(Photo of fabrics appear here along with the Culp logo) 1995 ANNUAL REPORTFABRICS FOR FURNISHINGS (Full page photo of a living room appears here and on next page) CULP IS A FULLY INTEGRATED MARKETER OF FABRICS FOR THE FURNITURE, BEDDING AND INSTITUTIONAL FURNISHINGS INDUSTRIES. CULP OPERATES 10 MANUFACTURING PLANTS WITH A COMBINED TOTAL OF 2.2 MILLION SQUARE FEET IN NORTH AND SOUTH CAROLINA, GEORGIA, PENNSYLVANIA AND CANADA. CULP PROVIDES REGIONAL DISTRIBUTION FACILITIES IN AREAS WHERE CONSIDERABLE FURNITURE MANUFACTURING IS CONCENTRATED INCLUDING HIGH POINT, NORTH CAROLINA; TUPELO, MISSISSIPPI; AND LOS ANGELES, CALIFORNIA. CULP EMPLOYS APPROXIMATELY 2,650 ASSOCIATES. CULP'S COMMON SHARES ARE TRADED ON THE NASDAQ STOCK MARKET (NATIONAL MARKET) UNDER THE SYMBOL CULP. (Photo of fabrics appears here) DIVERSE MARKETS FURNITURE INDUSTRY (55% OF 1995 SALES) Culp is the second largest supplier of upholstery fabrics in the United States. The company provides furniture manufacturers with a broad product line of upholstery fabrics, including flat wovens (jacquard and dobby) and velvets (woven, tufted and flock). Culp's business focus is providing innovative fabric designs at good values with a consistently high level of customer service. BEDDING INDUSTRY (17% OF 1995 SALES) Culp ranks among the top four suppliers of mattress tickings to the highly concentrated bedding industry. The company markets a broad variety of printed and damask tickings. Through creative designs utilizing various fabrics and colors, Culp has helped promote the use of covers with a more "fashion-conscious" look to differentiate mattress lines at retail. OTHER MARKETING GROUPS (28% OF 1995 SALES) Culp exports fabrics to foreign furniture manufacturers and distributors (18% of 1995 sales) and also provides manufacturers of institutional furnishings with coordinated packages of contract and upholstery fabrics. 2 HIGHLIGHTS (Diamond) NET SALES FOR FISCAL 1995 reached a new high of $308.0 million. Net income also set a new annual record of $9.8 million, or $0.87 per share, up 26% from $0.69 per share in fiscal 1994. (Diamond) THE ACQUISITION OF RAYONESE Textile Inc. in March 1995 expanded Culp's customer base and enhanced the company's capacity for manufacturing wide jacquard fabrics used for mattress ticking and comforters. (Diamond) CULP'S QUARTERLY CASH dividends during fiscal 1995 totaled $0.10 per share, up 25% from the previous year. (Diamond) IN JUNE 1995 THE BOARD increased the regular quarterly cash dividend for the sixth consecutive year. The current indicated annual rate of $0.11 per share represents a 10% increase over the previous annualized payout. (Diamond) CAPITAL EXPENDITURES FOR fiscal 1995 reached a new annual total of $18.1 million. Major initiatives included expanding the company's yarn manufacturing and fabric weaving capabilities as well as strengthening the company's information systems. (Diamond) THE COMPANY'S FINANCIAL position remained sound at the close of fiscal 1995 with a funded debt-to-capital ratio of 51%. Book value increased to a new high of $6.37 per share. (Diamond) ALTHOUGH DOWN FROM A YEAR ago, the price of Culp's shares at the end of fiscal 1995 represented a 26% compound return over the past five years. (Bar chart appears here with the following plot points:) NET INCOME PER SHARE 91 92 93 94 95 $0.27 $0.27 $0.41 $0.69 $0.87 3
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 % CHANGE STATEMENTS OF INCOME Net sales $ 308,026 245,049 25.7% Gross profit 54,681 42,623 28.3 Income from operations 21,249 14,764 43.9 Net income 9,775 7,665 27.5 Average shares outstanding 11,203 11,076 1.1 PER SHARE Net income $ 0.87 0.69 26.1% Cash dividends 0.10 0.08 25.0 Book value 6.37 5.60 13.8 Year-end stock price 9.75 11.63 (16.2) BALANCE SHEET Working capital $ 38,612 37,949 1.7% Total assets 194,999 164,948 18.2 Funded debt 72,947 58,639 24.4 Shareholders' equity 71,396 62,649 14.0 RATIOS Gross profit margin 17.8 17.4 2.3% Operating income margin 6.9 6.0 15.0 Net profit margin 3.2 3.1 3.2 Return on beginning equity 15.6 14.1 10.6 Funded debt to equity 102.2 93.6 9.2 Current ratio 1.7 1.9 (10.5) (Photo of Robert C. (Rob) Culp, III and Howard L. Dunn, Jr. appears here) LETTER TO SHAREHOLDERS Record sales of $308 million, a 26% gain in earnings per share and another strategic acquisition highlighted fiscal 1995 as a noteworthy year for Culp. New quarterly highs in both sales and net income were set in each respective period of the year. This represented a strong corporate performance both in terms of absolute growth and relative to the results of other companies associated with the furniture and home furnishings industry. Ironically, investors' concerns, evidently fostered by recurring forecasts for a slowdown in consumer spending, kept stock valuations for the group at very low historical levels during much of our fiscal year. Although this situation was frustrating, our main focus has remained on the longer-term return generated for the owners of Culp. We are therefore gratified that the rise in the price of the company's shares over the past five years has been double that of the industry as a whole and well above the sizable gains in the popular stock market indices over the same period. The accomplishments for fiscal 1995 included not only positive contributions from newly acquired operations but also sound gains in existing product categories. For the year as a whole, sales of mattress ticking and exports of upholstery fabrics were especially strong. The inclusion of the Rossville/Chromatex division for a full year also provided particular impetus to the year-to-year growth. Our most recent acquisition, Rayonese Textile Inc., was included for most of the fourth quarter; and that incremental business aided results in the final period. A complete discussion of the financial developments during fiscal 1995 is provided in the Management's Discussion and Analysis starting on page 23, and we encourage you to read those comments which accompany the audited consolidated financial statements. Culp's results for fiscal 1995 marked the sixth consecutive year in which we have achieved higher sales and net income. We are proud of that record which reflects an earnest commitment throughout the organization to work smarter and more productively. The strategic operational goal we have set is clear: Establish Culp as 4 the leading provider of upholstery fabrics and mattress ticking by utilizing our resources as effectively as possible. In striving toward that objective, we have had the benefit in recent years of a sustained resurgence in consumer purchases of home furnishings. This, in turn, has led to increasing sales for many retailers and manufacturers-an environment in which most companies in the industry have done well. Although we too have prospered, our firm intent has been not just to participate in the broad uptrend but to capitalize on opportunities to enhance Culp's basic competitive stance, thereby supporting the company's future expansion. The worldwide broadening of the company's customer base testifies to the positive momentum we have established. The challenge is to extend this leadership by recognizing changes now under way and serving as a catalyst to make the industry more responsive to consumers who are continually seeking more service, more value and more choices. This presents a tough combination of demands-one that the home furnishings industry is addressing through a number of initiatives. New retail concepts abound with exciting new formats for presenting entire rooms and groupings of furniture. Electronic ordering systems enable custom selection of styles and colors and link stores directly with distribution centers and manufacturing facilities to ensure fast delivery. Although the new retailing landscape is proving successful, the capital necessary to support this marketing evolution in home furnishings is, in turn, accelerating the consolidation already under way at all levels of the distribution channel. Sales of the 100 largest, multi-store furniture chains in 1994 are reported to have increased well more than twice the gain for the industry as a whole. The annual survey from Furniture Today, a leading trade publication, indicates that the top ten chains alone now capture one of every six dollars spent on furniture, bedding and other home decorative items. Among manufacturers the same pattern exists. The 25 largest furniture manufacturers increased their share to 46% of all shipments in 1994, continuing a long-term trend which has direct implications for Culp. We have viewed this increasing concentration of resources as an exceptional chance to establish high performance standards within the company and to expand our market presence through strategic acquisitions. Fiscal 1995 represented the first full year of inclusion of Rossville/ Chromatex, which we purchased in November1993. The incremental sales from Rossville/Chromatex accounted for about half of the total increase in sales Culp experienced for the full year. Equally important, the effective merger of Rossville/Chromatex's marketing and manufacturing capabilities into Culp has firmly established the company as the second largest manufacturer of upholstery fabrics. In evaluating this acquisition, we had identified considerable potential synergy between our organizations. The results during fiscal 1995 soundly affirmed this perspective, enabling us not only to increase our business with a number of the nation's largest manufacturers but also to broaden Culp's presence with new accounts. During fiscal 1995, we continued to consider other acquisition opportunities and in March 1995 closed the purchase of Rayonese Textile Inc., a privately owned manufacturer of fabrics for home furnishings based near Montreal, Canada. The addition of Rayonese Textile Inc. has importantly expanded our line of woven and printed fabrics. The more significant advantage we have gained from this transaction, however, is the ability to integrate Rayonese's production capacity for greige, or unfinished, goods into the flow of fabrics through our existing mills. During fiscal 1996, we plan to start using Rayonese Textile Inc. as a primary source for the fabrics we process and market as printed fabrics. Achieving this step will involve a capital investment program of approximately $6 million to meet Culp's future needs and to capitalize on the increasing worldwide demand for wide jacquard fabrics used for large home furnishings items such as mattress ticking and comforters. The majority of this investment relates to the purchase and installation of state-of-the-art, air-jet jacquard looms which should be fully operational by mid year. The purchase of Rayonese Textile Inc. is the latest in a series of acquisitions and product line expansions (Bar graph appears here with the following plot points:) NET INCOME (Dollars in Thousands) 91 92 93 94 95 $2,901 $2,973 $4,501 $7,665 $9,775 5 which extend back over 15 years. Our initial thrust in this corporate program was to establish Culp's basic capabilities as a fully integrated marketer of upholstery fabrics and mattress ticking. More recent transactions have served principally to strengthen the Company's overall competitive leadership. Integral to this activity has been a concerted effort to understand customers' needs better and work ever closer with them and suppliers to build true partnerships. The concept of value continues to emerge as a driving force. Although easy to state, defining this term proves exceedingly complex. Offering competitive prices and consistently meeting high quality standards is essential. At Culp we must also satisfy the important attributes of design and styling to ensure our fabrics indeed provide value. One of the key changes we have implemented to accomplish this goal is adoption of a design-for-manufacture approach in planning new fabrics. Very simply, this concept starts not with design but with a careful assessment of the market in concert with customers. A collaborative effort then follows between the design and manufacturing areas to yield a marketable product truly appealing in value. Similar to the operational quality programs now firmly in place at Culp, this approach toward marketing new fabrics is one which demands ongoing measurement to ensure continual progress. Financial gauges of Culp's operations confirm the success of the effort we are steadfastly making to contain expenses and increase the return on the assets we employ. Selling, general and administrative expenses in fiscal 1995 declined for the third consecutive year as a percentage of net sales. Manufacturing seconds were lower, and inventory turnover remained well above industry standards even with the sharply higher level of sales. Although we had expected capital (Photo of living room appears here) 6 PHOTO COURTESY OF HAVERTYS FURNITURE expenditures for fiscal 1995 to be essentially unchanged from the previous year, the decision to expand the capacity of Rayonese Textile Inc. contributed to total spending of $18.1 million, a new annual high for Culp. Over the past five years, the company's investment in new equipment and facilities has amounted to $70 million. The magnitude of that commitment to maintain efficient manufacturing facilities is shown by considering that our capital base (funded debt plus equity) at the close of fiscal 1995 was $144 million. For fiscal 1996, we expect a considerably lower level of spending because of the completion of several modernization programs during the past year. Culp's strong financial position continues to serve as a vital asset in our corporate planning. Supported by the company's consolidated balance sheet and favorable performance in fiscal 1995, the Board approved a 10% increase in the quarterly cash dividend in June 1995. Culp's dividend has been increased in each of the past six years, and the current indicated annual rate of $0.11 per share is more than triple the corresponding rate five years ago, adjusted for the three stock splits distributed over that period. As we look ahead over the next several quarters, we find recent industry reports confirming that a slowing has developed in consumer purchases of furniture. This pattern, and perhaps more the concern that this trend may signal a persistent turndown in demand, has caused furniture manufacturers to become more cautious about forward commitments. We experienced tangible evidence of this industrywide slow-down in the fourth quarter, and this softness in incoming orders has carried over into the early part of fiscal 1996. Although the current environment is affecting the company's short-term results, our fundamental approach continues to be positioning Culp strongly as a leading supplier of fabrics for the home furnishings industry. Acknowledging the near-term uncertainty that exists, we remain confident about the Company's longer term prospects. This optimism is grounded both in the tangible measures of Culp's financial performance and in the enthusiasm and dedication of the 2,650 associates who comprise Culp. We consider the energies of our entire team to be the essential attribute that will ensure the success of the company's future. Sincerely, (Signature of Robert C. (Rob) Culp, III appears here) Robert C. (Rob) Culp, III Chairman and Chief Executive Officer (Signature of Howard L. Dunn, Jr. appears here) Howard L. Dunn, Jr. President and Chief Operating Officer (Four bar charts appear here. The plot points are as follows:) NET SALES (Dollars in Thousands) 91 92 93 94 95 $174,107 $191,311 $200,783 $245,049 $308,026 CASH DIVIDENDS PER SHARE 91 92 93 94 95 $0.045 $0.049 $0.064 $0.080 $0.100 RETURN ON EQUITY 91 92 93 94 95 6.4% 6.2% 8.9% 14.1% 15.6% CLOSING STOCK PRICE 91 92 93 94 95 $3.69 $5.23 $7.20 $11.63 $9.75 7 FINANCIAL TABLE OF CONTENTS CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . .10 CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . . . . . . . .11 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY . . . . . . . . . . . . .12 CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . .14 REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . .21 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS . . . . . . . . . .22 MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . 23 SELECTED QUARTERLY DATA . . . . . . . . . . . . . . . . . . . . . . . . 26 SELECTED ANNUAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . 27 CORPORATE AND SHAREHOLDER INFORMATION . . . . . . . . . . . . . . . . . 28 FINANCIAL STATEMENTS CONSOLIDATED Balance Sheets THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 10
APRIL 30, 1995 AND MAY 1, 1994 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1995 1994 ASSETS current assets: cash and cash investments $ 1,393 2,693 accounts receivable 44,252 36,743 inventories 45,771 36,596 other current assets 3,194 2,227 total current assets 94,610 78,259 restricted investments 795 2,923 property , plant and equipment, net 75,805 64,004 goodwill 22,600 18,706 other assets 1,189 1,056 total assets $ 194,999 164,948 LIABILITIES AND SHAREHOLDERS' EQUITY current liabilities: current maturities of long-term debt $ 11,555 3,050 accounts payable 32,250 28,466 accrued expenses 11,532 8,158 income taxes payable 661 636 total current liabilities 55,998 40,310 long-term debt 62,187 58,512 deferred income taxes 5,418 3,477 total liabilities 123,603 102,299 commitments and contingencies (note 11) shareholders' equity: preferred stock, $.05 par value, authorized 10,000,000 shares 0 0 common stock, $.05 par value, authorized 40 ,000 ,000 shares, issued and outstanding 11 ,204,766 at April 30 , 1995 and 11 ,177,353 at May 1, 1994 560 558 capital contributed in excess of par value 16,577 16,487 retained earnings 54,259 45,604 total shareholders' equity 71,396 62,649 total liabilities and shareholders' equity $ 194,999 164,948 CONSOLIDATED STATEMENTS OF Income THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 11
FOR THE YEARS ENDED APRIL 30, 1995, MAY 1, 1994, AND MAY 2, 1993 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993 net sales $ 308,026 245,049 200,783 cost of sales 253,345 202,426 168,599 gross profit 54,681 42,623 32,184 selling, general and administrative expenses 33,432 27,858 24,203 income from operations 21,249 14,765 7,981 interest expense 4,715 2,515 1,409 interest income (64) (79) (29) other expense 1,082 350 1 income before income taxes 15,516 11,979 6,600 income taxes 5,741 4,314 2,099 net income $ 9,775 7,665 4,501 net income per share $ 0.87 0.69 0.41 CONSOLIDATED STATEMENTS OF Shareholders' Equity THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 12
CAPITAL FOR THE YEARS ENDED APRIL 30, 1995, COMMON COMMON CONTRIBUTED TOTAL MAY 1, 1994, AND MAY 2, 1993 STOCK STOCK IN EXCESS OF RETAINED SHAREHOLDERS' (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SHARES AMOUNT PAR VALUE EARNINGS EQUITY balance, May 3, 1992 5,794,329 $ 290 15,340 35,021 50,651 cash dividends ($0.064 per share) (696) (696) net income 4,501 4,501 common stock received in exchange for common stock issued under stock option plan (1,300) (5) (5) common stock issued in connection with stock option plan 14,300 70 70 five-for-four stock split 1,451,832 72 (72) - balance, May 2, 1993 7,259,161 362 15,333 38,826 54,521 cash dividends ($0.08 per share) (887) (887) net income 7,665 7,665 common stock issued in connection with stock option plan, including $484 of tax benefit 212,140 11 1,339 1,350 three-for-two stock split 3,706,052 185 (185) - balance, May 1, 1994 11,177,353 558 16,487 45,604 62,649 cash dividends ($0.10 per share) (1,120) (1,120) net income 9,775 9,775 common stock issued in connection with stock option plan 27,413 2 90 92 balance, April 30, 1995 11,204,766 $ 560 16,577 54,259 71,396 CONSOLIDATED STATEMENTS OF Cash Flows THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 13
FOR THE YEARS ENDED APRIL 30, 1995, MAY 1, 1994 AND MAY 2, 1993 (DOLLARS IN THOUSANDS) 1995 1994 1993 cash flows from operating activities: net income $ 9,775 7,665 4,501 adjustments to reconcile net income to net cash provided by operating activities: depreciation 11,257 8,497 6,724 amortization of intangible assets 628 344 229 provision for deferred income taxes 1,373 1,118 272 changes in assets and liabilities, net of effects of businesses acquired: accounts receivable (5,515) (1,839) (1,404) inventories (7,281) (4,330) (3,407) other current assets (310) (304) (104) other assets (518) (389) (65) accounts payable 2,319 7,023 (1,252) accrued expenses 2,180 539 103 income taxes payable 25 (401) 617 net cash provided by operating activities 13,933 17,923 6,214 cash flows from investing activities: capital expenditures (18,058) (16,764) (11,938) purchase of restricted investments (57) (3,593) 0 sale of restricted investments 2,185 670 0 businesses acquired (10,455) (38,205) 0 net cash used in investing activities (26,385) (57,892) (11,938) cash flows from financing activities: proceeds from issuance of long-term debt 23,455 49,203 12,500 principal payments on long-term debt (11,275) (14,223) (2,735) net decrease in bank overdrafts 0 0 (142) dividends paid (1,120) (887) (696) proceeds from common stock issued 92 1,350 65 net cash provided by financing activities 11,152 35,443 8,992 increase (decrease) in cash and cash investments (1,300) (4,526) 3,268 cash and cash investments, beginning of year 2,693 7,219 3,951 cash and cash investments, end of year $ 1,393 2,693 7,219 Notes TO CONSOLIDATED FINANCIAL STATEMENTS 1.GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the company and its subsidiary, which is wholly-owned. All significant intercompany balances and transactions are eliminated in consolidation. BUSINESS SEGMENT The company is a leading manufacturer and marketer of fabrics for the furniture, bedding, and institutional furnishings markets. FISCAL YEAR The company's fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30. Fiscal years 1995, 1994 and 1993 included 52 weeks. STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, the company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash investments. ACCOUNTS RECEIVABLE Substantially all of the company's accounts receivable are due from manufacturers in the markets noted above. The company grants credit to customers, a substantial number of which are located in the United States. Management performs credit evaluations of the company's customers and generally does not require collateral. INVENTORIES Principally all inventories are valued at the lower of last-in, first-out (LIFO) cost or market. Information related to the first-in, first-out (FIFO) method may be useful in comparing operating results to those of companies not on LIFO. The LIFO valuation method had no effect on net income in 1995 and 1993 and decreased net income $73,000 ($.01 per share) in 1994 compared with the FIFO method. RESTRICTED INVESTMENTS Restricted investments were purchased with proceeds from industrial revenue bond issues and are invested pending application of such proceeds to project costs or repayment of the bonds. The investments are stated at cost which approximates market value. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost. Depreciation is generally computed using the straight-line method over the estimated useful lives of the respective assets. 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. In 1993, the company changed its estimates of the useful lives of certain property, plant and equipment. These changes were made to better reflect the estimated periods during which these assets will remain in service. The change had the effect of reducing depreciation expense by $1,490,000 and increasing net income by $933,000 ($.09 per share) in 1993. FOREIGN CURRENCY TRANSLATION The United States dollar is the functional currency for the company's Canadian subsidiary. Translation gains or losses for this subsidiary are reflected in net income. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill, which represents the unamortized excess of the purchase price over the fair values of the net assets acquired, is being amortized using the straight-line method over 40 years. The company assesses the recoverability of goodwill by determining whether the amortization of the balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired businesses. Other intangible assets are included in other assets and consist principally of debt issue costs. Amortization is computed using the straight-line method over the respective terms of the debt agreements. INCOME TAXES The company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," effective May 3, 1993. The cumulative effect of this accounting change was not material to the 1994 consolidated financial statements. Under Statement No. 109, deferred taxes are recognized for the temporary differences between the financial statement carrying amounts and the tax bases of the company's assets and liabilities at income tax rates expected to be in effect when such amounts are realized or settled. Under Statement No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. For fiscal 1993 and prior years, the company accounted for income taxes under APB Opinion No. 11. No provision is made for income taxes which may be payable if undistributed income of the company's Canadian subsidiary were to be paid as dividends to the company, since the company intends that such income will continue to be invested. At April 30, 1995, the cumulative amount of foreign undistributed income was not material. Foreign tax credits may be available as a reduction of United States income taxes in the event of such distributions. 14 REVENUE RECOGNITION Revenue is recognized when products are shipped to customers. Provision is made currently for estimated product returns, claims and allowances. INTEREST RATE SWAP AGREEMENTS Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. These agreements are used to effectively fix the interest rates on certain variable rate borrowings. Net amounts paid or received are reflected as adjustments to interest expense. FORWARD CONTRACTS Gains and losses related to qualifying hedges of firm commitments are deferred and included in the measurement of the related foreign currency transaction when the hedged transaction occurs. PER SHARE DATA Primary income per share is computed by dividing net income by the weighted average number of common shares outstanding during each year, as restated for stock splits (11,203,160 in 1995, 11,075,988 in 1994 and 10,874,622 in 1993). Fully-diluted net income per share is not presented since conversion of the convertible notes discussed in note 10 into common stock is not materially dilutive. RECLASSIFICATION Certain items in the 1994 consolidated financial statements have been reclassified to conform with the presentation adopted in the current year. The reclassifications did not impact net income as previously reported. 2. ACQUISITIONS On March 6, 1995, the company acquired Rayonese Textile Inc. (Rayonese), a manufacturer of home furnishings fabrics based near Montreal, Canada. The transaction has a preliminary estimated value of approximately $10.5 million and included the purchase of 100% of the Rayonese common stock and the assumption of Rayonese's funded debt. The acquisition was accounted for as a purchase, and accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. The preliminary estimated fair values of assets and retained liabilities acquired are summarized below: (DOLLARS IN THOUSANDS) MARCH 6, 1995 accounts receivable, net $ 1,994 inventories 1,894 other current assets 89 property , plant and equipment 5,000 goodwill 4,137 accounts payable and accrued expenses (2,659) $ 10,455 The acquisition did not have a material effect on 1995 or 1994 net sales, net income or net income per share. On November 2, 1993, the company purchased the operations and assets relating to an upholstery fabric business operating as Rossville Mills, Chromatex and Rossville Velours (Rossville/Chromatex). The transaction was valued at approximately $39.3 million and involved the purchase of assets for cash, the repayment of Rossville/Chromatex debt and the assumption of certain liabilities. The goodwill was approximately $18.9 million which is being amortized on the straight-line method over 40 years. The acquisition was accounted for as a purchase, and, accordingly, the net assets and operations of Rossville/Chromatex have been included in the company's consolidated financial statements since November 1, 1993. 3. ACCOUNTS RECEIVABLE The company factors a portion of its accounts receivable on a nonrecourse basis. The factoring arrangements are used solely for credit purposes, and not for borrowing purposes. A summary of accounts receivable follows: [S] [C] [C] (DOLLARS IN THOUSANDS) 1995 1994 customers $ 44,014 33,346 factors 1,314 4,423 allowance for doubtful accounts (739) (631) reserve for returns and allowances (337) (395) $ 44,252 36,743 15 4.INVENTORIES A summary of inventories follows: 5. PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows:
(DOLLARS IN THOUSANDS) 1995 1994 inventories on the FIFO cost method raw materials $ 25,385 20,099 work-in-process 3,465 3,418 finished goods 19,834 15,102 total inventories on the FIFO cost method 48,684 38,619 adjustments of certain inventories to the LIFO cost method (2,913) (2,023) $ 45,771 36,596 6. GOODWILL A summary of goodwill follows: (DOLLARS IN THOUSANDS) 1995 1994 goodwill $ 23,337 18,943 accumulated amortization (737) (237) $ 22,600 18,706 7. ACCOUNTS PAYABLE A summary of accounts payable follows: (DOLLARS IN THOUSANDS) 1995 1994 accounts payable-trade $ 22,647 21,023 accounts payable-capital expenditures 9,603 7,443 $ 32,250 28,466 8. ACCRUED EXPENSES A summary of accrued expenses follows: (DOLLARS IN THOUSANDS) 1995 1994 compensation and benefits $ 5,252 3,554 other 6,280 4,604 $ 11,532 8,158 16
(DOLLARS IN THOUSANDS) DEPRECIABLE LIVES (IN YEARS) 1995 1994 land and improvements 10 $ 958 622 buildings and improvements 7-40 12,793 9,533 leasehold improvements 7-10 1,242 1,243 machinery and equipment 3-12 101,427 80,582 office furniture and equipment 3-10 12,020 11,151 capital projects in progress 6,047 9,654 134,487 112,785 accumulated depreciation (58,682) (48,781) $ 75,805 64,004 9. INCOME TAXES A summary of income taxes follows: (DOLLARS IN THOUSANDS) 1995 1994 1993 current federal $ 3,473 2,420 1,587 state 699 383 240 4,172 2,803 1,827 deferred federal 1,374 1,279 230 state 195 232 42 1,569 1,511 272 $ 5,741 4,314 2,099 The following schedule summarizes the principal differences between income taxes at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements: 1995 1994 1993 federal income tax rate 34.1% 34.0 34.0 state income taxes, net of federal income tax benefit 3.8 3.8 2.8 tax-exempt interest (0.1) (0.2) (0.1) exempt income of foreign sales corporation (1.5) (1.4) (2.7) amortization of property basis differences 0.0 0.0 (3.1) other 0.7 (0.2) 0.9 37.0% 36.0 31.8 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) 1995 1994 deferred tax liabilities: property , plant and equipment, net $ (5,625) (4,205) goodwill (432) (144) employee benefits (249) (108) other (139) (148) total deferred tax liabilities (6,445) (4,605) deferred tax assets: accounts receivable 357 240 inventories 81 103 compensation 475 167 liabilities and reserves 922 598 alternative minimum tax 699 959 gross deferred tax assets 2,534 2,067 valuation allowance 0 0 total deferred tax assets 2,534 2,067 $ (3,911) (2,538) Deferred taxes are classified in the accompanying consolidated Balance Sheet captions as follows: (DOLLARS IN THOUSANDS) 1995 1994 other current assets $ 1,507 939 deferred income taxes (5,418) (3,477) $ (3,911) (2,538) Deferred income tax expense results from the following: (DOLLARS IN THOUSANDS) 1993 depreciation $ 603 inventory valuation (168) bad debts (74) compensation and fringe benefits 11 other (100) $ 272 At April 30, 1995, the company had an alternative minimum tax credit carryforward of approximately $699,000 for federal income tax purposes. The company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining deferred tax assets. Income taxes paid, net of income tax refunds, were $4,071,000 in 1995; $3,113,000 in 1994; and $1,204,000 in 1993. 17 10. LONG-TERM DEBT A summary of long-term debt follows: (DOLLARS IN THOUSANDS) 1995 1994 industrial revenue bonds $ 15,787 15,929 revolving credit line 10,000 0 term loan 41,500 36,000 subordinated note payable 1,000 9,633 convertible note payable 5,455 0 73,742 61,562 current maturities (11,555) (3,050) $ 62,187 58,512 The company entered into a loan agreement in April 1994 with two banks, which provides for a $44,000,000 seven-year term loan and a $33,500,000 revolving credit line. The revolving credit line has a six-year term, or can be terminated by either of the participating banks upon a thirteen-month notice to the company. The term loan requires monthly installments of $500,000 which began in December 1994, and a final payment of $6,500,000 on March 1, 2001. The revolving credit line requires payment of an annual facility fee in advance. Additionally, the term loan and the credit line require payment of interest on any outstanding borrowings at an interest rate based on a spread over the one month LIBOR (LIBOR at April 30, 1995 was 6.1%). Borrowings under the term loan and revolving credit line are secured by all accounts receivable, work-in- process and finished goods inventories, and property, plant and equipment not already pledged under other borrowings. The industrial revenue bonds (IRB) are collateralized by property, plant and equipment with depreciated cost of approximately $10,994,000 and restricted investments of $795,000 at April 30, 1995. Substantially all of the bonds are due in one-time payments at various dates from 2008 to 2013, with interest at variable rates at approximately 70% of the prime rate (prime at April 30, 1995 was 9.0%). In connection with the Rossville/Chromatex acquisition (note 2), the company has a subordinated note payable to the former owners with interest based on a spread over the one month LIBOR. The note is payable on November 1, 1996. In connection with the purchase of Rayonese Textile, Inc. (note 2), the company issued a convertible note payable of $5,455,000 bearing interest at 6.0%. The note is payable on March 6, 1998 or upon 45 days notice to the company by the holders starting on March 6, 1996 and is secured by the stock and assets of Rayonese. Due to the holders' 45 day notice provision, the convertible note is classified as a current maturity in the accompanying consolidated financial statements. At the option of the holder after March 6, 1996, the note is convertible into the company's common stock at a conversion price of $12.50 per share. The note is not redeemable at the option of the company. The company's bank and IRB loan agreements require, among other things, that the company maintain certain financial ratios. At April 30, 1995, the company was in compliance with these required financial covenants. At April 30, 1995, the company had three interest rate swap agreements with two banks in order to reduce its exposure to floating interest rates on a portion of its variable rate borrowings. The following table summarizes certain data regarding the interest rate swaps: NOTIONAL AMOUNT INTEREST RATE EXPIRATION DATE $ 3,300,000 6.4% July 1996 $ 900,000 7.6% July 1996 $ 15,000,000 7.3% April 2000 The estimated amount at which the company could terminate these agreements as of April 30, 1995 is approximately $126,000. Net amounts paid under these agreements increased interest expense by approximately $138,000 in 1995; $227,000 in 1994; and $283,000 in 1993. Management believes the risk of incurring losses resulting from the inability of the bank to fulfill its obligation under the interest rate swap agreements to be remote and that any losses incurred would be immaterial. The principal payment requirements of long-term debt during the next five years are: 1996-$11,555,000; 1997-$7,100,000; 1998-$6,100,000; 1999-$6,075,000; and 2000-$6,000,000, assuming that the revolving credit line remains outstanding for its six year term. The 1996 principal payment requirement assumes the convertible note payable is called under the holders' 45 day notice provision. Interest paid during 1995, 1994 and 1993 totalled $4,668,000, $2,254,000 and $1,388,000, respectively. 18 11.COMMITMENTS AND CONTINGENCIES The company leases certain office, manufacturing and warehouse facilities and transportation and other equipment under noncancellable operating leases. Lease terms range from five to ten years with renewal options for additional periods ranging from five to fifteen years. The leases generally require the company to pay real estate taxes, maintenance, insurance and other expenses. Rental expense for operating leases, net of sublease income, was $2,486,000 in 1995; $2,021,000 in 1994; and $1,476,000 in 1993. Future minimum rental commitments for noncancellable operating leases are $2,350,000 in 1996; $2,070,000 in 1997; $1,605,000 in 1998; $1,163,000 in 1999; $842,000 in 2000; and $472,000 in later years. The company is involved in several legal proceedings and claims which have arisen in the ordinary course of its 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 liquidity of the company. The company has outstanding capital expenditure commitments of $1,667,000 as of April 30, 1995. 12.STOCK OPTION PLANS The company has a stock option plan under which options to purchase common stock may be granted to officers, directors and key employees. At April 30, 1995, 809,500 shares of common stock were reserved for issuance under the plan. Options are granted under the plan at an option price not less than fair market value at the date of grant. Options are generally exercisable one year after the date of grant and generally expire beginning ten years after the date of grant. Tax benefits from early disposition of the stock by optionees under incentive stock options are credited to capital contributed in excess of par value. At April 30, 1995, 369,721 shares were exercisable and 353,779 shares were available for future grants. At May 1, 1994, 298,884 shares were exercisable and 551,616 shares were available for future grants. Stock option activity is summarized as follows: During fiscal 1995, the company adopted a performance-based option plan which provided for the one-time grant to officers and senior managers of options to purchase 128,000 shares of the company's common stock at $.05 per share. Coincident with the adoption of this plan, the company's 1993 stock option plan was amended to reduce the number of shares issuable under that plan by 128,000 shares. Options under the plan are exercisable the earlier of January 1, 2003 or approximately 45 days after the end of fiscal 1997 if the company achieves an annual compound rate of growth in its primary income per share of 17% during the three-year period ending April 28, 1997. At April 30, 1995, 121,000 options were outstanding. 13.DEFINED CONTRIBUTION PLAN The company has a defined contribution plan which covers substantially all employees and provides for participant contributions on a pre-tax basis and discretionary matching contributions by the company which are determined annually. Company contributions to the plan were $771,000 in 1995 and $574,000 in 1994 and 1993. 19
NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES OUTSTANDING OPTION PRICE GRANTED CANCELLED/EXPIRED EXERCISED AT YEAR-END PER SHARE 1993 173,062 0 (26,812) 576,470 $2.82-$4.63 1994 98,269 0 (288,855) 385,884 $2.82-$14.03 1995 97,250 0 (27,413) 455,721 $2.82-$14.03 14. EXPORT SALES Export sales, which are all denominated in U.S. dollars, accounted for 18% of net sales in 1995 and 1994, and 21% in 1993 and are summarized by geographic area as follows: (DOLLARS IN THOUSANDS) 1995 1994 1993 Europe $ 18,579 17,334 18,253 North America (excluding USA) 14,024 12,128 11,050 Far East and Asia 8,838 5,529 3,954 South America 2,213 1,248 1,053 Middle East 5,986 1,740 1,561 all other areas 6,459 6,059 5,600 $ 56,099 44,038 41,471 15. RELATED PARTY TRANSACTIONS A director of the company is also an officer and director of a major customer of the company. The amount of sales to this customer was approximately $20,484,000 in 1995; $15,464,000 in 1994; and $12,400,000 in 1993. The amount due from this customer at April 30, 1995 was approximately $2,443,000 and at May 1, 1994 was approximately $800,000. A director of the company is also a director of the company's lead bank, an officer and director of one of the company's factors, and an officer and director of the lessor of the company's office facilities in High Point. The amount of factor commissions paid to the factor was approximately $55,000 in 1995; $158,000 in 1994; and $204,000 in 1993, and the amount due from the factor at April 30, 1995 and May 1, 1994 was $808,000 and $1,977,000, respectively. The amount of interest and other fees paid to the bank was approximately $2,039,000 in 1995; $1,555,000 in 1994; and $542,000 in 1993, and the loans payable to the bank and amounts guaranteed through letters of credit by the bank at April 30, 1995 and May 1, 1994 aggregated $42,862,000 and $36,115,000, respectively. Rent expense for the company's office facilities in High Point was approximately $435,000 in 1995; $427,000 in 1994; and $400,000 in 1993. Rents paid to entities owned by certain shareholders and officers of the company and their immediate families were $670,000 in 1995; $630,000 in 1994; and $599,000 in 1993. 16. FOREIGN EXCHANGE FORWARD CONTRACTS The company generally enters into foreign exchange forward contracts as a hedge against its exposure to currency fluctuations on firm commitments to purchase certain machinery and equipment and raw materials. The Company does not engage in foreign currency speculation. Machinery and equipment and raw material purchases hedged by foreign exchange forward contracts are valued by using the exchange rate of the applicable foreign exchange forward contract. The Company had approximately $6,056,000 and $2,823,000 of outstanding foreign exchange forward contracts at April 30, 1995 and May 1, 1994, respectively (primarily denominated in German marks and Belgian and French francs). The contracts outstanding at April 30, 1995 mature at various dates in fiscal 1996. The fair values of these contracts were $6,553,000 and $2,937,000 at April 30, 1995 and May 1, 1994, respectively. Fair values were estimated by obtaining quotes from banks assuming all contracts were purchased on April 30, 1995 and May 1, 1994, respectively. 20 REPORT OF INDEPENDENT Auditors To the Board of Directors and Shareholders of Culp, Inc.: We have audited the accompanying consolidated balance sheets of Culp, Inc. and subsidiary as of April 30, 1995 and May 1, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended April 30, 1995. 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 generally accepted auditing standards. 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 subsidiary as of April 30, 1995 and May 1, 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended April 30, 1995, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in 1994. (Signature of KPMG Peat Marwick appears here) Greensboro, North Carolina June 1, 1995 21 MANAGEMENT'S Responsibility FOR FINANCIAL STATEMENTS The management of Culp, Inc. is responsible for the accuracy and consistency of all the information contained in this Annual Report, including the financial statements. These statements have been prepared to conform with generally accepted accounting principles. The preparation of financial statements and related data involves estimates and the use of judgment. Culp, Inc. maintains internal accounting controls designed to provide reasonable assurance that the financial records are accurate, that the assets of the company are safeguarded, and that the financial statements present fairly the financial position and results of operations of the company. KPMG Peat Marwick LLP, the company's independent auditors, conducts an audit in accordance with generally accepted auditing standards and provides an opinion on the financial statements prepared by management. Their report for 1995 appears on the preceding page. The Audit Committee of the Board of Directors reviews the scope of the audit and the findings of the independent auditors. The internal auditor and the independent auditors meet with the Audit Committee to discuss audit and financial reporting issues. The Committee also reviews the company's accounting policies, internal accounting controls, the Annual Report and all annual SEC filings. (Signature of Robert G. Culp, III appears here) Robert G. Culp, III Chairman and Chief Executive Officer (Signature of Franklin N. Saxon appears here) Franklin N. Saxon Vice President and Chief Financial Officer June 1, 1995 22 MANAGEMENT'S Discussion & Analysis The following analysis of the financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this report. GENERAL The company's business, as well as general demand for upholstery fabrics and mattress ticking, are cyclical in nature and can be significantly affected by changes in overall economic conditions. The company believes the key economic indicators influencing demand for its products are housing starts, sales of existing homes, the level of consumer confidence, population demographics, trends in disposable income and prevailing interest rates for home mortgages. Industrywide demand for upholstery fabrics and mattress ticking is directly related to sales of upholstered furniture and bedding (mattresses and box springs). OVERVIEW For the fiscal year ended April 30, 1995, net sales were $308.0 million, up 26% from $245.0 million in fiscal 1995. Net income for fiscal 1995 was $9.8 million, or $0.87 per share, up from $7.7 million, or $0.69 per share, for fiscal 1994. Of the increase of $63.0 million in net sales, $32.8 million was attributable to the contribution for a full year of the Rossville/Chromatex business unit which was purchased in November 1993 (see text below). The increase in net sales, excluding that contribution, reflected higher shipments of upholstery fabrics and mattress ticking to U.S.-based manufacturers and increased exports of upholstery fabrics. ROSSVILLE/CHROMATEX ACQUISITION As of November 1, 1993, the company completed the purchase of the upholstery fabric business operating as Rossville Mills, Chromatex and Rossville Velours. The transaction was valued at $39.3 million and involved the purchase of assets for cash and the assumption of certain liabilities related to the business. The assets acquired are principally located in Rossville, Georgia and West Hazelton, Pennsylvania. The acquisition is described in more detail elsewhere in this report and in the company's filings with the Securities and Exchange Commission on Form 8-K filed November 16, 1993, and amendments to that filing on Form 8-K/A filed January 15, 1994, and July 15, 1994. See also footnote 2 to the consolidated financial statements. RAYONESE TEXTILE INC. ACQUISITION On March 6, 1995, the company completed the acquisition of Rayonese Textile Inc. The transaction has a preliminary estimated value of approximately $10.5 million and includes the purchases of 100% of the Rayonese common stock and the assumption of Rayonese's funded debt. The acquisition is described in more detail elsewhere in this report and in the company's filing with the Securities and Exchange Commission on Form 8-K filed December 23, 1994. Also see footnote 2 to the Consolidated Financial Statements. ANALYSIS OF OPERATIONS The table below sets forth certain items in the Consolidated Statements of Income as a percentage of net sales. Income taxes are expressed as a percentage of income before income taxes. PERCENT OF SALES 1995 1994 1993 Net sales 100.0 100.0 100.0 Cost of sales 82.2 82.6 84.0 Gross profit 17.8 17.4 16.0 Selling, general and administrative expenses 10.9 11.4 12.0 Income from operations 6.9 6.0 4.0 Interest expense 1.5 1.0 0.7 Interest income (0.0) (0.0) 0.0 Other expense (income), net 0.4 0.1 0.0 Income before income taxes 5.0 4.9 3.3 Income taxes* 37.0 36.0 31.8 Net income 3.2 3.1 2.2 *INCOME TAXES ARE CALCULATED AS A PERCENT OF INCOME BEFORE INCOME TAXES. FISCAL 1995 COMPARED WITH FISCAL 1994 Sales by business unit are set forth in the table below: AMOUNTS PERCENT BUSINESS UNITS 1995 1994 CHANGE Upholstery Fabrics Flat Wovens Existing Culp 85,125 78,317 8.7% Rossville/Chromatex 63,765 31,047 N/A 148,890 109,364 36.1% Velvets/Prints 106,803 97,036 10.1% 255,693 206,400 23.9% Mattress Ticking 52,333 38,649 35.4% 308,026 245,049 25.7% The increase of $49.3 million in upholstery fabrics is attributable primarily to the incremental sales of $32.8 million contributed by the Rossville/Chromatex division which was acquired on November 1, 1993. Excluding that contribution, the company's sales of upholstery fabrics increased $16.5 million, or 8.0%. Shipments of each business unit within upholstery fabrics were up for the year. The sales gain in the Mattress Ticking business unit primarily 23 reflected higher shipments to existing accounts and, to a lesser degree, the success of programs to broaden the customer base. Sales of mattress ticking for fiscal 1995 included $1.4 million from Rayonese Textile Inc. which was acquired on March 6, 1995. Fiscal 1996 results will reflect the inclusion of a full year of the results of Rayonese Textile Inc. Exports, consisting primarily of upholstery fabrics, increased to $56.1 million, up 27% from fiscal 1994. This category of sales represented 18% of total sales in 1995 and 21% of total sales in 1994. Gross profit for fiscal 1995 increased both in absolute dollars and as a percentage of net sales. The Rossville/ Chromatex