SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 27, 2002
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 January 27, 2002: 11,221,158
Par Value: $.05
INDEX TO FORM 10-Q
For the period ended January 27, 2002
Part I - Financial Statements. Page
- ------------------------------------------ -------
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Statements of Income (Loss)---Three and Nine Months
Ended January 27, 2002 and January 28, 2001 I-1
Consolidated Balance Sheets---January 27, 2002, January 28, 2001
and April 29, 2001 I-2
Consolidated Statements of Cash Flows---Nine Months Ended January 27,
2002 and January 28, 2001 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Sales by Product Group 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-23
Market Risk
Part II - Other Information
- -------------------------------------
Item 6. Exhibits and Reports on Form 8-K II-1
Signature II-2
Item 1: Financial Sattements
CULP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 27, 2002 AND JANUARY 28, 2001
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------------------
Amounts Percent of Sales
------------------------------ -----------------------------
January 27, January 28, % Over
2002 2001 (Under) 2002 2001
-------------- -------------- -------------- -------------- -------------
Net sales $ 90,618 95,880 (5.5)% 100.0 % 100.0 %
Cost of sales 77,110 86,047 (10.4)% 85.1 % 89.7 %
-------------- -------------- -------------- -------------- -------------
Gross profit 13,508 9,833 37.4 % 14.9 % 10.3 %
Selling, general and
administrative expenses 11,038 12,480 (11.6)% 12.2 % 13.0 %
Restructuring expense 0 2,504 0.0 % 0.0 % 2.6 %
-------------- -------------- -------------- -------------- -------------
Income (loss) from operations 2,470 (5,151) 148.0 % 2.7 % (5.4)%
Interest expense 1,820 2,222 (18.1)% 2.0 % 2.3 %
Interest income (42) (18) 133.3 % (0.0)% (0.0)%
Other expense (income), net 435 811 (46.4)% 0.5 % 0.8 %
-------------- -------------- -------------- -------------- -------------
Income (loss) before income taxes 257 (8,166) 103.1 % 0.3 % (8.5)%
Income taxes 87 (2,696) 103.2 % 34.0 % 33.0 %
-------------- -------------- -------------- -------------- -------------
Net income (loss) $ 170 (5,470) 103.1 % 0.2 % (5.7)%
============== ============== ============== ============== =============
Net income per share $0.02 ($0.49) 104.1 %
Net income per share, assuming dilution $0.02 ($0.49) 104.1 %
Average shares outstanding 11,221 11,211 0.1 %
Average shares outstanding, assuming dilution 11,304 11,211 0.8 %
NINE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------------------
Amounts Percent of Sales
------------------------------ -----------------------------
January 27, January 28, % Over
2002 2001 (Under) 2002 2001
-------------- -------------- -------------- -------------- -------------
Net sales $ 273,481 308,739 (11.4)% 100.0 % 100.0 %
Cost of sales 233,642 267,845 (12.8)% 85.4 % 86.8 %
-------------- -------------- -------------- -------------- -------------
Gross profit 39,839 40,894 (2.6)% 14.6 % 13.2 %
Selling, general and
administrative expenses 33,823 39,749 (14.9)% 12.4 % 12.9 %
Restructuring expense 1,303 2,504 (48.0)% 0.5 % 0.8 %
-------------- -------------- -------------- -------------- -------------
Income (loss) from operations 4,713 (1,359) (446.8)% 1.7 % (0.4)%
Interest expense 5,851 6,830 (14.3)% 2.1 % 2.2 %
Interest income (99) (40) 147.5 % (0.0)% (0.0)%
Other expense (income), net 1,772 2,127 (16.7)% 0.6 % 0.7 %
-------------- -------------- -------------- -------------- -------------
Loss before income taxes (2,811) (10,276) 72.6 % (1.0)% (3.3)%
Income taxes (956) (3,392) 71.8 % 34.0 % 33.0 %
-------------- -------------- -------------- -------------- -------------
Net loss $ (1,855) (6,884) 73.1 % (0.7)% (2.2)%
============== ============== ============== ============== =============
Net loss per share ($0.17) ($0.61) 72.1 %
Net loss per share, assuming dilution ($0.17) ($0.61) 72.1 %
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
JANUARY 27, 2002, JANUARY 28, 2001, APRIL 29, 2001
Unaudited
(Amounts in Thousands)
Amounts Increase
--------------------------------- (Decrease)
January 27, January 28, --------------------------------- * April 29,
2002 2001 Amount Percent 2001
--------------- --------------- --------------- ------------- ------------
Current assets
Cash and cash investments $ 10,359 292 10,067 3,447.6 % 1,207
Accounts receivable 46,171 54,474 (8,303) (15.2)% 57,849
Inventories 59,398 67,156 (7,758) (11.6)% 59,997
Other current assets 9,323 13,706 (4,383) (32.0)% 7,856
--------------- --------------- --------------- ------------- ------------
Total current assets 125,251 135,628 (10,377) (7.7)% 126,909
Property, plant & equipment, net 102,457 116,207 (13,750) (11.8)% 112,322
Goodwill 47,432 48,827 (1,395) (2.9)% 48,478
Other assets 1,641 2,256 (615) (27.3)% 1,871
--------------- --------------- --------------- ------------- ------------
Total assets $ 276,781 302,918 (26,137) (8.6)% 289,580
=============== =============== =============== ============= ============
Current liabilities
Current maturities of long-term debt $ 3,127 2,159 968 44.8 % 2,488
Accounts payable 21,336 27,084 (5,748) (21.2)% 27,371
Accrued expenses 15,015 15,417 (402) (2.6)% 17,153
Income taxes payable 0 0 0 0.0 % 1,268
--------------- --------------- --------------- ------------- ------------
Total current liabilities 39,478 44,660 (5,182) (11.6)% 48,280
Long-term debt 106,960 119,213 (12,253) (10.3)% 109,168
Deferred income taxes 10,330 17,459 (7,129) (40.8)% 10,330
--------------- --------------- --------------- ------------- ------------
Total liabilities 156,768 181,332 (24,564) (13.5)% 167,778
Shareholders' equity 120,013 121,586 (1,573) (1.3)% 121,802
--------------- --------------- --------------- ------------- ------------
Total liabilities and
shareholders' equity $ 276,781 302,918 (26,137) (8.6)% 289,580
=============== =============== =============== ============= ============
Shares outstanding 11,221 11,211 10 0.1 % 11,221
=============== =============== =============== ============= ============
* Derived from audited financial statements.
