company and manufacture goods for the company for a limited period of time
to support the company's efforts to transition the former ITG mattress
fabrics products into the company's operations. The company hired only one
of ITG's employees after the transition period was completed. ITG 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 required the company to
register the Shares with the Securities and Exchange Commission, allowing
the Shares to be sold to the public after the registration statement became
effective. The Registration Agreement also contained provisions pursuant to
which ITG agreed not to purchase additional company shares or take certain
other actions to influence control of the company, and agreed to vote the
shares in accordance with recommendations of the company's board of
directors. Pursuant to a registration request by ITG, a registration
statement was filed and became effective April 10, 2007.
3. RESTRUCTURING AND ASSET IMPAIRMENTS
A summary of accrued restructuring costs follows:
---------------------------------------------------------------------------
(dollars in thousands) April 27, 2008(1) April 29, 2007
---------------------------------------------------------------------------
December 2006 Upholstery Fabrics $ 990 1,545
September 2005 Upholstery fabrics 178 258
August 2005 Upholstery Fabrics 2 18
April 2005 Upholstery Fabrics 27 141
October 2004 Upholstery Fabrics - 13
Fiscal 2003 Culp Decorative Fabrics 235 1,307
---------------------------------------------------------------------------
$ 1,432 3,282
---------------------------------------------------------------------------
(1) The company's existing restructuring plans have been substantially
completed as of April 27, 2008.
63
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 involved closing the company's
weaving plant located in Graham, NC, and closing the yarn plant located in
Lincolnton, NC. The company transferred 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. As a result of these two
plant closures, the company reduced the number of associates by
approximately 185 people.
During fiscal 2008, total restructuring and related charges incurred were
$2.9 million of which $1.0 million related to inventory markdowns, $978,000
related to other operating costs associated with closed plant facilities,
$503,000 related to write-downs of buildings and equipment, $467,000
related to lease termination and other exit costs, $189,000 related to
asset movement costs, $171,000 related to employee termination benefits,
and a credit of $362,000 related to sales proceeds received on equipment
with no carrying value. Of the total charge, $1.9 million was recorded in
cost of sales, $69,000 was recorded in selling, general, and administrative
expenses, and $968,000 was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
During fiscal 2007, total restructuring and related charges incurred were
$6.7 million of which $2.2 million related to inventory markdowns, $1.3
million related to employee termination benefits, $1.2 million related to
accelerated depreciation, $1.0 million related to write-downs of equipment,
$461,000 related to asset movement costs, $241,000 related to lease
termination and other exit costs, and $212,000 related to operating costs
associated with closed of plant facilities. Of the total charge, $3.6
million was recorded in cost of sales and $3.1 million was recorded in
restructuring expense in the 2007 Consolidated Statement of Loss.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
Lease
Employee Termination
Termination and Other
Benefits (1) Exit Costs Total
----------------------------------------------------------------------------------------
accrual established in fiscal 2007 $ 1,284 - 1,284
adjustments in fiscal 2007 63 241 304
paid in fiscal 2007 (43) - (43)
----------------------------------------------------------------------------------------
balance, April 29, 2007 1,304 241 1,545
adjustments in fiscal 2008 171 467 638
paid in fiscal 2008 (796) (397) (1,193)
----------------------------------------------------------------------------------------
balance, April 27, 2008 $ 679 311 990
----------------------------------------------------------------------------------------
(1) Employee termination benefit payments are net of cobra premiums
received from participants.
September 2005 Upholstery Fabrics
On September 27, 2005, the company's board of directors approved a
strategic alliance with Synthetics Finishing, a division of TSG
Incorporated, to provide finishing services to the company for its
domestically produced decorative upholstery fabrics. As a result, the
company closed its finishing plant in Burlington, NC, thereby reducing the
number of associates by approximately 100 people.
During fiscal 2008, as a result of management's continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by $34,000
to reflect current estimates of future health care claims. This $34,000
decrease in the restructuring accrual was recorded as a credit to
restructuring expense in the 2008 Consolidated Statement of Net Income.
64
During fiscal 2007, total restructuring and related charges incurred were
$494,000 of which $450,000 related to other operating costs associated with
a closed plant facility, $284,000 related to lease termination and other
exit costs, $212,000 related to asset movement costs, a credit of $177,000
related to employee termination benefits, and a credit of $275,000 related
to sales proceeds received on equipment with no carrying value. Of this
total charge, $44,000 was recorded in restructuring expense and $450,000
was recorded in cost of sales in the 2007 Consolidated Statement of Loss.
During fiscal 2006, total restructuring and related charges incurred were
$1.4 million of which $533,000 related to employee termination benefits,
$419,000 related to asset movement costs, $238,000 related to accelerated
depreciation, $177,000 related to write-downs of equipment, and $10,000
related to operating costs associated with a closed plant facility. Of the
total charge, $1.1 million was recorded in restructuring expense and
$245,000 was recorded in cost of sales in the 2006 Consolidated Statement
of Loss.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
Lease
Employee Termination and
Termination Other
Benefits (1) Exit Costs Total
--------------------------------------------------------------------------------------
accrual established in
fiscal 2006 $ 510 - 510
adjustments in fiscal 2006 23 - 23
paid in fiscal 2006 (94) - (94)
--------------------------------------------------------------------------------------
balance, April 30, 2006 439 - 439
additions in fiscal 2007 - 282 282
adjustments in fiscal 2007 (177) 2 (175)
paid in fiscal 2007 (231) (57) (288)
--------------------------------------------------------------------------------------
balance, April 29, 2007 31 227 258
adjustments in fiscal 2008 (34) - (34)
paid in fiscal 2008 3 (49) (46)
--------------------------------------------------------------------------------------
balance, April 27, 2008 $ - 178 178
--------------------------------------------------------------------------------------
(1) Employee termination benefit payments are net of cobra premiums
received from participants.
August 2005 Upholstery Fabrics
In August 2005, the company's board of directors approved a restructuring
plan within the upholstery fabrics segment designed to reduce the company's
U.S. yarn manufacturing operations. The company sold its polypropylene yarn
extrusion equipment (with a carrying value of $2.3 million) located in
Graham, NC to the company's supplier for polypropylene yarn, for $1.1
million payable in cash. Pursuant to terms of the sale agreement, the
company has a long-term supply contract with the supplier to continue to
provide the company with polypropylene yarn at prices tied to a published
index.
The company's board of directors also approved further reductions in the
company's yarn operations by closing the company's facility in Shelby, NC
and consolidating the yarn operations into the Lincolnton, NC facility. The
company is outsourcing the open-end yarns previously produced at the
Shelby, NC facility. Overall, these actions reduced the number of
associates by approximately 100 people.
During fiscal 2008, total restructuring charges incurred were $80,000 of
which $100,000 related to lease termination and other exit costs and a
credit of $20,000 related to employee termination benefits. This total
charge was recorded in restructuring expense in the 2008 Consolidated
Statement of Net Income.
During fiscal 2007, total restructuring and related charges incurred were
$63,000 of which $412,000 related to write-downs of a building and
equipment, $167,000 related to operating costs associated with a closed
plant facility, $49,000 related to asset movement costs, $6,000 related to
lease termination costs, a credit of $40,000 related to employee
termination benefits, and a credit of $531,000 related to sales proceeds on
equipment with no carrying value. Of this total net charge, a credit of
$104,000 was recorded in restructuring expense and a charge of $167,000 was
recorded in cost of sales in the 2007 Consolidated Statement of Loss.
65
During fiscal 2006, total restructuring and related charges incurred were
$5.5 million, of which $2.6 million related to write-downs of a building
and equipment, $1.2 million related to accelerated depreciation, $567,000
related to employee termination benefits, $565,000 related to inventory
markdowns, $394,000 related to operating costs associated with a closed
plant facility, $175,000 related to asset movement costs, and $11,000
related to lease termination costs. Of this total charge, $3.4 million was
recorded in restructuring expense and $2.1 million was recorded in cost of
sales in the 2006 Consolidated Statement of Loss.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
Lease
Employee Termination and
Termination Other
Benefits (1) Exit Costs Total
--------------------------------------------------------------------------------------
accrual established in
fiscal 2006 $ 570 14 584
adjustments in fiscal 2006 (3) (3) (6)
paid in fiscal 2006 (440) (4) (444)
--------------------------------------------------------------------------------------
balance, April 30, 2006 127 7 134
adjustments in fiscal 2007 (40) 6 (34)
paid in fiscal 2007 (69) (13) (82)
--------------------------------------------------------------------------------------
balance, April 29, 2007 18 - 18
adjustments in fiscal 2008 (20) 100 80
paid in fiscal 2008 4 (100) (96)
--------------------------------------------------------------------------------------
balance, April 27, 2008 $ 2 - 2
--------------------------------------------------------------------------------------
(1) Employee termination benefit payments are net of cobra premiums
received from participants.
April 2005 Upholstery Fabrics
In April 2005, the company's board of directors approved a restructuring
plan within the upholstery fabrics segment designed to reduce costs,
increase asset utilization, and improve profitability. The restructuring
plan included the consolidation of the company's velvet fabrics
manufacturing operations, additional fixed manufacturing cost reductions in
the decorative fabrics operation, and significant reductions in selling,
general and administrative expenses within the upholstery fabrics segment.
Also, the company combined its sales, design, and customer service
activities within the upholstery fabrics segment. As a result, on June 30,
2005, the company sold two buildings in Burlington, NC consisting of
approximately 140,000 square feet for proceeds of $2,850,000. Overall,
these restructuring actions reduced the number of associates by 350 people.
During fiscal 2008, the company recorded a restructuring credit of $35,000,
of which a charge of $32,000 related to lease termination and other exit
costs and a credit of $67,000 related to employee termination benefits.
This credit of $35,000 was recorded in restructuring expense in the 2008
Consolidated Statement of Net Income.
During fiscal 2007, the total restructuring and related charges incurred
were $1.1 million, of which approximately $671,000 related to asset
movement costs, $321,000 related to operating costs associated with the
closed plant facilities, $238,000 related to inventory markdowns, $194,000
related to lease termination costs, $59,000 related to write-downs of
equipment, a credit of $165,000 related to sales proceeds received on
equipment with no carrying value, and a credit of $195,000 related to
employee termination benefits. Of this total charge, $564,000 was recorded
in restructuring expense, $501,000 was recorded in cost of sales, and
$58,000 was recorded in selling, general and administrative expenses in the
2007 Consolidated Statement of Loss.
66
During fiscal 2006, the total restructuring and related charges incurred
were $8.8 million, of which approximately $3.5 million related to
accelerated depreciation, $2.3 million related to write-downs of equipment,
$1.5 million related to inventory markdowns, $557,000 related to asset
movement costs, $529,000 related to employee termination benefits, and
$435,000 related to lease termination costs. Of this total charge, $3.7
million was recorded in restructuring expense, $2.1 million was recorded in
cost of sales, and $3.0 million was recorded in selling, general and
administrative expenses in the 2006 Consolidated Statement of Loss.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
Lease
Employee Termination and
Termination Other
Benefits (1) Exit Costs Total
--------------------------------------------------------------------------------------
balance, May 1, 2005 $ 1,897 47 1,944
additions in fiscal 2006 - 406 406
adjustments in fiscal 2006 529 29 558
paid in fiscal 2006 (1,627) (281) (1,908)
--------------------------------------------------------------------------------------
balance, April 30, 2006 799 201 1,000
additions in fiscal 2007 - 184 184
adjustments in fiscal 2007 (195) 10 (185)
paid in fiscal 2007 (517) (341) (858)
--------------------------------------------------------------------------------------
balance, April 29, 2007 87 54 141
adjustments in fiscal 2008 (67) 32 (35)
paid in fiscal 2008 7 (86) (79)
--------------------------------------------------------------------------------------
balance, April 27, 2008 $ 27 - 27
--------------------------------------------------------------------------------------
(1) Employee termination benefit payments are net of cobra premiums
received from participants.
