April 27,
2009
Securities
and Exchange Commission
Division
of Corporation Finance
100 F
Street, N.E.
Mailstop
3561
Washington,
D.C. 20549-3561
Attention: H.
Christopher Owings, Assistant Director
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Re:
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Culp,
Inc.
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Form
10-K for the Fiscal Year Ended April 27, 2008, filed July 10,
2008
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Form
10-Qs for the Quarters Ended August 3, 2008, November 2, 2008 and February
1, 2009, filed September 10, 2008, December 12, 2008 and March 13,
2009
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Definitive
Proxy Statement on Schedule 14A, filed August 26, 2008
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File
No. 1-12597
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Ladies and
Gentlemen:
We
received a letter from the Division of Corporate Finance concerning a review of
the company’s Form 10-K for the fiscal year ended April 27, 2008, Form 10-Qs for
the quarters ended August 3, 2008, November 2, 2008 and February 1, 2009, and
Definitive Proxy Statement on Schedule 14A, filed August 26, 2008 (“the
filings”), including comments on the filings. This letter is
delivered in response to those comments, using the same numbering system
included in the staff’s letter.
Form 10-K for the Fiscal
Year Ended April 27, 2008
1. Comment:
Please
use file number 1-12597 for future filings.
Response:
We will
use file number 1-12597 for future filings.
Securities
and Exchange Commission
April 27,
2009
Page 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 28
Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 28
Overview, page
28
2. Comment:
Response:
In future
filings, we will include additional discussion about the impact of trends
identified in the business section on our results of operations. An
example would be a discussion of the impact that the trend toward more knitted
mattress fabrics has had on profit margins within the mattress fabrics
segment. An example from the upholstery segment would be the effect
of increasing imports of upholstery fabrics on both sales and profit margins in
this segment. In our overview of MD&A and in the remainder of
this section, we will point out the variables that management monitors in order
to evaluate the business. Examples would include overall sales,
profit margins, restructuring charges, cash flow, assets invested in each
segment, and inventory management. To the extent they are significant
for any period, these disclosures will be included in both annual and quarterly
reports.
3. Comment:
We
note that $1.0 million of your restructuring charge during fiscal year 2008 is
for inventory markdowns. Please tell us and expand your disclosure to
discuss the nature of the inventory markdowns, including the specific types of
expenses incurred and the reasons the markdowns were
necessary. Additionally, tell us and disclose why this inventory
markdown is part of your restructuring plan versus a markdown of inventory in
the normal course of business. In doing so, please differentiate
inventory markdowns recorded as restructuring expense and inventory markdowns
recorded as part of ongoing operations.
Securities
and Exchange Commission
April 27,
2009
Page 3
Response:
As
disclosed in our MD&A on page 28 of our 2008 Form 10-K, we incurred a
restructuring related charge of $1.0 million regarding inventory
markdowns. The nature of this inventory markdown charge pertained to
discontinued stock keeping units (SKUs) as a result of the closing of the
weaving plant in Graham, NC and the yarn plant located in Lincolnton, NC, both
of which were announced December 12, 2006. This inventory markdown
charge also pertained to discontinued SKUs that were produced at contract
weavers as a result of the Graham, NC plant closure.
EITF Issue
96-9, “Classification of Inventory Markdowns and Other Costs Associated with a
Restructuring”, stated that the SEC staff prefers that inventory
markdowns associated with an exit plan or restructuring activity be classified
in the income statement in cost of goods sold. As a result of this
literature, we classified this $1.0 million inventory markdown charge in cost of
goods sold as a related restructuring charge.
Segment Analysis, page
32
4. Comment:
Please
expand your analysis of segmental operating income to specifically address the
impact of your gross profit margins by segment. Given the difference
in gross profit margin percentages by segment and the changes in these
percentages from the prior year, we believe discussions of these changes are
relevant and useful for an investor in better understanding the factors that
drove the changes in segmental operating income. Additionally, please
disclose the types of cost you classify in cost of sales, either here or in the
footnotes to your financial statements, to provide your readers with further
context for your results and allow your readers to more easily compare you with
other companies.
Response:
Our
segment discussion in future filings will be expanded to disclose and analyze
gross profit and gross profit margin by segment. In addition, we will
discuss the factors that we believe caused the changes in gross profit in each
segment. We will also add disclosures in the MD&A and notes to
the consolidated financial statements about the types of costs included in costs
of sales, which in both segments represent costs to manufacture or source our
products, including costs such as raw material and finished goods purchases,
direct and indirect labor, overhead and incoming freight charges.
Securities
and Exchange Commission
April 27,
2009
Page
4
Financial Statements, page
53
Notes to Consolidated
Financial Statements, page 59
1. General and Summary of
Significant Accounting Policies, page 59
5. Comment:
We
note the discussion of your Chinese operations on page 60 and elsewhere in your
filing. Given the significance of your Chinese subsidiaries to your
consolidated company, please explain to us in reasonable detail how you
considered whether the transfer of net assets from your Chinese subsidiaries to
the U.S. parent company was restricted such that you should provide “Schedule I
- - Condensed Financial Information of Registrant” in your Form
10-K. In this regard, given that your foreign subsidiaries are
profitable while your domestic operations are unprofitable, we believe you
should clarify to your readers whether you can transfer funds from your foreign
subsidiaries to Culp, Inc. to assist with debt repayment, capital expenditures,
and other expenses of your business, and it is unclear to us from your current
disclosures including Note 20 to your financial statements whether you have the
ability to do so. Refer to Rules 5-04 and 12-04 of Regulation S-X,
and advise. Additionally, please clarify this matter to your readers
in future filings.