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 27, 2002 AND JANUARY 28, 2001
Unaudited
(Amounts in Thousands)
NINE MONTHS ENDED
------------------------------
Amounts
------------------------------
January 27, January 28,
2002 2001
-------------- --------------
Cash flows from operating activities:
Net loss $ (1,855) (6,884)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 13,214 14,781
Amortization of intangible and other assets 1,177 1,196
Amortization of deferred compensation 92 303
Restructuring expense 1,303 2,504
Changes in assets and liabilities:
Accounts receivable 11,678 20,749
Inventories 599 7,315
Other current assets (1,453) (3,357)
Other assets (19) 226
Accounts payable (1,768) (4,536)
Accrued expenses (3,319) (8,076)
Income taxes payable (1,268) 0
-------------- --------------
Net cash provided by operating activities 18,381 24,221
-------------- --------------
Cash flows from investing activities:
Capital expenditures (3,393) (6,532)
Sales of investments related to deferred compensation plan 0 4,547
-------------- --------------
Net cash used in investing activities (3,393) (1,985)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 0 564
Principal payments on long-term debt (1,569) (16,678)
Change in accounts payable-capital expenditures (4,267) (5,667)
Dividends paid 0 (1,177)
Proceeds from common stock issued 0 7
-------------- --------------
Net cash used in financing activities (5,836) (22,951)
-------------- --------------
Increase (decrease) in cash and cash investments 9,152 (715)
Cash and cash investments at beginning of period 1,207 1,007
-------------- --------------
Cash and cash investments at end of period $ 10,359 292
============== ==============
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 Loss 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 (1,855) (1,855)
Other comprehensive loss:
Loss on cash flow hedges, net of taxes (26) (26)
Common stock issued in connection
with stock option plans 92 92
- --------------------------------------------------------------------------------------------------------------------------------
Balance, January 27, 2002 11,221,158 $ 561 $ 37,007 $ 82,471 $ (26) $ 120,013
================================================================================================================================
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):
- --------------------------------------------------------------------------------
January 27, 2002 April 29, 2001
- --------------------------------------------------------------------------------
Customers $ 49,096 $ 60,218
Allowance for doubtful accounts (2,000) (1,282)
Reserve for returns and allowances (925) (1,087)
- --------------------------------------------------------------------------------
$ 46,171 $ 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):
- --------------------------------------------------------------------------------
January 27, 2002 April 29, 2001
- --------------------------------------------------------------------------------
Raw materials $ 30,393 $ 31,489
Work-in-process 3,989 4,748
Finished goods 25,404 24,148
- --------------------------------------------------------------------------------
Total inventories valued at FIFO 59,786 60,385
Adjustments of certain inventories to LIFO (388) (388)
- --------------------------------------------------------------------------------
$ 59,398 $ 59,997
================================================================================
4. Accounts Payable
A summary of accounts payable follows (dollars in thousands):
- --------------------------------------------------------------------------------
January 27, 2002 April 29, 2001
- --------------------------------------------------------------------------------
Accounts payable-trade $ 20,181 $ 21,949
Accounts payable-capital expenditures 1,155 5,422
- --------------------------------------------------------------------------------
$ 21,336 $ 27,371
================================================================================
5. Accrued Expenses
A summary of accrued expenses follows (dollars in thousands):
- --------------------------------------------------------------------------------
January 27, 2002 April 29, 2001
- --------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 6,639 $ 7,806
Interest 2,267 1,367
Restructuring 1,363 2,383
Other 4,746 5,597
- --------------------------------------------------------------------------------
$ 15,015 $ 17,153
================================================================================
6. Long-Term Debt
A summary of long-term debt follows (dollars in thousands):
- --------------------------------------------------------------------------------
January 27, 2002 April 29, 2001
- --------------------------------------------------------------------------------
Senior unsecured notes $ 75,000 $ 75,000
Industrial revenue bonds 30,612 30,612
Canadian government loan 1,798 2,347
Revolving credit facility 999 999
Obligations to sellers 1,678 2,698
- --------------------------------------------------------------------------------
110,087 111,656
Less current maturities (3,127) (2,488)
- --------------------------------------------------------------------------------
$ 106,960 $ 109,168
- --------------------------------------------------------------------------------
The senior unsecured notes have an average remaining term of 7 years. The
principal payments become due from March 2006 to March 2010 with interest
payable semi-annually. The note purchase agreements were amended as of January
31, 2002 to amend certain covenants, including the replacement of the minimum
consolidated net worth test with a minimum tangible net worth test.
Additionally, the amendment increased the fixed coupon rate from 6.76% to 7.76%.
The company's revolving credit agreement (the "Credit Agreement") provides
a revolving credit facility with two banks in the United States. Effective March
2002, the Credit Agreement provides for a revolving loan commitment of
$10,000,000. The agreement requires payment of a quarterly facility fee. On
borrowings outstanding at January 27, 2002, the interest rate was 5.909%. The
Credit Agreement was amended in March 2002 to extend the termination date from
April 2002 to June 2002.
The company's $2,000,000 revolving line of credit expires in April 2002. At
January 27, 2002, 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. As of January 27, 2002, the interest rate on
outstanding IRBs was 5.40%, 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 January 27, 2002, the
company was in compliance with these financial covenants.
At January 27, 2002, 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 nine months of fiscal 2002, the company recorded a
mark-to-market loss of $176,000 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
fiscal years are: 2002 - $0; 2003 - $3,126,000; 2004 - $449,000; 2005 -
$450,000; and 2006 - $11,450,000.
================================================================================
7. Cash Flow Information
Payments for interest and income taxes during the period were (dollars in
thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Interest $ 4,977 $ 5,650
Income taxes 1,553 319
================================================================================
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 Jan 27,
Non-Cash 2001 Non-Cash 2002
2001 Write- Paid in Reserve 2002 Write- Paid in Reserve
Charges Downs 2001 Balance Charges Downs 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 - 795 608
Lease termination and
other exit costs 2,116 - 211 1,905 218 - 1,368 755
- ------------------------------------------------------------------------------------------------
$ 6,499 $ 3,414 $ 702 $ 2,383 $ 1,303 $ 160 $ 2,163 $ 1,363
- ------------------------------------------------------------------------------------------------
================================================================================
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 (loss) for the three months ended
January 27, 2002 and January 28, 2001 follows (dollars in thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net lncome (Loss) $ 170 $ (5,470)
Gain (Loss) on foreign exchange forward contracts,
net of taxes:
Net changes in fair value (60) 0
Net gains reclassified into earnings 13 0
- --------------------------------------------------------------------------------
$ 123 $ (5,470)
- --------------------------------------------------------------------------------
A summary of total comprehensive loss for the nine months ended January 27, 2002
and January 28, 2001 follows (dollars in thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net loss $ (1,855) $ (6,884)
Gain (Loss) on foreign exchange forward contracts,
net of taxes:
Net changes in fair value of derivatives (56) 0
Net gains reclassified into earnings 30 0
- --------------------------------------------------------------------------------
$ (1,881) $ (6,884)
- --------------------------------------------------------------------------------
Losses on cash flow hedges reflected in other comprehensive income (loss) above
are expected to be recognized in results of operations over the next three
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.