October 2004 Upholstery Fabrics
In October 2004, the company's board of directors approved a restructuring
plan within the upholstery fabrics segment aimed at reducing costs,
increasing asset utilization and improving profitability. The restructuring
plan involved the consolidation of the company's decorative fabrics weaving
operations by closing Culp's facility in Pageland, SC, and consolidating
those operations into the Graham, NC facility. Additionally, the company
consolidated its yarn operations by integrating the production of the
Cherryville, NC plant into the company's Shelby, NC facility. Overall,
these restructuring actions reduced the number of associates by
approximately 250 people.
During fiscal 2008, as a result of management's continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by $13,000
to reflect current estimates of future health care claims. This $13,000
decrease in the restructuring accrual was recorded as a credit to
restructuring expense in the 2008 Consolidated Statement of Net Income.
During fiscal 2007, as a result of management's continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by $22,000
to reflect current estimates of future health care claims. This $22,000
decrease in the restructuring accrual was recorded as a credit to
restructuring expense in the 2007 Consolidated Statement of Loss.
During fiscal 2006, the total restructuring and related charges incurred
were $2.4 million, of which approximately $1.3 million related to asset
movement costs, $1.0 million related to write-downs of equipment, $88,000
related to employee termination benefits, $52,000 related to operating
costs associated with the closing of the plant facilities, $3,000 related
to lease termination costs. Of this total charge, $2.3 million was recorded
in restructuring expense, and $52,000 in cost of sales in the 2006
Consolidated Statement of Loss.
67
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
Lease
Employee Termination and
Termination Other Exit
Benefits (1) Costs Total
--------------------------------------------------------------------------------------
balance, May 1, 2005 $ 309 - 309
additions in fiscal 2006 - 3 3
adjustments in fiscal 2006 88 - 88
paid in fiscal 2006 (333) (3) (336)
--------------------------------------------------------------------------------------
balance, April 30, 2006 64 - 64
additions in fiscal 2007 - - -
adjustments in fiscal 2007 (22) - (22)
paid in fiscal 2007 (29) - (29)
--------------------------------------------------------------------------------------
balance, April 29, 2007 13 - 13
adjustments in fiscal 2008 (13) - (13)
--------------------------------------------------------------------------------------
balance, April 27, 2008 $ - - -
--------------------------------------------------------------------------------------
(1) Employee termination benefit payments are net of cobra premiums
received from participants.
Fiscal 2003 Culp Decorative Fabrics Restructuring
In August 2002, the company's board of directors approved a restructuring
plan in the upholstery fabrics segment aimed at lowering manufacturing
costs, simplifying the dobby fabric upholstery line, increasing asset
utilization and enhancing the division's manufacturing competitiveness. The
restructuring plan involved closing a facility in Chattanooga, TN and
integrating these functions into other plants, a significant reduction in
the number of stock keeping units, or SKUs, offered in the dobby product
line, and a net reduction in workforce of approximately 300 positions.
During fiscal 2008, as a result of management's continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by
approximately $79,000, of which, $66,000 related to lease termination and
other exit costs and $13,000 related to employee termination benefits. This
$79,000 decrease in the restructuring accrual was recorded as a credit to
restructuring expense in the 2008 Consolidated Statement of Net Income.
Additionally, the company recorded a restructuring related charge of
$44,000 for operating costs associated with a closed plant facility. This
$44,000 restructuring related charge was recorded in cost of sales in the
2008 Consolidated Statement of Net Income.
During fiscal 2007, as a result of management's continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by
approximately $17,000 in lease termination and other exit costs to reflect
current estimates of sub-lease income and other exit costs. This $17,000
decrease in the restructuring accrual was recorded as a credit to
restructuring expense in the 2007 Consolidated Statement of Loss.
Additionally, the company recorded a restructuring related charge of
$38,000 for operating costs associated with the closed plant facility. This
$38,000 restructuring related charge was recorded in cost of sales in the
2007 Consolidated Statement of Loss.
During fiscal 2006, as a result of management's continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by
approximately $241,000 in lease termination and other exit costs to reflect
current estimates of sub-lease income and other exit costs and was
decreased by $66,000 to reflect current estimates of employee termination
benefits. This $307,000 decrease in the restructuring accrual was recorded
as a credit to restructuring expense in the 2006 Consolidated Statement of
Loss. Additionally, the company recorded a restructuring related charge of
$34,000 for operating costs associated with a closed plant facility. This
$34,000 restructuring related charge was recorded in cost of sales in the
2006 Consolidated Statement of Loss.
68
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
Lease
Employee Termination and
Termination Other
Benefits (1) Exit Costs Total
--------------------------------------------------------------------------------------
balance, May 1, 2005 $ 200 3,387 3,587
adjustments in fiscal 2006 (66) (241) (307)
paid in fiscal 2006 (46) (822) (868)
--------------------------------------------------------------------------------------
balance, April 30, 2006 88 2,324 2,412
adjustments in fiscal 2007 - (17) (17)
paid in fiscal 2007 (45) (1,043) (1,088)
--------------------------------------------------------------------------------------
balance, April 29, 2007 43 1,264 1,307
adjustments in fiscal 2008 (13) (66) (79)
paid in fiscal 2008 (30) (963) (993)
--------------------------------------------------------------------------------------
balance, April 27, 2008 $ - 235 235
--------------------------------------------------------------------------------------
(1) Employee termination benefit payments are net of cobra premiums
received from participants.
4. ASSETS HELD FOR SALE AND RELATED IMPAIRMENTS
At April 27, 2008, the company had assets held for sale with carrying
values totaling $5.6 million. These assets held for sale consist of the
company's corporate headquarters with a carrying value of $4.8 million,
certain equipment related to its U.S. upholstery fabric operations with a
carrying value of $792,000, and certain equipment related to the mattress
fabrics segment totaling $35,000. The carrying value of these assets held
for sale are presented in the 2008 Consolidated Balance Sheet and are no
longer being depreciated.
Effective October 29, 2007, the company adopted a plan to sell its
corporate headquarters as the company is only utilizing one-half of the
available space and with the sale can lower costs and reduce debt. The
company expects that the final sale and disposal of the assets will be
completed within a year from the date the plan was adopted and the sales
proceeds will be applied against the $6.3 million mortgage balance. In
connection with the plan disposal, the company determined that the carrying
value of their corporate headquarters was less than fair value.
Consequently, no impairment loss was recorded.
Effective April 2008, the company adopted a plan to sell certain equipment
related to its U.S. upholstery fabric operations. In connection with the
plan of disposal, the company determined that the carrying value of this
equipment of $812,000 exceeded its fair value of $792,000. Consequently,
the company recorded an impairment loss of $20,000 in restructuring expense
in the 2008 Consolidated Statement of Net Income.
Effective January 2, 2008, the company adopted a plan to sell certain older
equipment related to its mattress fabrics segment that is being replaced by
newer and more efficient equipment. In connection with the plan of
disposal, the company determined that the carrying value of this equipment
of $513,000 exceeded its fair value of $224,000. Consequently, the company
recorded an impairment loss of $289,000. This impairment loss of $289,000
was recorded in cost of sales in the 2008 Consolidated Statement of Net
Income. The company received sales proceeds totaling $189,000 in fiscal
2008.
At April 29, 2007, the company had assets held for sale with carrying
values totaling $2.5 million. These assets held for sale consisted of
buildings and certain equipment to be sold from the closure of the
company's Lincolnton, NC and Graham, NC plant facilities. At April 27,
2008, all buildings and equipment classified as held for sale at April 29,
2007 have been sold. The company received sales proceeds totaling $1.9
million and recorded impairment losses of $482,000 in restructuring expense
on these assets held for sale in fiscal 2008. The carrying value of these
assets held for sale are presented separately in the 2007 Consolidated
Balance Sheet and were not depreciated in fiscal 2008.
69
5. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
April 27, April 29,
(dollars in thousands 2008 2007
--------------------------------------------------------------------------------------------
customers $ 28,830 31,192
allowance for doubtful accounts (1,350) (1,332)
reserve for returns and allowances and discounts (407) (570)
--------------------------------------------------------------------------------------------
$ 27,073 29,290
============================================================================================
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2008 2007 2006
-------------------------------------------------------------------------------------------
beginning balance $ (1,332) (1,049) (1,142)
provision for bad debts (180) (618) (5)
write-offs, net of recoveries 162 335 98
--------------------------------------------------------------------------------------------
ending balance $ (1,350) (1,332) (1,049)
============================================================================================
A summary of the activity in the allowance for returns and allowances and discounts follows:
(dollars in thousands) 2008 2007 2006
--------------------------------------------------------------------------------------------
beginning balance $ (570) (826) (837)
provision for returns and allowances (2,512) (1,429) (1,834)
discounts
cash discounts taken 2,675 1,685 1,845
--------------------------------------------------------------------------------------------
ending balance $ (407) (570) (826)
============================================================================================
6. INVENTORIES
A summary of inventories follows:
April 27, April 29,
(dollars in thousands) 2008 2007
--------------------------------------------------------------------------------------------
raw materials $ 9,939 10,200
work-in-process 1,682 1,711
finished goods 23,773 28,719
--------------------------------------------------------------------------------------------
$ 35,394 40,630
============================================================================================
7. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
depreciable lives April 27, April 29,
(dollars in thousands) (in years) 2008 2007
--------------------------------------------------------------------------------------------
land and improvements 10 $ 1,061 1,829
buildings and improvements 7-40 13,166 17,791
leasehold improvements life of lease 6,206 4,486
machinery and equipment 3-12 60,076 69,517
office furniture and equipment 3-10 5,475 5,884
capital projects in progress 4,515 1,708
-------------------------------------------------------------------------------------------
90,499 101,215
accumulated depreciation and amortization (57,560) (63,442)
--------------------------------------------------------------------------------------------
$ 32,939 37,773
============================================================================================
70
The non-cash portion for capital expenditures representing vendor financing
totaled $2.1 million and $1.7 million in fiscal years 2008 and 2006,
respectively. The company did not finance any of its capital expenditures
for fiscal 2007. The company's vendor financed arrangements in 2008 bear
interest with fixed interest rates ranging from 6% to 7.14%
The principal payment requirements of accounts payable-capital expenditures
during the next three fiscal years are: 2009 - $1.5 million; 2010 -
$725,000; and 2011 - $724,000.
At April 27, 2008, the company had a commitment to acquire equipment with
regards to its mattress fabrics segment for approximately $1.6 million.
This equipment is expected to be installed in the first quarter of fiscal
2009. The principal payment requirements of this commitment are $894,000
and $688,000 in fiscal 2009 and 2010, respectively. This obligation bears
interest at a fixed interest rate of 8%.
8. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands) 2008 2007 2006
--------------------------------------------------------------------------------------------
beginning balance $ 4,114 4,114 4,114
impairment charge - - -
--------------------------------------------------------------------------------------------
ending balance $ 4,114 4,114 4,114
============================================================================================
The goodwill balance relates to the mattress fabrics segment.
