SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2001
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
101 S. Main St., High Point, North Carolina 27261-2686
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
Common shares outstanding at October 28, 2001: 11,221,158
Par Value: $.05
INDEX TO FORM 10-Q
For the period ended October 28, 2001
Part I - Financial Statements. Page
- ------------------------------ ------
Item 1. Unaudited Interim Consolidated Financial Statements:
- ---------------------------------------------------------------
Consolidated Statements of Income (Loss) Three and Six Months Ended I-1
October 28, 2001 and October 29, 2000
Consolidated Balance Sheets-October 28, 2001, October 29, 2000 and I-2
April 29, 2001
Consolidated Statements of Cash Flows---Six Months Ended October 28, I-3
2001 and October 29, 2000
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Sales by Segment/Division I-13
International Sales by Geographic Area I-14
Item 2. Management's Discussion and Analysis of Financial I-15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About I-19
Market Risk
Part II - Other Information
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 6. Exhibits and Reports on Form 8-K II-2
Signature II-2
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 28, 2001 AND OCTOBER 29, 2000
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------------------------------------
Amounts Percent of Sales
--------------------------- ---------------------------
October 28, October 29, % Over
2001 2000 (Under) 2002 2001
------------- ------------- ------------ ------------ -------------
Net sales $ 96,400 110,981 (13.1) % 100.0 % 100.0 %
Cost of sales 80,858 94,094 (14.1) % 83.9 % 84.8 %
------------- ------------- ------------ ------------ -------------
Gross profit 15,542 16,887 (8.0) % 16.1 % 15.2 %
Selling, general and
administrative expenses 11,550 13,491 (14.4) % 12.0 % 12.2 %
Restructuring expense 0 0 0.0 % 0.0 % 0.0 %
------------- ------------- ------------ ------------ -------------
Income from operations 3,992 3,396 17.6 % 4.1 % 3.1 %
Interest expense 1,963 2,285 (14.1) % 2.0 % 2.1 %
Interest income (34) (15) 126.7 % (0.0)% (0.0)%
Other expense (income), net 765 575 33.0 % 0.8 % 0.5 %
------------- ------------- ------------ ------------ -------------
Income before income taxes 1,298 551 135.6 % 1.3 % 0.5 %
Income taxes * 441 209 111.0 % 34.0 % 37.9 %
------------- ------------- ------------ ------------ -------------
Net income $ 857 342 150.6 % 0.9 % 0.3 %
============= ============= ============ ============ =============
Net income per share $0.08 $0.03 166.7 %
Net income per share, assuming dilution $0.08 $0.03 166.7 %
Average shares outstanding 11,221 11,209 0.1 %
Average shares outstanding, assuming dilution 11,281 11,270 0.1 %
SIX MONTHS ENDED (UNAUDITED)
-------------------------------------------------------------------------
Amounts Percent of Sales
--------------------------- ---------------------------
October 28, October 29, % Over
2001 2000 (Under) 2002 2001
------------- ------------- ------------ ------------ -------------
Net sales $ 182,863 212,859 (14.1) % 100.0 % 100.0 %
Cost of sales 156,532 181,798 (13.9) % 85.6 % 85.4 %
------------- ------------- ------------ ------------ -------------
Gross profit 26,331 31,061 (15.2) % 14.4 % 14.6 %
Selling, general and
administrative expenses 22,785 27,269 (16.4) % 12.5 % 12.8 %
Restructuring expense 1,303 0 100.0 % 0.7 % 0.0 %
------------- ------------- ------------ ------------ -------------
Income from operations 2,243 3,792 (40.8) % 1.2 % 1.8 %
Interest expense 4,031 4,608 (12.5) % 2.2 % 2.2 %
Interest income (57) (22) 159.1 % (0.0)% (0.0)%
Other expense (income), net 1,337 1,316 1.6 % 0.7 % 0.6 %
------------- ------------- ------------ ------------ -------------
Loss before income taxes (3,068) (2,110) (45.4) % (1.7)% (1.0)%
Income taxes * (1,043) (696) (49.9) % 34.0 % 33.0 %
------------- ------------- ------------ ------------ -------------
Net loss $ (2,025) (1,414) (43.2) % (1.1)% (0.7)%
============= ============= ============ ============ =============
Net loss per share ($0.18) ($0.13) (38.5) %
Net loss per share, assuming dilution ($0.18) ($0.13) (38.5) %
Average shares outstanding 11,221 11,209 0.1 %
Average shares outstanding, assuming dilution 11,221 11,209 0.1 %
* Percent of sales column is calculated as a % of income (loss) before income taxes.