Response:
As
disclosed in Note 20 of our consolidated financial statements included in our
2008 Form 10-K, the company had $1.6 million in restricted net assets regarding
its subsidiaries located in Shanghai, China at April 27, 2008. This
amount represents 10% of accumulated earnings and profits determined in
accordance with the People’s Republic of China accounting rules and
regulations.
Regulation
S-X 210.5-04 (c) requires condensed financial information of the registrant as
prescribed by Regulation S-X 210.12-04 when the restricted net assets of
consolidated subsidiaries exceed 25 percent of consolidated net assets as of the
end of the most recently completed fiscal year. At April 27, 2008,
restricted net assets of our consolidated subsidiaries are $1.6 million or 1% of
consolidated net assets. As a result, Schedule I – Condensed
Financial Information of Registrant was not required.
Regulation
S-X 210.4-08 requires registrants to describe the most significant restrictions
on the payment of dividends by the registrant. This information was
disclosed in Note 20 of our consolidated financial statements included in our
2008 Form 10-K. We will expand our disclosures in the notes to our
financial statements in future filings to clarify to our readers that we can
transfer funds from our foreign subsidiaries with the exception of restrictions
placed by the Chinese government (as noted above) to assist with debt repayment,
capital expenditures, and other expenses of our business.
Securities
and Exchange Commission
April 27,
2009
Page 5
6. Comment:
We
note your discussion of shipping and handling costs in the middle of page
61. We read that handling costs consist principally of finished goods
warehousing costs in your various distribution facilities. Based on
this description, it appears that you define handling costs differently than
they are defined in paragraph three of EITF 00-10, as your definition appears to
include warehousing costs prior to the point the product is removed from
finished goods inventory to be shipped. Please confirm our
understanding, or explain this matter to us in greater detail. If our
understanding is correct, please tell us how you considered whether warehousing
costs incurred prior to the point the product is removed from finished goods
inventory to be shipped should be classified as cost of sales.
Response:
As
disclosed in the General and Summary of Significant Accounting Policies in our
2008 consolidated statements included in our 2008 Form 10-K, handling costs
primarily consist of finished goods warehousing costs in the company’s various
distribution facilities. These warehousing costs are handling costs
incurred to store, move, and prepare the products for shipment as defined in
paragraph 3, EITF 00-10, “Accounting for Shipping and Handling Fees and
Costs”.
EITF
00-10, paragraph 6 states that classification of shipping and handling costs is
an accounting policy decision. A company may adopt a policy of
including shipping and handling costs in an income statement line item other
than cost of sales, as long as the company discloses both the amount of such
costs and the line item in the income statement that includes them.
As a
result of this literature, we have disclosed the dollar amount of handling costs
and that they are classified in selling, general, and administrative
expenses. In future filings, we will expand our disclosure to clarify
that warehousing costs are handling costs incurred to store, move, and prepare
products for shipment.
2. Asset Acquisition, page
62
7. Comment:
We
read at the bottom of page 62 that you 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 such as
patterns, copyrights, artwork, and the like, and other records that related to
ITG’s mattress fabrics products line. We have the following
comments:
Securities
and Exchange Commission
April 27,
2009
Page 6
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Please tell us and disclose in
future filings how you are accounting for the acquired credit on future
purchases of inventory. If this credit is being amortized,
please tell us and disclose in future filings the periods over which it is
being amortized and where such amortization is classified in your
statement of operations.
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With reference to your table
at the top of page 63, please tell us why you do not appear to have
allocated any of the transaction cost to the acquired proprietary rights
such as patterns, copyrights, artwork, and the other records related to
ITG’s mattress fabrics product line. In this regard, we assume
that these items must have value or you would not have acquired
them.
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Response:
Credit
on Future Purchases of Inventory
As
disclosed in Note 2 of the consolidated financial statements included in our
2008 Form 10-K, we acquired a credit on future purchases of finished goods
inventory manufactured by ITG during the transition period. The term
of the transition period as defined in the asset purchase agreement was 120 days
after the closing date of the purchase (January 22, 2007). The fair
value of this credit of future purchases on finished goods inventory totaled
$2,173 and is included in the other current assets amount of $2,210 per the
purchase price allocation table.
The
acquired credit of future purchases on finished goods inventory was utilized as
we purchased finished goods inventory from ITG during the transition period of
120 days after the closing date of the purchase (January 22,
2007). This credit was fully utilized as of the end of the first
quarter of fiscal 2008 and before the 120 day transition period
expired. The accounting (as noted above) for the utilization for the
acquired credit on future purchases of inventory will be disclosed in future
filings.
Other
Intangible Assets
As
disclosed in Note 2 of the consolidated financial statements included in our
2008 Form 10-K, we acquired certain other intangible assets such as copyrights,
customer relationships, patterns, and other records related to ITG’s mattress
fabric product line. SFAS No. 141,”Business Combinations”, paragraph
37(e) states that other identifiable intangible assets acquired in a business
combination will initially be recognized and measured at their fair
values. None of the transaction cost was allocated to these acquired
other intangible assets as our company and ITG manufactured similar products and
shared the same customer base.
