================================================================================
UNITED STATES
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 31, 2004
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
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
---
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the latest practical date:
Common shares outstanding at October 31, 2004: 11,550,009
Par Value: $.05
================================================================================
INDEX TO FORM 10-Q
FOR THE PERIOD ENDED OCTOBER 31, 2004
PART I - FINANCIAL STATEMENTS. PAGE
- ----------------------------- -------
ITEM 1. UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
- ----------------------------------------------------------------
Consolidated Statements of Income (Loss)--Three and Six Months Ended October 31, 2004
and November 2, 2003 I-1
Consolidated Balance Sheets--October 31, 2004, November 2, 2003 and May 2, 2004 I-2
Consolidated Statements of Cash Flows--Three and Six Months Ended
October 31, 2004 and November 2, 2003 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS I-17
- ----------------------------------------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT I-26
MARKET RISK
- ----------------------------------------------------------------
ITEM 4. CONTROLS AND PROCEDURES I-26
- ----------------------------------------------------------------
PART II - OTHER INFORMATION
- ----------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 5. Other information II-1
Item 6. Exhibits and Reports on Form 8-K II-2
Signature II-3
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
----------------------------------------------------------
Amounts Percent of Sales
--------------------- ----------------------
October 31, November 2, % Over October 31, November 2,
2004 2003 (Under) 2004 2003
---------- --------- --------- --------- ----------
Net sales $ 75,406 82,731 (8.9)% 100.0 % 100.0 %
Cost of sales 65,839 65,993 (0.2)% 87.3 % 79.8 %
---------- --------- --------- --------- ----------
Gross profit 9,567 16,738 (42.8)% 12.7 % 20.2 %
Selling, general and
administrative expenses 8,838 10,296 (14.2)% 11.7 % 12.4 %
Goodwill impairment 5,126 0 100.0 % 6.8 % 0.0 %
Restructuring expense 1,292 0 100.0 % 1.7 % 0.0 %
---------- --------- --------- --------- ----------
Income (loss) from operations (5,689) 6,442 (188.3)% (7.5)% 7.8 %
Interest expense 937 1,509 (37.9)% 1.2 % 1.8 %
Interest income (29) (121) (76.0)% (0.0)% (0.1)%
Other expense 173 62 179.0 % 0.2 % 0.1 %
----------- --------- --------- --------- ----------
Income (loss) before income taxes (6,770) 4,992 (235.6)% (9.0)% 6.0 %
Income taxes * (2,577) 1,846 (239.6)% 38.1 % 37.0 %
----------- --------- --------- --------- ----------
Net income (loss) $ (4,193) 3,146 (233.3)% (5.6)% 3.8 %
=========== ========= ========= --------- ----------
Net income (loss) per share, basic $ (0.36) 0.27 (233.3)%
Net income (loss) per share, diluted $ (0.36) 0.27 (233.3)%
Average shares outstanding, basic 11,549 11,524 0.2 %
Average shares outstanding, diluted 11,549 11,774 (1.9)%
SIX MONTHS ENDED
----------------------------------------------------------
Amounts Percent of Sales
--------------------- ----------------------
October 31, November 2, % Over October 31, November 2,
2004 2003 (Under) 2004 2003
---------- --------- --------- --------- ---------
Net sales $ 143,255 156,407 (8.4)% 100.0 % 100.0 %
Cost of sales 125,013 128,191 (2.5)% 87.3 % 82.0 %
---------- --------- --------- --------- ---------
Gross profit 18,242 28,216 (35.3)% 12.7 % 18.0 %
Selling, general and
administrative expenses 18,118 20,812 (12.9)% 12.6 % 13.3 %
Goodwill impairment 5,126 0 100.0 % 3.6 % 0.0 %
Restructuring expense 1,154 0 100.0 % 0.8 % 0.0 %
---------- --------- --------- --------- ---------
Income (loss) from operations (6,156) 7,404 (183.1)% (4.3)% 4.7 %
Interest expense 1,877 3,006 (37.6)% 1.3 % 1.9 %
Interest income (56) (243) (77.0)% (0.0)% (0.2)%
Other expense 387 301 28.6 % 0.3 % 0.2 %
---------- --------- --------- --------- ---------
Income (loss) before income taxes (8,364) 4,340 (292.7)% (5.8)% 2.8 %
Income taxes * (3,119) 1,605 (294.3)% 37.3 % 37.0 %
---------- --------- --------- -------- ----------
Net income (loss) $ (5,245) 2,735 (291.8)% (3.7)% 1.7 %
========== ========= ========== -------- ----------
Net income (loss) per share, basic $ (0.45) 0.24 (287.5)%
Net income (loss) per share, diluted $ (0.45) 0.23 (295.7)%
Average shares outstanding, basic 11,548 11,519 0.3 %
Average shares outstanding, diluted 11,548 11,718 (1.5)%
*Percent of sales column for income taxes is calculated as a % of income (loss) before income taxes.
See accompanying notes to consolidated financial statements.
I-1
CULP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2004, NOVEMBER 2, 2003, AND MAY 2, 2004
UNAUDITED
(Amounts in Thousands)
Amount Increase
----------------------------- (Decrease)
October 31, November 2, ------------------------ * May 2,
2004 2003 Dollars Percent 2004
---------------- ----------- ----------- --------- ---------
Current assets:
Cash and cash equivalents $ 16,505 16,623 (118) (0.7)% 14,568
Short-term investments 0 15,134 (15,134) (100.0)% 0
Accounts receivable 26,590 31,342 (4,752) (15.2)% 30,719
Inventories 48,528 53,848 (5,320) (9.9)% 49,045
Deferred income taxes 4,980 12,303 (7,323) (59.5)% 9,256
Other current assets 3,100 3,211 (111) (3.5)% 1,634
---------------- ----------- ------------ --------- ---------
Total current assets 99,703 132,461 (32,758) (24.7)% 105,222
Property, plant & equipment, net 76,062 81,219 (5,157) (6.3)% 77,770
Goodwill 4,114 9,240 (5,126) (55.5)% 9,240
Deferred income taxes 834 0 834 100.0 % 0
Other assets 1,327 1,892 (565) (29.9)% 1,496
---------------- ----------- ------------ --------- ---------
Total assets $ 182,040 224,812 (42,772) (19.0)% 193,728
================= =========== ============ ========= =========
Current liabilities:
Current maturities of
long-term debt $ 594 539 55 10.2 % 528
Accounts payable 15,192 23,928 (8,736) (36.5)% 15,323
Accrued expenses 11,962 13,522 (1,560) (11.5)% 13,028
Accrued restructuring costs 5,458 6,712 (1,254) (18.7)% 4,968
Income taxes payable 0 1,578 (1,578) 100.0 % 1,850
----------------- ----------- ------------ --------- ---------
Total current
liabilities 33,206 46,279 (13,073) (28.2)% 35,697
Long-term debt, less current
maturities 50,569 76,077 (25,508) (33.5)% 50,502
Deferred income taxes 0 3,851 (3,851) (100.0)% 4,138
---------------- ----------- ------------ --------- ---------
Total liabilities 83,775 126,207 (42,432) (33.6)% 90,337
Shareholders' equity 98,265 98,605 (340) (0.3)% 103,391
---------------- ----------- ------------ --------- ---------
Total liabilities and
shareholders'
equity $ 182,040 224,812 (42,772) (19.0)% 193,728
================= =========== ============ ========= =========
Shares outstanding 11,550 11,529 21 0.2 % 11,547
================ =========== ============ ========= =========
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-2
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003
UNAUDITED
(Amounts in Thousands)
Six Months Ended
---------------------------
Amounts
---------------------------
October 31, November 2,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (5,245) 2,735
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 6,900 6,883
Amortization of other assets 70 91
Stock-based compensation 104 105
Goodwill impairment 5,126 0
Deferred income taxes (696) 0
Restructuring expense 1,154 0
Changes in assets and liabilities:
Accounts receivable 4,129 917
Inventories 517 (4,296)
Other current assets (1,466) (7)
Other assets 153 252
Accounts payable 1,228 5,121
Accrued expenses (1,066) (549)
Accrued restructuring (440) (1,031)
Income taxes payable (1,850) 1,229
------------ ------------
Net cash provided by operating activities 8,618 11,450
------------ ------------
Cash flows from investing activities:
Capital expenditures (5,556) (2,954)
Purchases of short-term investments 0 (5,147)
------------ ------------
Net cash used in investing activities (5,556) (8,101)
------------ ------------
Cash flows from financing activities:
Payments on vendor-financed capital expenditures (1,273) (1,254)
Proceeds from issuance of long-term debt 133 116
Proceeds from common stock issued 15 57
------------ ------------
Net cash used in financing activities (1,125) (1,081)
------------ ------------
Increase in cash and cash equivalents 1,937 2,268
Cash and cash equivalents at beginning of period 14,568 14,355
------------ ------------
Cash and cash equivalents at end of period $ 16,505 16,623
============ ============
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNAUDITED
(Dollars in thousands, except share data)
Capital
Common Stock Contributed Total
------------------------ in Excess Unearned Retained Shareholders'
Shares Amount of Par Value Compensation Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
Balance, April 27, 2003 11,515,459 $ 576 39,749 (559) 55,999 $ 95,765
- -------------------------------------------------------------------------------------------------------------------
Net income 7,220 7,220
Stock-based compensation 210 210
Common stock issued in connection
with stock option plans 31,175 2 194 196
- -------------------------------------------------------------------------------------------------------------------
Balance, May 2, 2004 11,546,634 $ 578 39,943 (349) 63,219 $ 103,391
- -------------------------------------------------------------------------------------------------------------------
Net loss (5,245) (5,245)
Stock-based compensation 104 104
Common stock issued in connection
with stock option plans 3,375 0 15 15
- -------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2004 11,550,009 $ 578 39,958 (245) 57,974 $ 98,265
===================================================================================================================
See accompanying notes to consolidated financial statements.