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 January 27, 2002, the duration of
these contracts is nine months.
The company adopted SFAS No. 133 as amended, effective April 30, 2001. The
effect of this adoption was not material for the nine months ended January 27,
2002.
================================================================================
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
- --------------------------------------------------------------------------------
January 27, 2002 January 28, 2001
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding (basic) 11,221 11,211
Effect of stock options 83 0
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding (diluted) 11,304 11,211
================================================================================
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, other current assets, property, plant and equipment,
and other assets on a total company basis. Thus, identifiable assets by business
segment represent accounts receivable, inventories and goodwill.
Sales and gross profit for the company's operating segments for the three
months ended January 27, 2002 and January 28, 2001 are as follows (dollars in
thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 65,844 $ 72,297
Mattress Ticking 24,774 23,583
- --------------------------------------------------------------------------------
$ 90,618 $ 95,880
- --------------------------------------------------------------------------------
Gross Profit
Upholstery Fabrics $ 6,828 $ 4,158 [1]
Mattress Ticking 6,680 5,675
- --------------------------------------------------------------------------------
$ 13,508 $ 9,833
- --------------------------------------------------------------------------------
Sales and gross profit for the company's operating segments for the nine
months ended January 27, 2002 and January 28, 2001 are as follows (dollars in
thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 197,869 $ 230,222
Mattress Ticking 75,612 78,517
- --------------------------------------------------------------------------------
$ 273,481 $ 308,739
- --------------------------------------------------------------------------------
Gross Profit
Upholstery Fabrics $ 19,561 [1] $ 21,426 [1]
Mattress Ticking 20,278 19,468
- --------------------------------------------------------------------------------
$ 39,839 $ 40,894
- --------------------------------------------------------------------------------
[1] Includes restructuring-related charges of $0.7 million for the three months
ended January 28, 2001; and $1.2 million and $0.7 million for the nine months
ended January 27, 2002 and January 28, 2001, respectively.
Identifiable assets, including accounts receivable, inventories and
goodwill, for the company's operating segments as of January 27, 2002 and
January 28, 2001 are as follows (dollars in thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Upholstery Fabrics $ 129,920 $ 49,954 [1]
Mattress Ticking 31,978 17,202 [1]
- --------------------------------------------------------------------------------
$ 155,898 $ 67,156
[1] Includes inventories only for fiscal 2001.
================================================================================
CULP, INC.
SALES BY PRODUCT GROUP
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 27, 2002 AND JANUARY 28, 2001
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------
Amounts Percent of Total Sales
-------------------- ----------------------
January 27, January 28, % Over
Product Group 2002 2001 (Under) 2002 2001
- ------------------------------ --------- --------- ------------ ---------- ----------
Upholstery Fabrics
Culp Decorative Fabrics $ 35,878 40,955 (12.4) % 39.6 % 42.7 %
Culp Velvets/Prints 28,648 28,631 0.1 % 31.6 % 29.9 %
Culp Yarn ** 1,318 2,711 (51.4) % 1.5 % 2.8 %
--------- --------- ------------ ---------- ----------
65,844 72,297 (8.9) % 72.7 % 75.4 %
Mattress Ticking
Culp Home Fashions 24,774 23,583 5.1 % 27.3 % 24.6 %
--------- --------- ------------ ---------- ----------
* $ 90,618 95,880 (5.5) % 100.0 % 100.0 %
========= ========= ============ ========== ==========
NINE MONTHS ENDED (UNAUDITED)
---------------------------------------------------------------
Amounts Percent of Total Sales
-------------------- -----------------------
January 27, January 28, % Over
Product Group 2002 2001 (Under) 2002 2001
- ------------------------------ --------- --------- ------------ ---------- ----------
Upholstery Fabrics
Culp Decorative Fabrics $ 109,531 129,280 (15.3) % 40.1 % 41.9 %
Culp Velvets/Prints 84,522 90,778 (6.9) % 30.8 % 29.4 %
Culp Yarn ** 3,816 10,164 (62.5) % 1.4 % 3.3 %
--------- --------- ------------ ---------- ----------
197,869 230,222 (14.1) % 72.4 % 74.6 %
Mattress Ticking
Culp Home Fashions 75,612 78,517 (3.7) % 27.6 % 25.4 %
--------- --------- ------------ ---------- ----------
* $ 273,481 308,739 (11.4) % 100.0 % 100.0 %
========= ========= ============ ========== ==========
* U.S. sales were $79,539 and $77,360 for the third quarter of fiscal 2002 and
fiscal 2001, respectively; and $233,617 and $246,672 for the nine months of
fiscal 2002 and 2001, respectively. The percentage increase in U.S. sales was
2.8% for the third quarter and a decrease of 5.3% for the nine months.
** The fiscal 2001 sales for Culp Yarn include sales from exited businesses due
to restructuring of $1.7 million in the third quarter and $6.3 million in the
first nine months.
CULP, INC.
INTERNATIONAL SALES BY GEOGRAPHIC AREA
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 27, 2002 AND JANUARY 28, 2001
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------------------------
Percent of Total
Amounts Sales
--------------------- --------------------
January 27, January 28, % Over
Geographic Area 2002 2001 (Under) 2002 2001
- ----------------------- ---------- --------- --------- --------- ---------
North America (Excluding USA) $ 6,613 8,226 (19.6)% 59.7 % 44.4 %
Europe 472 1,669 (71.7)% 4.3 % 9.0 %
Middle East 598 3,924 (84.8)% 5.4 % 21.2 %
Far East & Asia 2,924 4,277 (31.6)% 26.4 % 23.1 %
South America 155 147 5.6 % 1.4 % 0.8 %
All other areas 318 277 14.7 % 2.9 % 1.5 %
---------- --------- --------- --------- ---------
$ 11,079 18,520 (40.2)% 100.0 % 100.0 %
========== ========= ========= ========= =========
NINE MONTHS ENDED (UNAUDITED)
------------------------------------------------------
Percent of Total
Amounts Sales
--------------------- --------------------
January 27, January 28, % Over
Geographic Area 2002 2001 (Under) 2002 2001
- ----------------------- ---------- --------- --------- --------- ---------
North America (Excluding USA) $ 23,023 26,177 (12.0)% 57.9 % 42.2 %
Europe 2,115 4,928 (57.1)% 5.3 % 7.9 %
Middle East 4,804 14,456 (66.8)% 12.1 % 23.3 %
Far East & Asia 8,414 13,103 (35.8)% 21.1 % 21.1 %
South America 490 732 (33.1)% 1.2 % 1.2 %
All other areas 1,018 2,671 (61.9)% 2.6 % 4.3 %
---------- --------- --------- --------- ---------
$ 39,864 62,067 (35.8)% 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 third quarter represented 12.2%
and 19.3% for 2002 and 2001, respectively. Year-to-date international sales
represented 14.6% and 20.1% of total sales for 2002 and 2001, respectively.
