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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 November 2, 2003
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
101 S. Main St., High Point, North Carolina 27261-2686
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to the filing requirements for at
least the past 90 days.
YES X NO
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the latest practical date:
Common shares outstanding at November 2, 2003: 11,528,584
Par Value: $.05
INDEX TO FORM 10-Q
For the period ended November 2, 2003
Part I - Financial Statements. Page
- ------------------------------------------ -------
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Statements of Income (Loss)--Three and Six Months Ended
November 2, 2003 and October 27, 2002 I-1
Consolidated Balance Sheets-November 2, 2003, October 27, 2002 and
April 27, 2003 I-2
Consolidated Statements of Cash Flows--Six Months Ended November 2, 2003 I-3
and October 27, 2002
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial I-17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About I-25
Market Risk
Item 4. Controls and Procedures I-25
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
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 2, 2003 AND OCTOBER 27, 2002
Unaudited
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
------------------------------------------------------------------------------------
Amounts Percent of Sales
----------------------------- -----------------------------------
November 2, October 27, % Over November 2, October 27,
2003 2002 (Under) 2003 2002
------------ ------------- ------------- ---------------- ----------------
Net sales $ 82,731 83,740 (1.2)% 100.0 % 100.0 %
Cost of sales 65,993 69,997 (5.7)% 79.8 % 83.6 %
------------ ------------- ------------- ---------------- ----------------
Gross profit 16,738 13,743 21.8 % 20.2 % 16.4 %
Selling, general and
administrative expenses 10,296 9,481 8.6 % 12.4 % 11.3 %
Restructuring expense 0 13,360 (100.0)% 0.0 % 16.0 %
------------ ------------- ------------- ---------------- ----------------
Income (loss) from operations 6,442 (9,098) 170.8 % 7.8 % (10.9)%
Interest expense 1,509 1,676 (10.0)% 1.8 % 2.0 %
Interest income (121) (121) 0.0 % (0.1)% (0.1)%
Other expense (income), net 62 242 (74.4)% 0.1 % 0.3 %
------------ ------------- ------------- ---------------- ----------------
Income (loss) before income taxes 4,992 (10,895) 145.8 % 6.0 % (13.0)%
Income taxes * 1,846 (4,305) 142.9 % 37.0 % 39.5 %
------------ ------------- ------------- ---------------- ----------------
Net income (loss) $ 3,146 (6,590) 147.7 % 3.8 % (7.9)%
============ ============= ============= ================ ================
Net income (loss) per share-basic $0.27 ($0.57) 147.4 %
Net income (loss) per share-diluted $0.27 ($0.57) 147.4 %
Average shares outstanding-basic 11,524 11,483 0.4 %
Average shares outstanding-diluted 11,774 11,483 2.5 %
SIX MONTHS ENDED
------------------------------------------------------------------------------------
Amounts Percent of Sales
----------------------------- ----------------------------------
November 2, October 27, % Over November 2, October 27,
2003 2002 (Under) 2003 2002
------------ ------------- ------------- ---------------- ---------------
Net sales $ 156,407 169,748 (7.9)% 100.0 % 100.0%
Cost of sales 128,190 142,151 (9.8)% 82.0 % 83.7%
------------ ------------- ------------- ---------------- ---------------
Gross profit 28,217 27,597 2.2 % 18.0 % 16.3%
Selling, general and
administrative expenses 20,807 19,918 4.5 % 13.3 % 11.7%
Restructuring expense 0 13,360 (100.0)% 0.0 % 7.9%
------------ ------------- ------------- ---------------- ---------------
Income (loss) from operations 7,410 (5,681) 230.4 % 4.7 % (3.3)%
Interest expense 3,006 3,579 (16.0)% 1.9 % 2.1%
Interest income (243) (271) (10.3)% (0.2) % (0.2)%
Other expense (income), net 307 453 (32.2)% 0.2 % 0.3%
------------ ------------- ------------- ---------------- ---------------
Income (loss) before income taxes 4,340 (9,442) 146.0 % 2.8 % (5.6)%
Income taxes * 1,605 (3,767) 142.6 % 37.0 % 39.9%
------------ ------------- ------------- ---------------- ---------------
Income (loss) before cumulative effect of
accounting change 2,735 (5,675) 148.2 % 1.7 % (3.3)%
================ ===============
Cumulative effect of accounting change,
net of income taxes 0 (24,151)
------------ -------------
Net income (loss) $ 2,735 (29,826)
============ =============
Basic income (loss) per share:
Income (loss) before cumulative effect
of accounting change $ 0.24 (0.50) 147.8 %
Cumulative effect of accounting change 0.00 (2.11) (100.0)%
------------ ------------- ----------
Net income (loss) $ 0.24 (2.61) 109.1 %
============ ============= ==========
Diluted income (loss) per share:
Income (loss) before cumulative effect
of accounting change $ 0.23 (0.50) 147.0 %
Cumulative effect of accounting change 0.00 (2.11) (100.0)%
------------ ------------- ----------
Net income (loss) $ 0.23 (2.61) 108.9 %
============ ============= ==========
Average shares outstanding-basic 11,519 11,433 0.8 %
Average shares outstanding-diluted 11,718 11,433 2.5 %
* Percent of sales column for income taxes is calculated as a % of income (loss) before income taxes.