I-4
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Culp, Inc.
and subsidiaries (the "company") 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 notes 9 and 13 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 16, 2004 for the fiscal year
ended May 2, 2004. Certain items in the fiscal 2004 consolidated financial
statements have been reclassified to conform with the current presentation.
================================================================================
The company's six months ended October 31, 2004 and November 2, 2003
represent 26 and 27 week periods, respectively.
2. STOCK-BASED COMPENSATION
Compensation costs related to employee stock option plans are recognized
utilizing the intrinsic value-based method prescribed by APB No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. The company has
adopted the disclosure requirements of SFAS No. 123, ACCOUNTING FOR STOCK- BASED
COMPENSATION, as amended by SFAS No. 148. Accordingly, compensation cost is
recorded over the vesting period of the options based upon the difference in
option price and fair market price at the date of grant, if any.
The following table illustrates the effect on net income (loss) and
income (loss) per share if the company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148, for the three months
ended October 31, 2004 and November 2, 2003.
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ (4,193) $ 3,146
Add: Total stock-based employeecompensation expense
included in net income, net of tax 32 33
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax (155) (145)
- -------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ (4,316) $ 3,034
- -------------------------------------------------------------------------------------------------------------------
Income (loss) per share:
Basic - as reported $ (0.36) $ 0.27
Basic - pro forma (0.37) 0.26
Diluted - as reported (0.36) 0.27
Diluted - pro forma (0.37) 0.26
- -------------------------------------------------------------------------------------------------------------------
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table illustrates the effect on net income (loss) and income
(loss) per share if the company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148, for the six months ended
October 31, 2004 and November 2, 2003.
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ (5,245) $ 2,735
Add: Total stock-based employee compensation expense
included in net income, net of tax 67 66
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of tax (277) (240)
- -------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ (5,455) $ 2,561
- -------------------------------------------------------------------------------------------------------------------
Income (loss) per share:
Basic - as reported $ (0.45) $ 0.24
Basic - pro forma (0.47) 0.22
Diluted - as reported (0.45) 0.23
Diluted - pro forma (0.47) 0.22
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 May 2, 2004
- -------------------------------------------------------------------------------------------------------------------
Customers $ 28,579 $ 33,064
Allowance for doubtful accounts (1,119) (1,442)
Reserve for returns and allowances (870) (903)
- -------------------------------------------------------------------------------------------------------------------
$ 26,590 $ 30,719
- -------------------------------------------------------------------------------------------------------------------
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of the activity in the allowance for doubtful accounts follows:
Six months ended
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Beginning balance $ (1,442) $ (1,558)
Provision for bad debt expense 282 (162)
Net write-offs 41 134
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ (1,119) $ (1,586)
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
4. INVENTORIES
Inventories are carried at the lower of cost or market. Cost is
determined using the FIFO (first-in, first-out) method.
A summary of inventories follows:
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 May 2, 2004
- -------------------------------------------------------------------------------------------------------------------
Raw materials $ 22,125 $ 21,015
Work-in-process 2,927 2,489
Finished goods 23,476 25,541
- -------------------------------------------------------------------------------------------------------------------
$ 48,528 $ 49,045
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
5. ACCOUNTS PAYABLE
A summary of accounts payable follows:
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 May 2, 2004
- -------------------------------------------------------------------------------------------------------------------
Accounts payable-trade $ 14,666 $ 13,438
Accounts payable-capital expenditures 526 1,885
- -------------------------------------------------------------------------------------------------------------------
$ 15,192 $ 15,323
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
I-7
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. ACCRUED EXPENSES
A summary of accrued expenses follows:
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 May 2, 2004
- -------------------------------------------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 6,353 $ 8,040
Interest 448 459
Accrued rebates 2,485 2,258
Other 2,676 2,271
- -------------------------------------------------------------------------------------------------------------------
$ 11,962 $ 13,028
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
7. LONG-TERM DEBT
A summary of long-term debt follows:
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) October 31, 2004 May 2, 2004
- -------------------------------------------------------------------------------------------------------------------
Unsecured term notes $ 49,975 $ 49,975
Canadian government loan 1,188 1,055
- -------------------------------------------------------------------------------------------------------------------
51,163 51,030
Less current maturities (594) (528)
- -------------------------------------------------------------------------------------------------------------------
$ 50,569 $ 50,502
- -------------------------------------------------------------------------------------------------------------------
In December 2004, the company amended its agreement with its bank to
provide for a reduced revolving loan commitment of $10.0 million from an
existing commitment of $15.0 million, including letters of credit up to $2.5
million. Borrowings under the facility generally carry interest at the London
Interbank Offered Rate plus an adjustable margin based upon the company's
debt/EBITDA ratio, as defined by the agreement. As of October 31, 2004, there
were $399,000 in outstanding letters of credit in support of inventory purchases
and no borrowings outstanding under the agreement. The credit facility expires
August 2005.
The unsecured term notes are payable over an average remaining term of
five years beginning March 2006 through March 2010. Interest is payable
semi-annually at a fixed coupon rate of 7.76%.
The company's loan agreements require, among other things, that the
company maintain compliance with certain financial ratios. At October 31, 2004,
the company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next
five fiscal years are: 2005 - $594,000; 2006 - $8,129,000; 2007 - $7,535,000;
2008 - $19,835,000; and 2009 - $7,535,000.
I-8
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. CASH FLOW INFORMATION
Payments for interest and income taxes follow:
Six months ended
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Interest $ 1,989 $ 3,021
Income taxes 831 343
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
The non-cash portion of capital expenditures representing vendor
financing totaled $5,000 and $243,000 for the six months ended October 31, 2004
and November 2, 2003, respectively.
===============================================================================
9. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
A summary of accrued restructuring follows:
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 May 2, 2004
- -------------------------------------------------------------------------------------------------------------------
Fiscal 2005 Upholstery Fabrics $ 1,305 $ 0
Fiscal 2003 CDF 4,133 4,834
Wet Printed Flock 0 100
Fiscal 2001 CDF 20 34
- -------------------------------------------------------------------------------------------------------------------
$ 5,458 $ 4,968
- -------------------------------------------------------------------------------------------------------------------
FISCAL 2005 UPHOLSTERY FABRICS
In October 2004, management approved a restructuring plan within the
upholstery fabrics segment aimed at reducing costs, increasing asset utilization
and improving profitability. Due to continued pressure on demand in this
segment, management decided to further adjust the company's cost structure and
bring U.S. manufacturing capacity in line with current and expected demand. The
restructuring plan principally involves consolidation of the company's
decorative fabrics weaving operations by closing Culp's facility in Pageland,
South Carolina, and consolidating those operations into the Graham, North
Carolina facility. Additionally, the company will be consolidating its yarn
operations by integrating the production of the Cherryville, North Carolina
plant into the company's Shelby, North Carolina facility. Another element of the
restructuring plan is a substantial reduction in certain raw material and
finished goods stock keeping units, or SKUs, to reduce manufacturing
complexities and lower costs, with the ongoing objective of identifying and
eliminating products that are not generating acceptable volumes or margins.
Finally, the company is making reductions in selling, general and administrative
expenses. Overall, these restructuring actions will reduce the number of
associates by approximately 250 people, representing approximately 14 percent of
those in Culp's upholstery fabrics segment. The implementation of these
restructuring initiatives began in the second quarter and is expected to be
completed by May 1, 2005, the end of the current fiscal year. The company
expects the restructuring actions to result in total pre-tax charges of
approximately $20 million ($13 million on an after-tax basis). Approximately $15
million of the pre-tax amount is expected to be non-cash items, including $5.1
million for goodwill impairment (See note 13). Of the total charges expected,
$7.8 million ($4.9 million, net of taxes, or $0.42 per diluted share) was
incurred in the second quarter. The remaining charges are expected to be
recorded in the third and fourth quarters of fiscal 2005, as incurred.