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 contract 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 contract 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 an 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. While the physical relocation and movement of machinery
and equipment involved in the restructuring has been essentially completed and
the related fixed manufacturing cost savings achieved, the company still has
much improvement to make to reach targeted productivity and variance levels as
well as stock keeping unit (sku) reduction goals in the Culp Decorative Fabrics
division. The total charge from the restructuring, cost reduction and inventory
write-down initiatives was $9.9 million, about $3.6 million of which 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 nine months of fiscal
2002. No restructuring and related charges were recorded in the third quarter of
fiscal 2002. Restructuring and related charges for fiscal 2002 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's restructuring plan targeted
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
position Culp well to meet the demands by manufacturers for shorter lead times,
reliable delivery schedules and appealing designs.
Three Months and Nine Months ended January 27, 2002 compared with Three Months
and Nine Months ended January 28, 2001
Net Sales. Compared with the year-earlier period, the company's net sales
declined only 5.5% for the third quarter of fiscal 2002, versus 13.1% for the
second quarter of fiscal 2002, 15.1% for the first quarter of fiscal 2002, and
21.9% for the fourth quarter of fiscal 2001. This quarterly trend indicates that
the sales decline bottomed in the fourth quarter of fiscal 2001. Based upon
current business conditions, the company is optimistic that this improving sales
trend can continue.
Compared with fiscal 2001, upholstery fabric sales for the third quarter of
fiscal 2002 decreased 8.9% to $65.8 million, and decreased 14.1% to $197.9
million for the first nine months of fiscal 2002 (See Sales by Product Group
schedule on Page I-13). Reflecting a continuation of the trends identified in
the first half of fiscal 2002, the upholstery fabric sales decrease in the third
quarter represents: (1) a sharp reduction (42.1%, or $5.9 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
(51.4% or $1.4 million) due to the company's internal consumption of more of the
yarn division's output and its exit from certain yarn businesses as part of the
restructuring plan; and (3) a decrease in sales to contract furniture customers
($1.1 million). A significant factor contributing to the decline in
international sales is the persistent weakness in demand for the company's wet
print flock fabrics, which has negatively impacted the profitability of the Culp
Velvets/Prints product group. Management continues to assess its plan for
addressing this under-performing product line. Sales to U.S. residential
furniture manufacturers in the third quarter of fiscal 2002 increased 3.9% or
$2.0 million compared with the third 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, sales of mattress ticking for the third quarter of
fiscal 2002 increased 5.1% to $24.8 million, and decreased 3.7% to $75.6 million
for the first nine months of fiscal 2002. The year-to-date decline in mattress
ticking also reflects a strong decrease in international sales. Sales to U.S.
bedding manufacturers increased 14.1% to $21.8 million in the third quarter of
fiscal 2002, reversing a trend of sales decreases in the first two quarters, and
increased 1.8% to $66.0 million for the first nine months of fiscal 2002. The
company believes that it is gaining market share in the U.S. bedding market
because of well received ticking placements in the Culp Home Fashions product
group.
Gross Profit and Cost of Sales. Gross profit increased 37.4% for the third
quarter of fiscal 2002 compared with the year-earlier period and increased as a
percentage of net sales to 14.9% from 10.3%. 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 realized significant gross
profit increases over the third quarter of last year in Culp Home Fashions
(mattress ticking), Culp Velvets/Prints and Culp Yarn. During the quarter the
company began to realize lower variances and improved manufacturing productivity
in the Culp Decorative Fabrics product group, a positive trend that management
expects to continue in the fourth quarter. Even on a sales decline of 12.4%,
Culp Decorative Fabrics achieved higher gross margins over the third quarter of
last year.
Selling, General and Administrative Expenses. Reflecting the impact of the
company's actions to reduce expenses, SG&A expenses for the third quarter
declined 11.6% from the prior year. SG&A expenses in the third quarter included
bad debt expense of $703,000 compared with $31,600 in the year-earlier period.
Without the additional bad debt expense, SG&A expenses were reduced by $2.1
million, or 17.2%, and were 11.4% of net sales. For the first nine months of
fiscal 2002, bad debt expense totaled $2.9 million. Without the additional bad
debt expense, SG&A expenses for the first nine months were reduced by $8.9
million, or 22.3%, and were 11.3% of net sales. The increase in bad debt expense
from a year ago reflects primarily write-offs of one bedding and two residential
furniture customers as well as an increase in the allowance for doubtful
accounts.
Interest Expense. Interest expense for the third quarter declined 18.1% from
$2.2 million to $1.8 million due to significantly lower borrowings outstanding,
offset somewhat by a substantial increase in interest rates.
Other Expense. Other expense (income) for the third quarter of fiscal 2002
totaled $435,000 compared with $811,000 in the prior year. The decrease reflects
primarily 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 nine months 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 January 27, 2002 increased to $10.4
million from $1.2 million at fiscal year-end, reflecting cash flow from
operations of $18.4 million for the first nine months of fiscal 2002, which
exceeded capital expenditures of $3.4 million and debt repayment of $5.8
million.
Operating working capital (comprised of accounts receivable, inventory and
accounts payable) was $84.2 million at January 27, 2002, down from $94.5 million
a year earlier.
The company has reduced funded debt by $11.3 million or 9.3% from the third
quarter of last year. Funded debt equals long-term debt plus current maturities.
Funded debt was $110.1 million at January 27, 2002, compared with $121.4 million
a year ago and $111.7 million at fiscal year end. Compared with 50.0% a year
ago, the company's funded debt-to-capital ratio was 47.8% at January 27, 2002.
EBITDA for the third quarter of fiscal 2002 increased to $6.9 million compared
with $2.5 million for the third quarter of last year, and increased to $19.9
million for the first nine months of fiscal 2002 compared with $16.0 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.
Free cash flow (defined as cash available for debt repayment, dividends and/or
stock issuance) totaled $10.7 million and $16.6 million for the first nine
months of 2002 and 2001, respectively.