Securities
and Exchange Commission
April 27,
2009
Page 7
3. Restructuring and Asset
Impairments, page 63
8. Comment:
We
note your statement in footnote (1) to your table at the bottom of page 63 that
your existing restructuring plans have been substantially completed as of
April 27, 2008. Please reconcile this statement to the fact that
on page 1-16 of your Form 10-Q for the period ended November 2, 2008, you
disclose that you recorded $2.8 million of restructuring and restructuring
related expenses during the six months ended November 2, 2008 related to
your December 2006 Upholstery Fabrics restructuring. Please advise
why you recorded this significant charge in fiscal 2009 given the statement
noted in your fiscal 2008 Form 10-K. In doing so, tell us the
circumstances that changed following your fiscal 2008 Form 10-K that required
further assessment and additional restructuring charges during the period ended
November 2, 2008 related to your December 2006 Upholstery Fabrics
restructuring. Also clarify this matter to your readers and explain
to them whether you expect to incur similar additional charges in the
future.
Response:
As noted
in Note 3 of the 2008 consolidated financial statements included in our fiscal
2008 Form 10-K, we disclosed that our existing restructuring plans had been
substantially completed as of April 27, 2008. This disclosure was
also made in Note 14 of the consolidated financial statements included in our
Form 10-Q for the period ended August 3, 2008. However, as a
result of the adverse economic conditions resulting from the depressed housing
market, credit crisis, and decreased consumer spending that developed in the
second quarter of fiscal 2009, which were much more severe than we anticipated
at the time of the statement referenced in your comment, we further assessed the
net realizable value of our inventory and recoverability of our property, plant,
and equipment related to our upholstery fabric operations. As a
result, we recorded $2.4 million in restructuring and related charges for
our December 2006 Upholstery Fabrics Plan for the three-month period ending
November 2, 2008 (the company’s second quarter). We recorded $2.8
million in restructuring and related charges for our December 2006 Upholstery
Fabrics Plan for the six-month period ending November 2, 2008.
We will
disclose the facts and circumstances that changed following our fiscal 2008 Form
10-K that required further assessment and additional restructuring and related
charges in fiscal 2009 related to our December 2006 Upholstery Fabrics
Plan.
Securities
and Exchange Commission
April 27,
2009
Page 8
11. Income Taxes, page
72
9. Comment:
With
reference to Rule 4-08(h)(1) of Regulation S-X, please tell us how you
considered disclosing the components of pretax income or loss resulting from
domestic and foreign operations. In this regard, we note your
disclosure of the amounts allocated to foreign operations on page 72, but it is
unclear to us that your current presentation sufficiently highlights the fact
that your domestic operations have a history of pretax losses and are partially
or fully offsetting the pretax income generated by your foreign operations, and
we believe this information is important to clarify to your
readers.
Response:
We will
expand our disclosure in our notes to financial statements to include pretax
income or losses from our domestic operations in addition to our foreign
operations in future filings.
10. Comment:
We
note your rate reconciliation table at the top of page 73 and have the following
comments:
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We note that your state income
tax rate has varied significantly over the three year period
presented. Please explain to us why this occurred, and tell us
how you considered explaining this to your readers somewhere in your
filing.
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We note that your foreign tax
rate differential has varied significantly over the three year period
presented. Please explain to us why this occurred, and tell us
how you considered explaining this to your readers somewhere in your
filing. Also clarify in your response to us whether this line
item includes the Chinese tax holiday, and if so, tell us how you
determined the tax holiday did not exceed the 5% threshold specified in
Rule 4-08(h) of Regulation S-X to be presented as a separate line item in
your rate reconciliation.
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We note that your tax rate was
affected by a Canadian foreign exchange loss and Canadian research and
development credits for the first time in 2008. Please explain
to us why this occurred, including why these items were not present in
previous years, and tell us how you considered explaining this to your
readers somewhere in your
filing.
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Securities
and Exchange Commission
April 27,
2009
Page 9
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We note that your tax rate was
affected by China income tax incentives for the first time in
2008. Please explain to us why this occurred, including why
these tax incentives were not available to you in previous years, and tell
us how you considered explaining this to your readers somewhere in your
filing.
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We remind you that your income
tax disclosures as a whole, including both your footnote and MD&A
narrative, should provide your readers with enough context around the
historical variations in your tax rate that readers can assess the
likelihood that future taxes will be impacted by similar items in a
similar manner. Please revise your future disclosures as
necessary.
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Response:
(Bullet Point
1)
As
disclosed in Note 11 of the 2008 consolidated financial statements included in
our fiscal 2008 Form 10-K, U.S. state income taxes impacted our consolidated
effective income tax rate by 1.5%, 14.6%, and 5.1% for fiscal 2008, 2007, and
2006, respectively.
The
fluctuation from 5.1% in fiscal 2006 to 14.6% in fiscal 2007 is primarily due to
the decrease in our loss before income taxes from $19.9 million in fiscal 2006
to $3.0 million in fiscal 2007. As a result of this significant
decrease in the loss before income taxes, the permanent difference related to
U.S. state income taxes had a more significant effect on the consolidated
effective tax rate in fiscal 2007. We will disclose this significant
variation in our consolidated effective income tax rate in our income tax
footnote and MD&A in future filings.