I-9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The $7.8 million in charges incurred during the second quarter
consists of the following: (1) $5.1 million of goodwill impairment, which
represents all of the remaining goodwill associated with the upholstery fabrics
segment; (2) $1.6 million in restructuring expenses related to the Culp
Decorative Fabrics (CDF) and Culp Velvets/Prints (CVP) divisions, which includes
approximately $1.3 million in employee termination costs and approximately
$278,000 in write-downs of equipment; and (3) $1.1 million of restructuring
related costs for the CDF division, which include inventory mark-downs and
accelerated depreciation associated with plant and equipment scheduled to be
disposed of, either by sale or by abandonment, over the next six months. As
reflected in the consolidated financial statements, restructuring and related
expenses were recorded as $1.6 million in the line item "restructuring expense"
and $1.1 million in "cost of sales."
The balance of $1.3 million in accrued restructuring represents the
employee termination benefits incurred during the second quarter of fiscal 2005.
FISCAL 2003 CDF RESTRUCTURING
In August 2002, management approved a restructuring plan within the Culp
Decorative Fabrics division aimed at lowering manufacturing costs, simplifying
the dobby fabric upholstery line, increasing asset utilization and enhancing the
division's manufacturing competitiveness. The restructuring plan principally
involved (1) consolidation of the division's weaving, finishing, yarn making and
distribution operations by closing the facility in Chattanooga, Tennessee and
integrating these functions into other plants, (2) a significant reduction in
the number of stock keeping units (SKUs) offered in the dobby product line and
(3) a net reduction in workforce of approximately 300 positions.
During the second quarter of fiscal 2005, the accrual was reduced
$114,000 in employee termination benefits to reflect the current estimates of
future health care claims and reduced $165,000 in lease termination and other
exit costs to reflect current estimates of sub-lease income. The total of these
adjustments was $279,000, or approximately $176,000 net of tax, or $0.01 per
share diluted.
The following summarizes the fiscal 2005 activity in the restructuring
accrual:
- -------------------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(Dollars in Thousands) Benefits Other Exit Costs Total
- -------------------------------------------------------------------------------------------------------------------
Balance, May 2, 2004 $ 500 4,334 4,834
Adjustments in fiscal 2005 (114) (165) (279)
Paid in fiscal 2005 (58) (364) (422)
- -------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2004 $ 328 3,805 4,133
- -------------------------------------------------------------------------------------------------------------------
I-10
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
WET PRINTED FLOCK RESTRUCTURING
During the first quarter of fiscal 2005, assets held for sale consisting
of land and a building valued at $180,000 in the other assets line of the May 2,
2004 Consolidated Balance Sheet were sold, resulting in a restructuring credit
of $54,000. An additional restructuring credit of $84,000 was recognized
relating to the write-off of the remaining reserve balance, which consisted of
building related exit costs.
The following summarizes the fiscal 2005 activity in the CVP
restructuring accrual:
- -------------------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(Dollars in Thousands) Benefits Other Exit Costs Total
- -------------------------------------------------------------------------------------------------------------------
Balance, May 2, 2004 $ 0 100 100
Adjustments in fiscal 2005 0 (84) (84)
Paid in fiscal 2005 0 (16) (16)
- -------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2004 $ 0 0 0
- -------------------------------------------------------------------------------------------------------------------
FISCAL 2001 CDF RESTRUCTURING
During the second quarter of fiscal 2005, the reserve was reduced
$12,000 to reflect current estimates of future health care claims.
The following summarizes the fiscal 2005 activity in the CDF
restructuring accrual:
- -------------------------------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(Dollars in Thousands) Benefits Other Exit Costs Total
- -------------------------------------------------------------------------------------------------------------------
Balance, May 2, 2004 $ 34 0 34
Adjustments in fiscal 2005 (12) 0 (12)
Paid in fiscal 2005 (2) 0 (2)
- -------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2004 $ 20 0 20
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
I-11
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. 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) follows:
- -------------------------------------------------------------------------------------------------------------------
Three months ended
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (4,193) $ 3,146
Unrealized gain in fair value of short-term investments 0 9
- -------------------------------------------------------------------------------------------------------------------
Net comprehensive Income (loss) $ (4,193) $ 3,155
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Six months ended
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Net Income (loss) $ (5,245) $ 2,735
Unrealized loss in fair value of short-term investments 0 (57)
- -------------------------------------------------------------------------------------------------------------------
Net comprehensive loss $ (5,245) $ 2,678
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
11. INCOME (LOSS) PER SHARE
Basic income (loss) per share is computed using the weighted-average
number of shares outstanding during the period. Diluted income per share uses
the weighted-average number of shares outstanding during the period plus the
dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted income
(loss) per share follows:
Three months ended
- -------------------------------------------------------------------------------------------------------------------
(amounts in thousands) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,549 11,524
Effect of dilutive stock options 0 250
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,549 11,774
Options to purchase 409,750 shares and 326,625 shares of common stock
were not included in the computation of diluted loss per share for the three
months ended October 31, 2004 and November 2, 2003, respectively, because the
exercise price of the options was greater than the average market price of the
common shares.
Options to purchase 172,956 shares of common stock were not included in
the computation of diluted net loss per share for the three months ended October
31, 2004 because the company incurred a net loss for the period.
===============================================================================
I-12
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six months ended
- -------------------------------------------------------------------------------------------------------------------
(amounts in thousands) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,548 11,519
Effect of dilutive stock options 0 199
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,548 11,718
Options to purchase 423,438 shares and 462,412 shares of common stock
were not included in the computation of diluted loss per share for the six
months ended October 31, 2004 and November 2, 2003, respectively, because the
exercise price of the options was greater than the average market price of the
common shares.
Options to purchase 176,621 shares of common stock were not included in
the computation of diluted net loss per share for the six months ended October
31, 2004 because the company incurred a net loss for the period.
===============================================================================
12. SEGMENT INFORMATION
The company's operations are classified into two segments: mattress
fabrics and upholstery fabrics. The mattress fabrics segment principally
manufactures and sells fabrics to bedding manufacturers. The upholstery fabrics
segment principally manufactures and sells fabrics primarily to residential and
commercial (contract) furniture manufacturers. The upholstery fabrics segment
consists of two divisions: Culp Decorative Fabrics and Culp Velvets/Prints.
Since these divisions have similar products, manufacturing processes, customers,
methods of distribution and economic characteristics, they are aggregated for
segment reporting purposes.
Effective May 3, 2004, the company began evaluating the operating
performance of its segments based upon income (loss) from operations before
restructuring and related charges or credits and certain unallocated corporate
expenses. Previously, the company evaluated operating segment performance based
upon gross profit. Operating income (loss) for the prior period and gross profit
for both periods by segment is presented for comparative purposes. Unallocated
corporate expenses represent primarily compensation and benefits for certain
executive officers and all costs related to being a public company. Segment
assets include assets used in the operation of each segment and consist of
accounts receivable, inventories, and property, plant and equipment. The company
no longer allocates goodwill to its operating segments for the purposes of
evaluating operating performance.
Financial information for the company's operating segments follow:
Three months ended
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 26,886 $ 26,788
Upholstery Fabrics 48,520 55,943
- -------------------------------------------------------------------------------------------------------------------
$ 75,406 $ 82,731
- -------------------------------------------------------------------------------------------------------------------
I-13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Three months ended
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 4,461 $ 6,329
Upholstery Fabrics 6,230 10,409
Restructuring related charges (1,124)(1) 0
- -------------------------------------------------------------------------------------------------------------------
$ 9,567 $ 16,738
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 2,676 $ 4,247
Upholstery Fabrics 216 3,452
Unallocated corporate expenses (1,039) (1,257)
Goodwill impairment (5,126)(2) 0
Restructuring and related charges (2,416)(3) 0
- -------------------------------------------------------------------------------------------------------------------
$ (5,689) $ 6,442
- -------------------------------------------------------------------------------------------------------------------
(1) Restructuring related charges represent inventory markdowns and accelerated
depreciation associated with plant and equipment scheduled to be disposed
of, either by sale or abandonment, over the next six months and are
included in the cost of sales line item in the Consolidated Statements of
Income (Loss). These charges are related to the Upholstery Fabrics segment.
(2) The goodwill impairment was the result of an evaluation of all of the
remaining goodwill associated with the upholstery fabrics segment.