See accompanying notes to consolidated financial statements
CULP, INC.
CONSOLIDATED BALANCE SHEETS
NOVEMBER 2, 2003, OCTOBER 27, 2002 AND APRIL 27, 2003
Unaudited
(Amounts in Thousands)
Amounts Increase
---------------------------------- (Decrease)
November 2, October 27, --------------------------- * April 27,
2003 2002 Dollars Percent 2003
--------------- --------------- ----------- ------------- --------------
Current assets
Cash and cash equivalents $ 16,623 35,037 (18,414) (52.6)% 14,355
Short-term investments 15,134 0 15,134 100.0 % 10,043
Accounts receivable 31,342 32,869 (1,527) (4.6)% 32,259
Inventories 53,848 54,571 (723) (1.3)% 49,552
Deferred income taxes 12,303 9,447 2,856 30.2 % 12,303
Other current assets 3,211 6,497 (3,286) (50.6)% 3,204
--------------- --------------- ----------- ------------- --------------
Total current assets 132,461 138,421 (5,960) (4.3)% 121,716
Property, plant & equipment, net 81,219 85,049 (3,830) (4.5)% 84,962
Goodwill 9,240 9,240 0 0.0 % 9,240
Other assets 1,892 2,888 (996) (34.5)% 2,235
--------------- --------------- ----------- ------------- --------------
Total assets $ 224,812 235,598 (10,786) (4.6)% 218,153
=============== =============== =========== ============= ==============
Current liabilities
Current maturities of long-term debt $ 539 462 77 16.7 % 500
Accounts payable 23,928 18,948 4,980 26.3 % 19,874
Accrued expenses 13,522 16,199 (2,677) (16.5)% 14,071
Accrued restructuring 6,712 10,065 (3,353) (33.3)% 7,743
Income taxes payable 1,578 0 1,578 100.0 % 349
--------------- --------------- ----------- ---------- --------------
Total current liabilities 46,279 45,674 605 1.3 % 42,537
Long-term debt 76,077 96,096 (20,019) (20.8)% 76,000
Deferred income taxes 3,851 3,502 349 10.0 % 3,851
--------------- --------------- ----------- ------------- --------------
Total liabilities 126,207 145,272 (19,065) (13.1)% 122,388
Shareholders' equity 98,605 90,326 8,279 9.2 % 95,765
--------------- --------------- ----------- ------------- --------------
Total liabilities and
shareholders' equity $ 224,812 235,598 (10,786) (4.6)% 218,153
=============== =============== =========== ============= ==============
Shares outstanding 11,529 11,483 46 0.4 % 11,515
=============== =============== =========== ============= ==============
* Derived from audited financial statements
See accompanying notes to consolidated financial statements
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 2, 2003 AND OCTOBER 27, 2002
Unaudited
(Amounts in Thousands)
SIX MONTHS ENDED
--------------------------
Amounts
--------------------------
November 2, October 27,
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 2,735 (29,826)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change, net of income
taxes 0 24,151
Depreciation 6,883 7,139
Amortization of other assets 91 219
Stock-based compensation 105 105
Restructuring expense 0 13,360
Changes in assets and liabilities:
Accounts receivable 917 10,497
Inventories (4,296) 3,328
Other current assets (7) (2,504)
Other assets 252 (202)
Accounts payable 5,121 (6,894)
Accrued expenses (549) 2
Accrued restructuring expenses (1,031) (1,546)
Income taxes payable 1,229 0
------------ ------------
Net cash provided by operating activities 11,450 17,829
------------ ------------
Cash flows used in investing activities:
Capital expenditures (2,954) (3,566)
Purchases of short-term investments (5,147) 0
------------ ------------
Net cash used in investing activities (8,101) (3,566)
------------ ------------
Cash flows used in financing activities:
Payments on vendor-financed capital expenditures (1,254) (247)
Proceeds from issuance of long-term debt 116 0
Principal payments of long-term debt 0 (11,926)
Proceeds from common stock issued 57 954
------------ ------------
Net cash used in financing activities (1,081) (11,219)
------------ ------------
Increase in cash and cash equivalents 2,268 3,044
Cash and cash equivalents at beginning of period 14,355 31,993
------------ ------------
Cash and cash equivalents at end of period $ 16,623 35,037
============ ============
See accompanying notes to consolidated financial statements
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 Unearned Retained Comprehensive Shareholders'
Shares Amount of Par Value Compensation Earnings Income Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, April 28, 2002 11,319,584 $ 566 38,375 (769) 80,886 7 $ 119,065
Net loss (24,887) (24,887)
Net loss on cash flow hedges (7) (7)
Stock-based compensation 210 210
Common stock issued in connection
with stock option plans 195,875 10 1,374 1,384
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, April 27, 2003 11,515,459 $ 576 39,749 (559) 55,999 0 $ 95,765
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 2,735 2,735
Net loss on short-term
investments (57) (57)
Stock-based compensation 105 105
Common stock issued in connection
with stock option plans 13,125 1 56 57
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, November 2, 2003 11,528,584 $ 577 39,805 (454) 58,734 (57) $ 98,605
===================================================================================================================================
See accompanying notes to consolidated financial statements
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc.