Financing Arrangements. Culp has $75 million of senior unsecured notes with an
average remaining term of seven years. In January 2002, the company amended the
note purchase agreements to amend certain covenants, including the replacement
of the minimum net worth covenant with a minimum tangible net worth covenant.
The amendment increased the fixed coupon rate from 6.76% to 7.76%.
In addition, the company has a revolving credit facility, which was reduced from
$20 million to $10 million in March 2002. The facility, which expires in June
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 include terms that restrict the payment of cash dividends and share
repurchases at this time, limit capital expenditures, and increase the interest
rate on the facility. The interest rate matrix is based on the company's funded
debt to EBITDA ratio, as defined by the facility, such that a lower ratio allows
for a lower interest rate. As of January 27, 2002, the company had outstanding
balances of approximately $1 million under the credit facility with an interest
rate of 5.909% (LIBOR plus 4.00%). The interest rate is projected to be reduced
to LIBOR plus 3.50% in the fourth quarter based on a lower funded debt to EBITDA
ratio.
The company also has a total of $30.6 million in currently outstanding
industrial revenue bonds ("IRBs") and a $1.8 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 increased the letter of credit fees, which are
also based on the company's funded debt to EBITDA ratio. Interest on the
outstanding IRBs as of January 27, 2002 was 5.40% (tax-exempt adjustable rate
plus the letter of credit spread of 4.00%). The interest rate is projected to be
reduced to the tax-exempt adjustable rate plus 3.50% in the fourth quarter based
on a lower funded debt to EBITDA ratio.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. The company's principal
financial covenants are (1) funded debt to EBITDA; (2) EBILTDA to interest
expense plus leases; (3) funded debt to total capital; (4) funded debt to
tangible capital; and (5) minimum tangible shareholders' equity. As of January
27, 2002, the company was in compliance with these financial covenants.
As of January 27, 2002, the company had two interest rate swap agreements with a
$10 million notional amount. During the first nine 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 $4.5
million, compared with $8.1 million in fiscal 2001. Depreciation for the first
nine months of fiscal 2002 totaled $13.2 million.
The company believes that its cash investments, cash flows from operations and
funds available under existing credit facilities 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 moderately 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.
Critical Accounting Policies and Recent Accounting Developments
Accounting principles generally accepted in the United States of America require
the company to make estimates and assumptions that affect the reported amounts
in the financial statements and accompanying notes. Some of these estimates
require difficult, subjective and/or complex judgments about matters that are
inherently uncertain, and as a result, actual results could differ from those
estimates. Due to the estimation processes involved, management considers the
following summarized accounting policies and their application to be critical to
understanding the company's business operations, financial condition and results
of operations:
Accounts Receivable - Allowance for Doubtful Accounts
Substantially all the company's accounts receivable are due primarily from
residential furniture manufacturers and bedding manufacturers. Ownership of
these manufacturers is increasingly concentrated and in certain cases leveraged.
As of January 27, 2002, accounts receivable from residential and contract
furniture manufacturers totaled approximately $34.5 million and from bedding
manufacturers approximately $14.6 million. Approximately $11.7 million of the
total accounts receivable was due from international customers. Additionally, as
of January 27, 2002, the aggregate accounts receivable balance of the company's
ten largest customers was $23.1 million, or 47% of trade accounts receivable.
During fiscal 2001 and 2002, there has been significant change in the home
furnishings industry, including the bankruptcy of several of the largest home
furnishings retail chains. This in turn has affected the furniture and bedding
manufacturers who are the company's primary customers. As a result, Culp has
experienced significantly higher credit losses in fiscal 2002 and has made
substantial additional provisions to the allowance for doubtful accounts. Bad
debt expense for the first nine months of fiscal 2002 totaled $2.9 million
compared to $189,000 in the year-earlier period.
The company continuously performs credit evaluations of its customers,
considering numerous inputs including customers' financial position, past
payment history, cash flows and management capability; historical loss
experience; and economic conditions and prospects. While management believes
that adequate allowances for doubtful accounts have been provided in the
consolidated financial statements, it is possible that the company could
experience additional unexpected credit losses.
Inventory Valuation
The company operates generally as a make-to-order business; however, the company
also stocks products for certain customers in order to meet delivery schedules.
In addition, the company stocks its most popular fabrics in its regional
distribution facilities. Although management closely monitors demand in each
product area to decide which patterns and styles to hold in inventory, the
gradual, yet constant shifts in consumer preferences expose the company to
write-downs of inventory.
Substantially all inventories are valued at the lower of last-in, first-out
(LIFO) cost or market. Management continually examines inventory to determine if
there are indicators that the carrying value exceeds its net realizable value.
Experience has shown that the most significant indicator of the need for
inventory write-downs is the age of the inventory. As a result, the company
provides inventory valuation write-downs based upon set percentages for
inventory aging categories, generally using 6, 9 and 12 month categories. While
management believes that adequate write-downs for inventory obsolescence have
been made in the consolidated financial statements, consumer tastes and
preferences will continue to change and the company could experience additional
inventory write-downs in the future.
Revenue Recognition
Revenue is recognized from product sales upon shipment to customers from the
company's various distribution centers. Provision is made currently for
estimated product returns, claims and allowances. Management considers
historical claims and return experience, among other things, when establishing
the allowance for returns and allowances. While management believes that
adequate allowance has been established for returns and allowances, it is
possible that the company could experience levels higher than provided for in
the consolidated financial statements.
Long-lived Assets
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. Recoverability of
long-lived assets to be held and used is measured by a comparison of the
carrying amount of the asset to future net undiscounted cash flows expected to
be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized for the excess
of the carrying amount over the fair value of the asset. Assets to be disposed
of are reported at the lower of the carrying value or fair value less cost to
sell when the company has committed to a disposal plan.
Events or changes in circumstances that indicate an asset's carrying amount may
not be recoverable include: a) significant changes in its market price, b) a
significant change in the extent or manner in which the asset is being used, c)
adverse change in business climate that could affect the asset value
permanently, d) current and/or historical operating or cash flow losses and a
projection that demonstrates continuing losses associated with the asset's use,
and e) an expectation that it is more likely than not that the asset will be
sold.
The high value of the U.S. dollar relative to international currencies has
negatively impacted international demand for certain of the company's products,
including the wet print flock fabrics. Management continues to monitor the
performance and assess its plan for addressing the significantly
under-performing assets associated with the wet print flock product line. It is
reasonably possible that continued weak operating performance or a change in
management's plan for future utilization of this asset could result in a future
material impairment charge.