and Mattress Ticking business units contributed significantly to those gains. Flat Wovens and Velvets/Prints were up, although not as significantly. The company experienced increased raw material prices during fiscal 1995 which were not entirely passed along to customers through price increases. Selling, general and administrative expenses declined as a percentage of net sales for fiscal 1995. The lower ratio of expenses primarily reflects a comprehensive program throughout the company to contain these costs and operate more efficiently. Interest expense for fiscal 1995 increased 88% to $4.7 million. The increase principally reflected the full-year inclusion of the bank borrowings and financing provided by the seller related to the acquisition of Rossville/ Chromatex and increased capital expenditures. Significantly higher prevailing interest rates also contributed to the increase in interest expense for the year. Other expense for fiscal 1995 increased to $1.1 million compared with $350,000 in fiscal 1994. The principal factors contributing to the increased expense were amortization of goodwill related to the Rossville/Chromatex acquisition and to higher debt issue costs. The effective tax rate for fiscal 1995 increased to 37.0% compared with 36.0% in fiscal 1994. As we look ahead over the next several quarters, we find recent industry reports confirming that a slowing has developed in consumer purchases of furniture. This pattern, and perhaps more the concern that this trend may signal a persistent turndown in demand, has caused furniture manufacturers to become more cautious about forward commitments. We experienced tangible evidence of this industrywide slowdown in the fourth quarter, and this softness in incoming orders has carried over into the early part of fiscal 1996. Although the current environment is affecting the company's short-term results, our fundamental approach continues to be positioning Culp strongly as a leading supplier of fabrics for the home furnishings industry. FISCAL 1994 COMPARED WITH FISCAL 1993 Sales by business unit are set forth in the table below: AMOUNTS PERCENT BUSINESS UNITS 1994 1993 CHANGE Upholstery Fabrics Flat Wovens Existing Culp 78,317 79,837 (1.9)% Rossville/Chromatex 31,047 - N/A 109,364 79,837 37.0% Velvets/Prints 97,036 87,817 10.5% 206,400 167,654 23.1% Mattress Ticking 38,649 33,129 16.7% 245,049 200,783 22.0% The sales increase in upholstery fabrics is primarily attributable to the incremental sales of $31.0 million contributed by the Rossville/Chromatex division which was acquired on November 1, 1993. Excluding that contribution, the company's sales from upholstery fabrics increased 4%. Sales of tufted and woven velvets were up significantly during the year, but weakness in export shipments to Europe led to a moderate decline in revenues from heat-transfer prints. Increased shipments of pigment- and heat-transfer printed tickings accounted for the higher sales of mattress ticking for the year. Export shipments increased 6% to $44.0 million. The increase in gross profit dollars and margins is primarily attributable to the contribution from the Rossville/Chromatex business unit. Significant improvements were realized in the profitability of the Mattress Ticking business unit. These gains were offset in part by a lower return from heat-transfer prints and jacquard upholstery fabrics. Selling, general and administrative expenses declined as a percentage of sales due principally to a reduction in marketing and credit expenses. Interest expense increased $1.1 million, or 79%, for the year while interest income increased $50,000. The higher interest expense related principally to the Rossville/Chromatex acquisition which was funded through additional bank borrowings and financing provided by the seller. Other expense increased due to the recognition in fiscal 1993 of a gain of $640,000 on sales of fixed assets. No similar gain was realized in fiscal 1994. The effective tax rate increased for fiscal 1994 primarily because of reduced property basis differences, higher state income taxes and less exempt income associated with export sales, and higher pre-tax income. LIQUIDITY AND CAPITAL RESOURCES The company maintained a sound financial position during fiscal 1995. Funded long- and short-term debt 24 increased to $72.9 million at the close of fiscal 1995, up from $58.6 million a year earlier. As a percentage of total capital (funded debt plus total shareholders' equity), the company's debt amounted to 51% as of April 30, 1995 compared with 48% as of May 1, 1994. The company's current ratio at the close of fiscal 1995 was 1.7 compared with 1.9 a year earlier. Shareholders' equity increased 14% to $71.4 million as of April 30, 1995 compared with $62.6 million as of May 1, 1994. Cash flows from operating activities totaled $13.9 million for fiscal 1995. The primary factors contributing to operating cash flows were cash from earnings (net income plus depreciation and amortization) of $21.7 million and an increase in accounts payable related to capital expenditures. An increase of $7.3 million in inventories, which is exclusive of inventories purchased with the Rayonese acquisition, offset a portion of these sources of operating cash flows. The issuance of $23.5 million of long-term debt contributed to a total of $11.2 million in net cash provided by financing activities during fiscal 1995. The funds from operations and financing activities were used to fund capital expenditures for fiscal 1995 of $18.1 million compared with $16.8 million for fiscal 1994. The company's borrowings are through financing arrangements with two banks which provide for a term loan and a revolving credit agreement. During fiscal 1995, the term loan was increased by $8.0 million to $44.0 million to provide funds to repay the subordinated note payable; and the borrowing limit under the revolving credit agreement was raised by $6.5 million to $33.5 million. As of April 30, 1995, the company had $23.5 million in borrowings available under the revolving credit agreement. The company's Board of Directors has approved a capital expenditure budget of $11.0 million for fiscal 1996. The company believes that cash flows from operations and funds available under existing credit facilities will be sufficient to fund capital expenditures as well as financing needs related to operations during fiscal 1996. At April 30, 1995, the company had three interest rate swap agreements with two banks to reduce its exposure to floating interest rates on a portion of its variable rate borrowings. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement No. 112, "Employers' Accounting for Postemployment Benefits." Under Statement No. 112, the cost of postemployment benefits must be recognized on an accrual basis as employees perform services to earn the benefits. The company implemented this pronouncement during fiscal 1995, and the impact on the consolidated financial statements was not material. INFLATION During fiscal 1995, the company experienced increases in its raw material costs that were significantly greater than the increases in recent prior years. Increases also were experienced in other operating costs such as manufacturing supplies and spare parts. Market conditions have not allowed the company to pass all of these cost increases along to customers through price increase for its products. These factors created downward pressure on the company's profit margins during the latter stages of fiscal 1995, and this pressure will continue into fiscal 1996. (Three bar charts appear here with the following plot points:) RETURN ON TOTAL CAPITAL 91 92 93 94 95 6.4% 6.0% 7.4% 9.2% 9.6% CAPITAL EXPENDITURES (Dollars in Thousands) 91 92 93 94 95 $11,143 $12,396 $11,938 $16,764 $18,058 OPERATING INCOME MARGIN 91 92 93 94 95 2.9% 2.9% 4.0% 6.0% 6.9% 25 SELECTED Quarterly Data (1) FUNDED DEBT INCLUDES LONG- AND SHORT-TERM DEBT, LESS RESTRICTED INVESTMENTS. (2) P/E RATIOS BASED ON TRAILING 12-MONTH INCOME PER SHARE. (3) SHARE AND PER SHARE DATA ADJUSTED FOR STOCK SPLITS, EXCEPT FOR TRADING VOLUME. (4) ROSSVILLE/CHROMATEX INCLUDED IN CONSOLIDATED RESULTS FROM ITS NOVEMBER 1, 1993 ACQUISITION BY CULP. (5) RAYONESE INCLUDED IN CONSOLIDATED RESULTS FROM ITS MARCH 6, 1995 ACQUISITION BY CULP. 26