and subsidiary (the "company") include all adjustments, which are, in the
opinion of management, necessary for fair presentation of the results of
operations and financial position. All of these adjustments are of a normal
recurring nature except as disclosed in notes 9 and 13 to the consolidated
financial statements, which relate to fiscal 2003. 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
28, 2003 for the fiscal year ended April 27, 2003.
The company's six months ended November 2, 2003 and October 27, 2002
represent 27 and 26 week periods, respectively.
==============================================================================
2. Stock-Based Compensation
Compensation costs related to employee stock option plans are
recognized utilizing the intrinsic value-based method prescribed by APB No.
25, Accounting for Stock Issued to Employees, and related Interpretations.
The company has adopted the disclosure requirements of SFAS No. 123,
Accounting for Stock- Based Compensation, as amended by SFAS No. 148.
Accordingly, compensation cost is recorded over the vesting period of the
options based upon the difference in option price and fair market price at
the date of grant, if any.
The following table illustrates the effect on net income (loss) and
income (loss) per share if the company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148, for the three months
ended November 2, 2003 and October 27, 2002.
(dollars in thousands, except per share data) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Net income (loss), as reported $ 3,146 (6,590)
Add: Total stock-based employee
compensation expense included in
net income (loss), net of tax 33 17
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards,
net of tax (145) (56)
- --------------------------------------------------------------------------------
Pro forma net income (loss) $ 3,034 (6,629)
- --------------------------------------------------------------------------------
Income (loss) per share:
Basic - as reported $ .27 (.57)
Basic - pro forma .26 (.58)
Diluted - as reported .27 (.57)
Diluted - pro forma .26 (.58)
- --------------------------------------------------------------------------------
The following table illustrates the effect on net income (loss) and
income (loss) per share if the company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148, for the six months
ended November 2, 2003 and October 27, 2002.
(dollars in thousands, except per share data) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Net income (loss), as reported $ 2,735 (29,826)
Add: Total stock-based employee
compensation expense included in
net income (loss), net of tax 66 34
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards,
net of tax (240) (113)
- --------------------------------------------------------------------------------
Pro forma net income (loss) $ 2,561 (29,905)
- --------------------------------------------------------------------------------
Income (loss) per share:
Basic - as reported $ .24 (2.61)
Basic - pro forma .22 (2.62)
Diluted - as reported .23 (2.61)
Diluted - pro forma .22 (2.62)
- --------------------------------------------------------------------------------
================================================================================
3. Accounts Receivable
A summary of accounts receivable follows:
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 April 27, 2003
- --------------------------------------------------------------------------------
Customers $ 33,767 $ 34,580
Allowance for doubtful accounts (1,586) (1,558)
Reserve for returns and allowances (839) (763)
- --------------------------------------------------------------------------------
$ 31,342 $ 32,259
A summary of the activity in the allowance for doubtful accounts
follows:
Six months ended
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Beginning balance $ (1,558) $ (2,465)
Provision for bad debt expense (162) 78
Net write-offs 134 226
- --------------------------------------------------------------------------------
Ending balance $ (1,586) $ (2,161)
================================================================================
4. 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) November 2, 2003 April 27, 2003
- --------------------------------------------------------------------------------
Raw materials $ 22,383 23,269
Work-in-process 4,148 2,917
Finished goods 27,317 23,366
- --------------------------------------------------------------------------------
Total inventories valued at FIFO 53,848 49,552
Adjustments of certain
inventories to LIFO 0 0
- --------------------------------------------------------------------------------
$ 53,848 $ 49,552
================================================================================
5. Accounts Payable
A summary of accounts payable follows:
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 April 27, 2003
- --------------------------------------------------------------------------------
Accounts payable-trade $ 19,510 $ 14,389
Accounts payable-capital
expenditures 4,418 5,485