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.
Goodwill
The company assesses the recoverability of goodwill under SFAS No. 121 by
determining whether the amortization of the company's goodwill balance over its
remaining life can be recovered through undiscounted future operating cash flows
of the acquired businesses. If the company determines that goodwill is impaired,
the loss is measured using estimated fair value. The assessment of the
recoverability of goodwill will be impacted if estimated cash flows are not
achieved. Factors that may impact estimated cash flows include, among other
things, consumer demand, the acceptability of the company's products, ability to
offer competitive pricing at acceptable margins and a number of macro-economic
factors including the strength of the U.S. dollar relative to other foreign
currencies.
The company's goodwill, at January 27, 2002, related to the following divisions:
Culp Decorative Fabrics- $42.6 million, Culp Yarn - $0.7 million and Culp Home
Fashions - $4.1 million. The company's assessment at April 29, 2001 indicated
that future operating cash flows of these businesses were sufficient to recover
the carrying amounts of goodwill.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective as of the company's 2003 fiscal year that starts
April 29, 2002. SFAS No. 142 represents a substantial change in how goodwill is
accounted for. SFAS No. 142 requires that goodwill no longer be amortized and
that no later than October 27, 2002, goodwill be tested for impairment at the
reporting unit level by comparing the reporting unit's carrying value to its
fair value as of April 29, 2002. If any impairment is indicated, it must be
measured and recorded before the end of fiscal 2003. SFAS No. 142 requires that
any goodwill impairment loss recognized as a result of initial application be
reported as of the first quarter of fiscal 2003 as an effect of a change in
accounting principle, and that the income per share effects of the accounting
change be separately disclosed.
Goodwill amortization for the current fiscal year ending April 28,2002 is
projected to be $1.4 million. As of April 29, 2002, goodwill will no longer be
amortized.
Management has engaged a business valuation specialist to assist the company in
the determination of the fair value of Culp Decorative Fabrics because of the
significance of the goodwill associated with the division and due to its recent
operating performance for fiscal 2001 and 2002, which has been significantly
below its historical level of profitability. The company will determine if any
goodwill impairment is indicated no later than October 27, 2002 by comparing
Culp Decorative Fabrics' fair value with its carrying value as of April 29,
2002.
The application of SFAS No. 142 is complex and will require extensive effort. As
a result, it is not practical to reasonably estimate the impact of adoption as
of the date of this report. However, it is reasonably possible that the adoption
of SFAS No. 142 could result in a material charge in fiscal 2003.
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 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 January 27, 2002.
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. 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 January 27, 2002, 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 January 27, 2002 outstanding balance
of the variable rate debt would be approximately $300,000 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 amount of Canadian-denominated sales
and manufacturing costs are not material to the company's consolidated results
of operations; therefore, a 10% change in the exchange rate at January 27, 2002
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.
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.
10(a) First Amendment, dated January 31, 2002 to Note Purchase
Agreement (providing for the issuance by Culp, Inc. of its
$20 million 6.76% Series A Senior Notes due 3/15/08 and its
$55 million 6.76% Series B Senior Notes due 3/15/10), each
dated March 4, 1998, between Culp, Inc. and each of the
following:
1. Connecticut General Life Insurance Company;
2. Life Insurance Company of North America;
3. ACE Property and Casualty;
4. J. Romeo & Co;
5. United of Omaha Life Insurance Company;
6. Mutual of Omaha Insurance Company;
7. The Prudential Insurance Company of America; and
8. Allstate Life Insurance Company
10(b) Eighth Amendment to Credit Agreement, dated March 5, 2002,
among Wachovia Bank (successor by merger to Wachovia Bank
of Georgia, N.A.), as agent, First Union National Bank
(successor by merger to First Union National Bank of North
Carolina), as documentation agent, and Wachovia Bank, N.A.,
First Union National Bank, and Suntrust Bank (formerly known
as SunTrust Bank, Atlanta), as lenders.
(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 February 19, 2002, 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 nine months ended January 27, 2002.
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: March 13, 2002 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)
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENTS
THIS FIRST AMENDMENT TO NOTE PURCHASE AGREEMENTS, dated as of the 31st
day of January, 2002 (this "Amendment" or this "First Amendment"), is made by
and between Culp, Inc., a North Carolina corporation (the "Company") and the
holders of Notes (as defined in the Note Purchase Agreements referred to
below) listed on Schedule A (the "Noteholders").
RECITALS
A. The Company and certain financial institutions or entities have
heretofore entered into separate and several Note Purchase Agreements, each
dated as of March 4, 1998 (collectively, the "Note Purchase Agreements"),
pursuant to which the Company has issued its $20,000,000 6.76% Series A
Senior Notes due March 15, 2008 and its $55,000,000 6.76% Series B Senior
Notes due March 15, 2010 (collectively, the "Notes"). Capitalized terms used
herein without definition shall have the meanings given to them in the Note
Purchase Agreements.
B. The Company has requested that the Noteholders amend the Note
Purchase Agreements as set forth herein, and the Noteholders have agreed to
effect such amendments upon the terms and conditions set forth herein.
STATEMENT OF AGREEMENT
The parties hereto agree as follows:
1. Interest Rate. Effective February 1, 2002 (but subject to
Section 7.2), the principal amount of the Notes will bear interest at a rate
equal to 7.76% per annum. Accordingly, all references in the Note Purchase
Agreements to "6.76%" as the rate of interest applicable to the Notes shall
be deemed to read "7.76%," and all references in the Note Purchase Agreements
to "8.76%" as the rate of interest applicable to overdue payments of
principal, interest or any Make-whole Amount shall be deemed to read
"9.76%." Contemporaneously with the execution and delivery of this
Amendment, the Company will execute and deliver to each holder an amended and
restated Note (in exchange for the return by such holder to the Company of
such holder's original Note for cancellation by the Company), which amended
and restated Note will provide for such increased interest rate and otherwise
be in form and substance equivalent to the Notes delivered at the Closing.
The execution and delivery of each amended and restated Note in favor of a
holder will be a condition precedent to such holder's becoming bound in
respect of this Amendment.
2. Amendment to Section 9. A new Section 9.6 is hereby added to
each of the Note Purchase Agreements as follows:
Section 9.6. Liens. The Company will exercise its reasonable
best efforts to cause the Liens that have been granted to the lenders
under that certain Credit Agreement, dated April 23, 1997 between the
Company, Wachovia Bank, N.A. (as agent and as lender) and certain other
financial institutions party thereto (as amended, restated, modified,
replaced or refinanced from time to time, the "Credit Agreement") to be
released (the "Lien Release"). The Company agrees that, upon the
completion of any Lien Release, the references in clause (a)(3)(ii) of
Section 10.2 and paragraph (k) of Section 10.3 to '15% of Consolidated
Net Worth" shall be amended to read "10% of Consolidated Net Worth."