9. OTHER ASSETS
A summary of other assets follows:
April 27, April 29,
(dollars in thousands) 2008 2007
--------------------------------------------------------------------------------------------
cash surrender value - life insurance $ 1,269 1,154
ITG non-compete agreement, net (note 2) 789 1,076
other 351 358
--------------------------------------------------------------------------------------------
$ 2,409 2,588
============================================================================================
The company recorded a non-compete agreement related to the ITG asset
purchase at its fair value based on various valuation techniques. At April
27, 2008 and April 29, 2007, the gross carrying amount for the ITG
non-compete agreement was $1.1 million. At April 27, 2008 and April 29,
2007, accumulated amortization was $359,000 and $72,000, respectively.
Amortization expense for the ITG non-compete agreement was $287,000 and
$72,000 for fiscal 2008 and 2007, respectively. The remaining amortization
expense for the next three fiscal years follows: FY 2009 - $287,000; FY
2010 - $287,000; and FY 2011 - $215,000.
There are no restrictions on the company's cash surrender value - life
insurance balances at April 27, 2008 and April 29, 2007, respectively.
10. ACCRUED EXPENSES
A summary of accrued expenses follows:
April 27, April 29,
(dollars in thousands) 2008 2007
--------------------------------------------------------------------------------------------
compensation, commissions and related benefits $ 5,690 4,941
interest 186 314
accrued rebates 241 1,013
other 2,183 2,402
--------------------------------------------------------------------------------------------
$ 8,300 8,670
============================================================================================
71
11. INCOME TAXES
Total income taxes (benefits) were allocated as follows:
(dollars in thousands) 2008 2007 2006
--------------------------------------------------------------------------------------------
income (loss) from operations $ (542) (1,685) (8,081)
shareholders' equity, related to
the tax benefit arising from the
exercise of stock options (17) (16) (21)
shareholders' equity, related to tax effect
of cash flow hedge (25) (13) 11
--------------------------------------------------------------------------------------------
$ (584) (1,714) (8,091)
===========================================================================================
Income tax benefit attributable to income (loss) from operations consists of:
(dollars in thousands) 2008 2007 2006
--------------------------------------------------------------------------------------------
current
federal $ - - -
state - - -
foreign (1) 377 2,091 2,066
--------------------------------------------------------------------------------------------
377 2,091 2,066
--------------------------------------------------------------------------------------------
deferred
federal (408) (3,100) (8,742)
state (36) (344) (970)
foreign (475) (332) (455)
--------------------------------------------------------------------------------------------
(919) (3,776) (10,167)
--------------------------------------------------------------------------------------------
$ (542) (1,685) (8,081)
============================================================================================
(1) Foreign income tax expense includes U.S. income tax expense on income
tax reserves pertaining to foreign sources of taxable income of
$1,165,000, $702,000, and $1,526,000, in fiscal 2008, 2007, and 2006,
respectively. Also, foreign income tax expense in 2008 includes
research and development credits with regards to the company's
Canadian subsidiary of $593,000 and income tax incentives granted by
the Chinese government of $592,000. No investment tax credits from the
Chinese government were obtained in fiscal 2007 and 2006.
Income before income taxes related to the company's foreign operations for
the years ended April 27, 2008, April 29, 2007, and April 30, 2006 was $6.9
million, $8.6 million and $6.5 million, respectively.
Under a tax holiday in the People's Republic of China, the company was
granted an exemption from income taxes for two years commencing from the
first profit-making year on a calendar year basis and a 50% reduction in
the income tax rates for the following three years. Calendar year 2004 was
the first profit-making year. The company is entitled to a 50% income tax
reduction for the calendar years 2006, 2007, and 2008. The applicable
income tax rate before the tax holiday reduction was 27% in fiscal 2008,
2007 and 2006. Had the company not been entitled to the tax holiday, the
consolidated income tax benefit for fiscal years 2008, 2007 and 2006 would
have been $4,000, $830,000 and $6.9 million, respectively.
72
The following schedule summarizes the principal differences between the
income tax expense (benefit) at the federal income tax rate and the
effective income tax rate reflected in the consolidated financial
statements:
2008 2007 2006
--------------------------------------------------------------------------------------------
federal income tax rate 34.0% (34.0)% (34.0)%
state income taxes, net of federal
income tax benefit (1.5) (14.6) (5.1)
foreign tax rate differential (29.1) (51.5) (10.6)
increase in tax reserves 26.9 11.5 7.7
tax effects of Canadian foreign exchange loss (23.2) - -
Canadian research and development credits (12.2) - -
China income tax incentives (12.2) - -
non-deductible stock option expense 1.7 25.6 -
non-deductible expenses 1.6 3.3 1.4
other 2.8 3.6 (0.1)
--------------------------------------------------------------------------------------------
(11.2)% (56.1)% (40.7)%
============================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities consist of the
following:
(dollars in thousands) 2008 2007
--------------------------------------------------------------------------------------------
deferred tax assets:
accounts receivable $ 587 642
inventories 2,290 2,253
compensation 735 672
liabilities and reserves 977 1,898
alternative minimum tax 1,320 1,320
loss carryforwards - U.S. 28,786 27,005
loss carryforwards - foreign 169 -
--------------------------------------------------------------------------------------------
total deferred tax assets 34,864 33,790
--------------------------------------------------------------------------------------------
deferred tax liabilities:
property, plant and equipment, net (2,383) (2,691)
other (135) (40)
--------------------------------------------------------------------------------------------
total deferred tax liabilities (2,518) (2,731)
--------------------------------------------------------------------------------------------
$ 32,346 31,059
============================================================================================
Federal and state net operating loss carryforwards were $75.3 million with
related future tax benefits of $28.8 million at April 27, 2008. These
carryforwards principally expire in 14-20 years, fiscal 2022 through fiscal
2028. The company also has an alternative minimum tax credit carryforward
of approximately $1.3 million for federal income tax purposes that does not
expire.
In making the judgment about the realization of the U.S. net deferred tax
assets, management has considered both negative and positive evidence, and
concluded that sufficient positive evidence exists to overcome the
cumulative losses experienced in recent years. Specifically, management
considered the following, among other factors: nature of the company's
products; history of positive earnings in the mattress fabrics segment;
capital projects in progress to further enhance the company's globally
competitive cost structure in the mattress fabrics segment; recent
restructuring actions in the U.S. upholstery fabrics business to adjust the
U.S. cost structure and bring U.S. manufacturing capacity in line with
demand; development of offshore manufacturing and sourcing programs to meet
changing demands of upholstery fabric customers in the U.S.; inter-company
agreements with the company's China subsidiaries expected to be in place in
fiscal 2009 for various consulting services and intellectual property; and
the incremental sales volume from the purchase of certain assets from ITG
related to the mattress fabric product line of ITG's Burlington House
Division. Management's analysis of taxable income also included the
following considerations: none of the company's net operating loss
carryforwards have previously expired unused; the U.S. federal carryforward
period is 20 years; and the company's current income tax loss carryforwards
principally expire in 14-20 years; fiscal 2022 through 2028. The amount of
the deferred tax assets considered realizable, however, could be reduced if
estimates of future U.S. taxable income during the carryforward period are
reduced.
73
The following table sets forth the change to the company's unrecognized tax
benefit:
(dollars in thousands) 2008
--------------------------------------------------------------------------------------------
balance at April 30, 2007 $ 3,409
increases from prior period tax positions 1,329
decreases from prior period tax positions (92)
increases from current period tax positions 156
--------------------------------------------------------------------------------------------
balance at April 27, 2008 $ 4,802
============================================================================================
Upon adoption of FIN 48 as of April 30, 2007, the company had approximately
$3.4 million of total gross unrecognized tax benefits, of which $3.1
million represents the amount of gross unrecognized tax benefits that, if
recognized, would favorably affect the income tax rate in future periods.
At April 27, 2008, the company had approximately $4.8 million of total
gross unrecognized tax benefits, of which $4.4 million represents the
amount of gross unrecognized tax benefits that, if recognized, would
favorably affect the income tax rate in future periods. The total gross
unrecognized tax benefits of $4.8 million as of April 27, 2008, are
classified as income taxes payable-long-term in the accompanying
consolidated balance sheets.
The company has elected to classify interest and penalties, accrued as
required by FIN 48, as part of income tax expense. Upon adoption of FIN 48
as of April 30, 2007 and at April 27, 2008, the gross amount of interest
and penalties due to unrecognized tax benefits was $98,000 and $115,000,
respectively. The liability for uncertain tax positions includes $4.0
million related to tax positions for which significant change is reasonably
possible in fiscal 2009. This amount relates to double taxation under
applicable tax treaties with foreign tax jurisdictions. United States
federal and state income tax returns filed by the company remain subject to
examination for tax years 2002 and subsequent due to loss carryforwards.
Canadian federal returns remain subject to examination for tax years 2004
and subsequent. Canadian provincial returns remain subject to examination
for tax years 2005 and subsequent. Income tax returns for the company's
China subsidiaries are subject to examination for tax years 2006 and
subsequent.
Income tax payments, net of income tax refunds, were $360,000 in fiscal
2008, $393,000 in fiscal 2007, and $1.4 million in fiscal 2006.
12. LONG-TERM DEBT AND LINES OF CREDIT
A summary of long-term debt follows:
April 27, April 29,
(dollars in thousands) 2008 2007
--------------------------------------------------------------------------------------------
unsecured senior term notes $ 14,307 30,905
real estate loan - I 3,828 4,039
real estate loan - II 2,500 2,500
canadian government loan 788 716
--------------------------------------------------------------------------------------------
21,423 38,160
current maturities of long-term debt (7,375) (16,046)
--------------------------------------------------------------------------------------------
long-term debt, less current maturities $ 14,048 22,114
--------------------------------------------------------------------------------------------
lines of credit $ - 2,593
--------------------------------------------------------------------------------------------
total borrowings $ 21,423 40,753
--------------------------------------------------------------------------------------------
74
Unsecured Term Notes
The company's unsecured senior term notes have a fixed interest rate of
8.80% (payable semi-annually in March and September and subject to
prepayment provisions each fiscal quarter as defined in the agreement) and
are payable over an average remaining term of 1.9 years through March 2010.
As of April 27, 2008, the principal payments that are required to be paid
in periodic installments over the next two fiscal years are as follows:
March 2009 - $7.2 million; and March 2010 - $7.1 million.
On February 19, 2008, the company entered into a fourth amendment to its
senior note agreement. This amendment provided greater flexibility by
increasing the capital expenditure limit on a cash basis from $4.0 million
to $5.0 million for fiscal year 2008 and $4.0 million plus an additional
amount as defined in the agreement for any fiscal year thereafter.
Real Estate Loan - I
The company has a real estate loan that is secured by a lien on the
company's corporate headquarters office located in High Point, NC. This
term loan bears interest at the one-month LIBOR plus an adjustable margin
(all in rate of 5.23% at April 27, 2008) based on the company's debt/EBITDA
ratio, as defined in the agreement and is payable in varying monthly
installments through September 2010, with a final payment of $3.3 million
in October 2010.
Real Estate Loan - II
The company has a term loan in the amount of $2.5 million in connection
with the ITG asset purchase agreement (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 LIBOR plus an adjustable
margin (all in rate of 5.59% at April 27, 2008) based on the company's
debt/EBITDA ratio, as defined in the agreement. This agreement requires the
company to pay interest monthly with the entire principal amount due on
June 30, 2010.
Canadian Government Loan
The company has an agreement with the Canadian government to provide for a
term loan that is non-interest bearing and is payable in 48 equal monthly
installments commencing December 1, 2009. The proceeds are to partially
finance capital expenditures at the company's Rayonese facility located in
Quebec, Canada.