(3) Restructuring and related charges represent the $1.1 million in related
charges for inventory markdowns and accelerated depreciation and $1.3
million in restructuring charges for fixed asset write-downs and employee
termination benefits (see note 9). Restructuring charges are included in
the restructuring expense line item in the Consolidated Statements of
Income (Loss). These charges are related to the Upholstery Fabrics segment.
Six months ended
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 52,839 $ 54,008
Upholstery Fabrics 90,416 102,399
- -------------------------------------------------------------------------------------------------------------------
$ 143,255 $ 156,407
- -------------------------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 9,255 $ 12,401
Upholstery Fabrics 10,186 15,815
Restructuring related charges (1,199)(4) 0
- -------------------------------------------------------------------------------------------------------------------
$ 18,242 $ 28,216
- -------------------------------------------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 5,575 $ 8,391
Upholstery Fabrics (2,403) 1,733
Unallocated corporate expenses (1,849) (2,720)
Goodwill impairment (5,126)(2) 0
Restructuring and related charges (2,353)(5) 0
- -------------------------------------------------------------------------------------------------------------------
$ (6,156) $ 7,404
- -------------------------------------------------------------------------------------------------------------------
I-14
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) Restructuring related charges primarily represent inventory markdowns and
accelerated depreciation associated with plant and equipment scheduled to
be disposed of, either by sale or abandonment, over the next six months and
are included in the cost of sales line item in the Consolidated Statements
of Income (Loss). These charges are related to the Upholstery Fabrics
segment.
(5) Restructuring and related charges primarily represent the $1.2 million in
related charges for inventory markdowns and accelerated depreciation and
$1.2 million in restructuring charges for fixed asset write-downs and
employee termination benefits (see note 9). Restructuring charges are
included in the restructuring expense line item in the Consolidated
Statements of Income (Loss). These charges are related to the Upholstery
Fabrics segment.
Balance sheet information for the company's operating segments follow:
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) October 31, 2004 May 2, 2004
- -------------------------------------------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics $ 45,546 $ 47,691
Upholstery Fabrics 101,322 109,843
- -------------------------------------------------------------------------------------------------------------------
Total segment assets 146,868 157,534
Non-segment assets:
Cash and cash equivalents 16,505 14,568
Deferred income taxes 5,814 9,256
Other current assets 3,100 1,634
Property, plant & equipment 4,312 0
Goodwill 4,114 9,240
Other assets 1,327 1,496
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 182,040 $ 193,728
- -------------------------------------------------------------------------------------------------------------------
Three months ended
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 300 $ 217
Upholstery Fabrics 240 1,210
Unallocated corporate (7) 468 0
- -------------------------------------------------------------------------------------------------------------------
$ 1,008 $ 1,427
- -------------------------------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 915(6) $ 942
Upholstery Fabrics 2,408(6) 2,497
Unallocated Corporate 0 0
- -------------------------------------------------------------------------------------------------------------------
$ 3,323 $ 3,439
- -------------------------------------------------------------------------------------------------------------------
I-15
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6) Excludes accelerated depreciation of approximately $215,000 associated with
plant and equipment scheduled to be disposed of over the next six months
Six months ended
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) October 31, 2004 November 2, 2003
- -------------------------------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 730 $ 283
Upholstery Fabrics 477 2,984
Unallocated corporate 4,343(7) 0
- -------------------------------------------------------------------------------------------------------------------
$ 5,550 $ 3,267
- -------------------------------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 1,831(6) $ 1,887
Upholstery Fabrics 4,854(6) 4,996
Unallocated Corporate 0 0
- -------------------------------------------------------------------------------------------------------------------
$ 6,685 $ 6,883
- -------------------------------------------------------------------------------------------------------------------
(7) Unallocated corporate capital expenditures for fiscal 2005 represent
primarily capital spending for the new corporate office building.
===============================================================================
13. GOODWILL IMPAIRMENT
Due to the continued pressure on demand in the upholstery fabrics segment,
operating profits and cash flows were lower than expected for the second quarter
and year to date for fiscal 2005. As a result, management determined that the
goodwill associated with the segment should be tested for impairment in
accordance with the provisions of FAS 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
An independent business valuation specialist was engaged to assist the company
in the determination of the fair market value of the upholstery fabrics segment.
The fair value as determined using several different methods, including
comparable companies, comparable transactions and discounted cash flow analysis
was less than the carrying value. Accordingly, the company recorded a goodwill
impairment charge of $5.1 million ($3.2 million net of taxes of $1.9 million),
or $0.28 per share diluted, related to the goodwill associated with the
upholstery fabrics segment. After the goodwill impairment charge, the company's
remaining goodwill of $4.1 million relates to the mattress fabrics segment.
================================================================================
I-16
ITEM 2.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This Report and the exhibits attached hereto contain statements
that may be deemed "forward-looking statements" within the meaning of the
federal securities laws, including the Private Securities Litigation Reform Act
of 1995 (Section 27A of the Securities Act of 1933 and Section 27A of the
Securities and Exchange Act of 1934). Such statements are inherently subject to
risks and uncertainties. Further, forward-looking statements are intended to
speak only as of the date on which they are made. Forward-looking statements are
statements that include projections, expectations or beliefs about future events
or results or otherwise are not statements of historical fact. Such statements
are often but not always characterized by qualifying words such as "expect,"
"believe," "estimate," "plan" and "project" and their derivatives, and include
but are not limited to statements about the company's future operations,
production levels, sales, SG&A or other expenses, margins, gross profit,
operating income, earnings or other performance measures. Factors that could
influence the matters discussed in such statements include the level of housing
starts and sales of existing homes, consumer confidence, trends in disposable
income, and general economic conditions. Decreases in these economic indicators
could have a negative effect on the company's business and prospects. Likewise,
increases in interest rates, particularly home mortgage rates, and increases in
consumer debt or the general rate of inflation, could affect the company
adversely. In addition, 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. Also, economic and political
instability in international areas could affect the company's operations or
sources of goods in those areas, as well as demand for the company's products in
international markets. Finally, unanticipated delays or costs in executing
restructuring actions could cause the cumulative effect of restructuring actions
to fail to meet the objectives set forth by management. Other factors that could
affect the matters discussed in forward looking statements are included in the
company's periodic reports filed with the Securities and Exchange Commission.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following analysis of 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, Inc., which we sometimes refer to as the company,
manufactures and markets mattress fabrics (known as mattress ticking and used
for covering mattresses and box springs) and upholstery fabrics primarily for
use in furniture manufacturing (residential and commercial). The company's
executive offices are located in High Point, North Carolina. The company was
organized as a North Carolina corporation in 1972 and made its initial public
offering in 1983. Since 1997, the company has been listed on the New York Stock
Exchange and traded under the symbol "CFI."
Management believes that Culp is one of the two largest producers of mattress
fabrics in North America, as measured by total sales, and one of the three
largest marketers of upholstery fabrics for furniture in North America, again
measured by total sales. The company's fabrics are used primarily in the
production of bedding products and residential and commercial upholstered
furniture, including sofas, recliners, chairs, loveseats, 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 "good" and
"better" priced categories of furniture and bedding.
I-17
The company's fiscal year is the 52 or 53 week period ending on the Sunday
closest to April 30. The year-to-date period for fiscal 2005 included 26 weeks
versus 27 weeks for the same period of fiscal 2004. The company's operating
segments are mattress fabrics and upholstery fabrics, with related divisions
organized within those segments. In mattress fabrics, Culp Home Fashions markets
a broad array of fabrics used by bedding manufacturers. In upholstery fabrics,
Culp Decorative Fabrics markets jacquard and dobby woven fabrics for residential
and commercial furniture and yarn for use primarily by the company, with some
outside sales. Culp Velvets/Prints markets velvet, printed fabrics and
microdenier suedes used primarily for residential furniture.
Effective May 3, 2004, the company began allocating selling, general and
administrative expenses to its operating segments and began evaluating the
operating performance of its segments based upon income (loss) from operations
before restructuring and related charges or credits and certain unallocated
corporate expenses. Previously, the company evaluated operating segment
performance based upon gross profit. Operating income (loss) for the prior
period and gross profit for both periods by segment is presented for comparative
purposes. Unallocated corporate expenses represent primarily compensation and
benefits for certain executive officers and all costs related to being a public
company. Segment assets include assets used in the operation of each segment and
consist of accounts receivable, inventories, and property, plant and equipment.
The company no longer allocates goodwill to its operating segments for the
purposes of evaluating operating performance.
The following tables set forth the company's sales, gross profit and operating
income (loss) by segment/division for the three and six months ended October 31,
2004 and November 2, 2003.