The
fluctuation from 14.6% in fiscal 2007 to 1.5 % in fiscal 2008 is primarily due
to the decrease in our loss before income taxes from U.S.
operations. Our loss before income taxes from U.S. operations was
$11.6 million and $2.0 million in fiscal 2007 and 2008,
respectively. We will disclose this significant variation in our
consolidated effective income tax rate in our income tax footnote and MD&A
in future filings.
(Bullet Point
2)
As
disclosed in Note 11 of the 2008 consolidated financial statements included in
our fiscal 2008 Form 10-K, foreign tax rate differentials impacted our
consolidated effective income tax rate by 29.1%, 51.5%, and 10.6% for fiscal
2008, 2007, and 2006, respectively.
The
fluctuation from 10.6% in fiscal 2006 to 51.5% in fiscal 2007 is primarily due
to the decrease in our loss before income taxes from $19.9 million in fiscal
2006 to $3.0 million in fiscal 2007. In addition, income before
income taxes from foreign operations increased from $6.5 million in fiscal 2006
to $8.6 million in fiscal 2007. As a result of this significant
decrease in the loss before income taxes and increase in income taxes from
foreign operations, the permanent difference related to foreign tax rate
differentials had a more significant effect on the consolidated effective tax
rate in fiscal 2007. We will disclose this significant variation in
our consolidated effective income tax rate in our income tax footnote and
MD&A in future filings.
The
fluctuation from 51.5% in fiscal 2007 to 29.1% in fiscal 2008 is primarily due
to the decrease in income before income taxes from foreign
operations. Income before income taxes from foreign operations was
$8.6 million and $6.9 million in fiscal 2007 and 2008,
respectively. We will disclose this significant variation in our
consolidated effective income tax rate in our income tax footnote and MD&A
in future filings.
Securities
and Exchange Commission
April 27,
2009
Page 10
The
foreign tax rate differential line item does include the impact of the tax
holiday received from the Chinese government. The impact of the tax
holiday (which was over 5% of consolidated income (loss) before income taxes)
was included in this line item as it represents an income tax rate differential
between our statutory income tax rate in the U.S. and China. We
disclosed a description of the tax holiday we received from the Chinese
government and the impact on consolidated income tax expense had the company not
received the tax holiday in accordance with SEC Staff Accounting Bulletin Topic
11C. We will expand our income tax rate reconciliation disclosure and
show the impact of the tax holiday received from the Chinese government in
future filings. Also, we will disclose this significant variation in
our consolidated effective income tax rate in our income tax footnote and
MD&A in future filings.
(Bullet Point
3)
As
disclosed in Note 11 of the 2008 consolidated financial statements included in
our fiscal 2008 Form 10-K, we disclosed that the tax effects of the Canadian
foreign exchange loss impacted our consolidated effective income tax rate by
23.2% in fiscal 2008. No disclosure was made for fiscal 2007 and 2006
as the impact of this line item was under 5% of our consolidated income (loss)
before income taxes, pursuant to Regulation S-X 4.08(h)(2). We will
disclose this significant variation in our consolidated effective income tax
rate in our income tax footnote and MD&A in future filings.
As
disclosed in Note 11 of the 2008 consolidated financial statements included in
our fiscal 2008 Form 10-K, research and development credits regarding our
Canadian operations impacted our consolidated effective income tax rate by 12.2%
in fiscal 2008. This line item was not present in previous years as
we engaged a consultant in fiscal 2008 to assist management in documenting and
determining the dollar amount of these credits we could deduct on our Canadian
income tax returns. We will disclose this significant variation in
our consolidated effective income tax rate in our income tax footnote and
MD&A in future filings.
Securities
and Exchange Commission
April 27,
2009
Page 11
(Bullet Point
4)
As
disclosed in Note 11 of the 2008 consolidated financial statements included in
our fiscal 2008 Form 10-K, income tax incentives received from the Chinese
government impacted our consolidated effective income tax rate by 12.2% in
fiscal 2008. This line item was not present in previous years as the
income tax incentives received from the Chinese government were related to a Cut
and Sew operation that commenced operations in the third quarter of fiscal
2008. In future filings, we will disclose this significant variation
in our consolidated effective income tax rate in our income tax footnote and
MD&A.
(Bullet Point
5)
We will
expand our disclosures in future filings in both our income tax footnote and
MD&A to provide our readers with contexts around our historical variations
in our effective income tax rate so that they can assess the likelihood that
future income taxes will be impacted by similar items in a similar
manner.
14. Stock-Based Compensation,
page 77
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11.
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Comment:
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We
note your tabular presentation on page 77 of the assumptions used to value the
stock options granted to your employees, and your discussion of these
assumptions at the top of page 78. Please tell us and revise future
filings to clarify to your readers why the expected volatility of these options
changed in 2008 from a single relatively high number to a broad range and why
the expected term of these options changed in 2008 from a single relatively
short term to a broad range. In this regard, we assume that these
changes to your assumptions would reduce the stock compensation expense
associated with your 2008 grant of options, and we believe you should clearly
explain what led to these changes. Additionally, given the volatility
in your historical stock prices, please explain in more detail how you
determined a volatility of 38.59% was appropriate for any options
granted.