The Company further agrees that, in the event the Company is unable, by
May 5, 2003, to cause the Lien Release, the Company will promptly
thereafter grant, for the benefit of the holders of Notes, Liens on
assets having a book value equal to no less than $25,000,000, securing
repayment obligations in respect of the Notes of an amount equal to the
amount so secured under the Credit Agreement (which, as of the date
hereof, equals $15,177,554), pursuant to documentation reasonably
acceptable to the Required Holders and the Company; provided, however,
that in the event of any such grant of Liens for the benefit of such
holders (and only in such event), the Required Holders hereby waive
compliance with Sections 10.2(a)(3) and 10.3(k) hereof in respect of
(and only in respect of) any deemed incurrence of Priority Debt arising
by virtue of any such grant of Liens in favor of the holders of Notes
(it being understood that the calculation of Priority Debt shall not
include indebtedness under the Notes).
3. Amendment to Section 10.1. Section 10.1 of each of the Note
Purchase Agreements is hereby deleted in its entirety and is replaced with
the following:
Section 10.1. Tangible Net Worth. The Company will not at any
time permit Tangible Net Worth to be less than the sum of (i)
$60,000,000, plus (ii) an aggregate amount equal to 50% of its
Consolidated Net Income (but, in each case, only if a positive number)
for each completed fiscal quarter beginning with the fiscal quarter
ended January-27, 2002.
4. Amendment to Section 10.2(a). The following is hereby inserted
as new clause (4) of Section 10.2(a) of each of the Note Purchase Agreements:
Notwithstanding the foregoing, (i) Consolidated Funded Debt shall
not at any time exceed: (A) 65% of Tangible Capitalization during the
period from the Effective Date of the First Amendment (as defined
therein) through April 30, 2003; (B) 57% of Tangible Capitalization
during the period from May 1, 2003 through April 30, 2004; and (C) 50%
of Tangible Capitalization at any time thereafter; and (ii) from and
after the Effective Date of the First Amendment (as defined therein),
the Company shall not pay any dividends to its stockholders in respect
of the capital stock of the Company unless and until Consolidated
Funded Debt is less than 50% of Tangible Capitalization.
5. New Definitions. The following defined terms and definitions are
hereby inserted in appropriate alphabetical order in Schedule B to each of
the Note Purchase Agreements:
"First Amendment" means the First Amendment to Note Purchase
Agreements, dated as of January 31, 2002, between the Company and the
Noteholders (as defined therein), which amends this Agreement.
"Tangible Capitalization" means, at any time, Consolidated Total
Capitalization, less the amount of any intangible items as determined
in accordance with GAAP, at such time.
"Tangible Net Worth" means, at any time, Consolidated Net Worth,
less the amount of any intangible items as determined in accordance
with GAAP, at such time.
6. Representation and Warranty. The Company hereby represents and
warrants to the Noteholders that after giving effect to this Amendment, no
Default or Event of Default has occurred and is continuing.
7. Miscellaneous.
7.1 Amendment Fee. As a condition to the effectiveness of this
Amendment and in consideration of the amendments effected hereby, the
Company shall have paid to each holder of Notes, on or prior to the
Effective Date (as defined in Section 7.2), a fee equal to 0.250% of
the aggregate principal amount of the Notes held by such holder.
7.2 Counterparts; Effectiveness. This Amendment may be
executed in any number of counterparts and by different parties hereto
on separate counterparts, each of which when so executed and delivered
shall be an original, but all of which shall together constitute one
and the same instrument. Delivery of an executed signature page to
this Amendment by facsimile or electronic mail transmission shall be
effective as delivery of a manually executed counterpart thereof. This
Amendment shall become effective on the date (the "Effective Date")
upon which (i)-each of the Company and the Required Holders shall have
executed and delivered a counterpart hereof, (ii) the Company shall
have executed and delivered the amended and restated Notes as
contemplated by Section-1 hereof, and (iii)-the Company shall have paid
to each holder of Notes the fee required by Section-7.1.
7.3 Effect of Amendment. From and after the Effective Date,
all references in any Note Purchase Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import referring to
such Note Purchase Agreement shall mean and be a reference to such Note
Purchase Agreement as amended by this Amendment. This Amendment is
limited as specified and shall not constitute or be deemed to
constitute an amendment, modification or waiver of any provision of any
Note Purchase Agreement except as expressly set forth herein. Except
as expressly amended hereby, the Note Purchase Agreements shall remain
in full force and effect in accordance with their terms.
7.4 Governing Law. This Amendment shall be governed by and
construed and enforced in accordance with the laws of the State of New
York, excluding choice-of-law principles of such laws that would
require the application of the laws of a jurisdiction other than the
State of New York.
7.5 Severability. To the extent any provision of this
Amendment is prohibited by or invalid under the applicable law of any
jurisdiction, such provision shall be ineffective only to the extent of
such prohibition or invalidity and only in any such jurisdiction,
without prohibiting or invalidating such provision in any other
jurisdiction or the remaining provisions of this Amendment in any
jurisdiction.
7.6 Successors and Assigns. This Amendment shall be binding
upon, inure to the benefit of and be enforceable by the respective
successors and permitted assigns of the parties hereto and of all other
holders of Notes (including, without limitation, any subsequent holder
of a Note).
7.7 Construction. The headings of the various sections and
subsections of this Amendment have been inserted for convenience only
and shall not in any way affect the meaning or construction of any of
the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their duly authorized officers as of the date first above written.
CULP, INC.
By:
Name:
Title:
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
By CIGNA Investments, Inc.
By:
Name:
Title:
LIFE INSURANCE COMPANY OF NORTH
AMERICA
By CIGNA Investments, Inc.
By:
Name:
Title:
ACE PROPERTY AND CASUALTY INSURANCE
COMPANY
By CIGNA Investments, Inc.
By:
Name:
Title:
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY, on behalf of one or more
separate accounts
By CIGNA Investments, Inc.