I-18
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT/DIVISION
FOR THE THREE MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------
Amounts Percent of Total Sales
----------------------- --------------------------
October 31, November 2, % Over October 31, November 2,
Net Sales by Segment 2004 2003 (Under) 2004 2003
- ----------------------------------- ----------- ---------- ---------- ------------ ------------
Mattress Fabrics
Culp Home Fashions $ 26,886 26,788 0.4 % 35.7 % 32.4 %
----------- ---------- ---------- ------------ ------------
Upholstery Fabrics
Culp Decorative Fabrics 27,278 32,459 (16.0)% 36.2 % 39.2 %
Culp Velvets/Prints 21,242 23,484 (9.5)% 28.2 % 28.4 %
----------- ---------- ---------- ------------ ------------
48,520 55,943 (13.3)% 64.3 % 67.6 %
----------- ---------- ---------- ------------ ------------
Net Sales $ 75,406 82,731 (8.9)% 100.0 % 100.0 %
=========== ========== ========== ============ ============
Gross Profit by Segment Gross Profit Margin
- ----------------------------------- --------------------------
Mattress Fabrics $ 4,461 6,329 (29.5)% 16.6 % 23.6 %
Upholstery Fabrics 6,230 10,409 (40.1)% 12.8 % 18.6 %
Restructuring related charges (1) (1,124) 0 100.0 % (2.3)% 0.0 %
----------- ---------- ---------- ------------ ------------
Gross Profit $ 9,567 16,738 (42.8)% 12.7 % 20.2 %
=========== ========== ========== ============ ============
Operating Income (loss) by Segment Operating Income (Loss) Margin
- ----------------------------------- -------------------------------
Mattress Fabrics $ 2,676 4,247 (37.0)% 10.0 % 15.9 %
Upholstery Fabrics 216 3,452 (93.7)% 0.4 % 6.2 %
Unallocated corporate expenses (1,039) (1,257) (17.3)% (1.4)% (1.5)%
Goodwill impairment (5,126) 0 (100.0)% (6.8)% 0.0 %
Restructuring and related charges
and credits(1) (2,416) 0 (100.0)% (5.0)% 0.0 %
----------- ---------- ---------- ------------ ------------
Operating income (loss) $ (5,689) 6,442 (188.3)% (7.5)% 7.8 %
=========== ========== ========== ============ ============
Depreciation by Segment
- ----------------------------------
Mattress Fabrics $ 915(2) 942 (2.9)%
Upholstery Fabrics 2,408(2) 2,497 (3.6)%
----------- ---------- ----------
Total Depreciation $ 3,323 3,439 (3.4)%
=========== ========== ==========
(1) The $1.1 million represents restructuring related charges for inventory
markdowns and accelerated depreciation. The $2.4 million represents the
$1.1 million restructuring related charges plus $1.3 million in
restructuring charges for fixed asset write-downs and accrued termination
benefits. All of these charges relate to the upholstery fabrics segment.
(2) Excludes accelerated depreciation of approximately $215,000 associated with
plant and equipment scheduled to be disposed of over the next six months.
I-19
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT/DIVISION
FOR THE SIX MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003
(Amounts in thousands)
SIX MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------
Amounts Percent of Total Sales
----------------------- --------------------------
October 31, November 2, % Over October 31, November 2,
Net Sales by Segment 2004 2003 (Under) 2004 2003
- ---------------------------------- ----------- ---------- ---------- ------------ ------------
Mattress Fabrics
Culp Home Fashions $ 52,839 54,008 (2.2)% 36.9 % 34.5 %
----------- ---------- ---------- ------------ ------------
Upholstery Fabrics
Culp Decorative Fabrics 51,197 62,076 (17.5)% 35.7 % 39.7 %
Culp Velvets/Prints 39,219 40,323 (2.7)% 27.4 % 25.8 %
----------- ---------- ---------- ------------ ------------
90,416 102,399 (11.7)% 63.1 % 65.5 %
----------- ---------- ---------- ------------ ------------
Net Sales $ 143,255 156,407 (8.4)% 100.0 % 100.0 %
=========== ========== ========== ============ ============
Gross Profit by Segment Gross Profit Margin
- ---------------------------------- --------------------------
Mattress Fabrics $ 9,255 12,401 (25.4)% 17.5 % 23.0 %
Upholstery Fabrics 10,186 15,815 (35.6)% 11.3 % 15.4 %
Restructuring related charges (1) (1,199) 0 100.0 % (1.3)% 0.0 %
----------- ---------- ---------- ------------ ------------
Gross Profit $ 18,242 28,216 (35.3)% 12.7 % 18.0 %
=========== ========== ========== ============ ============
Operating Income (loss) by Segment Operating Income (Loss) Margin
- ---------------------------------- -------------------------------
Mattress Fabrics $ 5,575 8,391 (33.6)% 10.6 % 15.5 %
Upholstery Fabrics (2,403) 1,733 (238.7)% (2.7)% 1.7 %
Unallocated corporate expenses (1,849) (2,720) (32.0)% (1.3)% (1.7)%
Goodwill impairment (5,126) 0 (100.0)% (3.6)% 0.0 %
Restructuring and related charges and
credits(1) (2,353) 0 (100.0)% (2.6)% 0.0 %
----------- ---------- ---------- ------------ ------------
Operating income (loss) $ (6,156) 7,404 (183.1)% (4.3)% 4.7 %
=========== ========== ========== ============ ============
Depreciation by Segment
- ----------------------------------
Mattress Fabrics $ 1,844(2) 1,886 (2.2)%
Upholstery Fabrics 4,841(2) 4,997 (3.1)%
----------- ---------- ----------
Total Depreciation $ 6,685 6,883 (2.9)%
=========== ========== ==========
(1) The $1.2 million represents restructuring related charges for inventory
markdowns and accelerated depreciation. The $2.4 million represents the
$1.2 million restructuring related charges plus $1.2 million in
restructuring charges for fixed asset write-downs and accrued termination
benefits. All of these charges relate to the upholstery fabrics segment.
(2) Excludes accelerated depreciation of approximately $215,000 associated with
plant and equipment scheduled to be disposed of over the next six months.
I-20
Three and Six Months ended October 31, 2004 compared with Three and Six Months
ended November 2, 2003
The financial results for the second quarter reflect weak demand
for upholstery fabrics and industry wide pricing pressure impacting the mattress
fabrics segment. While the company anticipated the normal seasonal pick-up in
demand for upholstery fabric that occurs in the fall, sales in the upholstery
segment were approximately 13% lower than the same period last year. Overall,
the retail furniture business has not demonstrated signs of a meaningful
recovery from the summer slowdown. For the second quarter of fiscal 2005,
consolidated net sales decreased 8.9% to $75.4 million; and the company reported
a net loss of $4.2 million, or $0.36 per share diluted, compared with net income
of $3.1 million, or $0.27 per diluted share, for the second quarter of fiscal
2004. The financial results for this quarter reflect a total of $2.4 million in
restructuring and related charges, or $1.5 million net of tax ($0.13 per share)
and $5.1 million in goodwill impairment, or $3.2 million net of tax ($0.28 per
share). For the first six months of fiscal 2005, net sales decreased 8.4% to
$143.3 million; and the company reported a net loss of $5.2 million, or $0.45
per share diluted, compared with net income of $2.7 million or $0.23 per share
diluted, for the same period last year. The financial results for the first six
months of fiscal 2005 included $2.4 million in restructuring and related
charges, or $1.5 million net of tax ($0.12 per share) and $5.1 million in
goodwill impairment, or $3.2 million net of tax ($0.28 per share). The
year-to-date results for fiscal 2005 included 26 weeks versus 27 weeks for the
same period of fiscal 2004.
Goodwill Impairment and Restructuring and Related Charges
The financial results for the second quarter include a total of
$7.5 million in restructuring and related charges and goodwill impairment. The
charges are made up of the following: (1) $5.1 million of goodwill impairment,
which is the result of an evaluation of all of the remaining goodwill associated
with the upholstery fabrics segment (see note 13 in the Notes to the
Consolidated Financial Statements); (2) $1.3 million in restructuring expenses
related to the Culp Decorative Fabrics ("CDF") and Culp Velvets/Prints ("CVP")
divisions, which includes approximately $1.0 million in personnel costs and
approximately $300,000 in write-downs of equipment; and (3) $1.1 million of
restructuring related costs for the CDF division, which include inventory
mark-downs and accelerated depreciation associated with plant and equipment
scheduled to be disposed of, either by sale or by abandonment, over the next six
months. As reflected in the consolidated financial statements, restructuring and
related expenses were recorded as $1.3 million in the line item "restructuring
expense" and $1.1 million in "cost of sales." The goodwill impairment charge and
restructuring and related expenses have reduced net income per share by $0.41
for the second quarter of fiscal 2005. The goodwill impairment was accounted for
in accordance with SFAS 142, Goodwill and Other Intangible Assets. The
write-down of equipment and accelerated depreciation was accounted for in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Personnel costs were accounted for in accordance with SFAS
No. 112, Accounting for Employers' Accounting for Postemployment Benefits.