CULP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 28, 2001, OCTOBER 29, 2000, APRIL 29, 2001
Unaudited
(Amounts in Thousands)
Amounts Increase
-------------------------------------- (Decrease)
October 28, October 29, ------------------------------- * April 29,
2001 2000 Amount Percent 2001
-------------------- --------------- --------------- ----------- -----------
Current assets
Cash and cash investments $ 8,590 744 7,846 1,054.6 % 1,207
Accounts receivable 49,402 63,991 (14,589) (22.8) % 57,849
Inventories 60,814 72,967 (12,153) (16.7) % 59,997
Other current assets 9,851 11,003 (1,152) (10.5) % 7,856
-------------------- --------------- --------------- ----------- -----------
Total current assets 128,657 148,705 (20,048) (13.5) % 126,909
Property, plant & equipment, net 105,697 120,023 (14,326) (11.9) % 112,322
Goodwill 47,781 49,176 (1,395) (2.8) % 48,478
Other assets 1,682 6,508 (4,826) (74.2) % 1,871
-------------------- --------------- --------------- ----------- -----------
Total assets $ 283,817 324,412 (40,595) (12.5) % 289,580
==================== =============== =============== =========== ===========
Current liabilities
Current maturities of long-term debt $ 3,136 1,678 1,458 86.9 % 2,488
Accounts payable 25,870 30,351 (4,481) (14.8) % 27,371
Accrued expenses 17,196 22,404 (5,208) (23.2) % 17,153
Income taxes payable 0 0 0 0.0 % 1,268
-------------------- --------------- --------------- ----------- -----------
Total current liabilities 46,202 54,433 (8,231) (15.1) % 48,280
Long-term debt 107,447 125,079 (17,632) (14.1) % 109,168
Deferred income taxes 10,330 17,459 (7,129) (40.8) % 10,330
-------------------- --------------- --------------- ----------- -----------
Total liabilities 163,979 196,971 (32,992) (16.7) % 167,778
Shareholders' equity 119,838 127,441 (7,603) (6.0) % 121,802
-------------------- --------------- --------------- ----------- -----------
Total liabilities and
shareholders' equity $ 283,817 324,412 (40,595) (12.5) % 289,580
==================== =============== =============== =========== ===========
Shares outstanding 11,221 11,209 12 0.1 % 11,221
==================== =============== =============== =========== ===========
* Derived from audited financial statements.
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 28, 2001 AND OCTOBER 29, 2000
Unaudited
(Amounts in Thousands)
SIX MONTHS ENDED
----------------------------------
Amounts
--------------------------------
October 28, October 29,
2001 2000
--------------- ---------------
Cash flows from operating activities:
Net loss $ (2,025) (1,414)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 8,871 10,043
Amortization of intangible assets 785 798
Amortization of deferred compensation 39 125
Restructuring expense 1,303 0
Changes in assets and liabilities:
Accounts receivable 8,447 11,232
Inventories (817) 1,504
Other current assets (2,006) (654)
Other assets (17) 241
Accounts payable 2,522 (859)
Accrued expenses (1,067) 171
Income taxes payable (1,268) 0
--------------- ---------------
Net cash provided by operating activities 14,767 21,187
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (2,288) (3,659)
Purchase of investments to fund deferred compensation liability 0 (200)
--------------- ---------------
Net cash used in investing activities (2,288) (3,859)
--------------- ---------------
Cash flows from financing activities:
Principal payments on long-term debt (1,073) (10,729)
Change in accounts payable-capital expenditures (4,023) (6,077)
Dividends paid 0 (785)
--------------- ---------------
Net cash used in financing activities (5,096) (17,591)
--------------- ---------------
Increase (decrease) in cash and cash investments 7,383 (263)
Cash and cash investments at beginning of period 1,207 1,007
--------------- ---------------
Cash and cash investments at end of period $ 8,590 744
=============== ===============
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except share and per share data)
Capital Accumulated
Common Stock Contributed Other Total
--------------------- in Excess Retained Comprehensive Shareholders'
Shares Amount of Par Value Earnings Gain Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 2000 11,208,720 $ 560 $ 35,266 $ 93,814 $ $ 129,640
Cash dividends ($0.105 per share) (1,177) (1,177)
Net loss (8,311) (8,311)
Common stock issued in connection
with stock option plans 12,438 1 1,649 1,650
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 29, 2001 11,221,158 561 36,915 84,326 121,802
Net loss (2,025) (2,025)
Other comprehensive gain:
Gain on cash flow hedges, net of taxes 21 21
Common stock issued in connection
with stock option plans 40 40
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, October 28, 2001 11,221,158 $ 561 $ 36,955 $ 82,301 $ 21 $ 119,838
====================================================================================================================================
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc.
and subsidiary include all adjustments, which are, in the opinion of management,
necessary for fair presentation of the results of operations and financial
position. All of these adjustments are of a normal recurring nature except as
disclosed in note 8 to the consolidated financial statements. Results of
operations for interim periods may not be indicative of future results. The
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements, which are included in the
company's annual report on Form 10-K filed with the Securities and Exchange
Commission on July 26, 2001 for the fiscal year ended April 29, 2001.
================================================================================
2. Accounts Receivable
A summary of accounts receivable follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 28, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Customers $ 52,960 $ 60,218
Allowance for doubtful accounts (2,586) (1,282)
Reserve for returns and allowances (972) (1,087)
- --------------------------------------------------------------------------------
$ 49,402 $ 57,849
================================================================================
3. Inventories
Inventories are carried at the lower of cost or market. Cost is determined
for substantially all inventories using the LIFO (last-in, first-out) method.