Response:
As
disclosed in Note 14 of the 2008 consolidated financial statements included in
our fiscal 2008 Form 10-K, we disclosed the expected volatility to be a range of
38.59% - 65.74% for stock options granted to employees in fiscal 2008 compared
to a single volatility percentage of 67.03% for stock options granted to
employees in fiscal 2007 and 73.93% for stock options granted to employees in
fiscal 2006. In addition, we disclosed the expected term to be a
range of 1.1 years to 8 years for stock options granted in fiscal 2008 compared
to a single expected term of 1.6 years for stock options granted to employees in
fiscal 2007 and 3.5 years for stock options granted in fiscal 2006.
Securities
and Exchange Commission
April 27,
2009
Page 12
The reason
for the above changes was due to the fact that stock options granted to
employees in fiscal 2008 had an expiration period of 10 years, compared to 5
years for stock options granted in fiscal 2007 and 2006,
respectively. In addition, stock options granted to employees had an
original vesting period of 2 years in fiscal 2008 compared to 4 years in fiscal
2007. Due to this significant change in the expiration and vesting
periods, we reassessed the expected term of the options granted to employees in
fiscal 2008 and reviewed the historical experience of exercise patterns between
non-executive employees who had “in-the-money” stock option grants and executive
employees that had stock option grants with an expiration period of 10
years. As a result of this assessment, the expected term was
determined to be 1.1 years for each earned vesting period for non-executive
employees and 8 years from the date of grant for executive employees,
respectively. The volatility percentage for non-executive employees
was based on an historical 3 year period from the date of grant and was
38.59%. The historical 3 year period represents the original 2 year
vesting period plus the 1.1 expected term for each earned vesting period for
non-executive employees. The volatility percentage for executive
employees was based on an historical 8 year period from the date of grant and
was 65.74%. This historical 8 year period represents the 8 year
expected term for executive employees.
It should
be noted that for options granted in fiscal 2007 and 2006, the exercise patterns
between non-executive and executive employees was similar due to the relatively
short expiration period of 5 years. As a result, a single volatility
percentage and expected term was disclosed.
We will
expand our disclosures in our stock-based compensation footnote in future
filings to clarify to our readers any significant changes in our assumptions
used to fair value our stock option grants.
Signatures, page
96
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12.
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Comment:
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We
note that you did not include the signatures of your principal executive
officer, your principal financial officer and your controller or principal
accounting officer on behalf of the registrant in the second signature block as
required by General Instruction D(2)(a) and (b) of Form 10-K. Please
revise to include the signatures of your principal executive officer, your
principal financial officer and your controller or principal accounting in the
second signature block. Please note that any person who occupies more
than one of the specified positions shall indicate each capacity in which he or
she signs the report on behalf of the registrant in the second signature
block.
Securities
and Exchange Commission
April 27,
2009
Page 13
Response:
Through
the signatures included in the first signature block of the report, we intended
that the report was signed on behalf of the registrant by each of the principal
executive officer, principal financial officer, and principal accounting
officer. We will revise future filings to include these signatures in
the second signature block of the report and will indicate the capacities in
which each officer is signing in the second signature block.
Definitive Proxy Statement
on Schedule 14A
Voting Securities, page
4
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13.
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Comment:
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Please
disclose the natural person(s) or public company that has the ultimate voting or
investment control over the shares held by the entities identified in the
beneficial ownership table. Refer to Rule 13d-3 under the Securities
Exchange Act of 1934.
Response:
In future
filings, we will include additional disclosures in the footnotes to the
beneficial ownership table describing the natural person(s) or public company
that has the ultimate voting or investment control over the shares held by the
entities identified in the beneficial ownership table.
With
respect to the seven footnotes to the beneficial ownership table included in the
Definitive Proxy Statement on Schedule 14A, filed August 26, 2008, such
additional disclosures would include the following:
Footnote
(1): Robert G. Culp, III has sole voting power over all of these
shares, except the shares held by his wife, Susan B. Culp. Susan B.
Culp has sole voting power over her 64,738 shares. Robert G. Culp,
III has sole dispositive power over all of these shares, except the shares held
by his wife and the shares held in the name of Atlantic Trust. Susan
B. Culp has sole dispositive power over her 64,738 shares, and Robert G. Culp,
III and Atlantic Trust share dispositive power over the 1,708,750 shares held in
the name of Atlantic Trust.
Footnote
(2): We believe that this note sufficiently discloses that Robert G.
Culp, III has the sole right to vote and jointly (with Atlantic Trust) has the
right to invest all of these shares.
Footnote
(3): We believe that this note sufficiently discloses that R. Scott
Asen has sole voting and dispositive power over the 1,262,800 shares held in his
name. With respect to the 82,000 shares held by certain Managed
Accounts, we would additionally disclose that the voting and dispositive power
over these 82,000 shares is shared between R. Scott Asen and the Managed
Accounts.
Securities
and Exchange Commission
April 27,
2009
Page 14
Footnote
(4): Price Associates has sole dispositive power over all of these
shares. T. Rowe Price Small Cap Value Fund has sole voting power over
the 860,100 shares held in its name, and Price Associates has sole voting power
over the remaining shares.
Footnote
(5): We believe that this note sufficiently discloses that
Dimensional has sole investment and voting power over all 1,049,294
shares.
Footnote
(6): The Reporting Person has sole voting and dispositive power over
all 830,000 shares.