The restructuring and related charges for the upholstery fabrics segment reflect
the restructuring initiative announced in October 2004. The restructuring plan
is designed to reduce costs, increase asset utilization and improve
profitability within the upholstery fabrics segment. The company has made
substantial progress over the past several years with previous restructuring
initiatives. However, with continued pressure on demand in this segment,
management has decided to move forward with plans to further adjust the
company's cost structure and bring U.S. manufacturing capacity in line with
current and expected demand. The restructuring plan principally involves
consolidation of the company's decorative fabrics weaving operations by closing
Culp's facility in Pageland, South Carolina, and consolidating those operations
into the Graham, North Carolina facility. Additionally, the company will be
consolidating its yarn operations by integrating the production of the
Cherryville, North Carolina plant into the company's Shelby, North Carolina
facility. Another important element of the restructuring plan will be a
substantial reduction in certain raw material and finished goods stock keeping
units, or SKUs, to reduce manufacturing complexities and lower costs, with the
ongoing objective of identifying and eliminating products that are not
generating acceptable volumes or margins. Finally, the company is making
significant reductions in selling, general and administrative expenses. Overall,
these restructuring actions will reduce the number of associates by
approximately 250 people, representing approximately 14 percent of those in
Culp's upholstery fabrics segment. The implementation of these restructuring
initiatives has already begun and is expected to be completed by May 1, 2005,
the end of the current fiscal year. The company expects the restructuring
actions to result in total pre-tax charges of approximately $20 million ($13
million on an after-tax basis). Approximately $15 million of the pre-tax amount
is expected to be non-cash items, including $5.1 million for goodwill
impairment. As described above, of the total charges expected, $7.5 million
($4.7 million, net of taxes, or $0.41 per diluted share) was incurred in the
second fiscal quarter. The remaining charges are expected to be recorded in the
third and fourth quarters of fiscal 2005, as incurred.
I-21
As a result of these plant consolidations and other cost-reduction initiatives,
the company expects to realize annual savings of approximately $9.5 million, of
which approximately $4.0 million will be in fixed manufacturing costs, an
estimated $2.0 million in variable manufacturing costs, and approximately $3.5
million in selling, general and administrative costs. Once these initiatives are
completed, the company will have seven manufacturing facilities operating in the
upholstery fabrics segment, including one facility in China. Management believes
this configuration will allow the company to utilize its domestic operations
more efficiently, especially for promotional, commercial fabric and
make-to-order business. At the same time, the company intends to continue
aggressively pursuing its strategy to source upholstery fabrics that are not
manufactured in the U.S. As described in more detail below, sales of upholstery
fabrics produced outside of the company's U.S. manufacturing plants are
accounting for an increasing percentage of the company's overall upholstery
fabric sales.
Mattress Fabrics Segment
Net Sales -- Mattress fabric (known as mattress ticking) sales of $26.9
million for the second quarter of fiscal 2005 were up slightly from the same
period a year ago. Year-to-date sales of $52.8 million reflect a 2.2% decrease
from the year earlier period. As previously addressed, the year-to-date results
reflect a 26 week period versus a 27 week period last year. Mattress ticking
yards sold during the second quarter of fiscal 2005 were 11.3 million compared
with 10.9 million yards in the second quarter of last year, an increase of 3.7%.
A slightly lower year-over-year percentage increase occurred in the first
quarter of this fiscal year. This increase in yards sold is noteworthy because
it occurred as the bedding industry nears the completion of the transition to
selling predominantly one-sided mattresses, which utilize about one-third less
mattress ticking. The average selling price for mattress fabrics was $2.35 per
yard for the second quarter, compared to $2.43 per yard in the same quarter last
year, a decrease of 3.3%. For the first six months of fiscal 2005, the average
selling price for mattress fabrics was $2.37 per yard compared to $2.50 per yard
in the same period last year, a decrease of 5.2%. Mattress manufacturers are
currently incurring higher costs for other mattress components, such as steel,
as well as costs associated with flame retardant requirements. As a result of
these increased costs, mattress manufacturers are placing additional pressure on
mattress ticking prices, and in some instances manufacturers are moving to lower
priced ticking.
Operating income -- For the second quarter of fiscal 2005, the
mattress fabrics segment reported operating income of $2.7 million, or 10.0% of
sales, compared with $4.2 million, or 15.9% of sales, for the prior year period.
For the first six months of fiscal 2005, operating income was $5.6 million, or
10.6% of sales, compared with $8.4 million, or 15.5% of sales, for the same
period last year. Thus far in fiscal 2005, operating income has been primarily
impacted by industry wide pricing pressure, as discussed above, and inventory
markdowns related to certain customer programs. Additionally, operating income
was impacted by increased raw material costs due primarily to the increased cost
of petroleum based products.
I-22
Capital Project -- In order to reduce manufacturing costs, the
company will be consolidating its mattress fabric manufacturing into two plants
located in Quebec, Canada, and Stokesdale, North Carolina. This project will
involve relocation of ticking looms from an upholstery fabric plant and the
purchase of new looms that are faster and more efficient than the equipment they
will replace. The capital expenditure amount budgeted for this project is
approximately $7.0 million over the current and next fiscal year. This project
is underway and is expected to be completed by August 2005. Management believes
these changes in the company's manufacturing operations will significantly
enhance the company's cost structure in this segment. The company anticipates
approximately $4.5 million in annualized savings to be achieved as a result of
this capital project.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for the second quarter of fiscal
2005 decreased 13.3% to $48.5 million when compared to the second quarter of
fiscal 2004. For the first six months of fiscal 2005, upholstery fabric sales
decreased 11.7% to $90.4 million compared to the same period last year. The
lower sales for both the quarter and year-to-date primarily reflect soft demand
by furniture retailers, as well as current consumer preference for leather
furniture and increased competition from imported fabrics, including cut and
sewn kits, primarily from Asia. U.S. import quotas for upholstery fabric are
expected to end as of January 1, 2005, which will allow additional imports of
such products into the U.S. at lower costs. The magnitude of this development's
impact on the company is difficult to predict, but the end of these quotas is
another factor that is expected to put continuing pressure on demand for
upholstery fabrics produced in domestic plants.
With the company's offshore sourcing efforts, including the China platform, the
company is experiencing higher sales of upholstery fabric products produced
outside of the company's U.S. manufacturing plants for fiscal 2005. For the
second quarter of fiscal 2005, these sales increased 143% over the prior year
period and accounted for approximately $7.0 million or 14.4% of upholstery
fabric sales for the quarter. Offshore sourced fabrics of $2.9 million accounted
for approximately 5.1% of upholstery fabric sales for the same period last year.
Upholstery fabric yards sold during the second quarter were 10.7 million versus
13.1 million in the second quarter of fiscal 2004, a decline of 18.3%. The
average selling price for this segment was $4.23 per yard for the second quarter
compared with $4.13 per yard in the same quarter of last year, an increase of
2.4%, due to higher average selling prices in both the CDF and CVP divisions.
For the first six months of fiscal 2005, the average selling price for
upholstery fabrics was $4.24 per yard compared to $4.14 per yard in the same
period last year, an increase of 2.4%.
Operating income (loss) -- Operating income for the second quarter of
fiscal 2005 was $216,000, or 0.4% of sales, compared with operating income of
$3.5 million, or 6.2% of sales, for the same period last year. For the first six
months of fiscal 2005, this segment has experienced an operating loss of $2.4
million compared with operating income of $1.7 million for the same period last
year. This significant decrease in segment income as compared to last year was
primarily due to further underutilization of the company's U.S. manufacturing
capacity. Additionally, the upholstery fabrics segment has been experiencing
higher raw material costs due mainly to the increase in cost of petroleum based
products. As discussed earlier, the company is currently implementing an
aggressive restructuring plan to address the significant decline in operating
profit. Management will continue to closely monitor trends in demand for
upholstery fabrics produced by its domestic mills. If sales in the upholstery
fabrics segment of U.S.-produced goods continue to decline and the segment is
not able to produce acceptable levels of operating profit, the company remains
prepared to take additional actions to adjust its cost structure and capacity to
match demand from its customers.
I-23
Other Corporate Expenses
Selling, General and Administrative Expenses -- SG&A expenses of
$8.8 million for the second quarter of fiscal 2005 decreased approximately $1.5
million, or 14.2%, from the prior year amount. As a percent of net sales, SG&A
expenses decreased to 11.7% from 12.4% the previous year, due mostly to lower
incentive compensation expense and lower professional fees. Year-to-date results
also reflect lower spending, as SG&A expenses have decreased by 12.9% to $18.1
million compared to the same period last year for primarily the same reasons as
in the second quarter.
The unallocated corporate expense category includes certain items that have not
been allocated to the company's segments. The major components of unallocated
corporate expenses include compensation and benefits for certain executive
officers and all costs related to being a public company. For the second quarter
of fiscal 2005, unallocated corporate expenses totaled $1.0 million compared
with $1.3 million for the same period last year, reflecting a decrease in
incentive compensation expense and professional fees.
Interest Expense (Income) - Interest expense for the second quarter
declined to $937,000 from $1.5 million the previous year due to lower borrowings
outstanding. Interest income decreased to $29,000 from $121,000 the previous
year due to lower invested balances in fiscal 2005. The year-to-date interest
expense and interest income are significantly lower than last year for the same
reasons.
Income Taxes -- The effective tax rate (taxes as a percentage of pretax
income (loss)) for the first six months of fiscal 2005 was 37.3% compared with
37.0% for the first six months of fiscal 2004.
Liquidity and Capital Resources
Liquidity --The company's sources of liquidity include cash and
cash equivalents, cash flow from operations and amounts available under its
revolving credit line. These sources have been adequate for day-to-day
operations and capital expenditures. The company expects these sources of
liquidity to continue to be adequate for the foreseeable future. Cash and cash
equivalents as of October 31, 2004 increased to $16.5 million from $14.6 million
at the end of fiscal 2004, primarily reflecting cash flow from operations of
$8.6 million and capital expenditures and payments on vendor financed capital
expenditures of $ 6.9 million.
Working Capital -- Accounts receivable as of October 31, 2004
decreased 15.2% from the year-earlier level. Days sales outstanding totaled 32
days at October 31, 2004 compared with 34 days a year ago. Inventories at the
close of the second quarter decreased 9.9% from a year ago. Inventory turns for
the second quarter were 5.2 versus 5.1 for the year-earlier period. Operating
working capital (comprised of accounts receivable and inventories, less trade
accounts payable) was $59.9 million at October 31, 2004, down from $ 61.3
million a year ago.
I-24
Financing Arrangements -- The company's long-term debt of $51.2
million is unsecured and is comprised of $50.0 million in outstanding senior
notes, with a fixed interest rate of 7.76%, and a $1.2 million, non-interest
bearing term loan with the Canadian government. The Canadian government loan is
repaid in annual installments of approximately $600,000 per year. The company's
current bank agreement expires in August 2005. The first scheduled principal
payment on the $50.0 million senior notes is due March 2006 in the amount of
$7.5 million. The company was in compliance with all financial covenants in its
loan agreements as of October 31, 2004.
In December 2004, the company amended its bank agreement with its lender to
provide for, among other things, a reduced revolving loan commitment of $10.0
million from an existing commitment of $15.0 million, including letters of
credit up to $2.5 million (See Part II - Other Information Item 5 for additional
details). As of October 31, 2004, there were $399,000 in outstanding letters of
credit in support of inventory purchases and no borrowings outstanding under the
agreement.
Capital Expenditures -- Capital spending for the first six months of
fiscal 2005 was $5.5 million, including approximately $4.3 million for the
purchase of a building that will serve as the company's new corporate offices
and as new space for the company's showrooms. The company expects the annual
operating costs of the new building to be significantly lower than the lease and
related costs associated with the current facilities. Depreciation for the
second quarter was $3.5 million, of which approximately $215,000 was related to
accelerated depreciation associated with plant and equipment scheduled to be
disposed of over the next six months. The company increased the capital budget
by $6.1 million to $15.6 million, of which $4.9 million relates to the mattress
ticking capital project.
Cash Flow from Operations -- Cash flow from operations was $8.6 million
for the first six months of fiscal 2005, compared with $11.5 million for the
same period last year. This decrease was due primarily to lower profitability.
Seasonality
Mattress Fabrics Segment:
The ticking business and the bedding industry in general are slightly seasonal,
with sales typically being the highest in the company's first and fourth fiscal
quarters.
Upholstery Fabrics Segment:
The company's upholstery fabrics business is seasonal, with increased sales
during the company's 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 company's
first and third fiscal quarters for the holiday weeks of July 4th and Christmas.
Critical Accounting Policies and Recent Accounting Developments
The company considered the disclosure requirements of Financial
Reporting Release No. 60 regarding critical accounting policies and Financial
Reporting Release No. 61 regarding liquidity and capital resources, certain
trading activities and related party/certain other disclosures, and concluded
that there were no material changes during the first six months of fiscal 2005
that would warrant further disclosure beyond those matters previously disclosed
in the company's Annual Report on Form 10-K for the year ended May 2, 2004.
I-25
Inflation
The cost of many of the company's raw materials and supplies, principally
products from petroleum derivatives, and energy costs, have increased during the
company's current fiscal year and, as a result, have impacted margins this
fiscal year. Other operating expenses are 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.
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'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. As of October 31, 2004, there were no borrowings
outstanding under the company's revolving credit agreement. Additionally,
approximately 98% of the company's long-term debt is at a fixed rate. Thus, any
reasonably foreseeable change in interest rates would have no material effect on
the company's interest expense.
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 is not material to the company's consolidated results of
operations; therefore, a 10% change in the exchange rate at October 31, 2004
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.
Due to the start up of operations in China, the company does have exposure to
fluctuations in currency rates if China allows its currency to float, since it
has been essentially fixed in relation to the U.S. dollar. Currently, the risk
cannot be hedged. The amount of sales and manufacturing costs denominated in
Chinese currency is not material to the company's consolidated results of
operations; therefore, a 10% change in the exchange rate at October 31, 2004
would not have a significant impact on the company's results of operations or
financial position.
ITEM 4. CONTROLS AND PROCEDURES
The company conducted a review and evaluation of its disclosure
controls and procedures, under the supervision and with the participation of the
company's principal executive officer and principal financial officer as of
October 31, 2004, and the principal executive officer and principal financial
officer have concluded that the company's disclosure controls and procedures are
adequate and effective. In addition, no change in the company's internal control
over financial reporting has occurred during, or subsequent to, the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting.
I-26
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 21, 2004. Of the 11,547,759 shares of common stock
outstanding on the record date of July 23, 2004, 10,434,151 shares were present
in person or by proxy.
At the Annual Meeting, shareholders voted on:
o the election of five directors: Jean L.P. Brunel, Howard L. Dunn, Jr.,
H. Bruce English, Kenneth R. Larson and Kenneth W. McAllister
o ratification of the appointment of KPMG LLP as the independent
registered public accounting firm of the company for the current fiscal
year,
A. PROPOSAL FOR ELECTION OF DIRECTORS:
JEAN L.P. BRUNEL HOWARD L. DUNN, JR
---------------- ------------------
For 10,267,292 For 10,187,267
Abstain 166,859 Abstain 246,884
H. BRUCE ENGLISH KENNETH R. LARSON
---------------- -----------------
For 10,218,067 For 10,265,262
Abstain 216,084 Abstain 168,889
KENNETH W. MCALLISTER
---------------------
For 10,218,063
Abstain 216,088
B. PROPOSAL TO RATIFY THE ELECTION OF KPMG LLP AS THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM OF THE COMPANY FOR FISCAL YEAR 2005:
For 10,329,311
Against 104,327
Abstain 513
ITEM 5. OTHER INFORMATION
As of December 7, 2004, the company entered into a Fourth Amendment to Amended
and Restated Credit Agreement, which amends the credit agreement between the
company and its bank lender, Wachovia Bank, National Association. The credit
agreement, and two previous amendments to the agreement, were filed as Exhibits
10(o), 10(p) and 10(q) to the company's Annual Report on Form 10-K for the year
ended May 2, 2004. The Third Amendment to Amended and Restated Credit Agreement
("Third Amendment") was filed as Exhibit 10 to a Current Report on Form 8-K
dated August 31, 2004. The company and its bank lender entered into the Fourth
Amendment to Amended and Restated Credit Agreement ("Fourth Amendment") on
December 7, 2004. The principal terms of the Fourth Amendment are to increase
the capital expenditure limitation for the company's current fiscal year to $16
million, to eliminate the Funded Debt/EBITDA covenant, to decrease the line of
credit from $15 million to $10 million and to add a liquidity covenant requiring
the company to maintain at least $4 million in cash deposits with its bank
lender. The Fourth Amendment is filed as Exhibit 10(b) hereto.
II-1
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) 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 July 28,
2002, filed September 11, 2002, and are incorporated herein by
reference.