A summary of inventories follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 28, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Raw materials $ 32,657 $ 31,489
Work-in-process 4,162 4,748
Finished goods 24,383 24,148
- --------------------------------------------------------------------------------
Total inventories valued at FIFO cost 61,202 60,385
Adjustments of certain inventories to the
LIFO cost method (388) (388)
- --------------------------------------------------------------------------------
$ 60,814 $ 59,997
================================================================================
4. Accounts Payable
A summary of accounts payable follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 28, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Accounts payable-trade $ 24,473 $ 21,949
Accounts payable-capital expenditures 1,397 5,422
- --------------------------------------------------------------------------------
$ 25,870 $ 27,371
================================================================================
5. Accrued Expenses
A summary of accrued expenses follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 28, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Compensation and benefits $ 6,429 $ 6,503
Restructuring 1,748 2,383
Other 9,019 8,267
- --------------------------------------------------------------------------------
$ 17,196 $ 17,153
================================================================================
6. Long-Term Debt
A summary of long-term debt follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 28, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Senior unsecured notes $ 75,000 $ 75,000
Industrial revenue bonds 30,612 30,612
Canadian government loan 2,294 2,347
Revolving credit facility 999 999
Obligations to sellers 1,678 2,698
- --------------------------------------------------------------------------------
110,583 111,656
Less current maturities (3,136) (2,488)
- --------------------------------------------------------------------------------
$ 107,447 $ 109,168
- --------------------------------------------------------------------------------
6. Long-Term Debt
The senior unsecured notes have a fixed coupon rate of 6.76% and an average
remaining term of 7 years. The principal payments become due from March 2008 to
March 2010 with interest payable semi-annually.
The company's revolving credit agreement (the "Credit Agreement") provides
a multi-currency revolving credit facility, which expires in April 2002, with a
syndicate of banks in the United States. The Credit Agreement provides for a
revolving loan commitment of $20,000,000. The agreement requires payment of a
quarterly facility fee. On borrowings outstanding at October 28, 2001, the
interest rate was 7.54% (LIBOR plus 4.00%).
The company's $2,000,000 revolving line of credit expires on April 2002. At
October 28, 2001, no borrowings were outstanding under the revolving line of
credit.
The industrial revenue bonds (IRBs) are generally due in balloon maturities
which occur at various dates from 2009 to 2013. The IRBs are collateralized by
letters of credit for the outstanding balance of the IRBs and certain interest
payments due thereunder. At October 28, 2001, the bonds bear interest at
variable rates with a weighted average of 7.04%, including the letter of credit
fee percentage.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At October 28, 2001, the
company was in compliance with these financial covenants.
At October 28, 2001, the company had two interest rate swap agreements with
a bank. The following table summarizes certain data regarding the interest rate
swaps:
notional amount interest rate expiration date
--------------- ------------- ---------------
$ 5,000,000 6.9% June 2002
$ 5,000,000 6.6% July 2002
During the first six months of fiscal 2002, the company recorded a
mark-to-market loss of $164,000 because the interest rate swaps no longer serve
as a hedge due to the repayment of debt in fiscal 2001. 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: 2003 - $2,137,000; 2004 - $459,000; 2005 - $459,000; 2006 - $459,000;
and 2007 - $0.
================================================================================
7. Cash Flow Information
Payments for interest and income taxes during the period were (dollars in
thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Interest $ 4,226 $ 4,265
Income taxes 1,006 69
================================================================================
8. Restructuring
To reduce costs and improve efficiency, the company initiated a
restructuring plan in January 2001 to streamline the corporate structure,
consolidate manufacturing operations and close certain facilities. The company
recorded restructuring charges of $6.5 million in fiscal 2001 and an additional
amount of $1.3 million, primarily related to health care costs for terminated
personnel, in the first quarter of fiscal 2002. A portion of this total
restructuring charge, related to the write-down of inventories ($0.9 million),
was classified as a component of cost of sales in fiscal 2001. In addition, the
company recognized restructuring related charges, primarily costs related to
moving equipment, of $.2 million in the second quarter fiscal 2002, $1.0 million
in the first quarter of fiscal 2002 and $0.9 million in fiscal 2001.
The following summarizes the fiscal 2001 and 2002 restructuring activity
(dollars in thousands):
2001 April 29, 2002 July 29, Oct 28,
Non-Cash 2001 Non-Cash 2001 2001
Write- Paid in Reserve Q1 2002 Write- Paid in Reserve Paid in Reserve
Charges Downs 2001 Balance Adjustment Downs Q1 2002 Balance Q2 2002 Balance
- ----------------------------------------------------------------------------------------------------------------------
Non-cash write-downs
of fixed assets to
net realizable value $ 2,540 2,540 - - 160 160 - - - -
Non-cash write-downs
of inventories 874 874 - - - - - - - -
Employee termination
Benefits 969 - 491 478 925 - 410 993 241 752
Lease termination and
Other exit costs 2,116 - 211 1,905 218 - 576 1,547 551 996
---------------------------------------------------------------------------------------------------------------------
$ 6,499 $ 3,414 $ 702 $ 2,383 $ 1,303 $ 160 $ 986 $ 2,540 $ 792 $ 1,748
- ----------------------------------------------------------------------------------------------------------------------
================================================================================
9. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and other
changes in equity, except those resulting from investments by shareholders and
distributions to shareholders not reflected in net income (loss).