Footnote
(7): We believe that this note sufficiently discloses that Praesidium
Investment Management Company, LLC has sole investment and voting power over all
813,855 shares.
Compensation Discussion and
Analysis, page 15
Annual incentive bonus, page
18
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14.
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Comment:
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You
have not provided a quantitative discussion of the 2008 financial performance
goals to be achieved for your named executive officers to earn the management
incentive bonus. Please disclose or, to the extent you believe
disclosure of these goals is not required because it would result in competitive
harm, provide us on a supplemental basis a detailed explanation under
Instruction 4 to Item 402(b) of Regulation S-K for this conclusion.
Response:
For 2008,
we disclosed in our proxy statement that the performance measures for incentive
bonuses for our named executives were operating income, free cash flow, and
return on capital, in each case excluding extraordinary items (on a company-wide
basis for all NEOs except Mr. Culp, IV, and the same measures for the Culp Home
Fashions division (the mattress fabrics segment) for Mr. Culp,
IV). We also disclosed the weighting assigned to each financial
performance measure, and the amount of bonus attainable at each level of
potential performance (threshold, target, maximum and super maximum), as a
percentage of each executive’s target bonus opportunity. The
potential incentive bonus payments for each named executive at the various
performance levels were disclosed in the Grants of Plan-Based Awards table in
our proxy statement.
Securities
and Exchange Commission
April 27,
2009
Page 15
In 2008,
the incentive bonuses paid to all NEOs except Mr. Culp, IV were based on
financial results for the overall company, with operating income at 84% of the
target level, free cash flow at 152% of the super maximum level, and return on
capital at 90% of the target level, resulting in an overall bonus to these
executives of 98% of the executive’s target bonus opportunity. The
incentive bonus paid to Mr. Culp, IV was based on financial results for the
mattress fabrics segment, with operating income at 98% of the maximum level,
free cash flow at 106% of the super maximum level, and return on capital at 109%
of the super maximum level, resulting in an overall bonus to Mr. Culp, IV of
174% of his target bonus opportunity.
We will
include comparable disclosures in future filings.
Compensation of Directors,
page 26
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15.
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Comment:
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Please
disclose the grant date fair value of the options awarded in
2008. See Instruction to Item 402(k)(2)(iii) and (iv) of Regulation
S-K.
Response:
The
numbers included in the table for Compensation of Directors in the column marked
“Option Awards” are the grant date fair value of the options
awarded. We will add language to the footnote related to this column
to make this clear in future filings.
Certain Relationships and
Related Party Transactions, page 36
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16.
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Comment:
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You
mention here that you will review and approve transactions with your directors,
executive officers, and holders of five percent or more of your common
stock. Please revise this discussion to provide additional
information regarding your policies and procedures relating to the review and
approval of such transactions, as required pursuant to Item 404(b) of Regulation
S-K. Specifically, indicate how you will determine whether a
transaction “may present a conflict of interest.”
Response:
We collect
information about related party transactions from our officers and directors
through annual questionnaires distributed to officers and
directors. Each director and officer agrees to abide by our Code of
Business Conduct and Ethics, which provides that officers and directors should
avoid conflicts of interest and that any transaction or situation that could
involve a conflict of interest between the company and officer or director must
be reported to the Audit Committee of the Board and is subject to approval by
the Audit Committee if and when appropriate. The Code of Business
Conduct and Ethics identifies a non-exclusive list of situations that may
present a conflict of interest, including significant dealings with a
competitor, customer or supplier, similar dealings by an immediate family
member, personal investments in entities that do business with the company, and
gifts and gratuities that influence a person’s business decisions, as well as
other transactions between an individual and the company. The Audit
Committee’s charter provides that the Audit Committee will review, investigate
and monitor matters pertaining to the integrity or independence of the Board,
including related party transactions. The Audit Committee reviews and
makes determinations about related party transactions or other conflicts of
interest as they arise, and in addition the Audit Committee conducts an annual
review of all related party transactions early in each fiscal year, after
director and officer questionnaires have been received from management and the
Board. We will revise future filings to incorporate these
disclosures.
Securities
and Exchange Commission
April 27,
2009
Page 16
Form 10-Q for the Period
Ended February 1, 2009
Financial Statements, page
I-1
Notes to Financial
Statements, page I-5
3. Asset Acquisition - Mattress
Fabric Segment, page I-7
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17.
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Comment:
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We
note your purchase of Bodet & Horst USA, LP and Bodet & Horst GMBH &
Co. KG (collectively Bodet & Horst) on August 11, 2008. We also
note that you purchased certain assets and assumed certain liabilities of the
knitted mattress fabric operation of Bodet & Horst, including the
manufacturing operation in High Point, North Carolina. We further
note that the Bodet & Horst manufacturing operation in High Point has served
as your primary source of knitted mattress fabric for six
years. Please tell us how you determined this transaction constitutes
a business combination as defined in SFAS 141. Also refer to EITF
98-3 and Rule 11-01(d) of Regulation S-X.
We
have also reviewed your Form 8-K/A filed on October 23, 2008 which includes
financial statements of Bodet & Horst USA LP and pro forma financial
information. Please tell us whether the financial statements of Bodet
& Horst USA, LP and the column in the pro forma statements labeled “Bodet
& Horst USA LP” represent the financial information for only Bodet &
Horst USA, LP, or for Bodet & Horst USA, LP and Bodet & Horst GMBH &
Co. KG combined. If for only Bodet & Horst USA, LP, tell us why
financial information for Bodet & Horst GMBH & Co. KG was not provided
given that you acquired both companies.