- --------------------------------------------------------------------------------
$ 23,928 $ 19,874
================================================================================
6. Accrued Expenses
A summary of accrued expenses follows:
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 April 27, 2003
- --------------------------------------------------------------------------------
Compensation, commissions and
related benefits $ 7,248 $ 9,683
Interest 768 763
Other 5,506 3,625
- --------------------------------------------------------------------------------
$ 13,522 $ 14,071
================================================================================
7. Long-Term Debt
A summary of long-term debt follows:
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 April 27, 2003
- --------------------------------------------------------------------------------
Unsecured term notes $ 75,000 $ 75,000
Canadian government loan 1,616 1,500
- --------------------------------------------------------------------------------
76,616 76,500
Less current maturities (539) (500)
- --------------------------------------------------------------------------------
$ 76,077 $ 76,000
- --------------------------------------------------------------------------------
In August 2002, the company entered into an agreement with its principal
bank lender that provides for a revolving loan commitment of $15.0 million,
including letters of credit up to $2.5 million. Borrowings under the facility
generally carry interest at the London Interbank Offered Rate plus an
adjustable margin based upon the company's debt/EBITDA ratio, as defined by
the agreement. As of November 2, 2003, there were $2.3 million in outstanding
letters of credit in support of inventory purchases and no borrowings
outstanding under the agreement. The credit facility expires in August 2004.
The unsecured term notes have an average remaining term of 5 years. The
principal payments become due from March 2006 to March 2010. Interest is
payable semi-annually at a fixed coupon rate of 7.76%.
The company's loan agreements require, among other things, that the
company maintain compliance with certain financial ratios. At November 2,
2003, the company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next
five fiscal years are: 2004 - $539,000; 2005 - $539,000; 2006 -
$11,538,000; 2007 - $11,000,000; and 2008 - $31,000,000.
================================================================================
8. Cash Flow Information
Payments for interest and income taxes as follows:
Six months ended
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Interest $ 3,021 $ 3,750
Income taxes (refunds) 343 (2,173)
- --------------------------------------------------------------------------------
The non-cash portion of capital expenditures respresenting vendor financing
totaled $243,000 and $1.7 million for the six months ended November 2, 2003 and
October 27, 2002, respectively.
================================================================================
9. Restructuring and Asset Impairment Charges
- --------------------------------------------------------------------------------
A summary of accrued restructuring follows:
(dollars in thousands) November 2, 2003 April 27, 2003
- --------------------------------------------------------------------------------
Fiscal 2003 CDF $ 6,139 $ 6,989
Wet Print Flock 513 543
Fiscal 2001 CDF 60 211
- --------------------------------------------------------------------------------
$ 6,712 $ 7,743
- --------------------------------------------------------------------------------
Fiscal 2003 CDF Restructuring
In August 2002, management approved a restructuring plan within the Culp
Decorative Fabrics division aimed at lowering manufacturing costs, simplifying
the dobby fabric upholstery line, increasing asset utilization and enhancing the
division-s manufacturing competitiveness. The restructuring plan principally
involved (1) consolidation of the division's weaving, finishing, yarn making and
distribution operations by closing the facility in Chattanooga, Tennessee and
integrating these functions into other plants, (2) a significant reduction in
the number of stock keeping units (SKUs) offered in the dobby product line and
(3) a net reduction in workforce of approximately 300 positions. During fiscal
2003, the total restructuring and related charges incurred were $15.0 million,
of which approximately $4.1 million represented non-cash items, including $2.8
million in impairment of property, plant and equipment and $1.3 million in
inventory write-downs. Of the total charge, $12.0 million was recorded in
restructuring expense in the 2003 Consolidated Statement of Income (Loss); and
$1.3 million, related to inventory write-downs, and $1.7 million, related to
equipment moving and relocation expense, were recorded in cost of sales in the
2003 Consolidated Statement of Income (Loss).
As of November 2, 2003, assets classified as held for sale consisted of
machinery and equipment with a value of $166,000 and are included in other
assets. Management anticipates the successful disposal of these assets.