A summary of total comprehensive income for the three months ended October
28, 2001 and October 29, 2000 follows (dollars in thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net lncome $ 857 $ 342
Gain on derivative instruments, net of taxes:
Net changes in fair value of derivatives 96 0
Net gains reclassified into earnings 22 0
- --------------------------------------------------------------------------------
$ 975 $ 342
- --------------------------------------------------------------------------------
9. Comprehensive Income (Loss)
A summary of total comprehensive loss for the six months ended October 28, 2001
and October 29, 2000 follows (dollars in thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net loss $ (2,025) $ (1,414)
Gain on derivative instruments, net of taxes:
Net changes in fair value of derivatives 4 0
Net gains reclassified into earnings 17 0
- --------------------------------------------------------------------------------
$ (2,004) $ (1,414)
- --------------------------------------------------------------------------------
Gains on cash flow hedges reflected in other comprehensive loss above are
expected to be recognized in results of operations over the next six months.
================================================================================
10. Derivatives
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended by SFAS No. 137 and SFAS No. 138, requires the company to
recognize all derivative instruments on the balance sheet at fair value. These
statements also establish new accounting rules for hedging instruments, which
depend on the nature of the hedge relationship. A fair value hedge requires that
the effective portion of the change in the fair value of a derivative instrument
be offset against the change in the fair value of the underlying asset,
liability, or firm commitment being hedged through earnings. A cash flow hedge
requires that the effective portion of the change in the fair value of a
derivative instrument be recognized in Other Comprehensive Income ("OCI"), a
component of Stockholders' Equity, and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. The
ineffective portion of a derivative instrument's change in fair value is
immediately recognized in earnings.
Fair Value Hedging Strategy
The company uses forward exchange contracts and options to hedge against
its exposure to currency fluctuations on firm commitments to purchase certain
machinery and equipment and raw materials. The company had approximately $0 and
$1,547,000 of outstanding foreign exchange forward contracts (denominated in
Euros) as of October 28, 2001 and April 29, 2001, respectively.
Cash Flow Hedging Strategy
During 2001, the company adopted a policy to manage the exposure related to
forecasted purchases of inventories denominated in the EURO through use of
forward exchange contracts and options. At October 28, 2001, the duration of
these contracts is twelve months.
The company adopted SFAS No. 133 as amended, effective April 30, 2001. The
effect of this adoption is not material for the six months ended October 28,
2001.
================================================================================
11. Earnings per Share
Basic earnings per share is computed using the weighted-average number of
shares outstanding during the period. Diluted earnings per share uses the
weighted-average number of shares outstanding during the period plus the
additional common shares that would be outstanding during the period if the
dilutive potential common shares issuable under employee and director stock
options were issued. Weighted average shares used in the computation of basic
and diluted earnings per share are as follows:
(in thousands) Three Months Ended
- --------------------------------------------------------------------------------
October 28, 2001 October 29, 2000
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding (basic) 11,221 11,209
Effect of stock options 60 61
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding (diluted) 11,281 11,270
================================================================================
12. Segment Information
The company's operations are classified into two business segments:
upholstery fabrics and mattress ticking. The upholstery fabrics segment
principally manufactures and sells woven jacquards and dobbies, wet and
heat-transfer prints, and woven and tufted velvets primarily to residential and
commercial (contract) furniture manufacturers. The mattress ticking segment
principally manufactures and sells woven jacquards, heat-transfer prints and
pigment prints to bedding manufacturers.
The company internally manages and reports selling, general and
administrative expenses, interest expense, interest income, other expense and
income taxes on a total company basis. Thus, profit by business segment
represents gross profit. In addition, the company internally manages and reports
cash and cash investments, accounts receivable, other current assets, property,
plant and equipment, goodwill and other assets on a total company basis. Thus,
identifiable assets by business segment represent inventories.
12. Segment Information
Sales and gross profit for the company's operating segments for the three
months ended October 28, 2001 and October 29, 2000 are as follows (dollars in
thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 70,378 $ 82,999
Mattress Ticking 26,022 27,982
- --------------------------------------------------------------------------------
$ 96,400 $ 110,981
- --------------------------------------------------------------------------------
Gross Profit
Upholstery Fabrics $ 8,192 $ 9,355
Mattress Ticking 7,350 7,532
- --------------------------------------------------------------------------------
$ 15,542 $ 16,887
- --------------------------------------------------------------------------------
Sales and gross profit for the company's operating segments for the six
months ended October 28, 2001 and October 29, 2000 are as follows (dollars in
thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 132,025 $ 157,925
Mattress Ticking 50,838 54,934
- --------------------------------------------------------------------------------
$ 182,863 $ 212,859
- --------------------------------------------------------------------------------
Gross Profit
Upholstery Fabrics $ 12,732 $ 17,268
Mattress Ticking 13,599 13,793
- --------------------------------------------------------------------------------
$ 26,331 $ 31,061
- --------------------------------------------------------------------------------
12. Segment Information
Inventories for the company's operating segments as of October 28, 2001 and
October 29, 2000 are as follows (dollars in thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Upholstery Fabrics $ 48,462 $ 57,042
Mattress Ticking 12,352 15,925
- --------------------------------------------------------------------------------
$ 60,814 $ 72,967
================================================================================
13. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." This statement supersedes Accounting
Principles Board ("APB") Opinion No. 17 "Intangible Assets." SFAS No. 142
establishes new standards for measuring the carrying value of goodwill related
to acquired companies. Management is currently analyzing the impact of adopting
SFAS No. 142, which will become effective for the company on April 29, 2002.
