================================================================================
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 29, 2006
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)
1823 Eastchester Drive
High Point, North Carolina 27265-1402
(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. [X] YES [ ] NO
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one);
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined by
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 29, 2006: 11,686,959
Par Value: $0.05
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INDEX TO FORM 10-Q
For the period ended October 29, 2006
Page
--------
Part I - Financial Statements
-----------------------------
Item 1. Unaudited Interim Consolidated Financial Statements:
- --------------------------------------------------------------
Consolidated Statements of Net Income (Loss) -- Three and
Six Months Ended October 29, 2006 and October 30, 2005 I-1
Consolidated Balance Sheets -- October 29, 2006, October 30,
2005 and April 30, 2006 I-2
Consolidated Statements of Cash Flows -- Six Months Ended
October 29, 2006 and October 30, 2005 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Cautionary Statement Concerning Forward-Looking Information I-22
Item 2. Management's Discussion and Analysis of Financial Condition
- ---------------------------------------------------------------------
and Results of Operations I-22
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk I-35
- --------------------------------------------------------------------
Item 4. Controls and Procedures I-36
- ----------------------------------
Part II - Other Information
---------------------------
Item 1A. Risk Factors II-1
- ----------------------
Item 4. Submission of Matters To A Vote of Security Holders II-1
- -------------------------------------------------------------
Item 5. Other Information II-1
- ---------------------------
Item 6. Exhibits II-2
- ------------------
Signatures II-3
Item 1. Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 29, 2006 AND OCTOBER 30, 2005
(UNAUDITED)
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
--------------------------------------------------------------------------
Amounts Percent of Sales
------------------------------ ----------------------------
October 29, October 30, % Over October 29, October 30,
2006 2005 (Under) 2006 2005
--------------- ------------- ------------- -------------- ------------
Net sales $ 59,040 67,006 (11.9)% 100.0 % 100.0 %
Cost of sales 51,049 61,455 (16.9)% 86.5 % 91.7 %
--------------- ------------- ------------- -------------- ------------
Gross profit 7,991 5,551 44.0 % 13.5 % 8.3 %
Selling, general and
administrative expenses 6,273 6,526 (3.9)% 10.6 % 9.7 %
Restructuring (credit) expense (264) 4,412 (106.0)% (0.4)% 6.6 %
--------------- ------------- ------------- -------------- ------------
Income (loss) from operations 1,982 (5,387) 136.8 % 3.4 % (8.0)%
Interest expense 938 942 (0.4)% 1.6 % 1.4 %
Interest income (51) (19) 168.4 % (0.1)% (0.0)%
Other expense 338 214 (57.9)% 0.6 % 0.3 %
--------------- ------------- ------------- -------------- ------------
Income (loss) before income taxes 757 (6,524) 111.6 % 1.3 % (9.7)%
Income taxes * (55) (2,372) (97.7)% (7.3)% 36.4 %
--------------- ------------- ------------ -------------- ------------
Net income (loss) $ 812 (4,152) 119.6 % 1.4 % (6.2)%
=============== ============= ============= -------------- ------------
Net income (loss) per share, basic $ 0.07 (0.36) 119.4 %
Net income (loss) per share, diluted $ 0.07 (0.36) 119.4 %
Average shares outstanding, basic 11,686 11,559 1.1 %
Average shares outstanding, diluted 11,689 11,559 1.1 %
SIX MONTHS ENDED
--------------------------------------------------------------------------
Amounts Percent of Sales
------------------------------ ----------------------------
October 29, October 30, % Over October 29, October 30,
2006 2005 (Under) 2006 2005
--------------- ------------- ------------- -------------- ------------
Net sales $ 121,625 129,348 (6.0)% 100.0 % 100.0 %
Cost of sales 105,574 117,240 (10.0)% 86.8 % 90.6 %
--------------- ------------- ------------- -------------- ------------
Gross profit 16,051 12,108 32.6 % 13.2 % 9.4 %
Selling, general and
administrative expenses 12,846 16,382 (21.6)% 10.6 % 12.7 %
Restructuring expense 466 6,238 (92.5)% 0.4 % 4.8 %
--------------- ------------- ------------- -------------- ------------
Income (loss) from operations 2,739 (10,512) 126.1 % 2.3 % (8.1)%
Interest expense 1,888 1,892 (0.2)% 1.6 % 1.5 %
Interest income (97) (35) 177.1 % (0.1)% (0.0)%
Other expense 60 347 82.7 % 0.0 % 0.3 %
--------------- ------------- ------------- -------------- ------------
Income (loss) before income taxes 888 (12,716) 107.0 % 0.7 % (9.8)%
Income taxes * (58) (4,623) (98.7)% (6.5)% 36.4 %
--------------- ------------- ------------ -------------- ------------
Net income (loss) $ 946 (8,093) 111.7 % 0.8 % (6.3)%
=============== ============= ============= -------------- ------------
Net income (loss) per share, basic $ 0.08 (0.70) 111.4 %
Net income (loss) per share, diluted $ 0.08 (0.70) 111.4 %
Average shares outstanding, basic 11,679 11,555 1.1 %
Average shares outstanding, diluted 11,682 11,555 1.1 %
*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 29, 2006, OCTOBER 30, 2005 AND APRIL 30, 2006
(UNAUDITED)
(Amounts in Thousands)
Amounts Increase
------------------------------- (Decrease)
October 29, October 30, --------------------------- * April 30,
2006 2005 Dollars Percent 2006
--------------- -------------- ------------ ------------- ------------
Current assets:
Cash and cash equivalents $ 9,706 12,883 (3,177) (24.7)% 9,714
Accounts receivable, net 23,286 26,919 (3,633) (13.5)% 29,049
Inventories 44,430 43,449 981 2.3 % 36,693
Deferred income taxes 7,120 7,054 66 0.9 % 7,120
Assets held for sale 1,571 - 1,571 100.0 % 3,111
Other current assets 1,506 1,846 (340) (18.4)% 1,287
--------------- -------------- ------------ ------------- ------------
Total current assets 87,619 92,151 (4,532) (4.9)% 86,974
Property, plant and equipment, net 42,487 54,212 (11,725) (21.6)% 44,639
Goodwill 4,114 4,114 - 0.0 % 4,114
Deferred income taxes 22,023 14,541 7,482 51.5 % 20,176
Other assets 1,354 1,521 (167) (11.0)% 1,564
--------------- -------------- ------------ ------------- ------------
Total assets $ 157,597 166,539 (8,942) (5.4)% 157,467
=============== ============== ============ ============= ============
Current liabilities:
Current maturities of long-term debt $ 7,742 8,346 (604) (7.2)% 8,060
Accounts payable 18,540 16,613 1,927 11.6 % 20,835
Accrued expenses 9,001 10,669 (1,668) (15.6)% 7,845
Accrued restructuring costs 3,017 5,486 (2,469) (45.0)% 4,054
Income taxes payable 3,880 1,023 2,857 279.3 % 2,488
--------------- -------------- ------------ ------------- ------------
Total current liabilities 42,180 42,137 43 0.1 % 43,282
Long-term debt, less current maturities 39,554 46,584 (7,030) (15.1)% 39,662
--------------- -------------- ------------ ------------- ------------
Total liabilities 81,734 88,721 (6,987) (7.9)% 82,944
Shareholders' equity 75,863 77,818 (1,955) (2.5)% 74,523
--------------- -------------- ------------ ------------- ------------
Total liabilities and
shareholders' equity $ 157,597 166,539 (8,942) (5.4)% 157,467
=============== ============== ============ ============= ============
Shares outstanding 11,687 11,559 128 1.1 % 11,655
=============== ============== ============ ============= ============
* 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 29, 2006 AND OCTOBER 30, 2005
(UNAUDITED)
(Amounts in Thousands)
SIX MONTHS ENDED
------------------------------
Amounts
------------------------------
October 29, October 30,
2006 2005
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 946 (8,093)
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation 3,364 9,836
Amortization of other assets 41 51
Stock-based compensation 287 104
Deferred income taxes (1,847) (4,455)
Restructuring (credit) expense (364) 3,092
Changes in assets and liabilities:
Accounts receivable 5,763 1,905
Inventories (7,737) 7,050
Other current assets (219) 845
Other assets 148 149
Accounts payable (1,965) (5,623)
Accrued expenses 1,156 1,113
Accrued restructuring (1,037) (364)
Income taxes payable 1,392 (521)
------------- -------------
Net cash (used in) provided by operating
activities (72) 5,089
------------- -------------
Cash flows from investing activities:
Capital expenditures (1,705) (4,875)
Proceeds from the sale of buildings and equipment 2,738 3,950
------------- -------------
Net cash provided by (used in) investing
activities 1,033 (925)
------------- -------------
Cash flows from financing activities:
Payments on vendor-financed capital expenditures (670) (799)
Payments on long-term debt (426) -
Proceeds from issuance of long-term debt - 4,380
Proceeds from common stock issued 127 31
------------- -------------
Net cash (used in) provided by financing
activities (969) 3,612
------------- -------------
(Decrease) increase in cash and cash equivalents (8) 7,776
Cash and cash equivalents at beginning of period 9,714 5,107
------------- -------------
Cash and cash equivalents at end of period $ 9,706 12,883
============= =============
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands, except share data)
Capital Accumulated
Common Stock Contributed Other Total
--------------------- in Excess Unearned Retained Comprehensive Shareholders'
Shares Amount of Par Value Compensation Earnings Income (Loss) Equity
- ---------------------------------------------------------------------------------------------------------------------------
Balance, May 1, 2005 11,550,759 $ 579 39,964 (139) 45,367 - $ 85,771
- ---------------------------------------------------------------------------------------------------------------------------
Net loss - - - - (11,796) - (11,796)
Gain on cash flow hedge, net of
income taxes - - - - - 18 18
Stock-based compensation - - - 139 - - 139
Common stock issued in connection
with stock option plans 104,200 5 386 - - - 391
- ---------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 2006 11,654,959 $ 584 40,350 - 33,571 18 $ 74,523
- ---------------------------------------------------------------------------------------------------------------------------
Net income - - - - 946 - 946
Loss on cash flow hedge, net of
income taxes - - - - - (20) (20)
Stock-based compensation - - 287 - - - 287
Common stock issued in connection
with stock option plans 32,000 2 125 - - - 127
- ---------------------------------------------------------------------------------------------------------------------------
Balance, October 29, 2006 11,686,959 $ 586 40,762 - 34,517 (2) $ 75,863
===========================================================================================================================
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 note 10 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 20, 2006 for the fiscal year ended April 30, 2006.
The company's six months ended October 29, 2006 and October 30, 2005 represent
26 week periods.
-----------------------------------------------------------------
2. Stock-Based Compensation
Effective May 1, 2006, the company began recording compensation expense
associated with its stock option plans in accordance with SFAS No. 123R,
"Share-Based Payment" which requires the measurement of the cost of employee
services received in exchange for an award of an equity instrument based on the
grant date fair value of the award. The company adopted the modified prospective
transition method provided for under SFAS No. 123R, and consequently has not
retroactively adjusted results from prior periods. Under this transition method,
compensation expense associated with stock options recognized in the first
quarter of fiscal 2007 now includes amortization related to the remaining
unvested portion of all stock option awards granted prior to May 1, 2006 based
on their grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Prior to May 1, 2006, the company recognized compensation costs related to
employee stock option plans utilizing the intrinsic value-based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. The company had also adopted the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation Transition and
Disclosure." SFAS No. 123 required disclosure of pro-forma net income, earnings
per share, and other information as if the fair value method of accounting for
stock options and other equity instruments described in SFAS No. 123 had been
adopted.
As a result of adopting SFAS No. 123R, the company recorded $155,000 and
$287,000 of compensation expense for stock options within selling, general, and
administrative expense for the three-month and six-month periods ended October
29, 2006. In the prior year, the company recorded $51,000 and $104,000 of
compensation expense for stock options that were required to be accounted for
under the provisions of APB Opinion No. 25 for the three-month and six-month
periods ended October 30, 2005.
Prior to the adoption of SFAS No. 123R, the benefit of tax deductions in excess
of recognized compensation costs were reported as an operating cash flow. SFAS
No. 123R requires such benefits be recorded as financing cash flow rather than
as a reduction of taxes paid within operating cash flow. For the six-month
period ended October 29, 2006, no tax benefits in excess of recognized
I-5
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
compensation costs were realized from option exercises.
The remaining unrecognized compensation costs related to unvested awards at
October 29, 2006 is $1.2 million which is expected to be recognized over a
weighted average period of 2.9 years.
The following table illustrates the effect on net loss and net loss per share if
the company had applied the fair value recognition provisions of SFAS No. 123 to
options granted under the company's stock option plan for three-month and
six-month period ended October 30, 2005:
- ---------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Six Months Ended Three Months Ended
(dollars in thousands, except per share data) October 30, 2005 October 30, 2005
- ---------------------------------------------------------------------------------------------
Net loss, as reported $ (8,093) $ (4,152)
Add: Total stock-based employee compensation expense
included in net loss, net of taxes 66 33
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards,
net of taxes (243) (136)
- ---------------------------------------------------------------------------------------------
Pro forma net loss $ (8,270) $ (4,255)
- ---------------------------------------------------------------------------------------------
Net loss per share:
Basic - as reported $ (0.70) $ (0.36)
Basic - pro forma (0.72) (0.37)
Diluted - as reported (0.70) (0.36)
Diluted - pro forma (0.72) (0.37)
- ---------------------------------------------------------------------------------------------
Under the company's stock option plans, employees and directors may be granted
options to purchase shares of common stock at the fair market value on the date
of grant. Options granted under these plans generally vest over four years and
expire five to ten years after the date of grant. The fair value of each option
award was estimated on the date of grant using a Black-Scholes option-pricing
model. The fair value of stock options granted to directors during the six-month
period ended October 29, 2006 was $3.68 per share using the following
assumptions:
- ---------------------------------------------------------------------------------------------
Risk-free interest rate 4.57%
Dividend yield 0.00%
Expected volatility 68.36%
Expected term (in years) 6.8
- ---------------------------------------------------------------------------------------------
The fair value of stock options granted to employees during the six-month period
ended October 29, 2006 was $2.43 per share using the following assumptions:
- ---------------------------------------------------------------------------------------------
Risk-free interest rate 5.03%
Dividend yield 0.00%
Expected volatility 67.03%
Expected term (in years) 1.6
- ---------------------------------------------------------------------------------------------
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The assumptions utilized in the model are evaluated and revised, as necessary,
to reflect market conditions and actual historical experience. The risk-free
interest rate for periods within the contractual life of the option was based on
the U.S. Treasury yield curve in effect at the time of grant. The dividend yield
was calculated based on the company's annual dividend as of the option grant
date. The expected volatility was derived using a term structure based on
historical volatility and the volatility implied by exchange-traded options on
the company's common stock. The expected term of the options is the contractual
term of the stock options and expected employee exercise and post-vesting
employment termination trends.
The following table summarizes the stock options (vested and unvested) as of
October 29, 2006 and option activity during the six-month period then ended:
- ---------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
- ---------------------------------------------------------------------------------------------
Outstanding, April 30, 2006 993,875 $ 7.11
Granted 228,000 4.56
Expired (174,125) 6.27
Exercised (32,000) 3.91 $ 17,440
- ---------------------------------------------------------------------------------------------
Outstanding, October 29, 2006 1,015,750 6.78 3.2 Years $ 770,035
- ---------------------------------------------------------------------------------------------
At October 29, 2006, there were 274,750 shares available for future grants under
the company's incentive stock option plans and options to purchase 553,375
shares were exercisable which had a weighted average exercise price of $8.34 per
share, an aggregate intrinsic value of $403,893 and a weighted average
contractual term of 0.20 years.
-----------------------------------------------------------------
3. Accounts Receivable
A summary of accounts receivable follows:
- ---------------------------------------------------------------------------------------------
(dollars in thousands) October 29, 2006 April 30, 2006
- ---------------------------------------------------------------------------------------------
Customers $ 25,534 $ 30,924
Allowance for doubtful accounts (1,092) (1,049)
Reserve for returns and allowances and discounts (1,156) (826)
- ---------------------------------------------------------------------------------------------
$ 23,286 $ 29,049
- ---------------------------------------------------------------------------------------------
I-7
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 29, 2006 October 30, 2005
- ---------------------------------------------------------------------------------------------
Beginning balance $ (1,049) $ (1,142)
Provision for uncollectible accounts (115) 12
Net write-offs 72 6
- ---------------------------------------------------------------------------------------------
Ending balance $ (1,092) $ (1,124)
- ---------------------------------------------------------------------------------------------
A summary of the activity in the allowance for returns and allowances and
discounts accounts follows:
- ---------------------------------------------------------------------------------------------
Six months ended
(dollars in thousands) October 29, 2006 October 30, 2005
- ---------------------------------------------------------------------------------------------
Beginning balance $ (826) $ (837)
Provision for returns and allowances
and discounts (1,235) (808)
Discounts taken 905 962
- ---------------------------------------------------------------------------------------------
Ending balance $ (1,156) $ (683)
- ---------------------------------------------------------------------------------------------
-----------------------------------------------------------------
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 29, 2006 April 30, 2006
- ---------------------------------------------------------------------------------------------
Raw materials $ 12,676 $ 13,561
Work-in-process 1,917 2,020
Finished goods 29,837 21,112
- ---------------------------------------------------------------------------------------------
$ 44,430 $ 36,693
- ---------------------------------------------------------------------------------------------
-----------------------------------------------------------------
5. Accounts Payable
A summary of accounts payable follows:
- ---------------------------------------------------------------------------------------------
(dollars in thousands) October 29, 2006 April 30, 2006
- ---------------------------------------------------------------------------------------------
Accounts payable-trade $ 16,421 $ 18,386
Accounts payable-capital expenditures 2,119 2,449
- ---------------------------------------------------------------------------------------------
$ 18,540 $ 20,835
- ---------------------------------------------------------------------------------------------
6. Accrued Expenses
A summary of accrued expenses follows:
I-8
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- ---------------------------------------------------------------------------------------------
(dollars in thousands) October 29, 2006 April 30, 2006
- ---------------------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 4,643 $ 4,757
Interest 403 433
Accrued rebates 1,309 705
Other 2,646 1,950
- ---------------------------------------------------------------------------------------------
$ 9,001 $ 7,845
- ---------------------------------------------------------------------------------------------
-----------------------------------------------------------------
7. Long-Term Debt
A summary of long-term debt follows:
- ---------------------------------------------------------------------------------------------
(dollars in thousands) October 29, 2006 April 30, 2006
- ---------------------------------------------------------------------------------------------
Unsecured senior term notes $ 42,440 $ 42,440
Real estate loan 4,142 4,242
Canadian government loans 714 1,040
- ---------------------------------------------------------------------------------------------
47,296 47,722
Less current maturities (7,742) (8,060)
- ---------------------------------------------------------------------------------------------
$ 39,554 $ 39,662
- ---------------------------------------------------------------------------------------------
Unsecured Term Notes
The company's unsecured term notes (the "Notes") are payable over an average
remaining term of three years beginning March 2007 through March 2010. The
principal payments are required to be paid in periodic installments over the
next four years as follows: Year 1 - $7.5 million; Year 2 - $19.9 million; Year
3 - $7.5 million; and Year 4 - $7.5 million.
On December 6, 2006, the company entered into a Second Amendment to Note
Purchase Agreements (the "Amendment"). The Amendment changes the financial
covenants applicable to the company to provide additional flexibility to account
for recent changes and potential additional changes that the company has made or
could make to its business and the accounting consequences of those changes,
including markdowns of its inventory and write-downs of its property, plant, and
equipment for closed facilities and a valuation allowance against the Company's
net deferred tax assets from U.S. operations. The Amendment also allows for the
reduction of the company's outstanding debt, without the payment of a prepayment
penalty, and raises the interest rate payable on the remaining outstanding
Notes. A summary of the terms of the Amendment follows:
-- Upon execution of this amendment, the Company will prepay $3.0 million
in principal amount and interest on the Notes, without prepayment
penalty or "make whole" premium. Another principal payment of $4.5
million will be due in March of 2007.
-- An increase in the interest rate on the Notes from 7.76% to 8.80%,
effective December 1, 2006.
I-9
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-- A change in the calculation of consolidated net worth and tangible net
worth for purposes of financial covenant compliance, such that
restructuring expenses and related costs associated with previously
announced restructuring initiatives and any future restructuring
initiatives involving the remaining U.S. upholstery facilities will
not be counted against the Company's net worth.
-- A similar change in the calculation of net worth such that a valuation
allowance under U.S. generally accepted accounting principles against
the Company's net deferred tax assets from U.S. operations would not
be counted as a reduction of the Company's net worth for purposes of
financial covenant compliance.
-- A provision providing for prepayments of the Notes (at the option of
the noteholders and without prepayment penalty) to the extent that the
Company's cash balances exceed $8.0 million at the end of each fiscal
quarter.
-- Covenants regarding the use of net proceeds from sales of assets.
-- An increase in the amount of other debt allowed to be incurred by the
Company, including a provision that would allow for debt of up to $5.0
million in the Company's China subsidiary.
-- Other changes to financial covenants, including limits on capital
expenditures and restrictions on the payment of dividends or stock
repurchases.
-- Additional negative covenants to restrict certain changes in the
Company's business or methods of operation and certain business
transactions.
-- A decrease in the cross-default provision to cover any debt in an
amount of $1.0 million or more.
Real Estate Loan
The company's real estate loan is secured by a lien on the company's corporate
headquarters office located in High Point, NC. This term loan bears interest at
the one-month London Interbank Offered Rate plus an adjustable margin based on
the company's debt/EBITDA ratio, as defined in the agreement and is payable in
varying monthly installments through September 2010, with a final payment of
$3.3 million in October 2010.
I-10
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Revolving Credit Agreement
On July 20, 2006, the company entered into a Ninth Amendment to this credit
agreement. This credit agreement provides for a revolving loan commitment of
$8.0 million, including letters of credit up to $5.5 million. Borrowings under
the credit facility bear interest at the one-month London Interbank Offered Rate
plus an adjustable margin based on the company's debt/EBITDA ratio, as defined
in the agreement. This agreement limits annual capital expenditures to $2.5
million for fiscal 2007, requires the company to maintain collected deposit
balances of at least $2.0 million, and maintain certain other financial
covenants as defined in the agreement. As of October 29, 2006, there were $2.9
million in outstanding letters of credit and no borrowings outstanding under the
agreement. This agreement expires on August 31, 2007.
Canadian Government Loans
In November 2005, the company entered into an agreement with the Canadian
government to provide for a term loan in the amount of $680,000. The proceeds
are to partially finance capital expenditures at the company's Rayonese facility
located in Quebec, Canada. This loan is non-interest bearing and is payable in
48 equal monthly installments commencing December 1, 2009. In addition to the
term loan entered into in November 2005, the company had an existing
non-interest bearing term loan with the Canadian government which was paid in
May 2006.
Overall
The company's loan agreements require that the company maintain compliance with
certain financial ratios. At October 29, 2006, the company was in compliance
with these financial covenants.
The principal payment requirements of long-term debt during the next five years
are: Year 1 - $7.7 million; Year 2 - $20.1 million; Year 3 - $7.8 million; Year
4 - $11.1 million; Year 5 - $178,000; and thereafter - $373,000.
8. Interest Rate Hedging
In connection with the company's real estate loan with its bank, the company was
required to have an agreement to hedge the interest rate risk exposure on the
real estate loan. The company entered into a $2,170,000 notional principal
interest rate swap, which represents 50% of the principal amount of the real
estate loan, that effectively converted the floating rate LIBOR based payments
to fixed payments at 4.99% plus the spread calculated under the real estate loan
agreement. This agreement expires October 2010.
The company accounts for the interest rate swap as a cash flow hedge whereby the
fair value of this contract is reflected in other assets in the accompanying
consolidated balance sheets with the offset recorded as accumulated other
comprehensive income (loss). The fair value of the interest rate swap at October
29, 2006 was $3,000 in the bank's favor and was determined by quoted market
prices.
-----------------------------------------------------------------
9. Cash Flow Information
Payments for interest and income taxes follow:
I-11
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- ---------------------------------------------------------------------------------------------
Six months ended
(dollars in thousands) October 29, 2006 October 30, 2005
- ---------------------------------------------------------------------------------------------
Interest $ 1,928 $ 1,954
Income taxes 443 515
- ---------------------------------------------------------------------------------------------
The company did not finance any of its capital expenditures for the six-months
ended October 29, 2006. The non-cash portion of capital expenditures
representing vendor financing totaled $1,699,000 for the six months ended
October 30, 2005.
-----------------------------------------------------------------
10. Restructuring and Related Charges
A summary of accrued restructuring costs follows:
- ---------------------------------------------------------------------------------------------
(dollars in thousands) October 29, 2006 April 30, 2006
- ---------------------------------------------------------------------------------------------
September 2005 Upholstery Fabrics $ 404 $ 439
August 2005 Upholstery Fabrics 94 134
April 2005 Upholstery Fabrics 574 1,000
October 2004 Upholstery Fabrics 10 64
Fiscal 2003 Culp Decorative Fabrics 1,935 2,412
Fiscal 2001 Culp Decorative Fabrics - 5
- ---------------------------------------------------------------------------------------------
$ 3,017 $ 4,054
- ---------------------------------------------------------------------------------------------
September 2005 Upholstery Fabrics
During the second quarter of fiscal 2007, total restructuring and related
charges incurred were $223,000 of which $250,000 related to lease termination
and other exit costs, $110,000 related to operating costs associated with the
closing of a plant facility, $40,000 related to asset movement costs, a credit
of $40,000 related to a write-down of a building, and a credit of $137,000
related to a employee termination benefits. Of the total charge, a credit of
$122,000 was recorded in restructuring expense, a charge of $110,000 was
recorded in cost of sales, and a charge of $235,000 was recorded in other
expense in the 2007 Consolidated Statement of Net Income.
During the six month period of fiscal 2007, total restructuring and related
charges incurred were $532,000 of which $450,000 related to operating costs
associated with the closing of a plant facility, $259,000 related to lease
termination and other exit costs, $209,000 related to asset movement costs, a
credit of $40,000 related to a write-down of a building, a credit of $111,000
related to employee termination benefits, and a credit of $235,000 for sales
proceeds received on equipment with no carrying value. Of the total charge,
$82,000 was recorded in restructuring expense and a charge of $450,000 was
recorded in cost of sales in the 2007 Consolidated Statement of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
I-12
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- ---------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ---------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 439 - 439
Adjustments in fiscal 2007 (111) 2 (109)
Additions in fiscal 2007 - 257 257
Paid in fiscal 2007 (174) (9) (183)
- ---------------------------------------------------------------------------------------------
Balance, October 29, 2006 $ 154 250 404
- ---------------------------------------------------------------------------------------------
As of October 29, 2006, there were no assets classified as held for sale. At
April 30, 2006, assets classified as held for sale consisted of a building with
a carrying value of $641,000.
August 2005 Upholstery Fabrics
During the second quarter of fiscal 2007, a total restructuring and related
credit of $58,000 was recorded, of which, $35,000 related to write-downs of
equipment, $22,000 related to operating costs associated with the closing of a
plant facility, $1,000 related to asset movement costs, a credit of $11,000 for
sales proceeds received on equipment with no carrying value, and a credit of
$105,000 for employee termination benefits. Of the total credit, a credit of
$125,000 was recorded in restructuring expense, a charge of $22,000 was recorded
in cost of sales, and a charge of $45,000 was recorded in other expense in the
2007 Consolidated Statement of Net Income.
During the six month period of fiscal 2007, total restructuring and related
charges incurred were $99,000 of which $49,000 related to operating costs
associated with the closing of a plant facility, $48,000 related to asset
movement costs, $35,000 related to write-downs of equipment, $23,000 related to
employee termination benefits, and a credit of $56,000 for sales proceeds
received on equipment with no carrying value. Of the total charge, $50,000 was
recorded in restructuring expense and a charge of $49,000 was recorded in cost
of sales in the 2007 Consolidated Statement of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- ---------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ---------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 127 7 134
Adjustments in fiscal 2007 23 - 23
Paid in fiscal 2007 (61) (2) (63)
- ---------------------------------------------------------------------------------------------
Balance, October 29, 2006 $ 89 5 94
- ---------------------------------------------------------------------------------------------
As of October 29, 2006 and April 30, 2006, assets classified as held for sale
consisted of equipment with a carrying value of $700,000. As of April 30, 2006,
assets classified as held for sale also included a building with a carrying
value of $475,000, which was sold in May 2006.
I-13
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
April 2005 Upholstery Fabrics
During the second quarter of fiscal 2007, total restructuring and related
charges incurred were $217,000 of which approximately $313,000 related to asset
movement costs, $183,000 related to operating costs associated with closing a
plant facility, $83,000 related to lease termination costs, a credit of $49,000
for write-downs of equipment, a credit of $117,000 for sales proceeds received
on equipment with no carrying value, and a credit of $196,000 for employee
termination benefits. Of the total charge, $7,000 was recorded in restructuring
expense, $183,000 was recorded in cost of sales, and a charge of $27,000 was
recorded in other expense in the 2007 Consolidated Statement of Net Income.
During the first six months of fiscal 2007, the total restructuring and related
charges incurred were $918,000 of which approximately $484,000 related to asset
movement costs, $285,000 related to operating costs associated with the closing
of a plant facility, $238,000 related to inventory markdowns, $90,000 related to
lease termination costs, $67,000 related to write-downs of equipment, a credit
of $102,000 related to employee termination benefits, and a credit of $144,000
for sales proceeds received on equipment with no carrying value. Of the total
charge, $395,000 was recorded in restructuring expense; $493,000 was recorded in
cost of sales; and $30,000 was recorded in selling, general, and administrative
expenses in the 2007 Consolidated Statements of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- ---------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ---------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 799 201 1,000
Adjustments in fiscal 2007 (102) 10 (92)
Additions in fiscal 2007 - 80 80
Paid in fiscal 2007 (234) (180) (414)
- ---------------------------------------------------------------------------------------------
Balance, October 29, 2006 $ 463 111 574
- ---------------------------------------------------------------------------------------------
As of October 29, 2006 and April 30, 2006, assets classified as held for sale
consisted of equipment with a carrying value of approximately $871,000 and $1.3
million, respectively.
October 2004 Upholstery Fabrics
During the second quarter of fiscal 2007, as a result of management's continual
evaluation of the restructuring accrual, the reserve was decreased by $22,000 to
reflect current estimates of future health care claims. This $22,000 decrease in
the reserve was recorded in restructuring expense in the 2007 Consolidated
Statement of Net Income.
During the first six months of fiscal 2007, as a result of management's
continual evaluation of the restructuring accrual, the reserve was decreased by
$30,000 to reflect current estimates of future health care claims. This $30,000
decrease in the reserve was recorded in restructuring expense in the 2007
Consolidated Statement of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
I-14
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- ---------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ---------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 64 - 64
Adjustments in fiscal 2007 (30) - (30)
Paid in fiscal 2007 (24) - (24)
- ---------------------------------------------------------------------------------------------
Balance, October 29, 2006 $ 10 - 10
- ---------------------------------------------------------------------------------------------
As of October 29, 2006 and April 30, 2006, there were no assets classified as
held for sale.
Fiscal 2003 Culp Decorative Fabrics Restructuring
During the second quarter of fiscal 2007, the company recorded a restructuring
related charge of $4,000 for operating costs associated with a closed plant
facility. This $4,000 restructuring related charge was recorded in cost of sales
in the 2007 Consolidated Statement of Net Income. During the first six months of
fiscal 2007, as a result of management's continual evaluation of the
restructuring accrual, the reserve was decreased by approximately $22,000 to
reflect current estimates of sub-lease income and other exit costs. This $22,000
decrease in the reserve was recorded in restructuring expense in the 2007
Consolidated Statement of Net Income. Additionally, the company recorded a
restructuring related charge of $16,000 for operating costs associated with a
closed plant facility. This $16,000 restructuring related charge was recorded in
cost of sales in the 2007 Consolidated Statement of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
- ---------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ---------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 88 2,324 2,412
Adjustments in fiscal 2007 - (22) (22)
Paid in fiscal 2007 (22) (433) (455)
- ---------------------------------------------------------------------------------------------
Balance, October 29, 2006 $ 66 1,869 1,935
- ---------------------------------------------------------------------------------------------
As of October 29, 2006 and April 30, 2006, there were no assets classified as
held for sale.
Fiscal 2001 Culp Decorative Fabrics Restructuring
During the first quarter and first six months of fiscal 2007, as a result of
management's continual evaluation of the restructuring accrual, the reserve was
decreased by approximately $5,000 to reflect current estimates of future health
care claims. This $5,000 decrease in the reserve was recorded in restructuring
expense in the 2007 Consolidated Statement of Net Income. Additionally, the
company recorded a restructuring related charge of $26,000 for other operating
costs associated with a closed plant facility. This $26,000 restructuring
related charge was recorded in cost of sales in the 2007 Consolidated Statement
of Net Income.
The following summarizes the fiscal 2007 activity in the restructuring accrual
(dollars in thousands):
I-15
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
- ---------------------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- ---------------------------------------------------------------------------------------------
Balance, April 30, 2006 $ 5 - 5
Adjustments in fiscal 2007 (5) - (5)
Paid in fiscal 2007 - - -
- ---------------------------------------------------------------------------------------------
Balance, October 29, 2006 $ - - -
- ---------------------------------------------------------------------------------------------
As of October 29, 2006 and April 30, 2006, there were no assets classified as
held for sale.
-----------------------------------------------------------------
11. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number
of shares outstanding during the period. Diluted net income (loss) 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 net income
(loss) per share follows:
- ---------------------------------------------------------------------------------------------
Three months ended
(amounts in thousands) October 29, 2006 October 30, 2005
- ---------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,686 11,559
Effect of dilutive stock options 3 0
- ---------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,689 11,559
- ---------------------------------------------------------------------------------------------
Options to purchase 464,750 and 506,125 shares of common stock were not included
in the computation of diluted net income (loss) per share for the three months
ended October 29, 2006 and October 30, 2005, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
Options to purchase 48,209 shares of common stock were not included in the
computation of diluted net loss per share for the three months ended October 30,
2005, because the company incurred a net loss for the period.
- ---------------------------------------------------------------------------------------------
Six months ended
(amounts in thousands) October 29, 2006 October 30, 2005
- ---------------------------------------------------------------------------------------------
Weighted average common shares outstanding, basic 11,679 11,555
Effect of dilutive stock options 3 0
- ---------------------------------------------------------------------------------------------
Weighted average common shares outstanding, diluted 11,682 11,555
- ---------------------------------------------------------------------------------------------
Options to purchase 449,813 and 510,750 shares of common stock were not included
in the computation of diluted net income (loss) per share for the six months
ended October 29, 2006 and October 30, 2005, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
I-16
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Options to purchase 42,171 shares of common stock were not included in the
computation of diluted net loss per share for the six months ended October 30,
2005, 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,
sources, and sells fabrics to bedding manufacturers. The upholstery fabrics
segment principally manufactures, sources, and sells fabrics primarily to
residential and commercial (contract) furniture manufacturers.
Financial information for the company's operating segments follow:
- ---------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) October 29, 2006 October 30, 2005
- ---------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 23,494 $ 23,990
Upholstery Fabrics 35,546 43,016
- ---------------------------------------------------------------------------------------------
$ 59,040 $ 67,006
- ---------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 4,144 $ 3,302
Upholstery Fabrics 4,138 4,000
- ---------------------------------------------------------------------------------------------
Total segment gross profit 8,282 7,302
Restructuring related charges (291) (1) (1,751) (3)
- ---------------------------------------------------------------------------------------------
$ 7,991 $ 5,551
- ---------------------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 1,674 $ 1,636
Upholstery Fabrics 3,745 4,069
- ---------------------------------------------------------------------------------------------
Total segment selling, general, and
administrative expenses 5,419 5,705
Unallocated corporate expenses 824 821
Restructuring related charges 30 (1) -
- ---------------------------------------------------------------------------------------------
$ 6,273 $ 6,526
- ---------------------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 2,470 $ 1,666
Upholstery Fabrics 393 (69)
- ---------------------------------------------------------------------------------------------
Total segment operating income 2,863 1,597
Unallocated corporate expenses (824) (821)
Restructuring credit (expense) 264 (2) (4,412)(4)
Restructuring related charges (321)(1) (1,751)(3)
- ---------------------------------------------------------------------------------------------
$ 1,982 $ (5,387)
- ---------------------------------------------------------------------------------------------
(1) The $291,000 and the $30,000 represent restructuring related charges for
operating costs associated with the closing of plant facilities. These
charges relate to the Upholstery Fabrics segment.
I-17
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(2) The $264,000 restructuring credit represents $354,000 for asset movement
costs, $333,000 for lease termination and other exit costs, a credit of
$53,000 for write-downs of a building and equipment, a credit of $437,000
for sales proceeds received on equipment with no carrying value, and a
credit of $461,000 associated with employee termination benefits. These
charges relate to the Upholstery Fabrics segment.
(3) The $1.8 million represents restructuring related charges of $1.4 million
for accelerated depreciation, $331,000 for inventory markdowns, and $65,000
for operating costs associated with the closing of plant facilities. These
charges relate to the Upholstery Fabrics segment.
(4) The $4.4 million represents restructuring charges of $2.1 million for
write-downs of buildings and equipment, $1.6 million for employee
termination benefits, $395,000 for asset movement costs, and $328,000 for
lease termination costs. These charges relate to the Upholstery Fabrics
segment.
- -------------------------------------------------------------------------------------------------
Six months ended
(dollars in thousands) October 29, 2006 October 30, 2005
- -------------------------------------------------------------------------------------------------
Net sales:
Mattress Fabrics $ 45,339 $ 46,905
Upholstery Fabrics 76,286 82,443
- -------------------------------------------------------------------------------------------------
$ 121,625 $ 129,348
- -------------------------------------------------------------------------------------------------
Gross profit:
Mattress Fabrics $ 7,665 $ 6,397
Upholstery Fabrics 9,423 7,957
- -------------------------------------------------------------------------------------------------
Total segment gross profit 17,088 14,354
Restructuring related charges (1,037) (5) (2,246) (7)
- -------------------------------------------------------------------------------------------------
$ 16,051 $ 12,108
- -------------------------------------------------------------------------------------------------
Selling, general, and administrative expenses:
Mattress Fabrics $ 3,337 $ 3,373
Upholstery Fabrics 7,453 8,405
- -------------------------------------------------------------------------------------------------
Total segment selling, general, and
administrative expenses 10,790 11,778
Unallocated corporate expenses 2,026 1,582
Restructuring related charges 30 (5) 3,022 (8)
- -------------------------------------------------------------------------------------------------
$ 12,846 $ 16,382
- -------------------------------------------------------------------------------------------------
Operating income (loss):
Mattress Fabrics $ 4,328 $ 3,024
Upholstery Fabrics 1,970 (448)
- -------------------------------------------------------------------------------------------------
Total segment operating income 6,298 2,576
Unallocated corporate expenses (2,026) (1,582)
Restructuring expense (466) (6) (6,238) (9)
Restructuring related charges (1,067) (5) (5,268)(10)
- -------------------------------------------------------------------------------------------------
$ 2,302 $ (10,512)
- -------------------------------------------------------------------------------------------------
I-18
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(5) The $1.1 million represents restructuring related charges of $798,000 for
operating costs associated with the closing of plant facilities and
$239,000 for inventory markdowns. The $30,000 represents restructuring
related charges for operating costs associated with the closing of plant
facilities. These charges relate to the Upholstery Fabrics segment.
(6) The $466,000 represents restructuring charges of $740,000 for asset
movement costs, $327,000 for lease termination and other exit costs,
$62,000 for net write-downs of buildings and equipment, a credit of
$226,000 for employee termination benefits, and a credit of $437,000 for
sales proceeds received on equipment with no carrying value associated with
the closing of plant facilities. These charges relate to the Upholstery
Fabrics segment.
(7) The $2.3 million represents restructuring related charges of $1.9 million
for accelerated depreciation, $331,000 for inventory markdowns, and $65,000
for operating costs associated with the closing of plant facilities. These
charges primarily relate to the Upholstery Fabrics segment.
(8) The $3.0 million represents accelerated depreciation. These charges
primarily relate to the Upholstery Fabrics segment.
(9) The $6.2 million represents restructuring charges of $2.9 million for
write-downs of buildings and equipment, $1.6 million for asset movement
costs, $1.4 million for employee termination benefits, and $378,000 for
lease termination costs. These charges primarily relate to the Upholstery
Fabrics segment.
(10) The $5.3 million represents restructuring related charges of $4.9 million
for accelerated deprecation, $331,000 for inventory markdowns, and $65,000
for other operating costs associated with the closing of plant facilities.
These charges primarily relate to the Upholstery Fabrics segment.
I-19
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Balance sheet information for the company's operating segments follow:
- ---------------------------------------------------------------------------------------------
(dollars in thousands) October 29, 2006 April 30, 2006
- ---------------------------------------------------------------------------------------------
Segment assets:
Mattress Fabrics
Current assets (13) $ 22,660 $ 21,179
Property, plant and equipment (11) 23,441 25,357
- ---------------------------------------------------------------------------------------------
Total mattress fabrics assets 46,101 46,536
- ---------------------------------------------------------------------------------------------
Upholstery Fabrics
Current assets (13) 45,056 44,563
Assets held for sale 1,571 3,111
Property, plant and equipment (12) 19,000 19,229
- ---------------------------------------------------------------------------------------------
Total upholstery fabrics assets 65,627 66,903
- ---------------------------------------------------------------------------------------------
Total segment assets 111,728 113,439
Non-segment assets:
Cash and cash equivalents 9,706 9,714
Deferred income taxes 29,143 27,296
Other current assets 1,506 1,287
Property, plant & equipment 46 53
Goodwill 4,114 4,114
Other assets 1,354 1,564
- ---------------------------------------------------------------------------------------------
Total assets $ 157,597 $ 157,467
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Three months ended
(dollars in thousands) October 29, 2006 October 30, 2005
- ---------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 28 $ 546
Upholstery Fabrics 1,337 833
- ---------------------------------------------------------------------------------------------
$ 1,365 $ 1,379
- ---------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 918 $ 893
Upholstery Fabrics 744 1,417
- ---------------------------------------------------------------------------------------------
Total segment depreciation expense 1,662 2,310
Accelerated depreciation - 1,355
- ---------------------------------------------------------------------------------------------
$ 1,662 $ 3,665
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Six months ended
(dollars in thousands) October 29, 2006 October 30, 2005
- ---------------------------------------------------------------------------------------------
Capital expenditures:
Mattress Fabrics $ 54 $ 3,416
Upholstery Fabrics 1,991 2,007
- ---------------------------------------------------------------------------------------------
$ 2,045 $ 5,423
- ---------------------------------------------------------------------------------------------
Depreciation expense:
Mattress Fabrics $ 1,860 $ 1,749
Upholstery Fabrics 1,504 3,216
- ---------------------------------------------------------------------------------------------
Total segment depreciation expense 3,364 4,965
Accelerated depreciation - 4,871
- ---------------------------------------------------------------------------------------------
$ 3,364 $ 9,836
- ---------------------------------------------------------------------------------------------
I-20
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(11) Included in property, plant, and equipment are assets located in the U.S.
totaling $12.3 million and $12.9 million at October 29, 2006 and April 30,
2006, respectively.
(12) Included in property, plant, and equipment are assets located in the U.S.
totaling $11.8 million and $13.8 million at October 29, 2006 and April 30,
2006, respectively. Included in this U.S. property, plant, and equipment
are various other corporate allocations totaling $4.0 million and $4.1
million at October 29, 2006 and April 30, 2006, respectively.
(13) Current assets represent accounts receivable and inventory for the
respective segment.
-----------------------------------------------------------------
13. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No.48, "Accounting for Uncertainty in Income Taxes" ("FIN No.
48") which clarifies the criteria for the recognition of tax benefits under SFAS
No. 109, "Accounting for Income Taxes." This Interpretation prescribes a
comprehensive model for financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken, or expected to be
taken, in income tax returns. FIN No.48 is effective for fiscal years beginning
after December 15, 2006 and requires that the cumulative effect of applying its
provisions be disclosed as a one-time, non-cash charge or credit against the
opening balance of retained earnings in the year of adoption. This
Interpretation will be adopted by the company in the first quarter of fiscal
2008. The company is currently evaluating the potential impact of FIN No. 48 and
any impact on its financial position cannot be readily determined at this time.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 establishes a common definition of fair value,
provides a framework for measuring fair value under accounting principles
generally accepted in the United States and expands disclosure requirements
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and is effective for the company in the first
quarter of fiscal 2009. The company is currently evaluating the impact, if any,
the adoption of SFAS No. 157 will have on its consolidated financial statements.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 was issued in
order to eliminate the diversity of practice surrounding how public companies
quantify financial statement misstatements. This SAB establishes a "dual
approach" methodology that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the company's
financial statements (both the statement of operations and statement of
financial position). The SEC has stated SAB No. 108 should be applied no later
than the annual financial statements for the first fiscal year ending after
November 15, 2006. SAB No. 108 permits a company to elect either a retrospective
or prospective application. Prospective application requires recording a
cumulative effect adjustment in the period of adoption, as well as detailed
disclosure of the nature and amount of each individual error being corrected
through the cumulative adjustment and how and when it arose. The company is
currently evaluating the impact, if any, the application of SAB No 108 will have
on the consolidated financial statements.
-----------------------------------------------------------------
I-21
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 expectations for the company's future operations or success,
sales, gross profit margins, operating income, SG&A or other expenses, and
earnings, as well as any statements regarding future economic or industry trends
or future developments. 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, changes in
consumer preferences for various categories of furniture coverings, as well as
changes in costs to produce such products (including import duties and quotas or
other import costs) can have significant effect on demand for the company's
products. Also, changes in the value of the U.S. dollar versus other currencies
can affect the company's financial results because a significant portion of the
company's operations are located outside the United States. Further, 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.
Further information about these factors, as well as other factors that could
affect the company's future operations or financial results and the matters
discussed in forward-looking statements are included in Item 1A "Risk Factors"
section in the company's Form 10-K filed with the Securities and Exchange
Commission on July 26, 2006 for the fiscal year ended April 30, 2006.
Item 2. 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
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. (or the "company") has two operating segments - mattress fabrics and
upholstery fabrics. The company manufactures, sources and markets fabrics that
are used primarily in the production of bedding products and residential and
commercial upholstered furniture, including mattresses, box springs, mattress
sets, sofas, recliners, chairs, loveseats, sectionals, sofa-beds, and office
seating. The company primarily markets fabrics that have broad appeal in the
I-22
"good" and "better" priced categories of furniture and bedding. Management
believes that Culp is the largest producer 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 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." The company's fiscal
year is the 52 or 53 week period ending on the Sunday closest to April 30. The
company's six months ended October 29, 2006, and October 30, 2005, represent 26
week periods.
The following tables set forth the company's net sales, gross profit, selling,
general and administrative expenses and operating income (loss) by segment for
the three and six months ended October 29, 2006 and October 30, 2005.
I-23
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE THREE MONTHS ENDED OCTOBER 29, 2006 AND OCTOBER 30, 2005
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- -------------------------
October 29, October 30, % Over October 29, October 30,
Net Sales by Segment 2006 2005 (Under) 2006 2005
- -------------------------------------------------------- ----------- ----------- --------- ------------ -----------
Mattress Fabrics $ 23,494 23,990 (2.1)% 39.8 % 35.8 %
Upholstery Fabrics 35,546 43,016 (17.4)% 60.2 % 64.2 %
----------- ----------- --------- ------------ -----------
Net Sales $ 59,040 67,006 (11.9)% 100.0 % 100.0 %
=========== =========== ========= ============ ===========
Gross Profit by Segment Gross Profit Margin
- -------------------------------------------------------- -------------------------
Mattress Fabrics $ 4,144 3,302 25.5 % 17.6 % 13.8 %
Upholstery Fabrics 4,138 4,000 3.5 % 11.6 % 9.3 %
----------- ----------- --------- ------------ -----------
Subtotal 8,282 7,302 13.4 % 14.0 % 10.9 %
Restructuring related charges (291)(1) (1,751)(3) (83.4)% (0.5)% (2.6)%
----------- ----------- --------- ------------ -----------
Gross Profit $ 7,991 5,551 44.0 % 13.5 % 8.3 %
=========== =========== ========= ============ ===========
Selling, General and Administrative expenses by Segment Percent of Sales
- -------------------------------------------------------- -------------------------
Mattress Fabrics $ 1,674 1,636 2.3 % 7.1 % 6.8 %
Upholstery Fabrics 3,745 4,069 (8.0)% 10.5 % 9.5 %
Unallocated Corporate expenses 824 821 0.4 % 1.4 % 1.2 %
----------- ----------- --------- ------------ -----------
6,243 6,526 (4.3)% 10.6 % 9.7 %
Restructuring related charges 30 (1) - 100.0 % 0.1 % 0.0 %
----------- ----------- --------- ------------ -----------
Selling, General and Administrative expenses $ 6,273 6,526 (3.9)% 10.6 % 9.7 %
=========== =========== ========= ============ ===========
Operating Income
Operating Income (loss) by Segment (Loss) Margin
- -------------------------------------------------------- -------------------------
Mattress Fabrics $ 2,470 1,666 48.3 % 10.5 % 6.9 %
Upholstery Fabrics 393 (69) 669.6 % 1.1 % (0.2)%
Unallocated corporate expenses (824) (821) 0.4 % (1.4)% (1.2)%
----------- ----------- --------- ------------ -----------
Subtotal 2,039 776 162.8 % 3.5 % 1.2 %
Restructuring credit (expense) 264 (2) (4,412)(4) (106.0)% 0.4 % (6.6)%
Restructuring related charges (321)(1) (1,751)(3) (81.7)% (0.5)% (2.6)%
----------- ----------- --------- ------------ -----------
Operating income (loss) $ 1,982 (5,387) 136.8 % 3.4 % (8.0)%
=========== =========== ========= ============ ===========
Depreciation by Segment
- --------------------------------------------------------
Mattress Fabrics $ 918 893 2.8 %
Upholstery Fabrics 744 1,417 (47.5)%
----------- ----------- ---------
Subtotal 1,662 2,310 (28.1)%
Accelerated Depreciation - 1,355 (100.0)%
----------- ----------- ---------
Total Depreciation $ 1,662 3,665 (54.7)%
=========== =========== =========
Notes:
(1) The $291,000 and $30,000 represents restructuring related charges for other operating costs associated with the closing
of plant facilities.
(2) The $264,000 restructuring credit represents $354,000 for asset movement costs, $333,000 for lease termination and other
exit costs, a credit of $53,000 for write-downs of a building and equipment, a credit of $437,000 for sales proceeds
received on equipment with no carrying value associated with the closing of plant facilities, and a credit of $461,000
associated with employee termination benefits.
(3) The $1.8 million represents restructuring related charges of $1.4 million for accelerated depreciation, $331,000 for
inventory markdowns, and $65,000 for other operating costs associated with the closing of plant facilities.
(4) The $4.4 million represents restructuring charges of $2.1 million for write-downs of buildings and equipment, $1.6
million for employee termination benefits, $395,000 for asset movement costs and $328,000 for lease termination costs.
I-24
CULP, INC.
SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT
FOR THE SIX MONTHS ENDED OCTOBER 29, 2006 AND OCTOBER 30, 2005
(Amounts in thousands)
SIX MONTHS ENDED (UNAUDITED)
---------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- ------------------------
October 29, October 30, % Over October 29, October 30,
Net Sales by Segment 2006 2005 (Under) 2006 2005
- -------------------------------------------------------- ----------- ----------- -------- ------------ -----------
Mattress Fabrics $ 45,339 46,905 (3.3)% 37.3 % 36.3 %
Upholstery Fabrics 76,286 82,443 (7.5)% 62.7 % 63.7 %
----------- ----------- -------- ------------ -----------
Net Sales $ 121,625 129,348 (6.0)% 100.0 % 100.0 %
=========== =========== ======== ============ ===========
Gross Profit by Segment Gross Profit Margin
- -------------------------------------------------------- ------------------------
Mattress Fabrics $ 7,665 6,397 19.8 % 16.9 % 13.6 %
Upholstery Fabrics 9,423 7,957 18.4 % 12.4 % 9.7 %
----------- ----------- -------- ------------ -----------
Subtotal 17,088 14,354 19.0 % 14.0 % 11.1 %
Restructuring related charges (1,037)(1) (2,246)(3) (53.8)% (0.9)% (1.7)%
----------- ----------- -------- ------------ -----------
Gross Profit $ 16,051 12,108 32.6 % 13.2 % 9.4 %
=========== =========== ======== ============ ===========
Selling, General and Administrative expenses by Segment Percent of Sales
- -------------------------------------------------------- ------------------------
Mattress Fabrics $ 3,337 3,373 (1.1)% 7.4 % 7.2 %
Upholstery Fabrics 7,453 8,405 (11.3)% 9.8 % 10.2 %
Unallocated Corporate expenses 2,026 1,582 28.1 % 1.7 % 1.2 %
----------- ----------- -------- ------------ -----------
Subtotal 12,816 13,360 (4.1)% 10.5 % 10.3 %
Restructuring related charges 30 (1) 3,022 (4) (99.0)% 0.0 % 2.3 %
----------- ----------- -------- ------------ -----------
Selling, General and Administrative expenses $ 12,846 16,382 (21.6)% 10.6 % 12.7 %
=========== =========== ======== ============ ===========
Operating Income
Operating Income (loss) by Segment (Loss) Margin
- -------------------------------------------------------- ------------------------
Mattress Fabrics $ 4,328 3,024 43.1 % 9.5 % 6.4 %
Upholstery Fabrics 1,970 (448) 539.7 % 2.6 % (0.5)%
Unallocated corporate expenses (2,026) (1,582) 28.1 % (1.7)% (1.2)%
----------- ----------- -------- ------------ -----------
Subtotal 4,272 994 329.8 % 3.5 % 0.8 %
Restructuring expense (466)(2) (6,238)(5) (92.5)% (0.4)% (4.8)%
Restructuring related charges (1,067)(1) (5,268)(6) (79.7)% (0.9)% (4.1)%
----------- ----------- -------- ------------ -----------
Operating income (loss) $ 2,739 (10,512) 126.1 % 2.3 % (8.1)%
=========== =========== ======== ============ ===========
Depreciation by Segment
- --------------------------------------------------------
Mattress Fabrics $ 1,860 1,749 6.3 %
Upholstery Fabrics 1,504 3,216 (53.2)%
----------- ----------- --------
Subtotal 3,364 4,965 (32.2)%
Accelerated Depreciation - 4,871 (100.0)%
----------- ----------- --------
Total Depreciation $ 3,364 9,836 (65.8)%
=========== =========== ========
Notes:
(1) The $1.1 million represents restructuring related charges of $798,000 for other operating costs associated with the
closing of plant facilities and $239,000 for inventory markdowns. The $30,000 represents restructuring related charges
for other operating costs associated with the closing of plant facilities.
(2) The $466,000 represents restructuring charges of $740,000 for asset movement costs, $327,000 for lease termination
and other exit costs, $62,000 for net write-downs of buildings and equipment, a credit of $226,000 for employee
termination benefits, and a credit of $437,000 for sales proceeds received on equipment with no carrying value
associated with the closing of plant facilities.
(3) The $2.3 million represents restructuring related charges of $1.9 million of accelerated depreciation, $331,000 for
inventory markdowns, and $65,000 for other operating costs associated with the closing of plant facilities.
(4) The $3.0 million represents accelerated depreciation.
(5) The $6.2 million represents restructuring charges of $2.9 million for write-downs of buildings and equipment, $1.6
million for asset movement costs, $1.4 million for employee termination benefits, and $378,000 for lease termination
costs.
(6) The $5.3 million represents restructuring related charges of $4.9 million for accelerated depreciation, $331,000 for
inventory markdowns, and $65,000 for other operating costs associated with the closing of plant facilities.
I-25
Three and Six Months ended October 29, 2006 compared with Three and Six Months
ended October 30, 2005
For the second quarter of fiscal 2007, net sales were $59.0 million compared to
$67.0 million for the second quarter of fiscal 2006. The company reported a net
income of $812,000, or $0.07 per share diluted, in the second quarter of fiscal
2007, which included restructuring and related pre-tax charges of $365,000. The
company reported a net loss of $4.2 million, or $0.36 per share diluted, in the
second quarter of fiscal 2006, which included restructuring and related pre-tax
charges of $6.2 million.
For the first six months of fiscal 2007, net sales were $121.6 million compared
to $129.3 million for the first six months of fiscal 2006. The company reported
a net income of $946,000 or $0.08 per share diluted, for the first six months of
fiscal 2007, which included restructuring and related pre-tax charges of $1.5
million. The company reported a net loss of $8.1 million, or $0.70 per share
diluted, for the first six months of fiscal 2006, which included restructuring
and related pre-tax charges of $11.5 million.
Restructuring and Related Charges
During the second quarter of fiscal 2007, total restructuring and related
charges incurred were $365,000, of which $354,000 related to asset movement
costs, $333,000 for lease termination and other exit costs, $321,000 for
operating costs associated with the closing of plant facilities, a credit of
$53,000 for write-downs of a building and equipment, a credit of $129,000 for
sales proceeds received on equipment with no carrying value associated with
closed plant facilities, and a credit of $461,000 associated with employee
termination benefits. Of the total charge, $291,000 was recorded in cost of
sales, $30,000 was recorded in selling, general, and administrative expenses, a
credit of $264,000 was recorded in restructuring expense, and a charge of
$308,000 was recorded in other expense in the 2007 Consolidated Statement of Net
Income. These charges relate to the Upholstery Fabrics segment.
During the first six months of fiscal 2007, total restructuring and related
charges incurred were $1.5 million of which $828,000 represents operating costs
associated with the closing of plant facilities, $740,000 for asset movement
costs, $327,000 for lease termination and other exit costs, $239,000 for
inventory markdowns, $62,000 for net write-downs of buildings and equipment, a
credit of $226,000 for employee termination benefits, and a credit of $437,000
for sales proceeds received on equipment with no carrying value associated with
closed plant facilities. Of the total charge, $1.0 million was recorded in cost
of sales, $30,000 was recorded in selling, general, and administrative expenses,
and $466,000 was recorded in restructuring expense in the 2007 Consolidated
Statement of Net Income. These charges relate to the Upholstery Fabrics segment.
Mattress Fabrics Segment
Net Sales -- Mattress fabric (known as mattress ticking) sales for the second
quarter of fiscal 2007 decreased 2.1% to $23.5 million compared to $24.0 million
for the second quarter of fiscal 2006. Mattress ticking yards sold during the
second quarter of fiscal 2007 were 10.2 million compared to 11.1 million yards
in the second quarter of fiscal 2006, a decline of 7.9%. This trend reflects a
decline in demand for printed ticking, a less popular category. However, sales
of knitted ticking continued to increase, reflecting changing customer
preferences. The average selling price was $2.28 per yard for the second quarter
of fiscal 2007, compared to $2.16 per yard in the second quarter of fiscal 2006,
an increase of 5.5%. This increase is due to the shift in product mix to
increased sales of substantially higher priced knitted ticking. For the first
six months of fiscal 2007, net sales decreased 3.3% to $45.3 million compared to
$46.9 million for the first six months of fiscal 2006. Mattress ticking yards
sold during the first six months of fiscal 2007 were 19.7 million compared to
21.2 million for the first six months of fiscal 2006. For the first six months
I-26
of fiscal 2007, the average selling price for mattress fabrics was $2.29 per
yard compared to $2.22 per yard for the first six months of fiscal 2006, an
increase of 3.3%. The trends (and the factors causing those trends) for the
first six months of fiscal 2007 compared with the first six months of fiscal
2006 parallel those for the second quarter of fiscal 2007 compared with the
second quarter of fiscal 2006.
Operating Income -- For the second quarter of fiscal 2007, the mattress fabrics
segment reported operating income of $2.5 million, or 10.5% of net sales,
compared to $1.7 million, or 6.9% of net sales, for the second quarter of fiscal
2006. Operating margins improved for the second quarter of fiscal 2007 compared
to the second quarter of fiscal 2006 due to productivity gains from the $10.0
million capital project implemented over the past 2 years. We also continue to
see higher sales and gross margins compared to prior periods in knitted ticking,
and we expect this product line to represent a higher percentage of our mattress
ticking business in fiscal 2007. We are experiencing a growing trend with our
customers to use more knits on the top of the mattress and woven jacquards on
the sides. For the first six months of fiscal 2007, operating income was $4.3
million, or 9.5% of net sales, compared to $3.0 million, or 6.4% of net sales,
for the first six months of fiscal 2006. The trends (and the factors causing
those trends) for the first six months of fiscal 2007 compared with the first
six months of fiscal 2006 parallel those for the second quarter of fiscal 2007
compared with the second quarter of fiscal 2006.
Segment Assets -- Segment assets consist of accounts receivable, inventory, and
property, plant, and equipment. As of October 29, 2006, accounts receivable and
inventory totaled $22.7 million compared to $21.2 million at April 30, 2006.
Also as of October 29, 2006, property, plant and equipment totaled $23.4 million
compared to $25.4 million at April 30, 2006. Included in property, plant, and
equipment are assets located in the U.S. totaling $12.3 million and $12.9
million at October 29, 2006, and April 30, 2006, respectively.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for the second quarter of fiscal 2007
decreased 17.4% to $35.5 million compared with $43.0 million in the second
quarter of fiscal 2006. Upholstery fabric yards sold during the second quarter
of fiscal 2007 were 8.4 million compared to 10.3 million in the second quarter
of fiscal 2006, a decline of 18.1%. The average selling price was $4.16 per yard
for the second quarter of fiscal 2007, compared to $4.19 per yard in the second
quarter of fiscal 2006, a decrease of less than 1%. Sales of upholstery fabrics
reflect higher sales of non-U.S. produced fabrics, and continued very weak
demand industry wide for U.S. produced fabrics, driven by consumer preference
for leather and suede furniture and other imported fabrics, including an
increasing amount of cut and sewn kits. Sales of non-U.S. produced fabrics were
$20.6 million in the second quarter of fiscal 2007 compared with $12.5 million
in the second quarter of fiscal 2006, an increase of 65%. The company expects
continued growth in the sales of fabrics produced outside the U.S., however, the
year-over-year growth rate is expected to decline. Sales of U.S. produced
fabrics decreased 51% to $14.9 million in the second quarter of fiscal 2007
compared to $30.5 million in the second quarter of fiscal 2006.
For the first six months of fiscal 2007, net sales decreased 7.5% to $76.3
million compared to $82.4 million for the first six months of fiscal 2006.
Upholstery fabric yards sold during the first six months of fiscal 2007 were
18.0 million compared to 19.3 million for the first six months of fiscal 2006, a
decline of 6.7%.The average selling price for the first six months of fiscal
2007 was $4.19 compared to $4.28 for the first six months of fiscal 2006, a
decrease of 2.2%. Sales of non-U.S. produced fabrics were $44.1 million for the
first six months of fiscal 2007 compared with $24.1 million for the first six
months of fiscal 2006, and increase of 83% over the same period last year. Sales
of U.S. produced fabrics decreased 45% to $32.1 million for the first six months
of fiscal 2007 compared with $58.3 million for the first six months of fiscal
I-27
2006. The trends (and the factors causing those trends) for the first six months
of fiscal 2007 compared with the first six months of fiscal 2006 parallel those
for the second quarter of fiscal 2007 compared with the second quarter of fiscal
2006.
Operating Income (Loss) - Operating income for the second quarter of fiscal 2007
was $393,000 compared with an operating loss of $69,000 for the second quarter
of fiscal 2006. These results reflect significantly higher gross profit on
non-U.S. produced fabrics and substantially lower gross profit related to U.S.
produced fabrics. Operating income for the first six months of fiscal 2007 was
$2.0 million compared with an operating loss of $448,000 for the first six
months of fiscal 2006. The trends (and the factors causing those trends) for the
first six months of fiscal 2007 compared with the first six months of fiscal
2006 parallel those for the second quarter of fiscal 2007 compared with the
second quarter of fiscal 2006.
Non-U.S. Produced Sales - Net sales of upholstery fabrics produced outside the
company's U.S. manufacturing operations accounted for approximately 58% of total
upholstery fabric sales in the second quarter of 2007, compared to 29% for the
second quarter of fiscal 2006. Net sales of upholstery fabrics produced outside
the company's U.S. manufacturing operations accounted for approximately 58% of
total upholstery fabric sales for the first six months of fiscal 2007, compared
to 29% for the first six months of fiscal 2006. The company has established an
industry-leading operation near Shanghai, China, designed to accommodate the
growing customer demand for products sourced outside the U.S. This wholly-owned
platform is the key driver of the company's future growth in upholstery fabrics.
The company is aggressively expanding its capabilities in China with a strong
focus on product innovation, quality, and global logistics. The company now
employs 450 people in China and has five buildings approximating a total of
300,000 square feet.
U.S. Produced Sales - Management has continued to take aggressive actions over
the past year to reduce manufacturing complexities and improve the cost
structure of its U.S. upholstery fabric operations. The lower sales volume for
the first six months of fiscal 2007 has had a significant impact on the
company's operating results, and employment levels were reduced during the first
six months of fiscal 2007 across the remaining three U.S. manufacturing
facilities to more appropriately support current demand.
As a result of the continuing sharp declines in demand for U.S. produced
fabrics, management will continue to evaluate its domestic strategy and
production requirements. Management remains committed to take whatever
additional steps are necessary to achieve profitable U.S. upholstery fabric
operations, and the company could take additional restructuring actions in the
near future. The company could experience additional markdowns of its inventory
and write-downs of its property, plant, and equipment from any new restructuring
initiatives.
Segment Assets -- Segment assets consist of accounts receivable, inventory, and
property, plant, and equipment. As of October 29, 2006, accounts receivable and
inventory totaled $45.1 million compared to $44.6 million at April 30, 2006. As
of October 29, 2006, assets held for sale totaled $1.6 million compared to $3.1
million at April 30, 2006. The company received sales proceeds of $2.3 million
on assets held for sale during the six month period ended October 29, 2006. The
company expects the majority of assets held for sale as of October 29, 2006, to
be sold over the next twelve months. As of October 29, 2006, property, plant,
and equipment totaled $19.0 million compared to $19.2 million at April 30, 2006.
Included in property, plant, and equipment are assets located in the U.S.
totaling $11.8 million and $13.8 million at October 29, 2006, and April 30,
2006, respectively. Included in this U.S. property, plant, and equipment are
corporate allocations totaling $4.0 million and $4.1 million at October 29,
2006, and April 30, 2006, respectively.
I-28
Other (Income) Expense Categories
Selling, General and Administrative Expenses - Selling, general, and
administrative expenses were $6.3 million for the second quarter of fiscal 2007
compared with $6.5 million for the second quarter of fiscal 2006. Selling,
general, and administrative expenses were $12.8 million for the first six months
of fiscal 2007 compared with $16.4 million for the first six months of fiscal
2006. Included in the $16.4 million for the first six months of fiscal 2006 was
$3.0 million in accelerated depreciation associated with the company's design
and distribution centers sold in June of 2005. The company adopted SFAS No. 123R
as of the beginning of the current year, which requires all share-based payments
to be recognized as expense over the requisite service period based upon values
as of the grant dates. Under the provisions of SFAS No. 123R, total stock-based
compensation expense was $287,000 and $155,000 for the six-month and three-month
periods ended October 29, 2006. The company recorded $104,000 and $51,000 of
stock-based compensation expense for stock options accounted for under the
provisions of APB Opinion No.25 for the six-month and three-month periods ended
October 30, 2005.
Interest Expense (Income) -- Interest expense for the second quarter of fiscal
2007 was $938,000 compared to $942,000 for the second quarter of fiscal 2006.
Interest expense for the first six months of fiscal 2007 and 2006 was $1.9
million. Interest income for the second quarter of fiscal 2007 was $51,000
compared with $19,000 for the second quarter of fiscal 2006. Interest income for
the first six months of fiscal 2007 was $97,000 compared with $35,000 for the
first six months of fiscal 2006. The increase in interest income for fiscal 2007
reflects higher balances invested in money market funds.
Other Expense - Other expense for the second quarter of fiscal 2007 was $338,000
compared to $214,000 for the second quarter of fiscal 2006. Other expense for
the first six months of fiscal 2007 was $60,000 compared to $347,000 for the
first six months of fiscal 2006. This change primarily reflects fluctuations in
foreign currency exchange rates for subsidiaries domiciled in China and Canada.
Income Taxes -- The effective tax rate (taxes as a percentage of income (loss)
before income taxes) for the second quarter of fiscal 2007 was an income tax
benefit of 7.3% compared with 36.4% for the second quarter of fiscal 2006. The
effective tax rate for the first six months of fiscal 2007 was an income tax
benefit of 6.5% compared with 36.4% for the first six month of fiscal 2006. The
change in the effective income tax rate reflects losses from the company's U.S.
operations combined with lower income tax rates on income from foreign sources.
Liquidity and Capital Resources
Liquidity -- The company's sources of liquidity include cash and cash
equivalents, cash flow from operations, proceeds from the sale of buildings and
equipment related to closed plant facilities, and amounts available under its
revolving credit line. These sources have been adequate for day-to-day
operations and capital expenditures. Cash and cash equivalents were $9.7 million
at October 29, 2006 and April 30, 2006, respectively. Cash flow used in
operations for the first six months of fiscal 2007 was $72,000. Capital
expenditures were $1.7 million and primarily related to the company's China
operations. Payments on vendor-financed capital expenditures were $670,000, and
payments on long-term debt were $426,000. Proceeds from the sale of buildings
and equipment as part of the company's restructuring activities was $2.7
million, and proceeds from common stock in connection with stock option
exercises were $127,000.
Working Capital -- Accounts receivable as of October 29, 2006, decreased 13.5%
in comparison to October 30, 2005. Days sales outstanding totaled 36 days at
October 29, 2006, compared with 37 days at October 30, 2005. Inventories at
October 29, 2006, increased 2.3% from October 30, 2005. Inventory turns for the
I-29
second quarter of fiscal 2007 were 5.2 versus 5.0 for the second quarter of
fiscal 2006. Operating working capital (comprised of accounts receivable and
inventories, less trade accounts payable) was $49.2 million at October 29, 2006,
down from $53.8 million at October 30, 2005.
Financing Arrangements
Unsecured Term Notes
The company's unsecured term notes (the "Notes") are payable over an average
remaining term of three years beginning March 2007 through March 2010.
The principal payments are required to be paid in periodic installments over the
next four years as follows: Year 1 - $7.5 million; Year 2 - $19.9 million; Year
3 - $7.5 million; and Year 4 - $7.5 million.
On December 6, 2006, the company entered into a Second Amendment to Note
Purchase Agreements (the "Amendment"). The Amendment changes the financial
covenants applicable to the company to provide additional flexibility to account
for recent changes and potential additional changes that the company has made or
could make to its business and the accounting consequences of those changes,
including markdowns of its inventory and write-downs of its property, plant, and
equipment for closed facilities and a valuation allowance against the Company's
net deferred tax assets from U.S. operations. The Amendment also allows for the
reduction of the company's outstanding debt, without the payment of a prepayment
penalty, and raises the interest rate payable on the remaining outstanding
Notes. A summary of the terms of the Amendment is as follows:
-- Upon execution of this amendment, the Company will prepay $3.0 million
in principal amount and interest on the Notes, without prepayment
penalty or "make whole" premium. Another principal payment of $4.5
million will be due in March of 2007.
-- An increase in the interest rate on the Notes from 7.76% to 8.80%,
effective December 1, 2006.
-- A change in the calculation of consolidated net worth and tangible net
worth for purposes of financial covenant compliance, such that
restructuring expenses and related costs associated with previously
announced restructuring initiatives and any future restructuring
initiatives involving the remaining U.S. upholstery facilities will
not be counted against the Company's net worth.
-- A similar change in the calculation of net worth such that a valuation
allowance under U.S. generally accepted accounting principles against
the Company's net deferred tax assets from U.S. operations would not
be counted as a reduction of the Company's net worth for purposes of
financial covenant compliance.
-- A provision providing for prepayments of the Notes (at the option of
the noteholders and without prepayment penalty) to the extent that the
Company's cash balances exceed $8.0 million at the end of each fiscal
quarter.
-- Covenants regarding the use of net proceeds from sales of assets.
-- An increase in the amount of other debt allowed to be incurred by the
Company, including a provision that would allow for debt of up to $5.0
million in the Company's China subsidiary.
I-30
-- Other changes to financial covenants, including limits on capital
expenditures and restrictions on the payment of dividends or stock
repurchases.
-- Additional negative covenants to restrict certain changes in the
Company's business or methods of operation and certain business
transactions.
-- A decrease in the cross-default provision to cover any debt in an
amount of $1.0 million or more.
Real Estate Loan
The company's real estate loan is secured by a lien on the company's corporate
headquarters office located in High Point, NC. This term loan bears interest at
the one-month London Interbank Offered Rate plus an adjustable margin based on
the company's debt/EBITDA ratio, as defined in the agreement and is payable in
varying monthly installments through September 2010, with a final payment of
$3.3 million in October 2010.
Revolving Credit Agreement
On July 20, 2006, the company entered into a Ninth Amendment to this credit
agreement. This credit agreement provides for a revolving loan commitment of
$8.0 million, including letters of credit up to $5.5 million. Borrowings under
the credit facility bear interest at the one-month London Interbank Offered Rate
plus an adjustable margin based on the company's debt/EBITDA ratio, as defined
in the agreement. This agreement limits annual capital expenditures to $2.5
million for fiscal 2007, requires the company to maintain collected deposit
balances of at least $2.0 million, and maintain certain other financial
covenants as defined in the agreement. As of October 29, 2006, there were $2.9
million in outstanding letters of credit and no borrowings outstanding under the
agreement. This agreement expires on August 31, 2007.
Canadian Government Loans
In November 2005, the company entered into an agreement with the Canadian
government to provide for a term loan in the amount of $680,000. The proceeds
are to partially finance capital expenditures at the company's Rayonese facility
located in Quebec, Canada. This loan is non-interest bearing and is payable in
48 equal monthly installments commencing December 1, 2009. In addition to the
term loan entered into in November 2005, the company had an existing
non-interest bearing term loan with the Canadian government which was paid in
May 2006.
Overall
The company's loan agreements require that the company maintain compliance with
certain financial ratios. At October 29, 2006, the company was in compliance
with these financial covenants.
The principal payment requirements of long-term debt during the next five years
are: Year 1 - $7.7 million; Year 2 - $20.1 million; Year 3 - $7.8 million; Year
4 - $11.1 million; Year 5 - $178,000; and thereafter - $373,000.
Capital Expenditures -- Capital spending for the first six months of fiscal 2007
was $1.7 million, primarily for the company's China operations. The company's
revised capital budget for fiscal 2007 is $2.5 million. Depreciation for the
first six months of fiscal 2007 was $3.4 million and is estimated to be $7.0
I-31
million for all of fiscal 2007. The company expects that the availability of
funds under the revolving credit line and cash flow from operations will be
sufficient to fund its capital needs.
Liquidity Requirements -- As indicated earlier, the company's sources of
liquidity include cash and cash equivalents, cash flow from operations, proceeds
from the sale of buildings and equipment related to closed plant facilities and
amounts available under its revolving credit line. The company believes its
sources of liquidity continue to be adequate to meet its current operating
needs. In addition, the company is taking further steps to improve its
liquidity, including ongoing efforts to reduce inventories and operating
expenses. However, the company's cash position could be adversely affected by
factors beyond its control, such as weakening industry demand, delays in receipt
of payment on accounts receivable and the availability of trade credit.
Critical Accounting Policies and Recent Accounting Developments
U.S. generally accepted accounting principles require the company to make
estimates and assumptions that affect the reported amounts in the consolidated
financial statements and accompanying notes. Some of these estimates require
difficult, subjective and/or complex judgments about matters that are inherently
uncertain, and as a result actual results could differ significantly from those
estimates. Due to the estimation processes involved, management considers the
following summarized accounting policies and their application to be critical to
understanding the company's business operations, financial condition and results
of operations.
Accounts Receivable - Allowance for Doubtful Accounts. Substantially all of the
company's accounts receivable are due from residential and commercial furniture
and bedding manufacturers. Ownership of these manufacturers is increasingly
concentrated and certain bedding manufacturers have a high degree of leverage.
As of October 29, 2006, accounts receivable from furniture manufacturers totaled
approximately $14.8 million, and from bedding manufacturers approximately $8.5
million. Additionally, as of October 29, 2006, the aggregate accounts receivable
balance of the company's ten largest customers was $9.9 million, or 43% of trade
accounts receivable.
The company continuously performs credit evaluations of its customers,
considering numerous inputs including customers' financial position, past
payment history, cash flows and management capability; historical loss
experience; and economic conditions and prospects. Once evaluated, each customer
is assigned a credit grade. Credit grades are adjusted as warranted. Significant
management judgment and estimates must be used in connection with establishing
the reserve for allowance for doubtful accounts. While management believes that
adequate allowances for doubtful accounts have been provided in the consolidated
financial statements, it is possible that the company could experience
additional unexpected credit losses.
Inventory Valuation. The company operates as a "make-to-order" and
"make-to-stock" business. Although management closely monitors demand in each
product area to decide which patterns and styles to hold in inventory, the
increasing availability of low cost imports and the gradual shifts in consumer
preferences expose the company to write-downs of inventory.
Management continually examines inventory to determine if there are indicators
that the carrying value exceeds its net realizable value. Experience has shown
that the most significant indicator of the need for inventory write-downs is the
age of the inventory. As a result, the company provides inventory valuation
write-downs based upon set percentages for inventory aging categories, generally
using six, nine, twelve and fifteen month categories. While management believes
that adequate write-downs for excess and obsolete inventory have been made in
the consolidated financial statements, significant unanticipated changes in
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demand or changes in consumer tastes and preferences could result in additional
excess and obsolete inventory in the future.
Long-Lived Assets. The company follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes an impairment accounting model for long-lived assets to be held and
used, disposed of by sale, or disposed of by abandonment or other means.
Management reviews long-lived assets, which consists of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be recovered. During the first six
months of fiscal 2007, no events or changes in circumstances occurred that would
require the company to test for impairment. Unforeseen events and changes in
circumstances and market conditions could negatively affect the value of assets
and result in an impairment charge.
The determination of future operating cash flows involves considerable
estimation and judgment about future market conditions, future sales and
profitability, and future asset utilization. Although the company believes it
bases its impairment testing as required by SFAS No. 144 on reasonable estimates
and assumptions, the use of different estimates and assumptions, or a decision
to dispose of substantial portions of these assets, could result in materially
different results.
Goodwill. As of October 29, 2006, the company's remaining $4.1 million of
goodwill relates to the mattress fabrics segment. The determination of fair
value involves considerable estimation and judgment. In particular, determining
the fair value of a business unit involves, among other things, developing
forecasts of future cash flows and appropriate discount rates. During the first
six months of fiscal 2007, no events or changes in circumstances occurred that
would require the company to test for impairment.
Restructuring Charges. In June 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)."
Under SFAS 146, a liability for a cost associated with an exit or disposal
activity shall be recognized and measured initially at its fair value in the
period in which the liability is incurred, except for certain employee
termination benefits that qualify under SFAS No. 112, "Employers' Accounting for
Postemployment Benefits."
The upholstery fabric industry continues to be under significant pressure from a
variety of external forces, such as the current consumer preference for leather
and suede furniture and the growing competition from imported fabrics and cut
and sewn kits, primarily from China. In an effort to reduce operating expenses
and scale U.S. productive capacity in line with demand, the company has
undertaken restructuring initiatives during the past several years. These
restructuring initiatives have resulted in restructuring charges related to the
remaining lease costs of the closed facilities, the write-down of property,
plant and equipment, workforce reduction and elimination of facilities.
As a result of the continuing sharp declines in demand for U.S. produced
fabrics, management will continue to evaluate its domestic strategy and
production requirements. Management remains committed to take whatever
additional steps are necessary to achieve profitable U.S. upholstery fabric
operations, and the company could take additional restructuring actions in the
near future. The company could experience additional markdowns of its inventory
and write-downs of its property, plant, and equipment from any new restructuring
initiatives.
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Severance and related charges are accrued at the date the restructuring was
approved by the board of directors based on an estimate of amounts that will be
paid to affected employees, in accordance with SFAS 112. Under SFAS 144, asset
impairment charges related to the consolidation or closure of manufacturing
facilities are based on an estimate of expected sales prices for the real estate
and equipment. Other exit costs, which principally consist of charges for lease
termination and losses from termination of existing contracts, equipment
relocation costs and inventory markdowns that are related to the restructuring
are accounted for in accordance with SFAS 146.
The company reassesses the individual accrual requirements at the end of each
reporting period. If circumstances change, causing current estimates to differ
from original estimates, adjustments are recorded in the period of change.
Restructuring charges, and adjustments of those charges, are summarized in note
10 to the consolidated financial statements.
Income Taxes. The company is required to estimate its actual current tax
exposure and to assess temporary differences resulting from differing treatment
of items for tax and accounting purposes. At April 30, 2006, the company had
deferred tax assets of $31.4 million (all of which relate to U.S. operations)
and U.S. deferred tax liabilities of $2.2 million (all of which reverse in the
carryforward period), resulting in net U.S. deferred tax assets of $29.2
million. Total deferred tax liabilities at April 30, 2006 were $4.1 million,
resulting in total net deferred tax assets of $27.3 million. As of October 29,
2006, the company's net deferred tax assets total $29.1 million, an increase of
$1.8 million from the end of fiscal 2006, primarily reflecting the federal and
state tax benefits recorded for the loss from U.S. operations during the first
six months of fiscal 2007. No valuation allowance has been recorded to reduce
the company's deferred tax assets. Management has concluded that it is more
likely than not that the company will be able to realize the benefit of the
deferred tax assets.
In making the judgment about the realization of the deferred tax assets,
management has considered both negative and positive evidence, and concluded
that sufficient positive evidence exists to overcome the cumulative losses
experienced in recent years. Specifically, management considered the following,
among other factors: nature of the company's products; history of positive
earnings in the mattress fabrics segment; capital projects in progress to
further enhance the company's globally competitive cost structure in the
mattress fabrics segment; recent significant restructuring actions in the
domestic upholstery fabrics business to adjust the domestic cost structure and
bring U.S. manufacturing capacity in line with demand; and development of
offshore manufacturing and sourcing programs to meet changing demands of
upholstery fabric customers in the U.S. Management's analysis of taxable income
also included the following considerations: none of the company's net operating
loss carryforwards has previously expired unused; the U.S. federal carryforward
period is 20 years; and the company's current losses principally expire in 16-20
years, fiscal 2022 through 2026.
Considerable judgment is involved in this process as ultimate realization of
benefits is dependent on the generation of income from future operations.
Recently Issued Accounting Standards
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No.48, "Accounting for Uncertainty in Income Taxes" ("FIN No.
48") which clarifies the criteria for the recognition of tax benefits under SFAS
No. 109, "Accounting for Income Taxes." This Interpretation prescribes a
comprehensive model for financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken, or expected to be
taken, in income tax returns. FIN No.48 is effective for fiscal years beginning
after December 15, 2006 and requires that the cumulative effect of applying its
provisions be disclosed as a one-time, non-cash charge or credit against the
opening balance of retained earnings in the year of adoption. This
I-34
Interpretation will be adopted by the company in the first quarter of fiscal
2008. The company is currently evaluating the potential impact of FIN No. 48 and
any impact on its financial position cannot be readily determined at this time.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 establishes a common definition of fair value,
provides a framework for measuring fair value under accounting principles
generally accepted in the United States and expands disclosure requirements
about fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and is effective for the company in the first
quarter of fiscal 2009. The company is currently evaluating the impact, if any,
the adoption of SFAS No. 157 will have on its consolidated financial statements.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 was issued in
order to eliminate the diversity of practice surrounding how public companies
quantify financial statement misstatements. This SAB establishes a "dual
approach" methodology that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the company's
financial statements (both the statement of operations and statement of
financial position). The SEC has stated SAB No. 108 should be applied no later
than the annual financial statements for the first fiscal year ending after
November 15, 2006. SAB No. 108 permits a company to elect either a retrospective
or prospective application. Prospective application requires recording a
cumulative effect adjustment in the period of adoption, as well as detailed
disclosure of the nature and amount of each individual error being corrected
through the cumulative adjustment and how and when it arose. The company is
currently evaluating the impact, if any, the application of SAB No 108 will have
on the consolidated financial statements.
Inflation
The cost of certain company's raw materials, principally fibers from petroleum
derivatives, and utility/energy costs, increased during the first six months of
fiscal 2007 as oil and energy prices increased and had an impact on the
company's financial results. These increases, however, are often not directly
related to general economic inflation, which has not been a material factor in
the company's recent financial results. Any significant increase in the
company's raw material costs, utility/energy costs and general economic
inflation could have a material adverse impact on the company, because
competitive conditions have limited the company's ability to pass significant
operating cost increases on to its customers.
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
and real estate term loan. As of October 29, 2006, there were $4.1 million in
borrowings outstanding under the real estate term loan and no borrowings under
the company's revolving credit agreement. In connection with the real estate
term loan, the company entered into a $2,170,000 notional principal interest
rate swap agreement, which represents 50% of the principal amount on the real
estate loan, and effectively converts the floating rate LIBOR based payments to
fixed payments at 4.99% plus the spread calculated under the real estate term
loan agreement. The company's unsecured term notes have a fixed interest rate of
7.76% and the Canadian government loan is non-interest bearing. Additionally,
approximately 96% of the company's long-term debt is at a fixed rate or is
I-35
non-interest bearing. Thus, any foreseeable change in interest rates would have
a minimal material effect on the company's interest expense.
The company's exposure to fluctuations in foreign currency exchange rates are
due to foreign subsidiaries domiciled in China and Canada. These subsidiaries
use the United States dollar as their functional currency. The company generally
does not use financial derivative instruments to hedge foreign currency exchange
rate risks associated with its foreign subsidiaries. A 10% change in either
exchange rate at October 29, 2006 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 29,
2006, 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-36
Part II - Other Information
- ---------------------------
Item 1A. Risk Factors
There have been no material changes to our risk factors during the first six
months of fiscal 2007. Our risk factors are disclosed in our Form 10-K for the
year ended April 30, 2006.
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 26, 2006. Of the 11,684,959 of common stock outstanding on
the record date of July 27, 2006, 11,092,780 shares of common stock were present
in person or by proxy.
At the Annual Meeting, shareholders voted on:
-- The election of two directors: Robert G. Culp, III and Patrick B.
Flavin,
-- Ratification of the appointment of KPMG LLP as the independent
registered public accounting firm of the company for the fiscal year
2007.
A. Proposal For Election Of Directors
Robert G. Culp, III Patrick B. Flavin
------------------- -----------------
For 10,942,148 For 10,824,853
Withheld 150,632 Withheld 267,927
B. Proposal To Ratify The Election Of KPMG LLP As The Independent
Registered Public Accounting Firm Of The Company For Fiscal Year 2007.
For 10,904,795
Against 187,102
Abstain 883
Item 5. Other Information.
In a letter dated October 27, 2006, the New York Stock Exchange (NYSE) notified
the company that the NYSE has accepted the company's plan for continued listing
on the NYSE. As a result of the acceptance, the company's common stock will
continue to be listed on the NYSE pending quarterly reviews by the NYSE's
Listing and Compliance Committee to ensure progress against the plan. The
company previously announced that the NYSE notified the company that it was
considered "below criteria" because the company's average total market
capitalization was less than $75 million over a consecutive 30 trading-day
period and its shareholders' equity was less than $75 million. As of October 29,
2006, the end of the company's most recent fiscal quarter, the company's
shareholders' equity was $75,863 and its average total market capitalization was
well below $75 million over the consecutive 30 trading-day period.
II-1
Item 6. Exhibits
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.
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
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 8, 2006 By: /s/ Franklin N. Saxon
-------------------------------------------------
Franklin N. Saxon
President
(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 31.1
CERTIFICATIONS
I, Robert G. Culp, III, Chairman and Chief Executive Officer (principal
executive officer) of Culp, Inc., 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 any 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 quarterly 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) 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
(d) 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.
/s/ Robert G. Culp, III
------------------------------------
Robert G. Culp, III
Chairman and Chief Executive Officer
(principal executive officer)
Date: December 8, 2006
Exhibit 31.2
CERTIFICATIONS
I, Franklin N. Saxon, 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 any 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 quarterly 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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) 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
(d) 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.
/s/ Franklin N. Saxon
-------------------------------------
Franklin N. Saxon
President and Chief Operating Officer
(principal financial officer)
Date: December 8, 2006
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 this quarterly report of Culp, Inc. (the "Company") on
Form 10-Q for the quarterly period ended October 29, 2006 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
- -----------------------------------
Robert G. Culp, III
Chairman of the Board and
Chief Executive Officer
December 8, 2006
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 this quarterly report of Culp, Inc. (the "Company") on
Form 10-Q for the quarterly period ended October 29, 2006 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
- ---------------------------------
Franklin N. Saxon
President
December 8, 2006
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.