The following summarizes the activity in the restructuring accrual:
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(dollars in thousands) Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Accrual established in fiscal 2003 $ 1,972 $ 7,194 $ 9,166
Paid in fiscal 2003 (1,228) (949) (2,177)
- --------------------------------------------------------------------------------
Balance, April 27, 2003 744 6,245 6,989
Paid in fiscal 2004 (315) (535) (850)
- --------------------------------------------------------------------------------
Balance, November 2, 2003 $ 429 $ 5,710 $ 6,139
- --------------------------------------------------------------------------------
Wet Printed Flock Restructuring
In April 2002, management approved a plan to exit the wet printed flock
upholstery fabric business and has been actively seeking to sell the assets
related to this product line. The exit plan involved closing a printing
facility and flocking operation within the Culp Velvets/Prints division
(CVP), reduction in related selling and administrative expenses and
termination of 86 employees. The total charge for the exit plan was $9.7
million, of which approximately $8.2 million represented non-cash items,
including $7.6 million in impairment of property, plant and equipment and
$619,000 in inventory write-downs. Of the total charge, $9.1 million was
recorded in restructuring expense in the 2002 Consolidated Statement of
Income (Loss), and $619,000, related to inventory write-downs, was recorded
in cost of sales in the 2002 Consolidated Statement of Income (Loss). During
the fiscal year ended April 28, 2002, sales of the wet printed flock product
contributed $17.1 million, or 4.5%, of the company's total sales and resulted
in an operating loss of approximately $2.1 million.
During 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. Due to
management's continual evaluation of the restructuring accrual, the reserve
was reduced $313,000 to reflect current estimates of future health care
claims. Additionally, the reserve was reduced $42,000 to reflect current
estimates of future security expenses and other costs.
As of November 2, 2003, assets classified as held for sale, including
a building, machinery and equipment of $300,000 are included in other
assets. Management is actively marketing these assets and anticipates the
successful disposal of these assets.
The following summarizes the activity in the CVP restructuring
accrual:
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(dollars in thousands) 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
Adjustments in fiscal 2003 (313) (42) (355)
Paid in fiscal 2003 (428) (116) (544)
- --------------------------------------------------------------------------------
Balance, April 27, 2003 96 447 543
Paid in fiscal 2004 1 (31) (30)
- --------------------------------------------------------------------------------
Balance, November 2, 2003 $ 97 $ 416 $ 513
- --------------------------------------------------------------------------------
Fiscal 2001 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. The 2001 charge from the
restructuring and related costs was $7.4 million, approximately $3.4 million
of which represented non-cash items, including $2.5 million in impairment of
property, plant and equipment and $874,000 in inventory write-downs. Of the
total charge, $5.6 million was recorded in restructuring expense in the 2001
Consolidated Statement of Income (Loss); and $874,000, related to inventory
write-downs, and $931,000, related to equipment relocation costs, were
recorded in cost of sales in the 2001 Consolidated Statement of Income
(Loss). The 2002 charge from restructuring and related expenses was $2.5
million, approximately $160,000 of which represented the non-cash impairment
of property, plant and equipment. Of the total charge, $1.3 million was
included in restructuring expense in the 2002 Consolidated Statement of
Income (Loss), and $1.2 million, related to equipment relocation costs, was
recorded in cost of sales in the 2002 Consolidated Statement of Income
(Loss).
During fiscal 2003, as a result of management's continual evaluation of
the restructuring accrual, the reserve was reduced $275,000 to reflect
current estimates of future health care claims and increased $276,000 to
reflect current estimates of remaining lease expenses, property taxes,
insurance and other exit costs.
As of November 2, 2003, there were no assets classified as held for sale
in relation to the CDF restructuring.
The following summarizes the activity in the CDF restructuring accrual:
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(dollars in thousands) 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
Adjustments in fiscal 2003 (275) 276 1
Paid in fiscal 2003 (202) (591) (793)
- --------------------------------------------------------------------------------
Balance, April 27, 2003 35 176 211
Paid in fiscal 2004 (7) (144) (151)
- --------------------------------------------------------------------------------
Balance, November 2, 2003 $ 28 $ 32 $ 60
- --------------------------------------------------------------------------------
================================================================================
10. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and
other changes in equity, except those resulting from investments by
shareholders and distributions to shareholders not reflected in net income
(loss).
A summary of total comprehensive income (loss) follows:
Three months ended
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Net income (loss) $ 3,146 $ (6,590)
Gain (loss) on foreign currency contracts,
net of taxes:
Net changes in fair value 0 (33)
Net loss reclassified into earnings 0 (110)
Gain (loss) in fair value of short-term investments 9 0
- --------------------------------------------------------------------------------
Net comprehensive income (loss) $ 3,155 (6,733)
- --------------------------------------------------------------------------------
Six months ended
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Net income (loss) $ 2,735 $ (29,826)
Gain (loss) on foreign currency contracts,
net of taxes:
Net changes in fair value 0 35
Net loss reclassified into earnings 0 (7)
Gain (loss) in fair value of short-term investments (57) 0
- --------------------------------------------------------------------------------
Net comprehensive income (loss) $ 2,678 (29,798)
================================================================================
11. Income (Loss) per Share
Basic income (loss) per share is computed using the weighted-average
number of shares outstanding during the period. Diluted income per share
uses the weighted-average number of shares outstanding during the period plus
the dilutive effect of stock options calculated using the treasury stock
method. Weighted average shares used in the computation of basic and diluted
income (loss) per share follows:
Three months ended
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, basic 11,524 11,483
Effect of dilutive stock options 250 0
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, diluted 11,774 11,483
- --------------------------------------------------------------------------------
Options to purchase 326,625 shares and 388,375 shares of common stock
were not included in the computation of diluted income per share for the
three months ended November 2, 2003 and October 27, 2002, respectively,
because the exercise price of the options was greater than the average market
price of the common shares.