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement, which is effective for fiscal years beginning after December 15,
2001, supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The company has not yet
determined the financial impact, if any, of adopting this statement.
CULP, INC.
SALES BY PRODUCT GROUP
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 28, 2001 AND OCTOBER 29, 2000
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- -------------------------
October 28, October 29, % Over
Product Group 2001 2000 (Under) 2002 2001
- ------------------------------------ ------------ ------------ ----------- ----------- ------------
Upholstery Fabrics
Culp Decorative Fabrics $ 38,492 46,792 (17.7) % 39.9 % 42.2 %
Culp Velvets/Prints 30,354 32,073 (5.4) % 31.5 % 28.9 %
Culp Yarn 1,532 4,134 (62.9) % 1.6 % 3.7 %
------------ ------------ ----------- ----------- ------------
70,378 82,999 (15.2) % 73.0 % 74.8 %
Mattress Ticking
Culp Home Fashions 26,022 27,982 (7.0) % 27.0 % 25.2 %
------------ ------------ ----------- ----------- ------------
* $ 96,400 110,981 (13.1) % 100.0 % 100.0 %
============ ============ =========== =========== ============
SIX MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- -------------------------
October 28, October 29, % Over
Product Group 2001 2000 (Under) 2002 2001
- ------------------------------------ ------------ ------------ ----------- ----------- ------------
Upholstery Fabrics
Culp Decorative Fabrics $ 73,652 88,325 (16.6) % 40.3 % 41.5 %
Culp Velvets/Prints 55,875 62,147 (10.1) % 30.5 % 29.2 %
Culp Yarn 2,498 7,453 (66.5) % 1.4 % 3.5 %
------------ ------------ ----------- ----------- ------------
132,025 157,925 (16.4) % 72.2 % 74.2 %
Mattress Ticking
Culp Home Fashions 50,838 54,934 (7.5) % 27.8 % 25.8 %
------------ ------------ ----------- ----------- ------------
* $ 182,863 212,859 (14.1) % 100.0 % 100.0 %
============ ============ =========== =========== ============
* U.S. sales were $82,280 and $87,022 for the second quarter of fiscal 2002 and
fiscal 2001, respectively; and $154,079 and $169,312 for the six months of
fiscal 2002 and 2001, respectively. The percentage decrease in U.S. sales was
5.4% for the second quarter and a decrease of 9.0% for the six months.
CULP, INC.
INTERNATIONAL SALES BY GEOGRAPHIC AREA
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 28, 2001 AND OCTOBER 29, 2000
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------
Amounts Percent of Total Sales
----------------------------- --------------------------
October 28, October 29, % Over
Geographic Area 2001 2000 Under) 2002 2001
- ----------------------------- -------------- ----------- ---------- ------------ ----------
North America (Excluding USA) $ 8,379 9,556 (12.3) % 59.3 % 39.9 %
Europe 938 1,807 (48.1) % 6.6 % 7.5 %
Middle East 1,311 5,489 (76.1) % 9.3 % 22.9 %
Far East & Asia 2,891 5,590 (48.3) % 20.5 % 23.3 %
South America 177 279 (36.6) % 1.3 % 1.2 %
All other areas 424 1,238 (65.8) % 3.0 % 5.2 %
-------------- ----------- ---------- ------------ ----------
$ 14,120 23,959 (41.1) % 100.0 % 100.0 %
============== =========== ========== ============ ==========
SIX MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------
Amounts Percent of Total Sales
----------------------------- --------------------------
October 28, October 29, % Over
Geographic Area 2001 2000 (Under) 2002 2001
- ----------------------------- -------------- ----------- ---------- ------------ ----------
North America (Excluding USA) $ 16,410 17,951 (8.6) % 57.1 % 41.2 %
Europe 1,643 3,259 (49.6) % 5.7 % 7.5 %
Middle East 4,214 10,532 (60.0) % 14.6 % 24.2 %
Far East & Asia 5,483 8,826 (37.9) % 19.0 % 20.3 %
South America 336 585 (42.6) % 1.2 % 1.3 %
All other areas 698 2,394 (70.8) % 2.4 % 5.5 %
-------------- ----------- ---------- ------------ ----------
$ 28,784 43,547 (33.9) % 100.0 % 100.0 %
============== =========== ========== ============ ==========
International sales, and the percentage of total sales, for each of the last
five fiscal years follows: fiscal 1997-$101,571 (25%); fiscal 1998-$137,223
(29%); fiscal 1999-$113,354 (23%); fiscal 2000-$111,104 (23%); and fiscal
2001-$77,824 (19%). International sales for the second quarter represented 14.6%
and 21.6% for 2002 and 2001, respectively. Year-to-date international sales
represented 15.7% and 20.5% of total sales for 2002 and 2001, respectively.
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following analysis of the financial condition and results of operations
should be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
Overview
Culp is one of the largest integrated marketers in the world for upholstery
fabrics for furniture and is one of the leading global producers of mattress
fabrics (ticking). The company's fabrics are used primarily in the production of
residential and commercial upholstered furniture and bedding products, including
sofas, recliners, chairs, love seats, sectionals, sofa-beds, office seating and
mattress sets. Although Culp markets fabrics at most price levels, the company
emphasizes fabrics that have broad appeal in the promotional and popular-priced
categories of furniture and bedding.