Securities
and Exchange Commission
April 27,
2009
Page 17
Response:
SFAS No.
141 addresses the financial accounting standards and reporting for business
combinations. Paragraph 9 of this statement defines the scope of this
statement and states that a “business combination occurs when an entity acquires
net assets that constitute a business.” Paragraph 9 refers to guidance outlined
in EITF 98-3 on determining whether an asset group constitutes a
business.
EITF 98-3,
paragraph 6 outlines the guidance used to evaluate whether a business has been
acquired. Paragraph 6 states that “a business is a self-sustaining
integrated set of activities and assets conducted and managed for the purpose of
providing a return to investors. A business consists of (a) inputs,
(b) processes applied to those inputs, and (c) resulting outputs that are
used to generate revenues. For a transferred set of activities and
assets to be a business, it must contain all of the inputs and processes
necessary for it to continue to conduct normal operations after the transferred
set is separated from the transferor, which includes the ability to sustain a
revenue stream by providing outputs to customers.
An
evaluation of the necessary elements noted above should consider the
following:
Inputs
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•
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Long-lived
assets, including intangible assets, or rights to use the use of
long-lived assets
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| • | Intellectual property | |
| • | The ability to obtain access to necessary materials or rights | |
| • | Employees |
Processes
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|
•
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The
existence of systems, standards, protocols, conventions, and rules that
act to define the processes necessary for normal, self-sustaining
operations, such as (i) strategic management processes, (ii) operational
processes, and (iii) resource management
processes.
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Outputs
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•
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The
ability to obtain access to the customers that purchase the outputs of the
transferred set.
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EITF 98-3
paragraph 6 further states that “a transferred set of activities and assets
fails the definition of a business if it excludes one or more of the above items
(i.e. inputs, processes, or outputs) such that it is not possible for the set to
continue normal operations and sustain a revenue stream by providing its
products and/or services to customers. However, if the excluded item
or items are considered only minor (based on the level of difficulty and the
level of investment necessary to obtain access to or to acquire the missing
item(s)), then the transferred set is capable of continuing normal operations
and is a business. If goodwill is present in a transferred set of
activities and assets, it should be presumed that the excluded items are minor
and that the transferred set is a business.”
Securities
and Exchange Commission
April 27,
2009
Page 18
We
determined that this transaction constitutes a business combination as all of
the above elements (i.e. inputs, processes, and outputs) are present, and
goodwill regarding this asset purchase totaled $7.5 million or 66% of the
consideration paid and liabilities assumed. As a result, there is a
presumption that any excluded items would be considered minor and that the
transferred set is a business.
In
connection with our Form 8-K/A filed on October 23, 2008, we included the
financial statements of Bodet & Horst USA LP and pro forma financial
information. The financial statements of Bodet & Horst USA, LP
and the column in the pro forma information labeled Bodet & Horst USA, LP
represent the financial information for only Bodet & Horst USA,
LP. This financial information does not include any other financial
information regarding Bodet & Horst GMBH & Co. KG.
As
disclosed in Exhibit 99.3 included in our Form 8-K/A filed October 23, 2008, and
Note 3 to our consolidated financial statements included in our Form 10-Q for
the period ended February 1, 2009, we purchased certain assets of the knitted
mattress fabric operation located in High Point, North Carolina. The
financial statements of Bodet & Horst USA, LP and the column in the pro
forma financial information labeled Bodet & Horst USA, LP represent the
knitted mattress fabric operation located in High Point, North
Carolina.
The Asset
Purchase Agreement was among the company, Bodet & Horst USA LP (the knitted
mattress fabric operation purchased by the company and a subsidiary of Bodet
& Horst GMBH & Co. KG), and Bodet & Horst GMBH & Co, KG but we
did not acquire Bodet & Horst GMBH & Co, KG.
15. Restructuring and
Restructuring Related Charges, page I-18
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18.
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Comment:
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We
note you recorded a $2.1 million charge for accelerated deprecation for the
consolidation of plant facilities in China as part of your September 2008
Upholstery fabrics restructuring. Please expand your disclosure here
or in MD&A and discuss your basis for accelerating
depreciation. In doing so, disclose the reasons why depreciation was
accelerated specifically for these assets and disclose how the charge was
calculated.
Securities
and Exchange Commission
April 27,
2009
Page 19
Response:
As
disclosed in Note 15 to our consolidated financial statements included in our
Form 10-Q for the period ended February 1, 2009, we recorded a $2.1 million
restructuring related charge for accelerated depreciation in connection with the
consolidation of plant facilities located in China as part of our September 2008
Upholstery Fabrics restructuring plan. Due to the consolidation of
plant facilities, certain fixed assets were to be used and ultimately be
abandoned at the time the plant facility was closed and operations were
ceased. As a result, depreciation estimates were required to be
revised to reflect the use of the asset over its shortened useful life and fully
depreciate these fixed assets at the time the respective plant facility was
closed and operations were ceased.
SFAS No.