For the three months ended October 27, 2002 options to purchase
271,476 shares were not included in the computation of diluted net loss per
share because the company incurred a net loss for the quarter.
Six months ended
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, basic 11,519 11,433
Effect of dilutive stock options 199 0
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, diluted 11,718 11,433
- --------------------------------------------------------------------------------
Options to purchase 462,412 shares and 357,625 shares of common stock were
not included in the computation of diluted income per share for the six months
ended November 2, 2003 and October 27, 2002, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
For the six months ended October 27, 2002 options to purchase 345,536
shares were not included in the computation of diluted net loss per share
because the company incurred a net loss for the quarter.
================================================================================
12. Segment Information
The company's operations are classified into two business segments:
upholstery fabrics and mattress ticking. The upholstery fabrics segment
principally manufactures and sells woven jacquards and dobbies, 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 equivalents, short-term investments, deferred income
taxes, other current assets and other assets on a total company basis. Thus,
identifiable assets by business segment represent accounts receivable,
inventories, property, plant and equipment and goodwill.
Net sales and gross profit for the company's operating segments follow:
Three months ended
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Net sales:
Upholstery Fabrics $ 55,943 $ 58,480
Mattress Ticking 26,788 25,260
- --------------------------------------------------------------------------------
$ 82,731 $ 83,740
- --------------------------------------------------------------------------------
Gross Profit:
Upholstery Fabrics $ 10,409 $ 7,650
Mattress Ticking 6,329 6,093
- --------------------------------------------------------------------------------
$ 16,738 $ 13,743
- --------------------------------------------------------------------------------
Net sales and gross profit for the company's operating segments follow:
Six months ended
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Net sales:
Upholstery Fabrics $ 102,399 $ 118,458
Mattress Ticking 54,008 51,290
- --------------------------------------------------------------------------------
$ 156,407 $ 169,748
- --------------------------------------------------------------------------------
Gross Profit:
Upholstery Fabrics $ 15,816 $ 15,651
Mattress Ticking 12,401 11,946
- --------------------------------------------------------------------------------
$ 28,217 $ 27,597
- --------------------------------------------------------------------------------
Identifiable assets, consisting of accounts receivable, inventories,
property, plant and equipment and goodwill, for the company's operating
segments follow:
- --------------------------------------------------------------------------------
(dollars in thousands) November 2, 2003 April 27, 2003
- --------------------------------------------------------------------------------
Upholstery Fabrics $ 120,495 $ 124,889
Mattress Ticking 55,154 51,124
- --------------------------------------------------------------------------------
$ 175,649 $ 176,013
Non-identifiable assets
Cash and cash equivalents 16,623 14,355
Short-term investments 15,134 10,043
Deferred income taxes 12,303 12,303
Other current assets 3,211 3,204
Other assets 1,892 2,235
- --------------------------------------------------------------------------------
Total assets $ 224,812 $ 218,153
================================================================================
13. Cumulative Effect of Accounting Change
The company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective April 29, 2002. 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. 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 companies, comparable transactions 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 during the
first quarter of fiscal 2003. 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 and international sales by geographic area for the three and
six months ended November 2, 2003 and October 27, 2002.
CULP, INC.
SALES / GROSS PROFIT BY SEGMENT/DIVISION
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 2, 2003 AND OCTOBER 27, 2002
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
-----------------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------- ---------------------------------
November 2, October 27, % Over November 2, October 27,
Segment/Division Sales 2003 2002 (Under) 2003 2002
- -------------------------------------- ----------- ---------- --------- ---------------- --------------
Upholstery Fabrics
Culp Decorative Fabrics $ 30,821 33,904 (9.1)% 37.3 % 40.5 %
Culp Velvets/Prints 23,484 23,330 0.7 % 28.4 % 27.9 %
Culp Yarn 1,638 1,246 31.5 % 2.0 % 1.5 %
----------- ---------- --------- ---------------- --------------
55,943 58,480 (4.3)% 67.6 % 69.8 %
Mattress Ticking
Culp Home Fashions 26,788 25,260 6.0 % 32.4 % 30.2 %
----------- ---------- --------- ---------------- --------------
$ 82,731 83,740 (1.2)% 100.0 % 100.0 %
=========== ========== ========= ================ ==============
Segment Gross Profit Gross Profit Margin
- -------------------------------------- ---------------------------------
Upholstery Fabrics $ 10,409 7,650 (1) 36.1 % 18.6 % 13.1 %
Mattress Ticking 6,329 6,093 3.9 % 23.6 % 24.1 %
----------- ---------- --------- ---------------- --------------
Gross profit $ 16,738 13,743 21.8 % 20.2 % 16.4 %
=========== ========== ========= ================ ==============
SIX MONTHS ENDED (UNAUDITED)
-----------------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------- ---------------------------------
November 2, October 27, % Over November 2, October 27,
Segment/Division Sales 2003 2002 (Under) 2003 2002
- -------------------------------------- ----------- ---------- --------- ---------------- --------------
Upholstery Fabrics
Culp Decorative Fabrics $ 58,829 68,675 (14.3)% 37.6 % 40.5 %
Culp Velvets/Prints 40,324 46,437 (13.2)% 25.8 % 27.4 %
Culp Yarn 3,246 3,346 (3.0)% 2.1 % 2.0 %
----------- ---------- --------- ---------------- --------------
102,399 118,458 (13.6)% 65.5 % 69.8 %
Mattress Ticking
Culp Home Fashions 54,008 51,290 5.3 % 34.5 % 30.2 %
----------- ---------- --------- ---------------- --------------
$ 156,407 169,748 (7.9)% 100.0 % 100.0 %
=========== ========== ========= ================ ==============
Segment Gross Profit Gross Profit Margin
- -------------------------------------- ---------------------------------
Upholstery Fabrics $ 15,816 15,651 (1) 1.1 % 15.4 % 13.2 %
Mattress Ticking 12,401 11,946 3.8 % 23.0 % 23.3 %
----------- ---------- --------- ---------------- --------------
Gross profit $ 28,217 27,597 2.2 % 18.0 % 16.3 %
=========== ========== ========= ================ ==============
(1) Gross profit includes $1.2 million of restructuring related charges
CULP, INC.
INTERNATIONAL SALES BY GEOGRAPHIC AREA
FOR THE THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 2, 2003 AND OCTOBER 27, 2002
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------
Amounts
--------------------------------
November 2, October 27, % Over
Geographic Area 2003 2002 (Under)
- ---------------------------------------------- --------------- -------------- -----------
North America (Excluding USA) $ 7,048 8,424 (16.3)%
Far East & Asia 1,907 1,549 23.1 %
All other areas 445 1,239 (64.1)%
--------------- -------------- -----------
$ 9,400 11,211 (16.2)%
=============== ============== ===========
Percent of total sales 11.4% 13.4%
SIX MONTHS ENDED (UNAUDITED)
--------------------------------------------------
Amounts
--------------------------------
November 2, October 27, % Over
Geographic Area 2003 2002 (Under)
- ---------------------------------------------- --------------- -------------- -----------
North America (Excluding USA) $ 13,420 15,974 (16.0)%
Far East & Asia 3,301 2,983 10.6 %
All other areas 872 2,676 (67.4)%
--------------- -------------- -----------
$ 17,593 21,634 (18.7)%
=============== ============== ===========
Percent of total sales 11.2% 12.7%
Three and Six Months ended November 2, 2003 compared with Three and Six Months
ended October 27, 2002
For the second quarter of fiscal 2004, net sales decreased 1.2% to $82.7
million; and the company reported net income of $3.1 million or $0.27 per share
diluted, compared with a net loss of $6.6 million or $0.57 per share diluted in
the second quarter of fiscal 2003. For the first six months of fiscal 2004, net
sales decreased 7.9% to $156.4 million; and the company reported net income of
$2.7 million or $0.23 per share diluted, compared to a loss before the
cumulative effect of accounting change of $5.7 million or $.50 per share
diluted, for the same period last year. Including the cumulative effect of
accounting change, the company reported a net loss for the first six months of
fiscal 2003 of $29.8 million, or $2.61 per share. In the first quarter of 2003,
the company recorded a non-cash goodwill impairment charge, net of income taxes,
of $24.2 million, or $2.11 per share diluted. Additionally, the financial
results for the second quarter and first six months of fiscal 2003 included
$14.5 million in restructuring and related charges. As reflected in the
financial statements for fiscal 2003, restructuring and related charges were
recorded as $13.3 million in the line item "restructuring expense" and $1.2
million in "cost of sales," reducing net income by $8.9 million, net of taxes
(or $0.77 per share). Year- to-date for fiscal 2004 included 27 weeks versus 26
weeks for the same period of fiscal 2003.