Culp's worldwide leadership as a marketer of upholstery fabrics and mattress
ticking has been achieved through internal expansion and the integration of
strategic acquisitions.
The company's operating segments are upholstery fabrics and mattress ticking,
with related divisions organized within those segments. In upholstery fabrics,
Culp Decorative Fabrics markets jacquard and dobby woven fabrics for residential
and commercial furniture. Culp Velvets/Prints markets a broad range of printed
and velvet fabrics used primarily for residential and juvenile furniture. Culp
Yarn manufactures specialty filling yarn that is primarily used by Culp. In
mattress ticking, Culp Home Fashions markets a broad array of fabrics used by
bedding manufacturers.
Restructuring Actions
During fiscal 2001, the company initiated a restructuring plan intended to lower
operating expenses, increase manufacturing utilization, raise productivity and
position the company to operate profitably within the current environment of
reduced demand. The plan involved the consolidation of certain fabric
manufacturing capacity within the Culp Decorative Fabrics division, closing one
of the company's four yarn manufacturing plants within Culp Yarn, and an
extensive reduction in selling, general and administrative expenses. The company
also recognized certain inventory write-downs related to the closed facilities
as part of this initiative. The total charge from the restructuring, cost
reduction and inventory write-down initiatives was $9.9 million, of which $3.6
million represented non-cash items. The company recognized $7.4 million of
restructuring and related charges during fiscal 2001, and $2.5 million in the
first half of fiscal 2002. For the second quarter, restructuring-related charges
totaled $0.2 million and were recorded in "Cost of sales." For the first six
months of fiscal 2002, restructuring and related charges were recorded as $1.3
million in the line item "Restructuring expense" and $1.2 million in "Cost of
sales." The costs reflected in "Cost of sales" are principally related to the
relocation of manufacturing equipment. The company plans to realize annualized
cost reductions of at least $14 million when the full benefit of this program is
realized. Management believes the company now has a sound footprint of
efficient, world-class facilities utilizing state-of-the-art equipment that
positions the company well to meet the demands by manufacturers for even shorter
lead times, consistently reliable delivery schedules and appealing designs.
Three Months and Six Months ended October 28, 2001 compared with Three Months
and Six Months ended October 29, 2000
Net Sales. Compared with fiscal 2001, upholstery fabric sales for the second
quarter of fiscal 2002 decreased 15.2% to $70.4 million, and decreased 16.4% to
$132 million for the first six months of fiscal 2002 (See Sales by Product Group
schedule on page I-13). Reflecting a continuation of the trends identified in
the first quarter, the upholstery fabric sales decrease in the second quarter
represents: (1) a sharp reduction (44.2%, or $8.4 million) in international
sales, principally reflecting the high value of the U.S. dollar relative to
international currencies; (2) a decrease in external yarn sales (62.9% or $2.6
million) due to the company's internal consumption of more of the yarn
division's output and exit from certain yarn businesses as part of the
restructuring plan; and (3) a decrease in sales to contract furniture customers
($1.4 million). Sales to U.S. residential furniture manufacturers in the second
quarter of fiscal 2002 decreased only $0.2 million compared with the second
quarter of fiscal 2001. The company believes that it is improving its market
share in the U.S. residential market because of well-received fabric placements
in the Culp Decorative Fabrics and Culp Velvets/Prints product groups.
Compared with fiscal 2001, mattress ticking sales for the second quarter of
fiscal 2002 decreased 7.0% to $26 million, and decreased 7.5% to $50.8 million
for the first six months of fiscal 2002. The sales decrease in mattress ticking
reflects an overall slowdown in industry-wide demand for bedding in the U.S.
Gross Profit and Cost of Sales. Gross profit included restructuring-related
charges of $0.2 million. Excluding these charges, gross profit declined 7.0% for
the second quarter of fiscal 2002 compared with the year-earlier period but
increased as a percentage of net sales from 15.2% to 16.3%. The increase in
gross profit percentage reflects the benefit of the restructuring steps and
other actions that have been taken to reduce expenses. The company achieved
higher gross margins in each of its product groups except for Culp Decorative
Fabrics ("CDF"). The principal factors affecting CDF have been higher cost
variances due to lower sales volume and lower manufacturing productivity due to
the consolidation activities that have been concentrated within CDF. The
productivity of CDF during the second quarter improved from the first quarter,
and Culp expects that positive trend to continue during the second fiscal half.
Selling, General and Administrative Expenses. Reflecting the impact of the
company's actions to reduce expenses, SG&A expenses for the second quarter
declined 14.4% from the prior year. SG&A expenses in the second quarter included
bad debt expense of $1.4 million compared with $112,000 in the year-earlier
period. Without the additional bad debt expense, SG &A expenses were reduced by
$3.3 million, or 24.8%, and were 10.5% of net sales. For the first six months of
fiscal 2002, bad debt expense totaled $2.2 million. Without the additional bad
debt expense, SG&A expenses for the first six months were reduced by $6.7
million, or 24.5%, and were 11.3% of net sales. The increase in bad debt expense
from a year ago reflects primarily write-offs of receivables from one bedding
and two residential furniture customers.