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL 1995 1995 1995 1995 1994 1994 1994 1994 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER INCOME STATEMENT DATA (4) (5) net sales $ 85,441 77,791 78,445 66,349 77,232 67,248 53,986 46,583 cost of sales 69,039 64,785 64,272 55,249 62,491 55,352 44,808 39,775 gross profit 16,402 13,006 14,173 11,100 14,741 11,896 9,178 6,808 selling, general and administrative expenses 9,205 8,295 8,363 7,569 8,455 8,013 6,171 5,219 income from operations 7,197 4,711 5,810 3,531 6,286 3,883 3,007 1,589 interest expense 1,374 1,120 1,144 1,077 884 899 381 351 interest income (3) (14) (24) (23) (23) (11) (29) (16) other expense (income), net 470 245 190 177 425 91 (120) (46) income before income taxes 5,356 3,360 4,500 2,300 5,000 2,904 2,775 1,300 income taxes 1,931 1,260 1,700 850 1,800 1,129 945 440 net income $ 3,425 2,100 2,800 1,450 3,200 1,775 1,830 860 depreciation $ 3,020 2,897 2,718 2,622 2,588 2,378 1,792 1,739 cash dividends 280 280 280 280 223 222 222 220 weighted average shares outstanding 11,205 11,205 11,205 11,198 11,174 11,098 11,055 10,964 PER SHARE DATA (3) (4) (5) net income $ 0.31 0.19 0.25 0.13 0.29 0.16 0.17 0.08 cash dividends 0.025 0.025 0.025 0.025 0.020 0.020 0.020 0.020 book value 6.37 6.09 5.93 5.70 5.60 5.30 5.18 5.03 BALANCE SHEET DATA (4) (5) working capital $ 38,612 46,399 42,964 43,164 37,949 45,823 31,239 38,176 property , plant and equipment 75,805 69,373 68,848 66,535 64,004 60,333 48,295 45,846 total assets 194,999 179,138 178,404 1 64,585 164,948 158,993 106,007 104,058 capital expenditures 4,452 3,422 5,031 5,153 6,603 2,864 4,241 3,056 long-term debt 62,187 65,711 63,462 64,187 58,512 66,293 22,689 27,031 funded debt (1) 72,947 70,209 67,846 66,493 58,639 65,390 25,215 30,907 shareholders' equity 71,396 68,251 66,431 63,912 62,649 59,254 57,275 55,631 RATIOS & OTHER DATA (4) (5) gross profit margin 19.2% 16.7% 18.1% 16.7% 19.1% 17.7% 17.0% 14.6% operating income margin 8.4 6.1 7.4 5.3 8.1 5.8 5.6 3.4 net profit margin 4.0 2.7 3.6 2.2 4.1 2.6 3.4 1.8 effective income tax rate 36.1 37.5 37.8 37.0 36.0 38.9 34.1 33.8 debt-to-equity ratio (1) 102.2 102.9 102.1 104.0 93.6 110.4 44.0 55.6 working capital turnover 5.6 5.5 5.8 5.7 5.7 5.3 5.1 5.1 current ratio 1.7 2.1 2.0 2.3 1.9 2.5 2.2 3.0 days sales in receivables 47 44 50 42 43 44 45 42 inventory turnover 6.1 6.0 6.2 5.8 6.6 6.4 6.3 5.9 STOCK DATA (3) stock price high $ 9.75 10.50 9.25 12.50 16.25 17.33 9.33 10.83 low 8.50 8.75 7.50 7.25 11.00 8.75 5.67 7.08 close 9.75 9.50 8.75 8.75 11.63 16.00 9.33 7.83 P/E ratio (2) high 11.2 12.3 11.2 17.0 23.6 27.4 17.4 25.0 low 9.7 10.3 9.1 9.8 16.0 13.9 10.6 16.3 trading volume (shares) 1,617 1,886 3,702 2,956 2,343 5,242 2,056 1,537 SELECTED Annual Data (1) FUNDED DEBT INCLUDES LONG- AND SHORT-TERM DEBT, LESS RESTRICTED INVESTMENTS. (2) P/E RATIOS BASED ON TRAILING 12-MONTH INCOME PER SHARE. (3) SHARE AND PER SHARE DATA ADJUSTED FOR STOCK SPLITS, EXCEPT FOR TRADING VOLUME. (4) DURING FISCAL 1993, THE COMPANY CHANGED ITS ESTIMATES OF THE USEFUL LIVES OF CERTAIN PP&E. (5) ROSSVILLE/CHROMATEX INCLUDED IN CONSOLIDATED RESULTS FROM ITS NOVEMBER 1, 1993 ACQUISITION BY CULP. (6) RAYONESE INCLUDED IN CONSOLIDATED RESULTS FROM ITS MARCH 6, 1995 ACQUISITION BY CULP. 27
PERCENT FISCAL FISCAL FISCAL FISCAL FISCAL CHANGE (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993 1992 1991 1995/1994 INCOME STATEMENT DATA (5) (6) net sales $ 308,026 245,049 200,783 191,311 174,107 25.7% cost of sales 253,345 202,426 168,599 161,204 147,047 25.2 gross profit 54,681 42,623 32,184 30,107 27,060 28.3 selling, general and administrative expenses 33,432 27,858 24,203 24,597 22,001 20.0 income from operations 21,249 14,765 7,981 5,510 5,059 43.9 interest expense 4,715 2,515 1,409 1,421 1,555 87.5 interest income (64) (79) (29) (136) (536) (19.0) other expense 1,082 350 1 288 292 209.1 income before income taxes 15,516 11,979 6,600 3,937 3,748 29.5 income taxes 5,741 4,314 2,099 964 847 33.1 net income 9,775 7,665 4,501 2,973 2,901 27.5 depreciation (4) $ 11,257 8,497 6,724 7,085 6,183 32.5 cash dividends 1,120 887 696 533 487 26.3 weighted average shares outstanding 11,203 11,076 10,875 10,827 10,788 1.1 PER SHARE DATA (3) (5) (6) net income $ 0.87 0.69 0.41 0.27 0.27 26.1% cash dividends 0.100 0.080 0.064 0.049 0.045 25.0 book value 6.37 5.60 5.01 4.66 4.45 13.8 BALANCE SHEET DATA (4) (5) (6) working capital $ 38,612 37,949 34,942 26,665 32,445 1.7% property , plant and equipment 75,805 64,004 44,529 39,315 34,315 18.4 total assets 194,999 164,948 106,548 93,195 88,732 18.2 capital expenditures 18,058 16,764 11,938 12,396 11,143 7.7 long-term debt 62,187 58,512 23,147 14,082 16,817 6.3 funded debt (1) 72,947 58,639 26,582 16,817 18,442 24.4 shareholders' equity 71,396 62,649 54,521 50,651 47,975 14.0 RATIOS & OTHER DATA (5) (6) gross profit margin 17.8% 17.4% 16.0% 15.7% 15.5% operating income margin 6.9 6.0 4.0 2.9 2.9 net profit margin 3.2 3.1 2.2 1.6 1.7 effective income tax rate 37.0 36.0 31.8 24.5 22.6 debt-to-equity ratio (1) 102.2 93.6 48.8 33.2 38.4 return on average total capital 9.6 9.2 7.4 6.0 6.4 return on beginning equity 15.6 14.1 8.9 6.2 6.4 working capital turnover 5.6 5.7 5.4 5.7 5.2 current ratio 1.7 1.9 2.3 2.0 2.6 days sales in receivables 47 43 43 43 49 inventory turnover 6.0 6.3 6.4 7.0 6.5 STOCK DATA (3) stock price high $ 12.50 17.33 7.33 5.59 4.00 low 7.25 5.67 3.60 3.28 2.57 close 9.75 11.63 7.20 5.23 3.69 P/E ratio (2) high 14.3 25.1 17.7 20.4 14.9 low 8.3 8.2 8.7 11.9 9.5 trading volume (shares) 10,161 11,178 2,646 1,497 1,703 CORPORATE AND SHAREHOLDER Information CORPORATE DIRECTORY Robert G. Culp, III Chairman of the Board and Chief Executive Officer; Director (E,N) Howard L. Dunn, Jr. President and Chief Operating Officer; Director (E) Andrew W. Adams Senior Vice President, Manufacturing; Director (E) Franklin N. Saxon Vice President and Chief Financial Officer, Treasurer, Secretary; Director (E) Kenneth M. Ludwig Vice President, Human Resources; Assistant Secretary Baxter P. Freeze, Sr. Director (A,C); Retired President, Chairman of the Board, Commonwealth Hosiery Mills, Inc., Randleman, NC Earl M. Honeycutt Director (A,C); Retired President, Amoco Fabrics and Fibers Company, Atlanta, GA Bland W. Worley Director (A,C,N); Retired Chairman of the Board and Chief Executive Officer, BarclaysAmericanCorporation, Charlotte, NC Patrick H. Norton Director (N); Senior Vice President, Sales and Marketing; La-Z-Boy Chair Company, Monroe, MI Judith C. Walker Director Charlotte, NC Earl N. Phillips, Jr. Director; Co-Founder and President, First Factors Corporation, High Point, NC BOARD COMMITTEES: A-AUDIT C-COMPENSATION E-EXECUTIVE N-NOMINATING SHAREHOLDER INFORMATION TRANSFER AGENT Wachovia Bank of North Carolina, N.A. Corporate Trust Department P. O. Box 3001 Winston-Salem, North Carolina 27102 (800) 633-4236 GENERAL COUNSEL Robinson, Bradshaw & Hinson, PA Charlotte, NC 28246 INDEPENDENT AUDITORS KPMG Peat Marwick LLP Greensboro, NC 27401 MARKET MAKERS Bridge Trading Company Herzog, Heine, Geduld, Inc. Interstate/Johnson Lane Mayer & Schweitzer, Inc. Nash Weiss/Div. of Shatkin Inv. Neuberger & Berman Raymond, James & Associates Robinson-Humphrey Co., Inc. Scott & Stringfellow Sherwood Securities Corp. Troster Singer Corp. Wheat First Securities, Inc. STOCK LISTING Culp, Inc. common stock is traded on the Nasdaq Stock Market (National Market) under the symbol CULP. As of April 30, 1995, the company had approximately 2,800 shareholders based on the number of holders of record and an estimate of the number of individual participants represented by security position listings. CORPORATE HEADQUARTERS Culp, Inc. 101 South Main Street Post Office Box 2686 High Point, NC 27261 (910) 889-5161 FORM 10K, OTHER INVESTOR INFORMATION If you would like a copy of the Form 10K (Annual Report filed with the Securities and Exchange Commission) or other information about Culp, please contact Frank Saxon at the address listed above or at telephone number (910) 888-6266. ANNUAL MEETING Shareholders are cordially invited to attend the company's annual meeting to be held Tuesday, September 19, 1995 at 9:00 AM in the Radisson Hotel, 135 South Main Street, High Point, North Carolina. 28 CULP, INC. 101 SOUTH MAIN STREET POST OFFICE BOX 2686 HIGH POINT NORTH CAROLINA 27261 (910) 889-5161