Revolving Credit Agreement -United States
The company has an unsecured credit agreement that provides for a revolving
loan commitment of $6.5 million, including letters of credit up to $5.5
million. This agreement bears interest at the one-month LIBOR plus an
adjustable margin (all in rate of 5.23% at April 27, 2008) based on the
company's debt/EBITDA ratio, as defined in the agreement. As of April 27,
2008, there were $1.3 million in outstanding letters of credit (all of
which related to workers compensation) under the agreement. At April 27,
2008 and April 29, 2007, there were no borrowings outstanding under the
agreement.
On December 27, 2007, the company entered into a twelfth amendment to the
revolving credit agreement. This amendment extended the expiration date to
December 31, 2008, provided greater flexibility by increasing the capital
expenditure limit on a cash basis from $4.0 million to $5.0 million for
fiscal year 2008, and amended certain other financial covenants as defined
in the agreement.
Revolving Credit Agreement - China
The company's China subsidiary has an unsecured revolving credit agreement
with a bank in China to provide a line of credit available up to
approximately $5 million, of which approximately $1 million includes
letters of credit. This agreement bears interest at a rate determined by
the Chinese government. There were no borrowings outstanding under the
agreement as of April 27, 2008. At April 29, 2007, outstanding borrowings
under the agreement were $2.6 million.
75
Overall
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At April 27, 2008, the
company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five
fiscal years are: 2009 - $7.4 million; 2010 - $7.5 million; 2011 - $6.1
million; 2012 - $197,000; 2013 - $197,000; and thereafter - $66,000.
Interest paid during 2008, 2007 and 2006 totaled $3.2 million, $3.9 million
and $4.1 million, respectively.
13. COMMITMENTS AND CONTINGENCIES
The company leases certain office, manufacturing and warehouse facilities
and equipment, primarily computers and vehicles, under noncancellable
operating leases. Lease terms related to real estate range from one to
three years with renewal options for additional periods ranging up to ten
years. The leases generally require the company to pay real estate taxes,
maintenance, insurance and other expenses. Rental expense for operating
leases was $2.8 million in fiscal 2008, $3.2 million in fiscal 2007, and
$3.6 million in fiscal 2006. Future minimum rental commitments for
noncancellable operating leases are $2.3 million in fiscal 2009; $1.1
million in fiscal 2010; $176,000 in fiscal 2011; $67,000 in fiscal 2012,
and $49,000 in fiscal 2013. Included in the future minimum rental
commitments are accrued restructuring expenses for the company's inactive
Chattanooga manufacturing facility of $121,000 for fiscal 2009, the
company's inactive Mississippi distribution warehouse of $98,000 for fiscal
2009 and other equipment leases of $44,000, and $8,000 for fiscal 2009, and
2010, respectively. Management expects that in the normal course of
business, these leases will be renewed or replaced by other operating
leases, with the exception of lease commitments associated with closed
plant facilities.
The company leased a manufacturing facility in Chattanooga, Tennessee from
Joseph E. Proctor d/b/a Jepco Industrial Warehouses (the "Landlord') for a
term of 10 years. This lease expired on April 30, 2008. The company closed
this facility approximately five years ago and has not occupied the
facility except to provide supervision and security. The company continued
to make its lease payments to the landlord as required by the lease. A $1.4
million lawsuit was filed by the Landlord on April 10, 2008, in the Circuit
Court for Hamilton County Tennessee to collect the remainder of the rent
due under the lease for the months of March and April of 2008, additional
expenses to be paid by the company for March and April 2008, including
utilities, insurance, property taxes, and other tenant-paid expenses that
would result in the triple net rent due the Landlord, and for extensive
repairs, refitting, renovation, and capital improvement items the Landlord
alleges he is entitled to have the company pay for. The Landlord
unilaterally took possession of the leased premises on or about March 10,
2008, even though the lease was in good standing and the company was
entitled to complete possession. Consequently, the company has paid their
lease payments through March 10, 2008 but the Landlord has not accepted the
company's position. The company will assert the repossessory action of the
Landlord as a bar to his further action under the lease to collect any
items from the company. A significant portion of the Landlord's claim
relates to the company's alleged liability for physical damage to the
premises, to refit the premises to its original condition, and to make
physical improvements or alterations to the premises. The company disputes
the matters described in this litigation and intends to defend itself
vigorously.
A lawsuit was filed against the company and other defendants (Chromatex,
Inc., Rossville Industries, Inc., Rossville Companies, Inc. and Rossville
Investments, Inc.) on February 5, 2008 in United States District Court for
the Middle District of Pennsylvania. The plaintiffs are Alan Shulman,
Stanley Siegel, Ruth Cherenson as Personal Representative of Estate of Alan
Cherenson, and Adrienne Rolla and M.F. Rolla as Executors of the Estate of
Joseph Byrnes. The plaintiffs were partners in a general partnership that
formerly owned a manufacturing plant in West Hazleton, Pennsylvania (the
"Site"). Approximately two years after this general partnership sold the
Site to defendants Chromatex, Inc. and Rossville Industries, Inc. the
company leased and operated the Site as part of the company's
Rossville/Chromatex division. The lawsuit involves court judgments that
have been entered against the plaintiffs and against defendant Chromatex,
Inc. requiring them to pay costs incurred by the United States
Environmental Protection Agency ("USEPA") responding to environmental
contamination at the Site, in amounts approximating $8.6 million. Neither
USEPA nor any other governmental authority has asserted any claim against
the company on account of these matters. The plaintiffs seek contribution
from the company and other defendants and a declaration that the company
and the other defendants are responsible for environmental response costs
under environmental laws and certain agreements. The company does not
believe it has any liability for the matters described in this litigation
and intends to defend itself vigorously. In addition, the company has an
indemnification agreement with certain other defendants in the litigation
pursuant to which the other defendants agreed to indemnify the company for
any damages it incurs as a result of the environmental matters that are
subject of this litigation and consequently no reserve has been recorded.
76
The company is involved in legal proceedings and claims which have arisen
in the ordinary course of business. These actions, when ultimately
concluded and settled, will not, in the opinion of management, have a
material adverse effect upon the financial position, results of operations
or cash flows of the company.
14. STOCK-BASED COMPENSATION
Equity Incentive Plans
On September 20, 2007, the company's shareholders approved a new equity
incentive plan entitled the Culp, Inc. 2007 Equity Incentive Plan (the
"2007" Plan"). The 2007 Plan will expand the types of equity based awards
available for grant by the company's Compensation Committee. The types of
equity based awards available for grant include stock options, stock
appreciation rights, restricted stock and restricted stock units,
performance units, and other discretionary awards as determined by the
Compensation Committee. An aggregate of 1,200,000 shares of common stock
were authorized for issuance under the 2007 Plan. In conjunction with the
approval of the 2007 Plan, the company's 2002 Stock Option Plan was
terminated (with the exception of currently outstanding options) and no
additional options will be granted under the 2002 Stock Plan. At April 27,
2008, there were 1,194,000 shares available for future grants under the
company's 2007 Plan.
Under the company's prior stock option plans (terminated with the approval
of the 2007 Plan) and the 2007 Plan, employees and directors were and may
be granted options to purchase shares of common stock at the fair market
value on the date of grant. Options granted to employees under these plans
generally vest over four to five years and expire five to ten years after
the date of grant. Options granted to outside directors under these plans
vest immediately on the date of grant and expire ten years after the date
of grant. The fair value of each option award was estimated on the date of
grant using a Black-Scholes option-pricing model. The fair value of stock
options granted to employees at each grant date under the 2002 stock option
plan during fiscal 2008, 2007, and 2006 was $4.74, $2.43, and $2.47 per
share, respectively, using the following assumptions:
--------------------------------------------------------------------------------
2008 2007 2006
--------------------------------------------------------------------------------
Risk-free interest rate 4.92% - 5.09% 5.03% 4.39%
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 38.59%-65.74% 67.03% 73.93%
Expected term (in years) 1.1 - 8.0 1.6 3.5
--------------------------------------------------------------------------------
The fair value of stock options granted to outside directors at each grant
date under the 2007 Plan during fiscal 2008 and the 2002 stock option plan
during fiscal 2007 and 2006 were $7.19, $3.68, and $3.52 per share,
respectively, using the following assumptions:
--------------------------------------------------------------------------------
2008 2007 2006
--------------------------------------------------------------------------------
Risk-free interest rate 4.56% 4.57% 4.39%
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 66.28% 68.36% 73.93%
Expected term (in years) 8.0 6.8 8.5
--------------------------------------------------------------------------------
77
The assumptions utilized in the model are evaluated and revised, as
necessary, to reflect market conditions, actual historical experience, and
groups of employees (executives and non-executives) that have similar
exercise patterns that are considered separately for valuation purposes.
The risk-free interest rate for periods within the contractual life of the
option was based on the U.S. Treasury yield curve in effect at the time of
grant. The dividend yield was calculated based on the company's annual
dividend as of the option grant date. The expected volatility was derived
using a term structure based on historical volatility and the volatility
implied by exchange-traded options on the company's common stock. The
expected term of the options is based on the contractual term of the stock
options, expected employee exercise and post-vesting employment termination
trends.
The following table summarizes stock option activity for fiscal 2008, 2007,
and 2006:
2008 2007 2006
--------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------------------------------
outstanding at beginning
of year 926,000 $ 7.22 993,875 $ 7.11 903,575 $ 7.46
granted 145,500 8.81 228,000 4.56 257,000 4.59
exercised (78,736) 5.84 (115,750) 2.30 (104,200) 3.55
canceled/expired (199,999) 13.04 (180,125) 6.38 (62,500) 7.88
--------------------------------------------------------------------------------------------------------------
outstanding at end of year 792,765 6.19 926,000 7.22 993,875 7.11
--------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 4/27/08 Contractual Life Exercise Price at 4/27/08 Exercise Price
--------------------------------------------------------------------------------------------------------------
$ 3.05 - $ 5.41 418,515 3.0 years $4.54 160,017 $4.53
$ 6.61 - $ 7.63 195,750 1.0 7.21 175,375 7.22
$ 8.75 - $ 10.11 178,500 7.8 8.92 46,500 9.42
--------------------------------------------------------------------------------------------------------------
792,765 3.6 $6.19 381,892 $6.36
--------------------------------------------------------------------------------------------------------------
At April 27, 2008, outstanding options to purchase 381,892 were
exercisable, had a weighted average exercise price of $6.36 per share, an
aggregate intrinsic value of $541,000, and a weighted average contractual
term of 2.4 years. At April 27, 2008, the aggregate intrinsic value for
options outstanding was $1.3 million with a weighted average contractual
term of 3.6 years.
The aggregate intrinsic value for options exercised was $277,000, $329,000,
and $139,000 in fiscal 2008, 2007, and 2006, respectively.
The remaining unrecognized compensation costs related to unvested awards at
April 27, 2008 was $867,000 which is expected to be recognized over a
weighted average period of 2.9 years.
Stock Option Modifications
On December 12, 2007, the compensation committee of the board of directors
approved a modification of the June 25, 2007 stock option grant to change
the vesting period from 2 to 5 years from the original date of grant. There
were no other changes to the original stock option grant and no inducements
were given to the participating employees in exchange for this
modification. The option modification agreements were agreed to by all of
the participating employees (20 in total) and were effective January 22,
2008 (modification date). No incremental compensation cost was recognized
for this modification as the fair value of the revised award was less than
the fair value of the original award as of the modification date.
78
Effective December 31, 2007, an executive officer resigned from the company
and agreed to a separation agreement. As part of the separation agreement,
the exercise period for vested stock options was extended from 90 days from
the date of resignation (terms stated in the original option agreements) to
September 28, 2009. The incremental compensation cost recognized from this
modification approximated $54,000.