3(ii) Restated and Amended Bylaws of the company, as amended June 12, 2001,
were filed as Exhibit 3(ii) to the company's Form 10-Q for the quarter
ended July 29, 2001, filed September 12, 2001, and are incorporated
herein by reference.
10(a) Third Amendment to Amended and Restated Credit Agreement dated as of
August 23, 2004 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank, filed as Exhibit 10 to Current
Report on Form 8-K dated August 26, 2004, and incorporated herein by
reference.
10(b) Fourth Amendment to Amended and Restated Credit Agreement dated as as
of December 7, 2004 among Culp, Inc. and Wachovia Bank, National
Association, as Agent and as Bank.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.
II-2
(B) REPORTS ON FORM 8-K:
The following reports on Form 8-K were furnished during the period covered by
this report:
Form 8-K dated August 26, 2004, included under Item 2.02, Results of
Operations and Financial Condition, the company's press release
announcing its financial results for the first quarter ended August 1,
2004.
Form 8-K dated August 31, 2004, included under Item 1.01, Entry into a
Material Definitive Agreement, the company's press release disclosing
that the company entered into an agreement to amend and extend for one
year the term of its loan agreement with Wachovia Bank, National
Association.
Form 8-K dated September 21, 2004, included under Item 5.02, Departure
of Directors or Principal Officers; Election of Directors; Appointment
of Principal Officers; and Item 9.01, Financial Statements and
Exhibits, the company's press release announcing the results of its
annual meeting of shareholders.
Form 8-K dated October 27, 2004, included under Item 7.01, Regulation
FD Disclosure; and Item 9.01, Financial Statements and Exhibits, the
company's press release announcing its revised earnings expectations
for its second fiscal quarter ended October 31, 2004, and announcing a
restructuring plan to be effected over the reminder of its current
fiscal year, including the anticipated financial impact of this
restructuring plan.
SIGNATURES
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 9, 2004 By: /s/ FRANKLIN N. SAXON
-----------------
Franklin N. Saxon
President and Chief Operating Officer
(Authorized to sign on behalf
of the registrant and also signing as
principal financial officer)
By: /s/ KENNETH R. BOWLING
------------------
Kenneth R. Bowling
Vice President-Finance, Treasurer
(Authorized to sign on behalf
of the registrant and also signing as
principal accounting officer)
II-3
Exhibit 10(b)
FOURTH AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
("Fourth Amendment") is made as of the 7th day of December, 2004, by and between
CULP, INC., a North Carolina corporation (together with its successors and
permitted assigns, the "Borrower") and WACHOVIA BANK, NATIONAL ASSOCIATION
(formerly, Wachovia Bank, N.A.), a national banking association, as Agent and as
a Bank (together with its endorsees, successors and assigns, the "Bank").
BACKGROUND
The Borrower and the Bank entered into an Amended and Restated
Credit Agreement, dated as of August 23, 2002, as amended by Second Amendment to
Amended and Restated Credit Agreement (the "Second Amendment"), dated as of June
3, 2003, and by Third Amendment to Amended and Restated Credit Agreement (the
"Third Amendment"), dated as of August 23, 2004 (it being acknowledged by the
parties hereto that the proposed First Amendment to Amended and Restated Credit
Agreement, which had been under discussion in March 2003, was never executed by
the parties and is of no force or effect; otherwise, such agreement, as amended
by the Second Amendment and Third Amendment and as it may be further amended,
restated, supplemented and/or modified, shall be referred to herein as the
"Credit Agreement"). Terms used herein and not herein defined shall have the
meanings given to them in the Credit Agreement.
The Borrower has now requested certain other amendments to the
provisions of the Credit Agreement, which the Bank is willing to accommodate
subject to the terms, provisions and conditions set forth in this Fourth
Amendment.
NOW, THEREFORE, in consideration of the premises and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank hereby agree as follows:
1. Amendments to Credit Agreement. The Credit Agreement is hereby
amended as follows:
(a) The aggregate amount of the Commitment of the Bank and the
aggregate amount of the Total Commitments, each as set forth on page 61 of the
Credit Agreement, are hereby reduced from $15,000,000.00 to $10,000,000.00.
(b) Section 5.21 of the Credit Agreement is hereby deleted in its
entirety without any replacement therefor.
(c) Section 5.24 of the Credit Agreement is hereby amended and
restated in its entirety to read as follows:
SECTION 5.24. Capital Expenditures. Capital Expenditures will not
exceed (i) for the Fiscal Year 2003, $14,000,000; (ii) for Fiscal Years
2002 and 2004, 50% of the Depreciation incurred for Fiscal Year 2004,
and (iii) for the Fiscal Year 2005, $16,000,000.
(d) A new Section 5.26 is hereby added to the Credit Agreement,
which section shall read as follows:
SECTION 5.26. Liquidity Requirement. The Borrower will maintain
with the Bank at all times collected deposit balances of not less than
$4,000,000.00 (none of which has been borrowed hereunder).
2. Further Assurances. The Borrower will execute such
confirmatory instruments, if any, with respect to the Credit Agreement and this
Fourth Amendment as the Bank may reasonably request.
3. Ratification by Borrower. The Borrower ratifies and confirms
all of its representations, warranties, covenants, liabilities and obligations
under the Credit Agreement (except as expressly modified by this Fourth
Amendment) and agrees that: (i) except as expressly modified by this Fourth
Amendment, the Credit Agreement continues in full force and effect as if set
forth specifically herein; and (ii) the Borrower has no right of setoff,
counterclaim or defense to payment of its obligations under the Credit
Agreement. The Borrower and the Bank agree that this Fourth Amendment shall not
be construed as an agreement to extinguish the Borrower's obligations under the
Credit Agreement or the Notes and shall not constitute a novation as to the
obligations of the Borrower under the Credit Agreement or the Notes. The Bank
hereby expressly reserves all rights and remedies it may have against all
parties who may be or may hereafter become secondarily liable for the repayment
of the obligations under the Credit Agreement or the Notes.
4. Amendments. This Fourth Amendment may not itself be amended,
changed, modified, altered, or terminated without in each instance the prior
written consent of the Bank. This Fourth Amendment shall be construed in
accordance with and governed by the laws of the State of North Carolina.
5. Counterparts. This Fourth Amendment may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which, taken together, shall constitute one and the same agreement.
6. Credit Agreement Modification Fee. The Borrower shall pay to
the Bank on the date this Fourth Amendment is executed, an amendment fee equal
to $7,500.00, which fee, once paid, shall be fully earned and non-refundable.
-2-
7. Bank's Expenses. In accordance with Section 9.03 of the Credit
Agreement, Borrower hereby acknowledges and agrees to pay all reasonable
out-of-pocket expenses incurred by the Bank in connection with the preparation
of this Fourth Amendment, including without limitation reasonable attorneys'
fees.
[Signature Page Follows]
-3-
IN WITNESS WHEREOF, this Fourth Amendment has been duly executed
under seal by Borrower and Bank as of the day and year first above written.
BORROWER:
CULP, INC.
By: /s/ Kenneth R. Bowling
----------------------------------------
Name: Kenneth R. Bowling
Title: Vice President-Finance, Treasurer
ATTEST:
/s/ Kathy J. Hardy
- ------------------
Secretary
[Corporate Seal]
BANK:
WACHOVIA BANK, NATIONAL ASSOCIATION,
as Agent and as Bank
By: /s/ Peter T. Callahan
----------------------------------------
Name: Peter T. Callahan
Title: Senior Vice President
-4-
Exhibit 31.1
CERTIFICATION
I, Robert G. Culp, III, Chairman of the Board and Chief Executive Officer of
Culp, Inc., (principal executive officer) certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: December 9, 2004 By: /s/ Robert G. Culp, III
---------------------------------------
Robert G. Culp, III
Chairman of the Board and Chief
Executive Officer
(principal executive officer)
Exhibit 31.2
CERTIFICATION
I, Franklin N. Saxon, President and Chief Operating Officer of Culp, Inc.,
(principal financial officer) certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: December 9, 2004 By: /s/ Franklin N. Saxon
------------------------------------------------
Franklin N. Saxon
President and Chief Operating Officer (principal
financial officer)
Exhibit 32.1
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Culp, Inc. (the "Company") on
Form 10-Q for the period ended October 31, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Robert G. Culp,III,
Chairman of the Board and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Robert G. Culp, III
- -------------------------
Chairman of the Board and
Chief Executive Officer
December 9, 2004
A signed original of this written statement required by Section 906,
or other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
Exhibit 32.2
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Culp, Inc. (the "Company") on
Form 10-Q for the period ended October 31, 2004 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Franklin N. Saxon,
President and Chief Operating Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Franklin N. Saxon
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President and
Chief Operating Officer
December 9, 2004
A signed original of this written statement required by Section 906,
or other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