Interest Expense. Interest expense for the second quarter declined 14.1% from
$2.3 million to $2.0 million due to significantly lower borrowings outstanding,
offset somewhat by a substantial increase in interest rates.
Other Expense. Other expense (income) for the second quarter of fiscal 2002
totaled $765,000 compared with $575,000 in the prior year. The increase reflects
the accrual for certain litigation expenses, offset by the elimination of the
nonqualified deferred compensation plan terminated in January 2001 as a part of
the company's cost reduction initiatives.
Income Taxes. The effective tax rate for the first half of fiscal 2002 was 34.0%
compared with 33.0% for the year-earlier period.
Liquidity and Capital Resources Liquidity. Cash and cash investments as of
October 28, 2001 increased to $8.6 million from $1.2 million at fiscal year-end,
reflecting cash flow from operations of $14.8 million for the first half of
fiscal 2002, which exceeded capital expenditures of $2.3 million and debt
repayment of $5.1 million.
Operating working capital (comprised of accounts receivable, inventory and
accounts payable) was $84.3 million at October 28, 2001, down from $106.6
million a year earlier.
The company has reduced funded debt by $16.2 million or 12.8% from the second
quarter of last year. Funded debt equals long-term debt plus current maturities.
Funded debt was $110.6 million at October 28, 2001, compared with $126.8 million
a year earlier and $111.7 million at fiscal year end. Compared with 50.1% a year
earlier, the company's funded debt-to-capital ratio was 48.0% at October 28,
2001, its lowest level since July 1997.
EBITDA for the second quarter of fiscal 2002 was $8.3 million compared with $8.2
million for the second quarter of last year, and was $13.0 million for the first
half of fiscal 2002 compared with $13.3 million in the year-earlier period.
EBITDA includes earnings before interest, income taxes, depreciation,
amortization, all restructuring and related charges and certain non-cash
charges, as defined by the company's credit agreement.
Financing Arrangements. Culp has $75 million of senior unsecured notes with a
fixed coupon rate of 6.76% and an average remaining term of seven years.
In addition, the company has a $20 million syndicated, multi-currency revolving
credit facility. The facility, which expires in April 2002, requires quarterly
payments of interest on all outstanding borrowings and a quarterly facility fee.
In January 2001, the company amended the credit facility to amend certain
covenants. Additionally, the amendment increased the interest rate from LIBOR
plus 1.10% to 1.60% to LIBOR plus 2.50% to 4.25%. The interest rate matrix is
based on the company's debt to EBITDA ratio, as defined by the facility, such
that a lower ratio allows for a lower interest rate. The amended facility also
limits capital expenditures and restricts dividends and common stock
repurchases. As of October 28, 2001, the company had outstanding balances of
approximately $1 million under the credit facility.
The company also has a total of $30.6 million in currently outstanding
industrial revenue bonds ("IRBs") and a $2.3 million non interest bearing
Canadian government loan, which have been used to finance capital expenditures.
The IRBs are collateralized by letters of credit for the outstanding balance of
the IRBs and certain interest payments due thereunder. The January 2001
amendment to the credit facility also increased the letter of credit fees to a
range from 2.50% to 4.25%, based on the company's debt to EBITDA ratio. The IRBs
bear interest at variable rates with a weighted average of 7.04%, including the
letter of credit fee percentage.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. As of October 28, 2001, the
company was in compliance with these financial covenants.
As of October 28, 2001, the company had two interest rate swap agreements with a
$10 million notional amount. During the first six months of fiscal 2002, the
company recorded a mark-to-market loss of $.2 million because the interest rate
swaps no longer serve as a hedge due to the repayment of debt. The company also
enters into foreign exchange forward and option contracts to hedge against
currency fluctuations with respect to firm commitments and anticipated
transactions to purchase certain machinery, equipment and raw materials in
foreign currencies.
Capital Expenditures. The company maintains an ongoing program of capital
expenditures designed to increase capacity as needed, enhance manufacturing
efficiencies through modernization and increase the company's vertical
integration. The company's budget for capital spending for fiscal 2002 is $4.0
million, compared with $8.1 million in fiscal 2001. Depreciation for the first
half of fiscal 2002 totaled $8.9 million.
The company believes that cash flows from operations and funds available under
existing credit facilities and committed IRB financings will be sufficient to
fund capital expenditures and working capital requirements for the foreseeable
future.
Inflation
The cost of the company's raw materials is remaining generally stable. Factors
that reasonably can be expected to influence margins in the future include
changes in raw material prices, trends in other operating costs and overall
competitive conditions.
Seasonality
The company's business is slightly seasonal, with increased sales during the
second and fourth fiscal quarters. This seasonality results from one-week
closings of the company's manufacturing facilities, and the facilities of most
of its customers in the United States, during the first and third quarters for
the holiday weeks including July 4th and Christmas.
Forward-Looking Information
This quarterly report on Form 10-Q contains statements that may be deemed
"forward-looking statements" within the meaning of the federal securities laws,
including the Private Securities Litigation Reform Act of 1995. Such statements
are inherently subject to risks and uncertainties. Forward-looking statements
are statements that include projections, expectations or beliefs about future
events or results or otherwise are not statements of historical fact. Such
statements are often characterized by qualifying words such as "expect,"
"believe," "estimate," "plan," and "project" and their derivatives. Factors that
could influence the matters discussed in such statements include the level of
housing starts and sales of existing homes, consumer confidence, trends in
disposable income and general economic conditions. Decreases in these economic
indicators could have a negative effect on the company's business and prospects.
Likewise, increases in interest rates, particularly home mortgage rates, and
increases in consumer debt or the general rate of inflation, could affect the
company adversely. Because of the significant percentage of the company's sales
derived from international shipments, strengthening of the U.S. dollar against
other currencies could make the company's products less competitive on the basis
of price in markets outside the United States. Additionally, economic and
political instability in international areas could affect the demand for the
company's products.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company has not experienced any
significant changes in market risk since October 28, 2001.
The company's exposure to interest rate risk consists of floating rate debt
based on the London Interbank Offered Rate plus an adjustable margin under the
company's revolving credit agreement and variable rate debt in connection with
industrial revenue bonds. To lower or limit overall borrowing costs, the company
entered into interest rate swap agreements to modify the interest
characteristics of portions of its outstanding debt. The agreements entitle the
company to receive or pay to the counterparty (a major bank), on a quarterly
basis, the amounts, if any, by which the company's interest payments covered by
swap agreements differ from those of the counterparty. As of October 28, 2001,
the fair value of the swap agreements and changes in fair value resulting from
changes in market interest rates are recognized in the consolidated financial
statements because the interest rate swaps no longer serve as a hedge due to the
repayment of debt. The annual impact on the company's results of operations of a
100 basis point interest rate change on the October 28, 2001 outstanding balance
of the variable rate debt would be approximately $320,000 irrespective of any
swaps.
The company's exposure to fluctuations in foreign currency exchange rates is due
primarily to a foreign subsidiary domiciled in Canada and firmly committed and
anticipated purchases of certain machinery, equipment and raw materials in
foreign currencies. The company's Canadian subsidiary uses the United States
dollar as its functional currency. The company generally does not use financial
derivative instruments to hedge foreign currency exchange rate risks associated
with the Canadian subsidiary. However, the company generally enters into foreign
exchange forward and option contracts as a hedge against its exposure to
currency fluctuations on firmly committed and anticipated purchases of certain
machinery, equipment and raw materials. The Canadian subsidiary is not material
to the company's consolidated results of operations; therefore, the impact of a
10% change in the exchange rate at October 28, 2001 would not have a significant
impact on the company's results of operations or financial position.
Additionally, as the company utilizes foreign currency instruments for hedging
anticipated and firmly committed transactions, a loss in fair value for those
instruments is generally offset by increases in the value of the underlying
exposure.
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders of the company was held in High Point, North
Carolina on September 25, 2001. Of the 11,221,158 shares of common stock
outstanding on the record date of July 23, 2001, 10,636,451 shares were present
in person or by proxy.
At the Annual Meeting, shareholders voted on:
- Adoption of a resolution to fix the number of directors constituting the
entire board at nine (9), and;
- the election of three directors: Howard L. Dunn, Jr., H. Bruce English,
and Earl N. Phillips, Jr. to serve until the 2004 Annual Meeting, and;
- ratification of the appointment of KPMG LLP as the independent auditors
of the company for the current fiscal year.
A. Proposal to fix the number of directors constituting the entire board at
nine (9):
For 10,569,531
Against 62,840
Abstain 4,080
B. Proposal to elect Directors:
Howard L. Dunn, Jr. H. Bruce English
----------------------------- ----------------------
For 10,496,261 For 10,496,261
Abstain 140,190 Abstain 140,190
Earl N. Phillips, Jr.
--------------------
For 10,496,061
Abstain 140,390
C. Proposal to ratify the appiontment of KPMG LLP as independent
auditors of the company for fiscal year 2002:
For 10,604,985
Against 11,373
Abstain 20,093
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed as part of this report.
3(i) Articles of Incorporation of the Company, as
amended, were filed as Exhibit 3(i) to the
Company's Form 10-Q for the quarter ended January
29, 1995, filed March 15, 1995, and are
incorporated herein by reference.
3(ii) Restated and Amended Bylaws of the Company, as
amended June 12, 2001.
3(iii) Articles of Amendment of Culp, Inc. dated October
5, 1999 for the purpose of amending its Restated
Charter to fix the designation, preferences,
limitations and relative rights of a series of its
Preferred Stock. The Articles of Amendment of
Culp, Inc. were filed as Exhibit 3(iii) to the
Company's Form 10-Q for the quarter ended October
31, 1999, filed December 15, 1999, and are
incorporated herein by reference.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the period covered
by this report:
(1)Form 8-K dated November 19, 2001, included under Item 5,
Other Events, the Company's press release for quarterly earnings
and the Financial Information Release relating to certain
financial information for the quarter and six months ended
October 28, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
CULP, INC.
(Registrant)
Date: December 12, 2001 By: s/s Franklin N. Saxon
----------------- -----------------
Franklin N. Saxon
Executive Vice President and
Chief Financial Officer
(Authorized to sign on behalf
of the registrant and also sign-
ing as principal financial officer)