Other Share-Based Arrangements
The company has a stock-based compensation agreement with an individual
that requires the company to settle in cash and is indexed by shares of the
company's common stock as defined in the agreement. The cash settlement is
based on a 30-day average closing price of the company's common stock at
the time of payment. At April 27, 2008, this agreement was indexed by
approximately 85,000 shares of the company's common stock. The fair value
of this agreement is included in accrued expenses and was approximately
$660,000 at April 27, 2008. The company recorded a decrease of $49,000 to
reflect the change in fair value for fiscal 2008. Payments made under this
arrangement were $161,000 in fiscal 2008.
15. DERIVATIVES
The company applies the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by
SFAS No. 137, SFAS No. 138 and SFAS No. 149, requires the company to
recognize all derivative instruments on the balance sheet at fair value.
These statements also establish new accounting rules for hedging
instruments, which depend on the nature of the hedge relationship. A fair
value hedge requires that the effective portion of the change in the fair
value of a derivative instrument be offset against the change in the fair
value of the underlying asset, liability, or firm commitment being hedged
through earnings. A cash flow hedge requires that the effective portion of
the change in the fair value of a derivative instrument be recognized in
Other Comprehensive Income (Loss) ("OCI"), a component of Shareholders'
Equity, and reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. The ineffective portion of a
derivative instrument's change in fair value is immediately recognized in
earnings.
In connection with one of the company's real estate loans with its bank,
the company was required to have an agreement to hedge the interest rate
risk exposure on the real estate loan. The company entered into a
$2,170,000 notional principal interest rate swap, which represents 50% of
the original principal amount of the real estate loan, that effectively
converted the floating rate LIBOR based payments to fixed payments at
4.99%, plus the spread calculated under the real estate loan agreement.
This agreement expires in October 2010.
The company accounts for the interest rate swap as a cash flow hedge
whereby the fair value of this contract is reflected in other assets if the
contract is in the company's favor or accrued expenses if the contract is
in the bank's favor in the accompanying consolidated balance sheets with
the offset recorded as accumulated other comprehensive income (loss). The
fair value of the interest rate swap agreement was approximately $75,000
and $6,000 in the bank's favor at April 27, 2008 and April 29, 2007,
respectively. The fair value of the interest rate swap agreement was
determined by quoted market prices.
79
16. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted-average
number of shares outstanding during the period. Diluted net income (loss)
per share uses the weighted-average number of shares outstanding during the
period plus the dilutive effect of stock options calculated using the
treasury stock method. Weighted average shares used in the computation of
basic and diluted net income (loss) per share are as follows:
(in thousands) 2008 2007 2006
---------------------------------------------------------------------------
weighted-average common
shares outstanding, basic 12,624 11,922 11,567
effect of dilutive stock options 141 - -
---------------------------------------------------------------------------
weighted-average common
shares outstanding, diluted 12,765 11,922 11,567
---------------------------------------------------------------------------
Options to purchase 46,500, 467,459 and 504,938 shares of common stock were
not included in the computation of diluted net income (loss) per share for
fiscal 2008, 2007 and 2006, respectively, because the exercise price of the
options was greater than the average market price of the common shares.
Options to purchase 3,665 and 50,385 shares were not included in the
computation of diluted net loss per share for fiscal 2007 and 2006,
respectively, because the company incurred a net loss for these fiscal
years.
17. BENEFIT PLANS
The company has a defined contribution plan which covers substantially all
employees and provides for participant contributions on a pre-tax basis and
matching contributions by the company. Company contributions to the plan
were $575,000, $672,000, and $1.0 million in fiscal 2008, 2007, and 2006,
respectively.
In addition to the defined contribution plan, the company implemented a
nonqualified deferred compensation plan covering officers and certain other
associates in fiscal 2003. The plan provides for participant deferrals on a
pre-tax basis and non-elective contributions made by the company. Company
contributions to the plan were $80,000 for fiscal 2008, $72,000 for fiscal
2007, and $72,000 for fiscal 2006, respectively. The company's nonqualified
plan liability of $882,000 and $731,000 at April 27, 2008 and April 29,
2007, respectively, is included in accrued expenses in the Consolidated
Balance Sheets.
18. SEGMENT INFORMATION
The company's operations are classified into two business segments:
mattress fabrics and upholstery fabrics. The mattress fabrics segment
manufactures and sells fabrics to bedding manufacturers. The upholstery
fabrics segment manufactures and sells fabrics primarily to residential and
commercial (contract) furniture manufacturers.
Net sales denominated in U.S. dollars accounted for 88%, 86% and 89% of
total consolidated net sales in 2008, 2007 and 2006, respectively.
International sales accounted for 20%, 21% and 18% of net sales in 2008,
2007 and 2006, respectively, and are summarized by geographic area as
follows:
(dollars in thousands) 2008 2007 2006
---------------------------------------------------------------------------
north america (excluding USA) $ 18,880 17,310 18,944
far east and asia 28,465 32,683 28,104
all other areas 4,000 2,792 501
---------------------------------------------------------------------------
$ 51,345 52,785 47,549
---------------------------------------------------------------------------
80
The company evaluates the operating performance of its segments based upon
income (loss) from operations before restructuring and related charges or
credits, certain unallocated corporate expenses, and certain other
non-recurring items. Unallocated corporate expenses represent primarily
compensation and benefits of certain executive officers and all costs
related to being a public company. Segment assets include assets used in
the operation of each segment and consist of accounts receivable,
inventories, and property, plant, and equipment. The mattress fabrics
segment also includes in segment assets, assets held for sale, goodwill,
and other current and non-current assets associated with the ITG
acquisition (Note 2). The upholstery fabrics segment also includes assets
held for sale in segment assets.
Sales and gross profit for the company's operating segments are as follows:
(dollars in thousands) 2008 2007 2006
-------------------------------------------------------------------------------
net sales:
upholstery fabrics $ 115,982 142,736 167,413
mattress fabrics 138,064 107,797 93,688
-------------------------------------------------------------------------------
$ 254,046 250,533 261,101
===============================================================================
gross profit:
upholstery fabrics $ 12,829 17,397 14,909
mattress fabrics 22,576 18,610 13,579
-------------------------------------------------------------------------------
total segment gross profit 35,405 36,007 28,488
loss on impairment of equipment (289)(1) - -
restructuring related charges (1,957)(2) (4,802)(4) (4,620)(6)
-------------------------------------------------------------------------------
$ 33,159 31,205 23,868
===============================================================================
(dollars in thousands) 2008 2007 2006
-------------------------------------------------------------------------------
selling, general, and administrative
expenses:
upholstery fabrics $ 11,650 15,065 15,863
mattress fabrics 8,457 7,856 6,724
unallocated corporate 3,797 4,051 3,345
-------------------------------------------------------------------------------
total segment selling, general, and administrative
expenses 23,904 26,972 25,932
restructuring related charges 69(2) 58(4) 3,022 (7)
-------------------------------------------------------------------------------
$ 23,973 27,030 28,954
===============================================================================
income (loss) from operations:
upholstery fabrics $ 1,180 2,332 (954)
mattress fabrics 14,118 10,754 6,855
-------------------------------------------------------------------------------
total segment income from
operations 15,298 13,086 5,901
unallocated corporate expenses (3,797) (4,051) (3,345)
loss on impairment of equipment (289) - -
restructuring and related charges (2,912)(3) (8,394)(5) (17,915)(8)
-------------------------------------------------------------------------------
total income (loss) from operations 8,300 641 (15,359)
interest expense (2,975) (3,781) (4,010)
interest income 254 207 126
other expense (736) (68) (634)
-------------------------------------------------------------------------------
income (loss) before income
taxes $ 4,843 (3,001) (19,877)
===============================================================================
1) The $289 represents impairment losses on older and existing equipment
that is being replaced by newer and more efficient equipment. This
impairment loss pertains to the mattress fabrics segment.
2) The $1.9 million restructuring related charge represents $1.0 million
for inventory markdowns and $954 for other operating costs associated
with closed plant facilities. The $69 restructuring related charge
represents other operating costs associated with closed plant
facilities. These charges relate to the upholstery fabrics segment.
81
3) The $2.9 million represents $1.0 million for inventory markdowns, $1.0
million for other operating costs associated with closed plant
facilities, $533 for lease termination and other exit costs, $503 for
write-downs of buildings and equipment, $189 for asset movement costs,
$23 for employee termination benefits, and a credit of $362 for sales
proceeds received on equipment with no carrying value. Of this total
charge $1.9 million was recorded in cost of sales, $69 was recorded in
selling, general, and administrative expenses, and $886 was recorded
in restructuring expense in the 2008 Consolidated Statement of Net
Income. These charges relate to the upholstery fabrics segment.
4) The $4.8 million represents restructuring related charges of $2.4
million for inventory markdowns, $1.2 million for accelerated
depreciation, and $1.2 million for other operating costs associated
with closed plant facilities. The $58 represents other operating costs
associated with closed plant facilities. These charges relate to the
upholstery fabrics segment.
5) The $8.4 million represents restructuring related charges of $2.4
million of inventory markdowns, $1.5 million for write-downs of
buildings and equipment, $1.4 million for asset movement costs, $1.2
million for accelerated depreciation, $1.2 million for other operating
costs associated with closed plant facilities, $909 for employee
termination benefits, $706 for lease termination and other exit costs,
and a credit of $930 for sales proceeds received on equipment with no
carrying value. Of this total charge $4.8 million was recorded in cost
of sales, $58 was recorded in selling, general, and administrative
expenses, $3.5 million was recorded in restructuring expense in the
2007 Consolidated Statement of Net Loss. These charges relate to the
upholstery fabrics segment.
6) The $4.6 million represents restructuring related charges of $2.0
million for inventory markdowns, $1.9 million for accelerated
depreciation, and $665 for operating costs associated with closed
plant facilities. These charges relate to the upholstery fabrics
segment.
7) The $3.0 million represents accelerated depreciation. This charge
relates to the upholstery fabrics segment.
8) The $17.9 million represents restructuring and related charges of $6.0
million for write-downs of buildings and equipment, $5.0 million for
accelerated depreciation, $2.2 million for asset movement costs, $2.0
million for inventory markdowns, $1.7 million for employee termination
benefits, $665,000 for operating costs associated with closed plant
facilities, and $316,000 for lease termination and other exit costs.
Of this total charge, $4.6 million was recorded in cost of sales, $3.0
million was recorded in selling, general, and administrative expenses,
and $10.3 million was recorded in restructuring expense in the 2006
Consolidated Statement of Net Loss. These charges relate to the
upholstery fabrics segment.
One customer within the upholstery fabrics segment represented
approximately 11%, 11% and 13% of consolidated net sales in fiscal 2008,
2007 and 2006, respectively. One customer within the mattress fabrics
segment accounted for approximately 11% of consolidated net sales in fiscal
2008 and was less than 10% of consolidated net sales in fiscal 2007 and
2006, respectively. One customer within the upholstery fabrics segment
represented 10% of accounts receivable at April 27, 2008. One customer
within the mattress fabrics segment represented 11% of accounts receivable
at April 27, 2008. No customers accounted for 10% or more of accounts
receivable at April 29, 2007 and April 30, 2006, respectively.
82
Balance sheet information for the company's operating segments follow:
(dollars in thousands) 2008 2007 2006
-------------------------------------------------------------------------------
segment assets
mattress fabrics
current assets (9) $ 27,572 32,990 21,179
assets held for sale 35 - -
non-compete agreement, net 789 1,076 -
goodwill 4,114 4,114 4,114
property, plant, and equipment 21,687 (10) 22,849 (10) 25,357 (10)
-------------------------------------------------------------------------------
total mattress fabrics assets $ 54,197 61,029 50,650
-------------------------------------------------------------------------------
upholstery fabrics
current assets (11) $ 34,895 37,457 44,563
assets held for sale 792 2,499 3,111
property, plant, and equipment 11,214 (12) 14,880 (12) 19,229 (12)
-------------------------------------------------------------------------------
total upholstery fabrics assets $ 46,901 54,836 66,903
-------------------------------------------------------------------------------
total segment assets 101,098 115,865 117,553
non-segment assets
cash and cash equivalents 4,914 10,169 9,714
assets held for sale 4,783 - -
income taxes receivable 438 - -
deferred income taxes 33,810 31,059 27,296
other current assets 1,328 1,297 1,287
property, plant, and equipment 38 44 53
other assets 1,620 1,512 1,564
-------------------------------------------------------------------------------
total assets $ 148,029 159,946 157,467
-------------------------------------------------------------------------------
capital expenditures (13):
mattress fabrics $ 4,425 2,963 3,659
upholstery fabrics 2,458 1,264 2,811
unallocated corporate 45 - -
-------------------------------------------------------------------------------
$ 6,928 4,227 6,470
===============================================================================
depreciation expense
mattress fabrics $ 3,443 3,679 3,662
upholstery fabrics 2,105 2,923 5,740
-------------------------------------------------------------------------------
total segment depreciation
expense 5,548 6,602 9,402
accelerated depreciation -
upholstery fabrics - 1,247 4,960
-------------------------------------------------------------------------------
$ 5,548 7,849 14,362
===============================================================================
9) Current assets represent accounts receivable and inventory. At April
29, 2007 current assets also included a credit of future purchases of
inventory associated with the ITG acquisition (Note 2). This credit of
future purchases of inventory was fully utilized at April 27, 2008.
10) The $21.7 million at April 27, 2008, represents property, plant, and
equipment located in the U.S. of $13.1 million, located in Canada of
$8.4 million, and various corporate allocations of $168,000. The $22.8
million at April 29, 2007, represents property, plant, and equipment
located in the U.S. of $10.9 million, located in Canada of $10.0
million, and various corporate allocations of $1.9 million. The $25.4
million at April 30, 2006, represents property, plant, and equipment
located in the U.S. of $11.0 million, located in Canada of $12.4
million, and various corporate allocations of $2.0 million. The
corporate allocations of $1.9 million at April 29, 2007 and $2.0
million at April 30, 2006 primarily relate to the corporate
headquarters which is classified in assets held for sale at April 27,
2008.
11) Current assets represent accounts receivable and inventory.
83
12) The $11.2 million at April 27, 2008 represents property, plant, and
equipment located in China of $9.0 million, located in the U.S. of
$1.7 million, and various corporate allocations of $501,000. The $14.9
million at April 29, 2007 represents property, plant, and equipment
located in China of $7.7 million, located in the U.S. of $3.4 million,
and various corporate allocations of $3.8 million. The $19.2 million
at April 30, 2006 represents property, plant, and equipment located in
China of $5.4 million, located in the U.S. of $9.8 million, and
various corporate allocations of $4.0 million. The corporate
allocations of $3.8 million at April 29, 2007 and $4.0 million at
April 30, 2006 primarily relate to the corporate headquarters which is
classified in assets held for sale at April 27, 2008.
13) Capital expenditure amounts are stated on an accrual basis. See
Consolidated Statement of Cash Flows for capital expenditure amounts
on a cash basis.
19. RELATED PARTY TRANSACTIONS
In fiscal 2006, a director of the company was also an officer and director
of a major customer of the company. Net sales from this customer was
approximately $33.3 million in fiscal 2006. Accounts receivable from this
customer at April 30, 2006 was approximately $2.4 million.
Rents paid to entities owned by certain shareholders and officers of the
company and their immediate families were approximately $46,500 in fiscal
2007 and $158,000 in fiscal 2006. No rents were paid to entities owned by
certain shareholders and officers of the company and their immediate
families in fiscal 2008.
20. STATUTORY RESERVES
The company's subsidiaries located in China are required to transfer 10% of
their net income, as determined in accordance with the People's Republic of
China (PRC) accounting rules and regulations, to a statutory surplus
reserve fund until such reserve balance reaches 50% of the company's
registered capital.
The transfer to this reserve must be made before distributions of any
dividend to shareholders. As of April 27, 2008, the company's statutory
surplus reserve was $1.6 million, representing 10% of accumulated earnings
and profits determined in accordance with PRC accounting rules and
regulations. The surplus reserve fund is non-distributable other than
during liquidation and can be used to fund previous years' losses, if any,
and may be utilized for business expansion or converted into share capital
by issuing new shares to existing shareholders in proportion to their
shareholding or by increasing the par value of the shares currently held by
them provided that the remaining reserve balance after such issue is not
less than 25% of the registered capital.
21. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is the total of net income (loss) and other
changes in equity, except those resulting from investments by shareholders
and distributions to shareholders not reflected in net income (loss).
A summary of comprehensive income (loss) follows:
(dollars in thousands) 2008 2007 2006
---------------------------------------------------------------------------
net income (loss) $ 5,385 (1,316) (11,796)
(loss) gain on cash flow hedge,
net of taxes (44) (22) 18
---------------------------------------------------------------------------
$ 5,341 (1,338) (11,778)
---------------------------------------------------------------------------
22. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 as common definition of fair value,
provides a framework for measuring fair value under accounting principles
generally accepted in the United States and expands disclosure requirements
84
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. In February 2008, the FASB issued FASB Staff
Position FAS 157-2, "Effective Date of FASB Statement No. 157," referred to
as FSP 157-2. FSP 157-2 delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, that are not remeasured
at fair value on a recurring basis until years beginning after November 15,
2008, and interim periods within those years. FSP 157-2 is effective for
the company in the first quarter of fiscal 2010. The company does not
expect there to be a material effect on the consolidated financial
statements upon adoption of these new standards.
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 does not expect there to be a material effect on the
consolidated financial statements upon adoption of this new standard.
In March 2007, the FASB issued Statement No. 161, `Disclosures about
Derivative Instruments and Hedging Activities, An Amendment of FASB
Statement No. 133." SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities", does not provide adequate information about how
derivative and hedging activities affect an entity's financial position,
financial performance, and cash flows. Accordingly, SFAS No. 161 requires
enhanced disclosures about an entity's derivative and hedging activities
and thereby improves transparency of financial reporting. SFAS No. 161 is
effective for fiscal and interim periods beginning after November 15, 2008
and is effective for the company in the third quarter of fiscal 2009. The
adoption of the provisions of SFAS No. 161 is not expected to have a
material effect on the company's financial position.
In December 2007, the FASB issued SFAS No.141 (revised 2007) "Business
Combinations." SFAS No. 141 requires the acquiring entity in a business
combination to recognize all the assets acquired and liabilities assumed in
the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose all information required to evaluate and
understand the nature and financial effect of the business combination.
This statement is effective for acquisition dates on or after the beginning
of the first annual reporting period beginning after December 15, 2008.
This statement is effective for the company in fiscal 2010 and is not
expected to have a material effect on our consolidated financial statements
to the extent we do not enter into a business acquisition subsequent to
adoption.
85
SELECTED QUARTERLY DATA
fiscal fiscal fiscal fiscal fiscal fiscal fiscal fiscal
2008 2008 2008 2008 2007 2007 2007 2007
(amounts in thousands, except per share amounts) 4th 3rd 2nd 1st 4th 3rd 2nd 1st
quarter quarter quarter quarter quarter quarter quarter quarter
- --------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) STATEMENT DATA
net sales $ 63,998 60,482 64,336 65,230 73,196 55,712 59,040 62,585
cost of sales 55,093 53,706 55,914 56,174 62,753 51,001 51,049 54,525
================================================================================================================================
gross profit 8,905 6,776 8,422 9,056 10,443 4,711 7,991 8,060
selling, general and administrative expenses 6,698 5,117 5,838 6,321 7,790 6,394 6,273 6,575
restructuring expense (credit) and asset impairments 127 412 (84) 432 1,792 1,275 43 423
================================================================================================================================
income (loss) from operations 2,080 1,247 2,668 2,303 861 (2,958) 1,675 1,062
interest expense 595 753 809 818 940 952 938 950
interest income (57) (77) (63) (58) (60) (50) (51) (46)
other (income) expense 112 (72) 463 232 166 (157) 31 29
================================================================================================================================
income (loss) before income taxes 1,430 643 1,459 1,311 (185) (3,703) 757 129
income taxes (647) (260) (95) 460 (145) (1,482) (55) (3)
================================================================================================================================
net income (loss) $ 2,077 903 1,554 851 (40) (2,221) 812 132
================================================================================================================================
depreciation $ 1,283 1,371 1,445 1,447 2,196 2,287 1,662 1,702
================================================================================================================================
weighted average shares outstanding 12,642 12,635 12,635 12,583 12,559 11,773 11,686 11,672
weighted average shares outstanding, assuming dilution
12,729 12,738 12,809 12,723 12,559 11,773 11,689 11,770
================================================================================================================================
PER SHARE DATA
net income (loss) per share - basic $ 0.16 0.07 0.12 0.07 (0.00) (0.19) 0.07 0.01
net income (loss) per share - diluted 0.16 0.07 0.12 0.07 (0.00) (0.19) 0.07 0.01
book value 6.83 6.66 6.58 6.44 6.29 6.29 6.49 6.41
================================================================================================================================
BALANCE SHEET DATA
operating working capital (3) $ 38,368 42,257 43,279 48,067 46,335 48,421 49,176 47,852
property, plant and equipment, net 32,939 32,218 37,887 36,901 37,773 40,784 42,487 42,835
total assets 148,029 153,326 158,914 154,076 159,946 159,021 157,597 159,930
capital expenditures 2,887 931 2,264 846 1,598 584 1,365 680
long-term debt and lines of credit (1) 21,423 33,378 38,970 38,584 40,753 46,709 47,296 47,340
shareholders' equity 86,359 84,118 83,125 81,345 79,077 78,931 75,863 74,907
capital employed (2) 102,868 101,996 105,265 110,912 109,661 114,965 113,453 113,860
================================================================================================================================
RATIOS & OTHER DATA
gross profit margin 13.9% 11.2% 13.1% 13.9% 14.3% 8.5% 13.5% 12.9%
operating income (loss) margin 3.3 2.1 4.1 3.5 1.2 (5.3) 2.8 1.7
net income (loss) margin 3.2 1.5 2.4 1.3 (0.1) (4.0) 1.4 0.2
effective income tax rate (45.2) (40.4) (6.5) 35.1 78.4 40.0 (7.3) (2.3)
long-term debt-to-total capital employed ratio (1) 20.8 32.7 37.0 34.8 37.2 40.6 41.7 41.6
operating working capital turnover (3) 5.8 5.7 5.4 5.2 5.3 5.2 5.2 5.2
days sales in receivables 38 32 32 31 36 36 36 35
inventory turnover 6.0 5.6 5.4 5.4 6.0 4.7 4.7 5.5
================================================================================================================================
STOCK DATA
stock price
high $ 8.30 10.02 12.19 12.30 8.52 6.97 6.15 6.75
low 6.47 6.12 8.47 8.17 5.68 4.37 4.64 4.24
close 7.53 7.47 9.52 11.30 8.50 6.21 5.48 5.35
daily average trading volume (shares) 30.0 33.2 38.7 51.2 12.2 18.3 23.4 17.2
================================================================================================================================
(1) Long-term debt includes long-term and current maturities of long-term debt
and lines of credit.
(2) Capital employed includes long-term and current maturities of long-term
debt, lines of credit, shareholders; equity, offset by cash and cash
equivalents.
(3) Operating working capital for this calculation is accounts receivable,
inventories offset by accounts payable
86
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 27, 2008, there were no disagreements on any
matters of accounting principles or practices or financial statement
disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have conducted an evaluation of the effectiveness of our disclosure controls
and procedures as of April 27, 2008. This evaluation was conducted under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, we
have concluded that these disclosure controls and procedures were effective, in
all material respects, to ensure that information required to be disclosed in
the reports filed by us and submitted under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") is recorded, processed, summarized and reported
as and when required. Further we concluded that our disclosure controls and
procedures have been designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, in a manner to allow timely decisions regarding the required
disclosure.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of our
financial reporting for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes: (1)
maintaining records that in reasonable detail accurately and fairly reflect the
transactions and disposition of assets; (2) providing reasonable assurance that
the transactions are recorded as necessary for preparation of financial
statements, and that receipts and expenditures are made in accordance with
authorizations of management and directors; and (3) providing reasonable
assurance that unauthorized acquisition, use or disposition of assets that could
have a material effect on financial statements would be prevented or detected on
a timely basis. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of financial statements would be prevented or detected. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of our internal control over financial
reporting based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated
Framework. Based on this assessment, management concluded that our internal
control over financial reporting was effective at April 27, 2008. Grant Thornton
LLP, an independent registered public accounting firm, has audited the
consolidated financial statements as of and for the year ended April 27, 2008,
and audited the effectiveness of our internal control over financial reporting
as of April 27, 2008, as stated in their report and attestation included in this
annual report on Form 10-K.During the quarter ended April 27, 2008, there were
no changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders
Culp, Inc.:
We have audited Culp, Inc. (a North Carolina corporation) and Subsidiaries'
internal control over financial reporting as of April 27, 2008, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Culp,
Inc. and subsidiaries' management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, including the
accompanying Management's Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on Culp, Inc. and subsidiaries'
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made on in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Culp, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of April 27,
2008 based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
88
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Culp, Inc. and subsidiaries as of April 27, 2008 and the related consolidated
statements of net income, shareholders' equity, and cash flows for the fiscal
year then ended, and our report dated July 7, 2008 expressed an unqualified
opinion on those financial statements.
Greensboro, North Carolina
July 7, 2008
/s/ GRANT THORNTON LLP
89
ITEM 9B. OTHER INFORMATION
The company has agreed to indemnify and hold KPMG LLP (KPMG) harmless against
and from any and all legal costs and expenses incurred by KPMG in successful
defense of any legal action proceeding that arises as a result of KPMG's consent
to the inclusion (or incorporation by reference) of its audit report on the
company's past financial statements included (or incorporated by reference) in
this registration statement.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information with respect to executive officers and directors of the company is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the caption "Nominees, Directors and
Executive Officers," which information is herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is included in the company's
definitive Proxy Statement to be filed within 120 days after the end of the
company's fiscal year pursuant to Regulation 14A of the Securities and Exchange
Commission, under the caption "Executive Compensation," which information is
herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information with respect to the security ownership of certain beneficial owners
and management is included in the company's definitive Proxy Statement to be
filed within 120 days after the end of the company's fiscal year pursuant to
Regulation 14A of the Securities and Exchange Commission, under the caption
"Voting Securities," which information is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information with respect to certain relationships and related transactions is
included in the company's definitive Proxy Statement to be filed within 120 days
after the end of the company's fiscal year pursuant to Regulation 14A of the
Securities and Exchange Commission, under the subcaption "Certain Relationships
and Related Transactions," which information is herein incorporated by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to accountants fees and services is included in the
company's definitive Proxy Statement to be filed within 120 days after the end
of the company's fiscal year pursuant to Regulation 14A of the Securities and
Exchange Commission, under the caption "Fees Paid to Independent Registered
Public Accounting Firm," which information is herein incorporated by reference.
90
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Consolidated Financial Statements
The following consolidated financial statements of Culp, Inc. and its
subsidiaries are filed as part of this report.
Page of Annual
Report on
Item Form 10-K
- ---- --------------
Consolidated Balance Sheets - April 27, 2008 and.................... 55
April 29, 2007
Consolidated Statements of Net Income (Loss) -
for the years ended April 27, 2008,
April 29, 2007 and April 30, 2006................................ 56
Consolidated Statements of Shareholders' Equity -
for the years ended April 27, 2008,
April 29, 2007 and April 30, 2006................................ 57
Consolidated Statements of Cash Flows -
for the years ended April 27, 2008,
April 29, 2007 and April 30, 2006................................ 58
Notes to Consolidated Financial Statements.......................... 59
Reports of Independent Registered Public Accounting Firm............ 53
2. Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
3. Exhibits
The following exhibits are attached at the end of this report, or
incorporated by reference herein. Management contracts, compensatory plans, and
arrangements are marked with an asterisk (*).
3(i) Articles of Incorporation of the company, as amended, were filed as
Exhibit 3(i) to the company's Form 10-Q for the quarter ended July 28,
2002, filed September 11, 2002, and are incorporated herein by
reference.
3(ii) Restated and Amended Bylaws of the company, as amended November 12,
2007, were filed as Exhibit 3.1 to the Company's Form 8-K dated
November 12, 2007, and incorporated herein by reference.
10(a) 1993 Stock Option Plan was filed as Exhibit 10(o) to the company's
Form 10-K for the year ended May 2, 1993, filed on July 29, 1993, and
is incorporated herein by reference. (*)
91
10(b) Amendments to 1993 Stock Option Agreement dated September 26, 2000.
This amendment was filed as Exhibit 10(rr) to the company's Form 10-Q
for the quarter ended October 29, 2000, and is incorporated herein by
reference. (*)
10(c) Form of Note Purchase Agreement (providing for the issuance by Culp,
Inc. of its $20 million 6.76% Series A Senior Notes due 3/15/08 and
its $55 million 6.76% Series B Senior Notes due 3/15/10), each dated
March 4, 1998, between Culp, Inc. and each of the following:
1. Connecticut General Life Insurance Company;
2. The Mutual Life Insurance Company of New York;
3. United of Omaha Life Insurance Company;
4. Mutual of Omaha Insurance Company;
5. The Prudential Insurance Company of America;
6. Allstate Life Insurance Company;
7. Life Insurance Company of North America; and
8. CIGNA Property and Casualty Insurance Company
This agreement was filed as Exhibit 10(ll) to the company's Form 10-K
for the year ended May 3, 1998, filed on July 31, 1998, and is
incorporated herein by reference.
10(d) First Amendment, dated January 31, 2002 to Note Purchase Agreement
(providing for the issuance by Culp, Inc. of its $20 million 6.76%
Series A Senior Notes due 3/15/08 and its $55 million 6.76% Series B
Senior Notes due 3/15/10), each dated March 4, 1998, between Culp,
Inc. and each of the following:
1. Connecticut General Life Insurance Company;
2. Life Insurance Company of North America;
3. ACE Property and Casualty;
4. J. Romeo & Co.;
5. United of Omaha Life Insurance Company;
6. Mutual of Omaha Insurance Company;
7. The Prudential Insurance of America; and
8. Allstate Life Insurance Company
This amendment was filed as Exhibit 10(a) to the company's Form 10-Q
for the quarter ended January 27, 2002, and is incorporated herein by
reference.
10(e) Rights Agreement, dated as of October 8, 1999, between Culp, Inc. and
EquiServe Trust Company, N.A., as Rights Agent, including the form of
Articles of Amendment with respect to the Series A Participating
Preferred Stock included as Exhibit A to the Rights Agreement, the
forms of Rights Certificate included as Exhibit B to the Rights
Agreement, and the form of Summary of Rights included as Exhibit C to
the Rights Agreement. The Rights Agreement was filed as Exhibit 99.1
to the company's Form 8-K dated October 12, 1999, and is incorporated
herein by reference.
10(f) 2002 Stock Option Plan was filed as Exhibit 10(a) to the company's
Form 10-Q for the quarter ended January 26, 2003, filed on March 12,
2003, and is incorporated herein by reference. (*)
10(g) Amended and Restated Credit Agreement dated as of August 23, 2002
among Culp, Inc. and Wachovia Bank, National Association, as Agent and
as Bank, was filed as Exhibit 10(a) to the company's Form10-Q for the
quarter ended July 28, 2002, filed September 11, 2002, and is
incorporated herein by reference.
10(h) First Amendment to Amended and Restated Credit Agreement dated as of
March 17, 2003 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as exhibit 10(p) to the
company's form 10-K for the year ended April 27, 2003, filed on July
25, 2003, and is incorporated here by reference.
10(i) Second Amendment to Amended and Restated Credit Agreement dated as of
June 3, 2003 among Culp, Inc. and Wachovia Bank, National Association,
as Agent and as Bank, was filed as exhibit 10(q) to the company's form
10-K for the year ended April 27, 2003, filed on July 25, 2003, and is
incorporated here by reference.
92
10(j) Third Amendment to Amended and Restated Credit Agreement dated as of
August 23, 2004 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 10 to the
Current Report on Form 8-K dated August 26, 2004, and is incorporated
herein by reference.
10(k) Fourth Amendment to Amended and Restated Credit Agreement dated as of
December 7, 2004 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as Exhibit 10(b) to the
company's form 10-Q for the quarter ended October 31, 2004, filed on
December 9, 2004, and is incorporated here by reference.
10(l) Fifth Amendment to Amended and Restated Credit Agreement dated as of
February 18, 2005 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 99(c) to
Current Report on form 8-K dated February 18, 2005, and is
incorporated herein by reference.
10(m) Sixth Amendment to Amended and Restated Credit Agreement dated as of
August 30, 2005 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 99(c) to
Current Report on form 8-K dated August 30, 2005, and is incorporated
herein by reference.
10(n) Real Estate Loan Commitment letter between Culp, Inc. and Wachovia,
National Association, was filed as Exhibit 99(d) to Current Report on
form 8-K dated August 30, 2005, and is incorporated herein by
reference.
10(o) Seventh Amendment to Amended and Restated Credit Agreement dated as
of December 7, 2005 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 10(c) to the
company's form 10-Q for the quarter ended October 30, 2005, filed
December 9, 2005, and is incorporated herein by reference.
10(p) Eighth Amendment to Amended and Restated Credit Agreement dated as of
January 29, 2006 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank., was filed as Exhibit 10(a) to the
company's form 10-Q for the quarter ended January 29, 2006, filed
March 10, 2006, and is incorporated herein by reference.
10(q) Ninth Amendment to Amended and Restated Credit Agreement dated as of
July 20, 2006 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as Exhibit 10.1 to the
company's form 8-K filed July 25, 2006, and is incorporated herein by
reference.
10(r) Second Amendment, dated December 6, 2006 to Note Purchase Agreement
(providing for the issuance by Culp, Inc. of its $20 million 6.76%
Series A Senior Notes due 3/15/08 and its $55 million 6.76% Series B
Senior Notes due 3/15/10), each dated March 4, 1998, between Culp,
Inc. and each of the following:
1. Connecticut General Life Insurance Company;
2. Life Insurance Company of North America;
3. ACE Property and Casualty;
4. J. Romeo & Co.;
5. Hare & Co.;
6. United of Omaha Life Insurance Company;
7. Mutual of Omaha Insurance Company;
8. The Prudential Insurance of America;
9. Prudential Retirement Insurance Annuity; and
10. Allstate Life Insurance Company;
This amendment was filed as Exhibit 99(c) to the company's Form 8-K
filed December 7, 2006, and is incorporated herein by reference.
93
10(s) Promissory Note dated as of January 22, 2007 among Culp, Inc. and
Wachovia Bank, National Association, as Agent and as Bank, was filed
as Exhibit 10.2 to the company's form 8-K filed January 26, 2007, and
is incorporated herein by reference.
10(t) Tenth Amendment to Amended and Restated Credit Agreement dated as of
January 22, 2007 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, was filed as Exhibit 10.3 to the
company's form 8-K filed January 26, 2007, and is incorporated herein
by reference.
10(u) Written summary of the Culp, Inc. Corporate Fiscal 2008 Management
Incentive Plan filed as Exhibit 10(a) to the company's Form 8-K filed
April 30, 2007, and is incorporated herein by reference.
10(v) Written summary of the Culp Home Fashions Division Fiscal 2008
Management Incentive Plan filed as Exhibit 10(b) to the company's Form
8-K filed April 30, 2007, and is incorporated herein by reference.
10(w) Written description of compensation arrangement for non-employee
directors, contained in the company's filing on Form 8-K filed on June
20, 2006 and is incorporated herein by reference.
10(x) Form of stock option agreement for options granted to executive
officers on June 25, 2007 pursuant to 2002 Stock Option Plan. This
agreement was filed as Exhibit 10.1 to the company's Form 10-Q for the
quarter ended July 29, 2007, and is incorporated herein by reference.
10(y) Separation Agreement and Waiver of Claims between the company and
Kenneth M. Ludwig dated December 11, 2007, filed as Exhibit 10.1 to
the company's Form 10-Q for the quarter ended October 28, 2007, and
incorporated herein by reference.
10(z) Form of stock option agreement for options granted to non-employee
directors pursuant to the 2007 Equity Incentive Plan. This agreement
was filed as Exhibit 10.2 to the company's Form 10-Q for the quarter
ended October 28, 2007, and incorporated herein by reference.
10(aa) Form of change in control and noncompetition agreement. This
agreement was filed as Exhibit 10.3 to the company's Form 10-Q for the
quarter ended October 28, 2007, and incorporated herein by reference.
10(ab) Twelfth Amendment to Amended and Restated Credit Agreement dated as
of December 27, 2007 among Culp, Inc. and Wachovia Bank, National
Association as Agent and as Bank, filed as Exhibit 10.1 to the
company's Form 8-K dated December 27, 2007, and incorporated herein by
reference.
21 List of subsidiaries of the company
23(a) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on Form S-8
(File Nos. 33-13310, 33-37027, 33-80206, 33-62843, 333-27519,
333-59512, 333-59514, 333-101805, 333-147663), dated March 20, 1987,
September 18, 1990, June 13, 1994, September 22, 1995, May 21, 1997,
April 26, 2001, April 25, 2001, December 12, 2002, and November 27,
2007 and on Form S-3 and S-3/A (File No. 333-141346).
23(b) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on Form S-8
(File Nos. 33-13310, 33-37027, 33-80206, 33-62843, 333-27519,
333-59512, 333-59514, 333-101805, 333-147663), dated March 20, 1987,
September 18, 1990, June 13, 1994, September 22, 1995, May 21, 1997,
April 26, 2001, April 25, 2001, December 12, 2002, and November 27,
2007 and on Form S-3 and S-3/A (File No. 333-141346).
24(a) Power of Attorney of Patrick B. Flavin, dated July 9, 2008
94
24(b) Power of Attorney of Kenneth R. Larson, dated July 9, 2008
24(c) Power of Attorney of Kenneth W. McAllister, dated July 9, 2008
31(a) Certification of Principal Executive Officer Pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
31(b) Certification of Principal Financial Officer Pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
b) Exhibits:
The exhibits to this Form 10-K are filed at the end of this Form 10-K
immediately preceded by an index. A list of the exhibits begins on page 97 under
the subheading "Exhibit Index."
c) Financial Statement Schedules:
See Item 15(a) (2)
95
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, CULP, INC. has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 9th day of July 2008.
CULP, INC.
By /s/ Franklin N. Saxon
-----------------
Franklin N. Saxon
Chief Executive Officer
(principal executive officer)
By /s/ Kenneth R. Bowling
------------------
Kenneth R. Bowling
Chief Financial Officer
(principal financial officer)
By /s/ Thomas B. Gallagher, Jr.
------------------------
Thomas B. Gallagher, Jr.
Corporate Controller
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 9th day of July 2008.
/s/ Robert G. Culp, III /s/ Kenneth R. Larson *
------------------- -------------------
Robert G. Culp, III Kenneth R. Larson
(Chairman of the Board of Directors) (Director)
/s/ Franklin N. Saxon
Franklin N. Saxon
(Director)
/s/ Patrick B. Flavin*
-----------------
Patrick B. Flavin
(Director)
/s/ Kenneth W. McAllister*
---------------------
Kenneth W. McAllister
(Director)
* By Kenneth R. Bowling, Attorney-in-Fact, pursuant to Powers of Attorney filed
with the Securities and Exchange Commission.
96
EXHIBIT INDEX
Exhibit Number Exhibit
- -------------- -------
21 List of subsidiaries of the company
23(a) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on
Form S-8 (File Nos. 33-13310, 33-37027, 33-80206, 33-62843,
333-27519, 333-59512, 333-59514, 333-101805, 333-147663),
dated March 20, 1987, September 18, 1990, June 13, 1994,
September 22, 1995, May 21, 1997, April 26, 2001, April 25,
2001, December 12, 2002, and November 27, 2007 and on Form
S-3 and S-3/A (File No. 333-141346).
23(b) Consent of Independent Registered Public Accounting Firm in
connection with the registration statements of Culp, Inc. on
Form S-8 (File Nos. 33-13310, 33-37027, 33-80206, 33-62843,
333-27519, 333-59512, 333-59514, 333-101805, 333-147663),
dated March 20, 1987, September 18, 1990, June 13, 1994,
September 22, 1995, May 21, 1997, April 26, 2001, April 25,
2001, December 12, 2002, and November 27, 2007 and on Form
S-3 and S-3/A (File No. 333-141346).
24(a) Power of Attorney of Patrick B. Flavin, dated July 9, 2008
24(b) Power of Attorney of Kenneth R. Larson, dated July 9, 2008
24(c) Power of Attorney of Kenneth W. McAllister, dated July 9, 2008
31(a) Certification of Principal Executive Officer Pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
31(b) Certification of Principal Financial Officer Pursuant to
Section 302 of Sarbanes-Oxley Act of 2002.
32(a) Certification of Chief Executive Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
32(b) Certification of Chief Financial Officer Pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
97
Exhibit 21
LIST OF SUBSIDIARIES OF CULP, INC.
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
Culp Fabrics (Shanghai) Co., Ltd. People's Republic of China
Culp Fabrics (Shanghai) International Trading Co., Ltd. People's Republic of China
Culp Cut and Sew Co., Ltd. People's Republic of China
Culp International Holdings Ltd. Cayman Islands
Rayonese Textile Inc. Canada
Exhibit 23(a)
Consent of Independent Registered Public Accounting Firm
--------------------------------------------------------
July 7, 2008
The Board of Directors
Culp, Inc.:
We have issued our reports dated July 7, 2008, with respect to the consolidated
financial statements and internal control over financial reporting included in
the Annual Report of Culp, Inc. and subsidiaries on Form 10-K for the year ended
April 27, 2008. Our reports contain an explanatory paragraph relating to the
adoption of Financial Accounting Standards Board Statement (FASB) Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes". We hereby consent to the
incorporation by reference of said reports in the Registration Statements of
Culp, Inc. on Form S-8 (File No. 333-59512 effective April 26, 2001, File No.
333-59514 effective April 25, 2001, File No. 333-27519 effective May 21, 1997,
File No. 333-101805 effective December 12, 2002, File No. 33-13310 effective
March 20,1987, File No. 33-37027 effective September 18, 1990, File No. 33-80206
effective June 13, 1994, File No. 33-62843 effective September 22,1995, and File
No. 333-147663 effective November 27, 2007).
/s/ Grant Thornton LLP
Greensboro, North Carolina
July 7, 2008
Exhibit 23(b)
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Culp, Inc.:
We consent to the incorporation by reference in the registration statements
(numbers 333-59512, 333-59514, 333-27519, 333-101805, 33-13310, 33-37027,
33-80206, 33-62843, 333-147663) on Form S-8 of Culp, Inc., as well as
registration statement (No. 333-141346) on Form S-3 and Form S-3/A, of our
report dated July 19, 2007, with respect to the consolidated balance sheet of
Culp, Inc. as of April 29, 2007, and the related consolidated statements of
loss, shareholders' equity, and cash flows, for each of the years in the
two-year period ended April 29, 2007, which report appears in the April 27, 2008
annual report on Form 10-K of Culp, Inc. Our report refers to a change in
accounting for stock-based compensation in fiscal year 2007.
/s/ KPMG LLP
Charlotte, North Carolina
July 7, 2008
Exhibit 24(a)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC.,
a North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING
the true and lawful agent and attorney-in-fact to sign for the undersigned as a
director of the Corporation the Corporation's Annual Report on Form 10-K for the
year ended April 27, 2008 to be filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Exchange Act of 1934, as
amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as
herein authorized.
/s/ Patrick B. Flavin
-----------------
Patrick B. Flavin
Date: July 9, 2008
------------
Exhibit 24(b)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC.,
a North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING
the true and lawful agent and attorney-in-fact to sign for the undersigned as a
director of the Corporation the Corporation's Annual Report on Form 10-K for the
year ended April 27, 2008 to be filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Exchange Act of 1934, as
amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as
herein authorized.
/s/ Kenneth R. Larson
-----------------
Kenneth R. Larson
Date: July 9, 2008
------------
Exhibit 24(c)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC.,
a North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING
the true and lawful agent and attorney-in-fact to sign for the undersigned as a
director of the Corporation the Corporation's Annual Report on Form 10-K for the
year ended April 27, 2008 to be filed with the Securities and Exchange
Commission, Washington, D.C., under the Securities Exchange Act of 1934, as
amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as
herein authorized.
/s/ Kenneth W. McAllister
---------------------
Kenneth W. McAllister
Date: July 9, 2008
------------
Exhibit 31(a)
CERTIFICATIONS
I, Franklin N. Saxon, certify that:
1. I have reviewed this report on Form 10-K of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a 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 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
Chief Executive Officer
(Principal Executive Officer)
Date: July 9, 2008
Exhibit 31(b)
CERTIFICATIONS
I, Kenneth R. Bowling, certify that:
1. I have reviewed this report on Form 10-K of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a 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 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/ Kenneth R. Bowling
-----------------------------
Kenneth R. Bowling
Chief Financial Officer
(Principal Financial Officer)
Date: July 9, 2008
Exhibit 32(a)
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 the Annual Report of Culp, Inc. (the "Company") on Form
10-K for the fiscal year ended April 27, 2008 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Franklin N. Saxon,
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
Chief Executive Officer
July 9, 2008
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(b)
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 the Annual Report of Culp, Inc. (the "Company") on Form
10-K for the fiscal year ended April 27, 2008 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Kenneth R. Bowling,
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/ Kenneth R. Bowling
- -----------------------
Kenneth R. Bowling
Chief Financial Officer
July 9, 2008
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.