144 “Accounting for the Impairment or Disposal of Long-Lived Assets” paragraph
28 states that a long-lived asset to be abandoned is disposed of when it ceases
to be used. If an entity commits to a plan to abandon a long-lived
asset before the end of its previously estimated useful life, depreciation
estimates shall be revised to reflect the use of the asset over its shortened
useful life.
We will
expand our disclosures regarding the facts and circumstances that warranted the
accelerated depreciation and how the charge was calculated in future
filings.
Form 8-K Filed March 3,
2009
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19.
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Comment:
|
We
note your presentation of the non-GAAP measure of free cash
flow. Please address the following:
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·
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Tell us why you describe this
as a performance non-GAAP measure instead of a liquidity non-GAAP measure
given that its purpose is to measure your available cash flow for
potential debt repayment, stock repurchases and additions to cash and cash
equivalents. This is further unclear since you have reconciled
free cash flow to net cash provided by operating activities, which would
be a comparable GAAP measure for a liquidity measure but not for a
performance measure. Please ensure that your description of
this measure and the GAAP measure to which it is reconciled are consistent
in the future.
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·
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Disclose how management uses
this non-GAAP measure.
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·
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Since free cash now does not
have a uniform definition, clearly disclose your definition of free cash
now and provide a clear description of its
calculation. Additionally, disclose all material limitations of
this measure.
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Securities
and Exchange Commission
April 27,
2009
Page 20
Refer
to Item 2.02 of Form 8-K, Item 10(e)(1)(i) of Regulation S-K and Question 13 of
our related Frequently Asked Questions Regarding the Use of Non-GAAP Financial
Measures (our Non-GAAP FAQ).
Response:
In future
filings, we will not refer to free cash flow as a non-GAAP performance measure,
but will refer to it as a non-GAAP financial measure or a non-GAAP liquidity
measure.
The
disclosure included in the filing about uses of the non-GAAP financial
information presented was intended to include the information about free cash
flow. We will revise future filings to make it clear that free cash
flow is among the information used by management to make operational decisions
about our business and is used as a financial goal for purposes of determining
management incentive bonuses.
In
addition to the reconciliation for free cash flow, in future filings we will
include a definition of free cash flow stating that we define free cash flow as
net cash provided by operating activities, as shown on our GAAP statement of
cash flows, minus cash expenditures for items such as capital expenditures and
payments on financing of capital items, and adding cash receipts from items such
as sales of capital assets. In addition, we will be careful not to
infer that all of our free cash flow is available for discretionary spending, as
we have mandatory debt payments and other cash requirements that must be
deducted from our cash available for future use.
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20.
|
Comment:
|
We
note your presentation of pro forma pre-tax income, which excludes cash and non
cash restructuring and related charges. We also note your
reconciliation of income (loss) before income taxes as reported to pro forma
income before income taxes and your pro forma consolidated statements of
operations. Please be advised that term “pro forma” is defined in
Article 11 of Regulation S-X and should not be used to describe items outside of
the scope of this guidance. Either tell us in sufficient detail how
you meet one of the criteria in Rule 11-01 of Regulation S-X to support your use
of the term “pro forma,” or revise future filings to re-name your
measure.
Response:
We did not
intend for our use of the term “pro forma” to imply that the information
presented was in accordance with Rule 11-01 of Regulation S-X. In
future filings, we will refer to this information as “adjusted” or will use
another descriptive label other than “pro forma.”
Securities
and Exchange Commission
April 27,
2009
Page 21
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21.
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Comment:
|
It
appears that your presentation of income before income taxes excluding
restructuring and related charges and impairment charges represents a non-GAAP
measure. If so, clearly indicate to your readers that this is a
non-GAAP measure and disclose whether it is used as a non-GAAP performance
measure, a non-GAAP liquidity measure or both. Furthermore, it is
unclear how your current presentation and narrative comply with Instruction 2 to
Item 2.02 of Form 8-K, Item 10(e)(1)(i) of Regulation S-K, and our Non-GAAP
FAQ. With reference to Questions 8, 9 and 12 of our Non-GAAP FAQ,
please revise your presentation to fully comply with all required
disclosures.
Response:
We will
revise our disclosure in future filings to explicitly and more clearly indicate
to readers that pre-tax income excluding restructuring and related charges and
impairment charges represents a non-GAAP financial measure. We
believe this measure is both a performance measure and a liquidity measure, and
will indicate this characterization in our disclosure. In addition,
we will revise disclosure to indicate that management believes this financial
measure is useful to investors in that it allows a comparison of comparable
reporting periods more readily, given that our provision for income taxes has
been extremely volatile in recent periods. We will continue to provide a
reconciliation that allows readers to reconcile the calculation of pre-tax
earnings to pre-tax earnings excluding restructuring and related charges in our
presentation of the adjusted consolidated statements of operations.
Conclusion
The
Company acknowledges that:
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·
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the
company is responsible for the adequacy and accuracy of the disclosure in
the filings;
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·
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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·
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the
company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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We hope
that the company has adequately addressed all of the concerns and comments
included in the staff’s letter. We appreciate your review of these
responses. If you have further comments or any questions about our
responses, please contact the undersigned at the address and telephone number
listed above. Thank you for your consideration.
Securities
and Exchange Commission
April 27,
2009
Page 22
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Sincerely
yours,
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Culp,
Inc.
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/s/
Franklin N. Saxon
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Franklin
N. Saxon
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Chief Executive
Officer
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