By:
Name:
Title:
J. ROMEO & CO.
By:
Name:
Title:
UNITED OF OMAHA LIFE INSURANCE
COMPANY
By:
Name:
Title:
MUTUAL OF OMAHA INSURANCE COMPANY
By:
Name:
Title:
THE PRUDENTIAL INSURANCE COMPANY OF
AMERICA
By:
Name:
Title:
ALLSTATE LIFE INSURANCE COMPANY
By:
Name:
Title: Authorized Signatory
By:
Name:
Title: Authorized Signatory
EIGHTH AMENDMENT TO CREDIT AGREEMENT
THIS EIGHTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is dated as of
March 5, 2002, among CULP, INC. (the "Borrower"), WACHOVIA BANK, N.A. (successor
by merger to Wachovia Bank of Georgia, N.A.), as Agent (the "Agent"), FIRST
UNION NATIONAL BANK (successor by merger to First Union National Bank of North
Carolina), as Documentation Agent (the "Documentation Agent"), and WACHOVIA
BANK, N.A., FIRST UNION NATIONAL BANK and SUNTRUST BANK (formerly known as
SunTrust Bank, Atlanta)(collectively, the "Banks");
W I T N E S S E T H :
WHEREAS, the Borrower, the Agent, the Documentation Agent and the Banks
executed and delivered that certain Credit Agreement, dated as of April 23,
1997, as amended by that certain First Amendment to Credit Agreement dated as of
July 22, 1998, that certain Second Amendment to Credit Agreement dated as of
October 26, 1998, that certain Third Amendment to Credit Agreement dated as of
April 28, 2000, that certain Fourth Amendment to Credit Agreement dated as of
July 30, 2000, that certain Fifth Amendment (the "Fifth Amendment") to Credit
Agreement dated as of January 26, 2001, that certain Sixth Amendment to Credit
Agreement dated as of March 28, 2001, and that certain Seventh Amendment to
Credit Agreement dated as of August 29, 2001 (as so amended, the "Credit
Agreement"); and
WHEREAS, the Borrower has requested, and the Agent, the Documentation Agent
and the Banks have agreed to certain amendments to the Credit Agreement, subject
to the terms and conditions hereof;
NOW, THEREFORE, for and in consideration of the above premises and other
good and valuable consideration, the receipt and sufficiency of which hereby is
acknowledged by the parties hereto, the Borrower, the Agent, the Documentation
Agent and the Banks hereby covenant and agree as follows:
1. Definitions. Unless otherwise specifically defined herein, each term
used herein which is defined in the Credit Agreement shall have the meaning
assigned to such term in the Credit Agreement. Each reference to "hereof",
"hereunder", "herein" and "hereby" and each other similar reference and each
reference to "this Agreement" and each other similar reference contained in the
Credit Agreement shall from and after the date hereof refer to the Credit
Agreement as amended hereby.
2. Amendments to Credit Agreement. The following definition contained in
Section 1.01 of the Credit Agreement is amended and restated in its entirety as
set forth below:
"Termination Date" means whichever is
applicable of (i) June 22, 2002, (ii) the date the
Commitments are terminated pursuant to Section
6.01 following the occurrence of an Event of
Default, or (iii) the date the Borrower terminates
the Commitments entirely pursuant to Section 2.08."
3. Restatement of Representations and Warranties. The Borrower hereby
restates and renews each and every representation and warranty heretofore made
by it in the Credit Agreement and the other Loan Documents as fully as if made
on the date hereof, except to the extent that any representation or warranty
related to an earlier specified date, and with specific reference to this
Amendment and all other loan documents executed and/or delivered in connection
herewith.
4. Effect of Amendment. Except as set forth expressly hereinabove, all
terms of the Credit Agreement and the other Loan Documents shall be and remain
in full force and effect, and shall constitute the legal, valid, binding and
enforceable obligations of the Borrower. The amendments contained herein shall
be deemed to have prospective application only, unless otherwise specifically
stated herein.
5. Ratification. The Borrower hereby restates, ratifies and reaffirms each
and every term, covenant and condition set forth in the Credit Agreement and the
other Loan Documents effective as of the date hereof.
6. Termsheet for New Credit Facility. Borrower and Agent each agree to
exercise their commercially-reasonable efforts to negotiate and agree on a
formal term sheet on or before April 28, 2002, which term sheet is anticipated
to provide for the terms and conditions of a credit facility which, at this
time, is contemplated to replace, amend and restate, or serve as a substitute
for, or a refinancing of, the credit facility provided for in the Credit
Agreement; provided, however, that (a) nothing contained herein shall obligate
Agent, for itself or as a Bank, the Documentation Agent, for itself or as a
Bank, any other Bank, or the Borrower to enter into any such facility or term
sheet; (b) neither Borrower nor any other party hereto is entitled to rely on
this paragraph as any commitment by any of the Agent, for itself or as a Bank,
the Documentation Agent, for itself or as a Bank, or any Bank to provide any
such facility; and (c) in no event shall this paragraph be deemed to constitute
any commitment made by any party hereto to enter into any such facility.
7. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed and delivered shall be deemed to be an original and all
of which counterparts, taken together, shall constitute but one and the same
instrument.
8. Section References. Section titles and references used in this Amendment
shall be without substantive meaning or content of any kind whatsoever and are
not a part of the agreements among the parties hereto evidenced hereby.
9. No Default. To induce the Agent, the Documentation Agent and the Banks
to enter into this Amendment and to continue to make advances pursuant to the
Credit Agreement, the Borrower hereby acknowledges and agrees that, as of the
date hereof, and after giving effect to the terms hereof, there exists (i)-no
Default or Event of Default and (ii)-no right of offset, defense, counterclaim,
claim or objection in favor of the Borrower arising out of or with respect to
any of the Loans or other obligations of the Borrower owed to the Banks under
the Credit Agreement.
10. Further Assurances. The Borrower agrees to take such further actions as
the Agent shall reasonably request in connection herewith to evidence the
amendments herein contained.
11. Governing Law. This Amendment shall be governed by and construed and
interpreted in accordance with, the laws of the State of Georgia.
12. Conditions Precedent. This Amendment shall become effective only upon
the execution and delivery of (i) this Amendment by each of the parties hereto,
and (ii) receipt by the Agent of an amendment fee in immediately available funds
in the amount of $12,500.00, which amendment fee shall be distributed by the
Agent to the Banks which execute this Amendment, pro rata based on their
respective proportionate share of all the Commitments. IN WITNESS WHEREOF, the
Borrower, the Agent, the Documentation Agent and each of the Banks has caused
this Amendment to be duly executed, under seal, by its duly authorized officer
as of the day and year first above written.
CULP,
INC.,
(SEAL)
as Borrower
By: ____________________________
Title:
WACHOVIA BANK, N.A.,
as Agent and as a
Bank
(SEAL)
By: ____________________________
Title:
FIRST UNION NATIONAL BANK,
as Documentation Agent and as a
Bank (SEAL)
By: ____________________________
Title:
SUNTRUST BANK,
as a Bank (SEAL)
By: ____________________________
Title: