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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 27, 2002
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
101 S. Main St., High Point, North Carolina 27261-2686
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to the filing requirements for at
least the past 90 days.
YES X NO
Common shares outstanding at October 27, 2002: 11,482,959
Par Value: $.05
INDEX TO FORM 10-Q
For the period ended October 27, 2002
Part I - Financial Statements. Page
- ------------------------------------------ -------
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Statements of Income (Loss) Three and Six Months Ended
October 27, 2002 and October 28, 2001 I-1
Consolidated Balance Sheets October 27, 2002, October 28, 2001
and April 28, 2002 I-2
Consolidated Statements of Cash Flows Six Months Ended October
27, 2002 and October 28, 2001 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial I-15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About I-25
Market Risk
Item 4. Controls and Procedures I-26
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders II-1
Item 6. Exhibits and Reports on Form 8-K II-2
Signature II-3
Certifications II-3
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
-----------------------------------------------------------------------------
Amounts Percent of Sales
-------------------------------------------- -----------------------------
October 27, October 28, % Over
2002 2001 (Under) 2003 2002
--------------- ----------- ------------- ------------- --------------
Net sales $ 83,573 96,400 (13.3) % 100.0 % 100.0 %
Cost of sales 69,830 80,858 (13.6) % 83.6 % 83.9 %
--------------- ----------- ------------- ------------- --------------
Gross profit 13,743 15,542 (11.6) % 16.4 % 16.1 %
Selling, general and
administrative expenses 9,481 11,550 (17.9) % 11.3 % 12.0 %
Restructuring expense 13,360 0 100.0 % 16.0 % 0.0 %
--------------- ----------- ------------- ------------- --------------
Income (loss) from operations (9,098) 3,992 (327.9) % (10.9)% 4.1 %
Interest expense 1,676 1,963 (14.6) % 2.0 % 2.0 %
Interest income (121) (34) 255.9 % (0.1)% (0.0)%
Other expense (income), net 242 765 (68.4) % 0.3 % 0.8 %
--------------- ----------- ------------- ------------- --------------
Income (loss) before income taxes (10,895) 1,298 (939.4) % (13.0)% 1.3 %
Income taxes * (4,305) 441 (1,076.2) % 39.5 % 34.0 %
--------------- ----------- ------------- ------------- --------------
Net income (loss) $ (6,590) 857 (869.0) % (7.9)% 0.9 %
=============== =========== ============= ============= ==============
Net income (loss) per share, basic ($0.57) $0.08 (812.5) %
Net income (loss) per share, diluted ($0.57) $0.08 (812.5) %
Average shares outstanding, basic 11,483 11,221 2.3 %
Average shares outstanding, diluted 11,483 11,281 1.8 %
SIX MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------------------
Amounts Percent of Sales
-------------------------------------------- -----------------------------
October 27, October 28, % Over
2002 2001 (Under) 2003 2002
---------------- ----------- ------------- ------------- --------------
Net sales $ 169,461 182,863 (7.3) % 100.0 % 100.0 %
Cost of sales 141,864 156,532 (9.4) % 83.7 % 85.6 %
---------------- ----------- ------------- ------------- --------------
Gross profit 27,597 26,331 4.8 % 16.3 % 14.4 %
Selling, general and
administrative expenses 19,918 22,785 (12.6) % 11.8 % 12.5 %
Restructuring expense 13,360 1,303 100.0 % 7.9 % 0.7 %
---------------- ----------- ------------- ------------- --------------
Income (loss) from operations (5,681) 2,243 (353.3) % (3.4)% 1.2 %
Interest expense 3,579 4,031 (11.2) % 2.1 % 2.2 %
Interest income (271) (57) 375.4 % (0.2)% (0.0)%
Other expense (income), net 453 1,337 (66.1) % 0.3 % 0.7 %
---------------- ----------- ------------- ------------- --------------
Loss before income taxes (9,442) (3,068) (207.8) % (5.6)% (1.7)%
Income taxes * (3,767) (1,043) (261.2) % 39.9 % 34.0 %
---------------- ----------- ---------- ------------- --------------
Loss before cumulative effect of
accounting change (5,675) (2,025) (180.2) % (3.3)% (1.1)%
============= ==============
Cumulative effect of accounting change,
net of income taxes (24,151) 0
---------------- -----------
Net loss $ (29,826) (2,025)
================ ===========
Basic loss per share:
Loss before cumulative effect of
accounting change $ (0.50) (0.18) (175.1) %
Cumulative effect of accounting change (2.11) 0.00 (100.0) %
---------------- ----------- ----------
Net loss (2.61) (0.18) (1,345.6) %
================ =========== ==========
Diluted loss per share:
Loss before cumulative effect of
accounting change $ (0.50) (0.18) (175.1) %
Cumulative effect of accounting change (2.11) 0.00 (100.0) %
---------------- ----------- ----------
Net loss (2.61) (0.18) (1,345.6) %
================ =========== ==========
Average shares outstanding, basic 11,433 11,221 1.9 %
Average shares outstanding, diluted 11,433 11,221 1.9 %
* Percent of sales column is calculated as a % of income (loss) before income taxes.
CULP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 27, 2002, OCTOBER 28, 2001, AND APRIL 28, 2002
Unaudited
(Amounts in Thousands)
Amounts Increase
------------------------------- (Decrease)
October 27, October 28, ------------------------- * April 28,
2002 2001 Dollars Percent 2002
--------------- -------------- ---------- ------------- ------------
Current assets
Cash and cash investments $ 35,037 8,590 26,447 307.9 % 31,993
Accounts receivable 32,869 49,402 (16,533) (33.5)% 43,366
Inventories 54,571 60,814 (6,243) (10.3)% 57,899
Other current assets 15,944 9,851 6,093 61.9 % 13,413
--------------- -------------- ---------- ------------- ------------
Total current assets 138,421 128,657 9,764 7.6 % 146,671
Property, plant & equipment, net 85,049 105,697 (20,648) (19.5)% 89,772
Goodwill 9,240 47,781 (38,541) (80.7)% 47,083
Other assets 2,888 1,682 1,206 71.7 % 4,187
--------------- -------------- ---------- ------------- ------------
Total assets $ 235,598 283,817 (48,219) (17.0)% 287,713
=============== ============== ========== ============= ============
Current liabilities
Current maturities of long-term debt $ 462 3,136 (2,674) (85.3)% 1,483
Accounts payable 18,948 25,870 (6,922) (26.8)% 24,327
Accrued expenses 16,199 15,448 751 4.9 % 16,460
Accrued restructuring 10,065 1,748 8,317 475.8 % 2,445
--------------- -------------- ---------- ------------- ------------
Total current liabilities 45,674 46,202 (528) (1.1)% 44,715
Long-term debt 96,096 107,447 (11,351) (10.6)% 107,001
Deferred income taxes 3,502 10,330 (6,828) (66.1)% 16,932
--------------- -------------- ---------- ------------- ------------
Total liabilities 145,272 163,979 (18,707) (11.4)% 168,648
Shareholders' equity 90,326 119,838 (29,512) (24.6)% 119,065
--------------- -------------- ---------- ------------- ------------
Total liabilities and
shareholders' equity $ 235,598 283,817 (48,219) (17.0)% 287,713
=============== ============== ========== ============= ============
Shares outstanding 11,483 11,221 262 2.3 % 11,320
=============== ============== ========== ============= ============
* Derived from audited financial statements.
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001
Unaudited
(Amounts in Thousands)
SIX MONTHS ENDED
--------------------------
October 27, October 28,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (29,826) (2,025)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of accounting change, net of income taxes 24,151 0
Depreciation 7,139 8,871
Amortization of intangible assets 219 785
Amortization of stock based compensation 105 39
Restructuring expense 13,360 1,303
Changes in assets and liabilities:
Accounts receivable 10,497 8,447
Inventories 3,328 (817)
Other current assets (2,504) (2,006)
Other assets (202) (17)
Accounts payable (6,894) 2,522
Accrued expenses 2 711
Accrued restructuring (1,546) (1,778)
Income taxes payable 0 (1,268)
------------ ------------
Net cash provided by operating activities 17,829 14,767
------------ ------------
Cash flows from investing activities:
Capital expenditures (5,328) (2,288)
------------ ------------
Net cash used in investing activities (5,328) (2,288)
------------ ------------
Cash flows from financing activities:
Principal payments of long-term debt (11,926) (1,073)
Change in accounts payable-capital expenditures 1,515 (4,023)
Proceeds from common stock issued 954 0
------------ ------------
Net cash used in financing activities (9,457) (5,096)
------------ ------------
Increase in cash and cash investments 3,044 7,383
Cash and cash investments at beginning of period 31,993 1,207
------------ ------------
Cash and cash investments at end of period $ 35,037 8,590
============ ============
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except share and per share data)
Capital Accumulated
Common Stock Contributed Other Total
---------------------------- in Excess Retained Comprehensive Shareholders'
Shares Amount of Par Value Earnings Income Equity
- ----------------------------------------------------------------------------------------------------------------------------
Balance, April 29, 2001 11,221,158 $ 561 36,915 84,326 $ 121,802
Net loss (3,440) (3,440)
Net gain on cash flow hedges 7 7
Common stock issued in connection
with stock option plans 98,426 5 691 696
- ----------------------------------------------------------------------------------------------------------------------------
Balance, April 28, 2002 11,319,584 $ 566 37,606 80,886 7 $ 119,065
Net loss (29,826) (29,826)
Net gain on cash flow hedges 28 28
Common stock issued in connection
with stock option plans 163,375 8 1,051 1,059
- ----------------------------------------------------------------------------------------------------------------------------
Balance, October 27, 2002 11,482,959 $ 574 38,657 51,060 35 $ 90,326
============================================================================================================================
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc.
and subsidiary include all adjustments, which are, in the opinion of management,
necessary for fair presentation of the results of operations and financial
position. All of these adjustments are of a normal recurring nature except as
disclosed in notes 8 and 12 to the consolidated financial statements. Results of
operations for interim periods may not be indicative of future results. The
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements, which are included in the
company's annual report on Form 10-K filed with the Securities and Exchange
Commission on July 26, 2002 for the fiscal year ended April 28, 2002.
================================================================================
2. Accounts Receivable
A summary of accounts receivable follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 27, 2002 April 28, 2002
- --------------------------------------------------------------------------------
Customers $ 35,869 $ 46,886
Allowance for doubtful accounts (2,161) (2,465)
Reserve for returns and allowances (839) (1,055)
- --------------------------------------------------------------------------------
$ 32,869 $ 43,366
================================================================================
3. Inventories
Inventories are carried at the lower of cost or market. Cost is determined
for substantially all inventories using the LIFO (last-in, first-out) method.
A summary of inventories follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 27, 2002 April 28, 2002
- --------------------------------------------------------------------------------
Raw materials $ 25,571 $ 27,081
Work-in-process 3,865 3,830
Finished goods 25,380 27,233
- --------------------------------------------------------------------------------
Total inventories valued at FIFO 54,816 58,144
Adjustments of certain inventories to LIFO (245) (245)
- --------------------------------------------------------------------------------
$ 54,571 $ 57,899
================================================================================
4. Accounts Payable
A summary of accounts payable follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 27, 2002 April 28, 2002
- --------------------------------------------------------------------------------
Accounts payable-trade $ 16,053 $ 22,947
Accounts payable-capital expenditures 2,895 1,380
- --------------------------------------------------------------------------------
$ 18,948 $ 24,327
================================================================================
5. Accrued Expenses
A summary of accrued expenses follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 27, 2002 April 28, 2002
- --------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 9,381 $ 10,122
Interest 966 1,111
Other 5,852 5,227
- --------------------------------------------------------------------------------
$ 16,199 $ 16,460
================================================================================
6. Long-Term Debt
A summary of long-term debt follows (dollars in thousands):
- --------------------------------------------------------------------------------
October 27, 2002 April 28, 2002
- --------------------------------------------------------------------------------
Unsecured term notes $ 75,000 $ 75,000
Industrial revenue bonds 19,712 30,612
Canadian government loan 1,846 1,852
Obligations to sellers 0 1,020
- --------------------------------------------------------------------------------
96,558 108,484
Less current maturities (462) (1,483)
- --------------------------------------------------------------------------------
$ 96,096 $ 107,001
- --------------------------------------------------------------------------------
In August 2002, the company entered into an agreement with its principal
bank lender that provides for a revolving loan commitment of $15,000,000. The
agreement provides an additional $21,000,000 in letters of credit supporting the
industrial revenue bonds described below. Borrowings under the facility
generally carry interest at the London Interbank Offered Rate plus an adjustable
margin based upon the company's debt/EBITDA ratio, as defined by the agreement.
Letter of credit and commitment fees are also determined by the company's
debt/EBITDA ratio, as defined by the agreement. The credit facility expires in
August 2004.
The unsecured notes have an average remaining term of 6 years. The
principal payments become due from March 2006 to March 2010 with interest
payable semi-annually at a fixed coupon rate of 7.76%.
The industrial revenue bonds (IRBs) are generally due in balloon maturities
which occur at various dates from 2009 to 2013. The IRBs are collateralized by
letters of credit for the outstanding balance of the IRBs and certain interest
payments accrued thereunder. As of October 27, 2002, the interest rate on
outstanding IRBs was 4.5%, including the letter of credit fee percentage.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At October 27, 2002, the
company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five
fiscal years are: 2003 - $462,000; 2004 - $462,000; 2005 - $462,000; 2006 -
$11,460,000; and 2007 - $11,000,000.
================================================================================
7. Cash Flow Information
Payments (refunds) for interest and income taxes for the six months ended
October 27, 2002 and October 28, 2001 follow (dollars in thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Interest $ 3,750 $ 4,226
Income taxes (refunds) (2,173) 1,006
================================================================================
8. Restructuring
A summary of accrued restructuring reserve activity follows:
Chattanooga Restructuring
In August 2002, management approved a restructuring plan within the Culp
Decorative Fabrics division aimed at lowering manufacturing costs, simplifying
the dobby fabric upholstery line, increasing asset utilization and enhancing the
division's manufacturing competitiveness. The restructuring plan principally
involves (1) consolidation of the division's weaving, finishing, yarn-making and
distribution operations by closing the facility in Chattanooga, Tennessee and
integrating these functions into other plants, (2) a significant reduction in
the number of stock keeping units (SKUs) offered in the dobby product line and
(3) a net reduction in workforce of approximately 300 positions. During the
second quarter of fiscal 2003, the total restructuring and related charges
incurred were $13.2 million, of which approximately $2.9 million represented
non-cash items relating to fixed asset write-downs included in restructuring
expense and $1.2 million represented machinery and equipment relocation costs
included in cost of sales. Additional related charges of approximately $1.3
million are estimated to be recorded over the next six months.
The following summarizes the activity in the restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Accrual established in fiscal 2003 $ 1,972 $ 7,194 $ 9,166
Paid in fiscal 2003 (474) (170) (644)
- --------------------------------------------------------------------------------
Balance, October 27, 2002 $ 1,498 $ 7,024 $ 8,522
- --------------------------------------------------------------------------------
Wet Printed Flock Restructuring
In April 2002, management approved a plan to exit the wet printed flock
upholstery fabric business. The exit plan involved closing a printing facility
and flocking operation within the Culp Velvets/Prints (CVP) division, reduction
in related selling and administrative expenses and termination of 25 employees.
The total charge for the exit plan was $9.7 million, of which approximately $8.2
million represented non-cash items relating to fixed asset and inventory
write-downs.
During the second quarter of fiscal 2003, an additional restructuring
expense of $1.3 million was recorded for the non-cash write-down of assets to
reflect the deterioration in market value experienced since April 2002. As of
October 27, 2002, assets held for sale of $1.0 million are included in other
assets. There were no assets held for sale at October 28, 2001.
The following summarizes the activity in the CVP restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Accrual established in fiscal 2002 $ 842 $ 610 $ 1,452
Paid in fiscal 2002 (5) (5) (10)
- --------------------------------------------------------------------------------
Balance, April 28, 2002 837 605 1,442
Paid in fiscal 2003 (396) (63) (459)
- --------------------------------------------------------------------------------
Balance, October 27, 2002 $ 441 $ 542 $ 983
- --------------------------------------------------------------------------------
CDF Restructuring
During fiscal 2001 and continuing into fiscal 2002, the company undertook a
restructuring plan in its upholstery fabric segment which involved (1) the
consolidation of certain fabric manufacturing capacity within the Culp
Decorative Fabrics (CDF) division, (2) closing one of the company's four yarn
manufacturing plants within the Culp Yarn division, (3) an extensive reduction
in selling, general and administrative expenses including the termination of 110
employees and (4) a comprehensive SKU reduction initiative related to finished
goods and raw materials in CDF. For fiscal 2001, the total restructuring and
related charges incurred were $7.4 million, of which approximately $3.4 million
represented non-cash items relating to fixed asset and inventory write-downs,
and $931,000 represented machinery and equipment relocation costs included in
cost of sales. During the first quarter of fiscal 2002, the total restructuring
and related charges incurred were $2.3 million, of which $160,000 represented
non-cash items relating to fixed asset write-downs included in restructuring
expense and $1 million represented machinery and equipment relocation costs
included in cost of sales. During the second quarter of fiscal 2002,
restructuring related charges of $158,000 were incurred and represented
machinery and equipment relocation costs included in cost of sales.
The following summarizes the activity in the CDF restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Accrual established in fiscal 2001 $ 969 $ 2,116 $ 3,085
Paid in fiscal 2001 (491) (211) (702)
- --------------------------------------------------------------------------------
Balance, April 29, 2001 478 1,905 2,383
Additions in fiscal 2002 925 218 1,143
Paid in fiscal 2002 (891) (1,632) (2,523)
- --------------------------------------------------------------------------------
Balance, April 28, 2002 512 491 1,003
Paid in fiscal 2003 (89) (354) (443)
- --------------------------------------------------------------------------------
Balance, October 27, 2002 $ 423 $ 137 $ 560
- --------------------------------------------------------------------------------
================================================================================
9. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and other
changes in equity, except those resulting from investments by shareholders and
distributions to shareholders not reflected in net income (loss).
A summary of total comprehensive income (loss) for the three months ended
October 27, 2002 and October 28, 2001 follows (dollars in thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net income (loss) $ (6,590) $ 857
Gain (loss) on foreign currency contracts, net of taxes:
Net changes in fair value (33) 96
Net gains (losses) reclassified into earnings (110) 22
- --------------------------------------------------------------------------------
$ (6,733) $ 975
- --------------------------------------------------------------------------------
A summary of total comprehensive loss for the six months ended October 27,
2002 and October 28, 2001 follows (dollars in thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net income (loss) $ (29,826) $ (2,025)
Gain (loss) on foreign currency contracts, net of taxes:
Net changes in fair value 35 4
Net gains (losses) reclassified into earnings (7) 17
- --------------------------------------------------------------------------------
$ (29,798) $ (2,004)
- --------------------------------------------------------------------------------
Gains on cash flow hedges reflected in other comprehensive loss above are
expected to be recognized in results of operations over the next six months.
================================================================================
10. Income (Loss) per Share
Basic income (loss) per share is computed using the weighted-average number
of shares outstanding during the period. Diluted income per share uses the
weighted-average number of shares outstanding during the period plus the
dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted income
(loss) per share follows:
(in thousands) Three Months Ended
- --------------------------------------------------------------------------------
October 27, 2002 October 28, 2001
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, basic 11,483 11,221
Effect of dilutive stock options 0 60
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, diluted 11,483 11,281
- --------------------------------------------------------------------------------
Options to purchase 388,375 shares and 996,926 shares of common stock were not
included in the computation of diluted income (loss) per share for the three
months ended October 27, 2002 and October 28, 2001, respectively, because the
exercise price of the options was greater than the average market price of the
common shares.
================================================================================
11. Segment Information
The company's operations are classified into two business segments:
upholstery fabrics and mattress ticking. The upholstery fabrics segment
principally manufactures and sells woven jacquards and dobbies, heat-transfer
prints, and woven and tufted velvets primarily to residential and commercial
(contract) furniture manufacturers. The mattress ticking segment principally
manufactures and sells woven jacquards, heat-transfer prints and pigment prints
to bedding manufacturers.
The company internally manages and reports selling, general and
administrative expenses, interest expense, interest income, other expense and
income taxes on a total company basis. Thus, profit by business segment
represents gross profit. In addition, the company internally manages and reports
cash and cash investments, other current assets, property, plant and equipment,
and other assets on a total company basis. Thus, identifiable assets by business
segment represent accounts receivable, inventories and goodwill.
Sales and gross profit for the company's operating segments for the three
months ended October 27, 2002 and October 28, 2001 follow (dollars in
thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 58,410 $ 70,378
Mattress Ticking 25,163 26,022
- --------------------------------------------------------------------------------
$ 83,573 $ 96,400
- --------------------------------------------------------------------------------
Gross Profit
Upholstery Fabrics $ 7,650 $ 8,192
Mattress Ticking 6,093 7,350
- --------------------------------------------------------------------------------
$ 13,743 $ 15,542
- --------------------------------------------------------------------------------
Sales and gross profit for the company's operating segments for the six months
ended October 27, 2002 and October 28, 2001 follow (dollars in thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 118,360 $ 132,025
Mattress Ticking 51,101 50,838
- --------------------------------------------------------------------------------
$ 169,461 $ 182,863
- --------------------------------------------------------------------------------
Gross Profit
Upholstery Fabrics $ 15,651 $ 12,732
Mattress Ticking 11,946 13,599
- --------------------------------------------------------------------------------
$ 27,597 $ 26,331
- --------------------------------------------------------------------------------
Identifiable assets, consisting of accounts receivable, inventories and
goodwill for the company's operating segments as of October 27, 2002 and October
28, 2001 follow (dollars in thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Upholstery Fabrics $ 66,888 $ 48,462 [1]
Mattress Ticking 29,792 12,352 [1]
- --------------------------------------------------------------------------------
$ 96,680 $ 60,814
- --------------------------------------------------------------------------------
[1] Includes inventories only for fiscal 2002. Inventories by operating segment
for fiscal 2003: $39,884 for Upholstery Fabrics and $14,687 for Mattress
Ticking.
================================================================================
12. Recently Adopted Accounting Standard
The company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective April 29, 2002. SFAS No. 142 represents a substantial change in how
goodwill is accounted for. SFAS No. 142 requires that goodwill no longer be
amortized and that goodwill be tested for impairment by comparing each reporting
unit's carrying value to its fair value. SFAS No. 142 requires that any goodwill
impairment loss recognized as a result of initial application be reported as a
change in accounting principle, and that the income per share effects of the
accounting change be separately disclosed.
As required by the standard, the company ceased recording goodwill
amortization for fiscal 2003. The following table reconciles fiscal 2002 net
income (loss) to its amount adjusted to exclude goodwill:
(in thousands, except per share data) Three Months Ended Six Months Ended
- --------------------------------------------------------------------------------
October 28, 2001 October 28, 2001
- --------------------------------------------------------------------------------
Reported net income (loss) $ 857 $ (2,025)
Goodwill amortization, net of tax 230 460
- --------------------------------------------------------------------------------
Adjusted net income (loss) 1,087 (1,565)
- --------------------------------------------------------------------------------
Basic
Reported net income (loss) per share 0.08 (0.18)
Adjusted net income (loss) per share 0.10 (0.14)
Diluted
Reported net income (loss) per share 0.08 (0.18)
Adjusted net income (loss) per share 0.10 (0.14)
- --------------------------------------------------------------------------------
12. Recently Adopted Accounting Standard (continued)
For the initial application of SFAS No. 142, an independent business
valuation specialist was engaged to assist the company in the determination of
the fair market value of the Culp Decorative Fabrics (CDF) division because of
the significance of the goodwill associated with the division and due to its
operating performance for fiscal 2002 and 2001. The fair value of the CDF
division as determined using several different valuation methods, including
comparable company, comparable transaction and discounted cash flow analysis,
was determined to be less than its carrying value. Accordingly, the company
recorded a goodwill impairment charge of $37.6 million ($24.2 million net of
taxes of $13.4 million), or $2.11 per share diluted, related to the goodwill
associated with the CDF division. After the goodwill impairment charge, the
company's goodwill by division is: Culp Decorative Fabrics - $4.4 million, Culp
Yarn - $700,000 and Culp Home Fashions - $4.1 million.
================================================================================
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following analysis of the financial condition and results of operations
should be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
Overview
Culp is one of the largest integrated marketers in the world for upholstery
fabrics for furniture and mattress fabrics (ticking) for bedding. The company's
fabrics are used primarily in the production of residential and contract
upholstered furniture and bedding products, including sofas, recliners, chairs,
love seats, sectionals, sofa-beds, office seating and mattress sets. Although
Culp markets fabrics at most price levels, the company emphasizes fabrics that
have broad appeal in the promotional and popular-priced categories of furniture
and bedding.
The company's operating segments are upholstery fabrics and mattress ticking,
with related divisions organized within those segments. In upholstery fabrics,
Culp Decorative Fabrics markets jacquard and dobby woven fabrics for residential
and contract furniture. Culp Velvets/Prints markets a broad range of printed and
velvet fabrics used primarily for residential and juvenile furniture. Culp Yarn
manufactures specialty filling yarn that is primarily used by Culp. In mattress
ticking, Culp Home Fashions markets a broad array of fabrics used by bedding
manufacturers.
The following tables set forth the company's sales and gross profit by
segment/division, excluding restructuring related charges, and international
sales by geographic area for the three and six months ended October 27, 2002 and
October 28, 2001.
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------------------
Amounts Percent of Total Sales
----------------------------------- -------------------------
October 27, October 28, % Over
Segment/Division Sales 2002 2001 (Under) 2003 2002
- ------------------------------------- ----------------- ---------------- ------------ ----------- ------------
Upholstery Fabrics
Culp Decorative Fabrics $ 33,859 38,492 (12.0) % 40.5 % 39.9 %
Culp Velvets/Prints 23,305 30,354 (23.2) % 27.9 % 31.5 %
Culp Yarn 1,246 1,532 (18.7) % 1.5 % 1.6 %
----------------- ---------------- ------------ ----------- ------------
58,410 70,378 (17.0) % 69.9 % 73.0 %
Mattress Ticking
Culp Home Fashions 25,163 26,022 (3.3) % 30.1 % 27.0 %
----------------- ---------------- ------------ ----------- ------------
* $ 83,573 96,400 (13.3) % 100.0 % 100.0 %
================= ================ ============ =========== ============
Segment Gross Profit (1) Gross Profit Margin
- ------------------------------------- -------------------------
Upholstery Fabrics $ 8,810 8,348 5.5 % 15.1 % 11.9 %
Mattress Ticking 6,093 7,350 (17.1)% 24.2 % 28.2 %
----------------- ---------------- ------------ ----------- ------------
$ 14,903 15,698 (5.1)% 17.8 % 16.3 %
================= ================ ============ =========== ============
SIX MONTHS ENDED (UNAUDITED)
----------------------------------------------------------------------------
Amounts Percent of Total Sales
----------------------------------- -------------------------
October 27, October 28, % Over
Segment/Division Sales 2002 2001 (Under) 2003 2002
- ------------------------------------- ----------------- ---------------- ------------ ----------- ------------
Upholstery Fabrics
Culp Decorative Fabrics $ 68,590 73,652 (6.9)% 40.5 % 40.3 %
Culp Velvets/Prints 46,424 55,875 (16.9)% 27.4 % 30.6 %
Culp Yarn 3,346 2,498 33.9 % 2.0 % 1.4 %
----------------- ---------------- ------------ ----------- ------------
118,360 132,025 (10.4)% 69.8 % 72.2 %
Mattress Ticking
Culp Home Fashions 51,101 50,838 0.5 % 30.2 % 27.8 %
----------------- ---------------- ------------ ----------- ------------
* $ 169,461 182,863 (7.3)% 100.0 % 100.0 %
================= ================ ============ =========== ============
Segment Gross Profit (1) Gross Profit Margin
- ------------------------------------- -------------------------
Upholstery Fabrics $ 16,811 13,866 21.2 % 14.2 % 10.5 %
Mattress Ticking 11,946 13,599 (12.2)% 23.4 % 26.7 %
----------------- ---------------- ------------ ----------- ------------
$ 28,757 27,465 4.7 % 17.0 % 15.0 %
================= ================ ============ =========== ============
* U.S. sales were $72,362 and $82,280 for the second quarter of fiscal 2003 and
fiscal 2002, respectively; and $147,827 and $154,079 for the six months of
fiscal 2003 and 2002, respectively. The percentage decrease in U.S. sales was
12.1% for the second quarter and a decrease of 4.1% for the six months.
(1) Excludes restructuring related charges of $1.2 million and $0.2 million for
the second quarter of fiscal 2003 and 2002, respectively; and excludes $1.2
million for the first six months of fiscal 2003 and 2002.
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------
Amounts
------------------------------
October 27, October 28, % Over
Geographic Area 2002 2001 (Under)
- -------------------------------------- -------------- -------------- ----------
North America (Excluding USA) $ 8,424 8,379 0.5 %
Europe 138 938 (85.3) %
Middle East 760 1,311 (42.0) %
Far East & Asia 1,652 2,891 (42.8) %
South America 171 177 (3.7) %
All other areas 66 424 (84.4) %
-------------- -------------- ----------
$ 11,211 14,120 (20.6) %
============== ============== ==========
Percent of total sales 13.4% 14.6%
SIX MONTHS ENDED (UNAUDITED)
------------------------------------------
Amounts
------------------------------
October 27, October 28, % Over
Geographic Area 2002 2001 (Under)
- -------------------------------------- -------------- -------------- ----------
North America (Excluding USA) $ 15,974 16,410 (2.7) %
Europe 261 1,643 (84.1) %
Middle East 1,647 4,214 (60.9) %
Far East & Asia 2,983 5,483 (45.6) %
South America 414 336 23.1 %
All other areas 355 698 (49.1) %
-------------- -------------- ----------
$ 21,634 28,784 (24.8) %
============== ============== ==========
Percent of total sales 12.8% 15.7%
International sales, and the percentage of total sales, for each of the last
three fiscal years follows: fiscal 2000-$111,104 (23%); fiscal 2001 - $77,824
(19%) and fiscal 2002 - $53,501 (14%).
Restructuring Actions
The financial results for the second quarter include a total of $14.5 million in
restructuring and related charges, all of which reflect previously announced
restructuring initiatives. The charges are made up of the following: (1) $12.0
million of restructuring expenses related to the Culp Decorative Fabrics ("CDF")
division, the largest items of which are lease termination expenses and
personnel costs; (2) $1.2 million of "restructuring related" costs for CDF,
which include inventory mark-downs and equipment moving expense; and (3) $1.3
million of restructuring expenses related to further write-downs of equipment in
connection with the exit from the wet printed flock business by the Culp
Velvets/Prints ("CVP") division. The additional write down, which is a non cash
item, was recorded to more closely estimate the current market value of this
equipment, which has continued to deteriorate since April 2002. Of the charges
related to CDF, approximately $3.9 million are non-cash items, while the
remaining $9.4 million relates to cash expenditures. As reflected in the
financial statements, restructuring and related charges were recorded as $13.4
million in the line item "restructuring expense" and $1.2 million in "cost of
sales" and have reduced net income per share by $0.77 for the second quarter of
fiscal 2003.
The restructuring and related charges for CDF reflect the restructuring
initiative announced in August 2002. This initiative was substantially completed
by the end of the second quarter. In fact, the company is well ahead of schedule
in completing the most important elements of the plan as announced. The company
continues to expect that the CDF restructuring actions will significantly
improve gross margins within the division, while allowing the ability to meet
foreseeable levels of demand, all on a substantially lower cost base. The
initiative is projected to result in annual cost savings of approximately $12 to
$15 million. Approximately $8 million of these savings relate to fixed
manufacturing costs and the remaining $4 to $7 million relate to variable
manufacturing costs.
Specifically, the company completed the shut down of its operations at CDF's
Chattanooga, Tennessee facility at the end of the second quarter, while it was
originally contemplated that this process could take until the end of the third
quarter. All of the operations have been successfully transferred to CDF's
Pageland, South Carolina and Graham, North Carolina plants. In addition, the
consolidation of the finishing, yarn-making and distribution operations from the
Chattanooga facility to other CDF plants has been completed, with each of those
transitions taking place ahead of the targeted completion dates. There are no
manufacturing operations remaining at the Chattanooga plant as of the end of the
second quarter.
The remaining elements from the CDF restructuring initiative to be completed are
as follows: (1) achieve targeted levels of operating efficiency for the looms
transferred into Pageland, which is projected to take until the end of the
fourth quarter; (2) transfer certain equipment to other CDF plants by the end of
this fiscal year; and (3) complete the capital expenditure projects related to
the restructuring.
The announced addition to the Pageland plant is currently under construction and
is expected to be ready for occupancy in early 2003. The company plans to
install ten new high speed weaving machines in the building during the third
quarter. These new machines will replace lower speed equipment that is now in
place at the Pageland plant, thereby further increasing the efficiency and
output of that facility's operations.
Another important element of the CDF restructuring initiative is a major
reduction in the complexity of the dobby upholstery product line, which has led
to the elimination of approximately 1,500 low volume stock keeping units (SKUs)
representing about 70% of the finished goods SKUs (but only 10% of sales) in
that product category. This initiative is substantially complete and has been
accomplished without significant disruptions of customer relationships.
In line with previous estimates, the CDF restructuring is expected to result in
total restructuring and related charges of approximately $15 million. The
company currently estimates that this restructuring will result in additional
charges of approximately $1.3 million during the second half of the fiscal year,
most of which will relate to equipment moving costs.
Three and Six Months ended October 27, 2002 compared with Three and Six Months
ended October 28, 2001
UPHOLSTERY FABRIC SEGMENT
NET SALES - Upholstery fabric sales for the second quarter of fiscal 2003
decreased 17.0% to $58.4 million (see sales by Segment/Division on page I-16).
Domestic upholstery fabric sales decreased 13.9% to $51.4 million, due primarily
to overall weakness in consumer demand for upholstered furniture. International
sales decreased 34.3% to $7.0 million, due primarily to the exiting of the wet
printed flock fabric business in April 2002.
In addition to significant overall softness in demand during the quarter, the
sales decrease in upholstery fabrics is partially attributable to the company's
strategy to focus on improving the profitability of its sales mix by reducing or
eliminating products generating little or no profit. In the Culp Velvets/Prints
division, the company discontinued its unprofitable wet printed flock business
at the end of last fiscal year. This product line reported annual sales last
year of approximately $17 million with approximately $2 million in operating
losses. In the CDF division, the company discontinued about half of its finished
goods SKUs (or approximately 10,000) over the last year, most of which were
small volume items and were very costly to produce. These discontinued SKUs
include the dobby product line SKUs that were recently eliminated as part of the
Chattanooga restructuring. The company expects this process of identifying and
dropping its low profit items to continue through the balance of this fiscal
year.
The company believes additional factors that are likely impacting upholstery
fabric sales are (1) the increasing market share of leather furniture being sold
in the U.S.; and (2) the increase in imported fabrics, both in "piece goods" and
"cut and sewn kits".
GROSS PROFIT - In spite of weak furniture demand and the significant operational
disruption in connection with the Chattanooga restructuring, the upholstery
fabric segment improved its gross profit dollars and margins. Excluding
restructuring related charges of $1.2 million and $0.2 million for the second
quarter of fiscal 2003 and 2002, respectively, gross profit dollars and margin
increased in the second quarter of fiscal 2003 to $8.8 million and 15.1%,
respectively, from $8.3 million and 11.9% in the second quarter of last year.
The key factors behind these gains were: (1) a more profitable sales mix; (2)
the elimination of losses related to the wet printed flock business; (3) the
increasing productivity benefits from the CDF 2001 restructuring; and (4) some
cost reduction benefits from the Chattanooga closure.
With the earlier-than-expected cost reduction benefits as a result of the
Chattanooga closure being completed by the end of the second quarter, the
company is optimistic that gross profit dollars and margins in CDF will continue
to improve over the next few quarters. Additionally within CDF, the company is
focused on (1) creating and selling products with better margins; (2) continuing
to reduce low profit SKUs; and (3) improving manufacturing performance in CDF,
in terms of productivity and inventory obsolescence.
MATTRESS TICKING SEGMENT
NET SALES - Mattress fabric sales for the second quarter of fiscal 2003
decreased 3.3% to $25.2 million. Sales to U.S. bedding manufacturers fell 7.1%
to $21.0 million, while sales to international customers increased by 21.4% to
$4.2 million. The sales decrease is due to the overall weakness in consumer
demand for mattresses.
GROSS PROFIT--Culp Home Fashions (CHF) reported for the second quarter of fiscal
2003 lower gross profit dollars and margins of $6.1 million and 24.2%,
respectively, both down from $7.3 million and 28.2% during the corresponding
quarter of the prior year. The key factors impacting gross profit were a high
cost European sourcing agreement and lower sales. CHF entered into an agreement
with a European supplier last fall as part of the termination of a long-term
supply relationship. The agreement provided, among other things, that the
company maintain a certain level of weekly purchases through October 31, 2002.
Therefore, for the first and second quarters of this year, the company has been
required to source products from this supplier that are significantly more
expensive than products manufactured at the company's U.S. and Canadian plants
in order to meet the agreement's minimum purchase levels. The company had
planned during the last fiscal year for the termination of this supply agreement
by initiating a plan to increase capacity in the U.S. and Canadian plants
beginning in the first quarter and ending by December 2002. This capacity
expansion project accounts for approximately $4.5 million of the company's
fiscal 2003 capital spending plan. This supply agreement was concluded on
October 31, 2002 and only a few additional containers of product will arrive
during the third quarter. There is potential for some residual effect on profits
during the third quarter from the supply agreement as the division works down
its inventory position of these products.
Selling, General and Administrative Expenses. SG&A expenses for the second
quarter declined $2.1 million, or 17.9%, from the prior year, and as a percent
of net sales, SG&A expenses declined to 11.3% from 12.0%. SG&A expenses in the
second quarter included a net reduction of $424,000 in the allowance for
doubtful accounts, due to a reduction in past due balances. This compares with
bad debt expense of $1.4 million in the year-earlier period.
Interest Expense (Income). Interest expense for the second quarter declined to
$1.7 million from $2.0 million due to significantly lower borrowings
outstanding, offset somewhat by an increase in the interest rate on the private
placement debt. Interest income increased to $121,000 from $34,000 due to
significantly higher invested cash as compared with the prior year.
Other Expense. Other expense (income) for the second quarter of fiscal 2003
totaled $242,000 compared with $765,000 in the prior year. The decrease was
principally due to the adoption of SFAS No. 142, which discontinued the
amortization of goodwill. Goodwill amortization during second quarter fiscal
2002 was $350,000.
Income Taxes. Excluding the cumulative effect of accounting change and
restructuring and related charges, the effective tax rate for the first half of
fiscal 2003 was 37.0% compared to 34.0% the prior year.
Liquidity and Capital Resources
Liquidity. - Cash and cash investments as of October 27, 2002 increased to $35.0
million from $32.0 million at the end of fiscal 2002, reflecting cash flow from
operations of $17.8 million for the first half of fiscal 2003, capital
expenditures of $5.3 million, debt repayment of $12.0 million, stock issuance of
$1.0 million and an increase in accounts payable for capital expenditures of
$1.5 million.
Accounts receivable as of October 27, 2002 decreased 33.5% from the year-earlier
level, due principally to the decline in international sales with their related
longer credit terms, and an increase in the number of customers taking the cash
discount for shorter payment terms. Days sales outstanding totaled 36 days at
October 27, 2002 compared with 47 a year ago and 36 at last fiscal year end.
Inventories at the close of the second quarter decreased 10.3% from a year ago.
Inventory turns for the second quarter were 4.9 versus 5.4 for the year-earlier
period. Operating working capital (comprised of accounts receivable, inventory
and accounts payable) was $68.5 million at October 27, 2002, down from $84.3
million a year ago.
EBITDA for the second quarter of fiscal 2003 was $8.8 million compared with $8.3
million in the prior year. EBITDA includes earnings before interest, income
taxes, depreciation, amortization, all restructuring and related charges,
certain non-cash charges and cumulative effect of accounting change, as defined
by the company's credit agreement.
Financing Arrangements. As of the end of the second quarter, the company had
reduced funded debt by $12.0 million from last fiscal year end. Funded debt
equals long-term debt plus current maturities. Funded debt was $96.6 million at
October 27, 2002, compared with $108.5 million at fiscal 2002 year end. The
company's funded debt-to-capital ratio was 51.7% at October 27, 2002. The
company also reports it leverage statistics in terms of funded debt, net of cash
and cash investments, under the assumption it could use the cash to repay debt
at any time. Therefore, funded debt, net of cash and cash investments, is $61.5
million at October 27, 2002 compared with $76.5 million at fiscal 2002 year end.
In addition, the company's funded debt (net of cash and cash investments) to
capital employed ratio was 40.5% and funded debt (net of cash and cash
investments) to EBITDA was 1.70. Since the end of fiscal 2000 (two and one half
years), the company has substantially reduced its funded debt (net of cash and
cash investments) to $61.5 million from $136.5 million, a total of $75 million
or 55%.
Culp has $75 million of senior unsecured notes with an average remaining term of
six years and a fixed coupon rate of 7.76%. The company also has a $1.8 million
non-interest bearing Canadian government loan.
In addition, the company entered into a new loan agreement during August 2002
with its principal bank lender that provides, among other things, for: (1) a two
year $34.7 million credit facility, which includes a $15.0 million revolving
credit line and $19.7 million for letters of credit for the company's industrial
revenue bonds (IRBs) excluding interest, (2) lower interest rates based upon a
pricing matrix, and (3) improved financial covenants. The IRBs are
collateralized by letters of credit for the outstanding balance of the IRBs and
certain interest payments accrued thereunder. Interest on the outstanding IRBs
as of October 27, 2002 was 4.50%, including the letter of credit fee percentage.
Also, the agreement specifically allows for the fiscal 2003 Culp Decorative
Fabrics restructuring and related charges (see discussion above).
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. The company's principal
financial covenants are (1) funded debt to EBITDA; (2) EBILTDA to interest
expense plus leases; (3) funded debt to total capital; (4) funded debt to
tangible capital; and (5) minimum tangible shareholders' equity. EBILTDA
includes earnings before interest, income taxes, lease expense, depreciation,
amortization, all restructuring and related charges, certain non-cash charges
and cumulative effect of accounting change, as defined by the company's credit
agreement. As of October 27, 2002, the company was in compliance with these
financial covenants.
Capital Expenditures. Capital spending for the first half of fiscal 2003 was
$5.3 million. The company's original budget for capital spending for all of
fiscal 2003 was $8.5 million, compared with $4.7 million in fiscal 2002. As part
of the fiscal 2003 restructuring plan in CDF, the company increased the budget
by $4.5 million to $13.0 million. Depreciation for the second quarter of fiscal
2003 totaled $3.5 million, and is estimated at $14.0 million for the full fiscal
year.
Free Cash Flow. Free cash flow, defined as cash from operations, less capital
expenditures, plus or minus the change in accounts payable for capital
expenditure, was $14.0 million for the first six months of fiscal 2003 compared
with $8.5 million for the same period of the prior year. The key reasons for
this improvement were continued improvement in accounts receivable collections,
lower inventory levels, higher profits and the benefit from deferred payment
terms for capital expenditures.
BUSINESS OUTLOOK
For the third quarter of fiscal 2003, the company believes consolidated sales
will decline somewhat less than the second quarter decrease of 13.3% while gross
profit margins are expected to improve significantly over last year's third
quarter gross margin of 14.9%, due primarily to the substantial progress being
made in the Culp Decorative Fabrics division. Additionally, total SG&A, interest
and other expenses are expected to decline over $1.2 million, absent any large
unusual items, in the third quarter from a total of $13.3 million in the last
year's third quarter. Therefore, with gross profit margin improvement and lower
costs, the company is comfortable with the range of published analysts earnings
estimates of $0.11 to $0.15 per share for the third quarter of fiscal 2003,
excluding any restructuring and related charges. The net earnings for the third
quarter of last year were $400,000, or $0.04 per share, excluding goodwill
amortization.
The company's financial results over the last few quarters and its business
outlook clearly demonstrate the company's strategic focus on: (1) improving the
profitability of its sales mix; (2) increasing margins and return on capital
employed; and (3) generating free cash flow.
Inflation
The cost of the company's raw materials is remaining generally stable. Factors
that reasonably can be expected to influence margins in the future include
changes in raw material prices, trends in other operating costs and overall
competitive conditions.
Seasonality
The company's business is moderately seasonal, with increased sales during the
second and fourth fiscal quarters. This seasonality results from one-week
closings of the company's manufacturing facilities, and the facilities of most
of its customers in the United States, during the first and third quarters for
the holiday weeks including July 4th and Christmas.
Critical Accounting Policies and Recent Accounting Developments
The company considered the disclosure requirements of Financial Reporting
Release No. 60 regarding critical accounting policies and Financial Reporting
Release No. 61 regarding liquidity and capital resources, certain trading
activities and related party/certain other disclosures, and concluded that there
were no material changes during the first six months of fiscal 2003 that would
warrant further disclosure beyond those matters previously disclosed in the
company's Annual Report on Form 10-K for the year ended April 28, 2002 except
for the areas noted below:
Long-lived Assets
The company adopted the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective April 29, 2002. SFAS No.
144 establishes a single accounting model for long-lived assets to be disposed
of by sale, and also resolves implementation issues related to SFAS 121.
Adoption of SFAS No. 144 did not have a significant impact on the company's
financial position, results of operations or cash flows.
Goodwill
As of April 29, 2002, Culp adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 represents a substantial change in how goodwill is
accounted for. SFAS No. 142 requires that goodwill no longer be amortized and
that goodwill be tested for impairment by comparing the reporting unit's
carrying value to its fair value as of April 29, 2002. SFAS No. 142 requires
that any goodwill impairment loss recognized as a result of initial application
is reported as of the first quarter of fiscal 2003 as a change in accounting
principle, and that the income per share effects of the accounting change be
separately disclosed.
For initial application of SFAS No. 142, an independent business valuation
specialist was engaged to assist the company in the determination of the fair
market value of Culp Decorative Fabrics because of the significance of the
goodwill associated with the division and due to its operating performance for
fiscal 2001 and 2002. As a result of the adoption of SFAS No. 142, during the
first quarter of fiscal 2003 the company recorded a non-operating, non-cash
goodwill impairment charge of $37.6 million ($24.2 million net of taxes of $13.4
million), or $2.12 per share diluted, related to the goodwill associated with
the Culp Decorative Fabrics division. After the goodwill impairment charge, the
company's remaining goodwill relates to the following divisions: Culp Decorative
Fabrics - $4.4 million, Culp Yarn - $0.7 million and Culp Home Fashions - $4.1
million.
Forward-Looking Information
This Report contains statements that may be deemed "forward-looking statements"
within the meaning of the federal securities laws, including the Private
Securities Litigation Reform Act of 1995 (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. Forward-looking
statements are statements that include projections, expectations or beliefs
about future events of 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 sales, gross profit margins, SG&A or other expenses,
and earnings, as well as any statements regarding the company's view of
estimates of the company's future results by analysts. Factors that could
influence the matters discussed in such statements include the level of housing
starts and sales of existing homes, consumer confidence, trends in disposable
income, and general economic conditions. Decreases in these economic indicators
could have a negative effect on the company's business and prospects. Likewise,
increases in interest rates, particularly home mortgage rates, and increases in
consumer debt or the general rate of inflation, could affect the company
adversely. Because of the significant percentage of the company's sales derived
from international shipments, strengthening of the U. S. dollar against other
currencies could make the company's products less competitive on the basis of
price in markets outside the United States. Additionally, economic and political
instability in international areas could affect the demand for the company's
products. Finally, unanticipated delays or costs in executing restructuring
actions could cause the cumulative effect of restructuring actions to fail to
meet the objectives set forth by management. Other factors that could affect the
matters discussed in forward looking statements are included in the company's
periodic reports filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company has not experienced any
significant changes in market risk since October 27, 2002.
The company's exposure to interest rate risk consists of floating rate debt
based on the London Interbank Offered Rate plus an adjustable margin under the
company's revolving credit agreement and variable rate debt in connection with
industrial revenue bonds. The annual impact on the company's results of
operations of a 100 basis point interest rate change on the October 27, 2002
outstanding balance of the variable rate debt would be approximately $197,000.
The company's exposure to fluctuations in foreign currency exchange rates is due
primarily to a foreign subsidiary domiciled in Canada and firmly committed and
anticipated purchases of certain machinery, equipment and raw materials in
foreign currencies. The company's Canadian subsidiary uses the United States
dollar as its functional currency. The company generally does not use financial
derivative instruments to hedge foreign currency exchange rate risks associated
with the Canadian subsidiary. However, the company generally enters into foreign
exchange forward and option contracts as a hedge against its exposure to
currency fluctuations on firmly committed and anticipated purchases of certain
machinery, equipment and raw materials. The amount of Canadian-denominated sales
and manufacturing costs are not material to the company's consolidated results
of operations; therefore, a 10% change in the exchange rate at October 28, 2002
would not have a significant impact on the company's results of operations or
financial position. Additionally, as the company utilizes foreign currency
instruments for hedging anticipated and firmly committed transactions, a loss in
fair value for those instruments is generally offset by increases in the value
of the underlying exposure.
Item 4. Controls and Procedures
Within 90 days of the filing of this report, the company conducted a review and
evaluation of its disclosure controls and procedures, under the supervision and
with the participation of the company's Chief Executive Officer and Chief
Financial Officer. Based upon this review, the Chief Executive Officer and Chief
Financial Officer have concluded that the company's disclosure controls and
procedures were adequate and effective to ensure that information required to be
disclosed is recorded, processed, summarized, and reported in a timely manner.
There were no significant changes in the company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation described above, nor were there any significant deficiencies or
material weaknesses in the controls which required corrective action.
Part II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders of the company was held in High Point, North
Carolina on September 24, 2002. Of the 11,482,959 shares of common stock
outstanding on the record date of July 24, 2002, 10,319,475 shares were present
in person or by proxy.
At the Annual Meeting, shareholders voted on:
o the election of four directors: Harry R. Culp, Kenneth W.
McAllister, Albert L. Prillaman, and Franklin N. Saxon.
o ratification of the appointment of KPMG LLP as the
independent auditors of the company for the current fiscal year,
o approval of the company's 2002 Stock Option Plan
A. Proposal for Election of Directors:
Harry R. Culp Kenneth W. McAllister
---------------------------- ------------------------
For 9,038,939 For 9,103,496
Abstain 1,280,536 Abstain 1,215,979
Albert L. Prillaman Franklin N. Saxon
--------------------------- ------------------------
For 9,100,543 For 9,046,343
Abstain 1,218,932 Abstain 1,273,132
B. Proposal to ratify the election of KPMG LLP as independent auditors
-------------------------------------------------------------------
of the company for fiscal year 2003:
------------------------------------
For 10,243,238
Against 71,055
Abstain 5,182
Del - N - Vote 0
C. Proposal to approve the company's 2002 Stock Option Plan
For 7,009,678
Against 1,522,827
Abstain 18,590
Del - N - Vote 1,768,020
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed as part of this report.
3(i) Articles of Incorporation of the Company, as
amended, were filed as Exhibit 3(i) to the
Company's form 10-Q for the quarter included
July 28, 2002, filed September 11, 2002, and are
incorporated herein by reference.
3(ii) Restated and Amended Bylaws of the Company, as
amended June 12, 2001, were filed as Exhibit
3(ii) to the Company's Form 10-Q for the quarter
ended July 29, 2001 filed September 12, 2001,
and are incorporated herein by reference.
10(a) Amended and Restated Credit Agreement dated as
of August 23, 2002 among Culp, Inc. and Wachovia
Bank, National Association, as Agent and as
Bank, was filed as Exhibit 10(a) to the
Company's form 10-Q for the quarter ended July
28, 2002, filed September 11, 2002, and is
incorporated herein by reference.
10(b) Fourth Amendment to Reimbursement and Security
Agreements dated August 23, 2002, made by and
between Culp, Inc. and Wachovia Bank, National
Association, was filed as Exhibit 10(b) to the
Company's form 10-Q for the quarter ended July
28, 2002, filed September 11, 2002, and is
incorporated herein by reference.
99(a) Certification of Chief Executive Officer
Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
99(b) Certification of Chief Financial Officer
Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the period
covered by this report:
(1) Form 8-K dated August 27, 2002, included under Item 5, Other
Events, the Company's press release for quarterly earnings
and the Financial Information Release relating to certain
financial information for the quarter and year ended July
28, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CULP, INC.
(Registrant)
Date: December 11, 2002 By: /s/ Franklin N. Saxon
----------------- -----------------
Franklin N. Saxon
Executive Vice President and
Chief Financial Officer
(Authorized to sign on behalf
of the registrant and also
signing as principal financial officer)
CERTIFICATIONS
I, Robert G. Culp, III, Chairman of the Board and Chief 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 quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
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 quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effective of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 11, 2002
/s/ Robert G. Culp, III
-------------------
Robert G. Culp, III
Chairman of the Board and
Chief Executive Officer
I, Franklin N. Saxon, Executive Vice President and Chief Financial 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 quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and
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 quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being
prepared;
b) evaluated the effective of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 11, 2002
/s/ Franklin N. Saxon
-----------------
Franklin N. Saxon
Executive Vice President and
Chief Financial Officer