UPHOLSTERY FABRIC SEGMENT
Net Sales -- Upholstery fabric sales for the second quarter of fiscal 2004
decreased 4.3% to $55.9 million when compared to the second quarter of fiscal
2003. The 4.3% decline is a substantial improvement over the 22.5% decrease in
the first quarter of fiscal 2004 and the 17.2% decrease in the fourth quarter of
fiscal 2003. Year-to-date upholstery fabric sales decreased 13.6% to $102.4
million when compared to the same period last year. Most of this year-over-year
decrease occurred in the first quarter and was due primarily to the overall
general weakness in consumer demand for furniture. Additional factors that are
likely affecting demand for upholstery fabrics thus far in fiscal 2004 are (1)
an increase in consumer preference for leather furniture (which has been
decreasing in price at retail due to increasing imports), and (2) an increase in
imported upholstery fabrics, both in "piece goods" and "cut and sewn kits."
Upholstery fabric yards sold during the second quarter were 13.1 million versus
14.1 million in the second quarter of fiscal 2003, a decline of 7.1%. Average
selling price was $4.13 for the second quarter compared with $4.05 in the same
quarter of last year, an increase of 2.0%, due to higher selling prices in the
Culp Decorative Fabrics (CDF) division.
Gross Profit -- Gross profit for the second quarter of fiscal 2004 was
$10.4 million, or 18.6%, versus $7.7 million, or 13.1%, for the same quarter of
last year. For the first six months of fiscal 2004, upholstery gross profit was
$15.8 million, or 15.4% compared with $15.7 million, or 13.2% in the same period
last year. Restructuring related charges of $1.2 million were included in gross
profit for the second quarter and first six months of fiscal 2003. The increase
in gross profit and margins for the second quarter reflects higher capacity
utilization and gains in manufacturing operating efficiencies within the CDF
division. Year-to-date fiscal 2004 gross profit performance as compared with the
year earlier period was negatively affected by the significant decline in sales
of velvet fabrics during the first quarter.
China Operations -- The start up of the company's China operation is
generally proceeding in accordance with previously announced plans, although
delays of one to two months were experienced in receiving some manufacturing
equipment. The equipment has been received, and installation is expected to be
completed within two months. During the third quarter, the company expects to
begin incoming fabric inspection and testing, and to start shipping fabric to
customers. Limited finishing operations are anticipated to begin in the fourth
quarter of this fiscal year. As expected, the company is experiencing modest
operating losses in its China operation during the start up phase, which is
expected to be completed by the end of this fiscal year, although some level of
operating losses from the China operation is expected to continue until some
time in fiscal 2005.
MATTRESS TICKING SEGMENT
Net Sales -- Mattress ticking sales for the second quarter of fiscal 2004
increased 6.0% to $26.8 million, and sales for the first six months of fiscal
2004 increased 5.3% to $54.0 million. This sales improvement is due to better
industry demand and continued market share gains with key customers. The sales
gain in this segment for the fiscal year to date (5.3%) is especially noteworthy
because it is occurring during the bedding industry's transition to selling
predominately one-sided mattresses, which utilizes about one-third less mattress
ticking. This transition at retail began in mid to late calendar year 2002 and
is expected to continue through early calendar year 2005.
Mattress ticking yards sold during the second quarter of fiscal 2004 were
10.9 million compared with 10.1 million yards in the second quarter of last
year. The average selling price was $2.43 for the second quarter, compared to
$2.48 in the same quarter last year. The slight decrease from last year's same
quarter and the first quarter of this year is due to product mix and a higher
concentration of closeout sales this quarter.
Gross Profit -- For the second quarter of fiscal 2004, the mattress ticking
segment reported gross profit dollars and margins of $6.3 million and 23.6%,
respectively, compared with $6.1 million and 24.1% for the same period of last
year. For the first six months of fiscal 2004, gross profit dollars increased
3.8% to $12.4 million when compared to the same period last year, while the
gross profit margin declined slightly to 23.0% from 23.3% the previous year.
OTHER CORPORATE EXPENSES
Selling, General and Administrative Expenses. SG&A expenses of $10.3
million for the second quarter increased approximately $800,000, or 8.6%, from
the prior year amount. As a percent of net sales, SG&A expenses increased to
12.4% from 11.3% the previous year. SG&A expenses in the second quarter included
higher professional fees and higher bad debt expense. In the second quarter of
fiscal 2003, SG&A expenses included a credit to bad debt expense resulting from
a net reduction of $424,000 in the allowance for doubtful accounts, due to a
reduction in past due balances. Bad debt expense in the second quarter of fiscal
2004 was $122,000. Year-to-date SG&A expenses increased 4.5% to $20.8 million
due primarily to the reasons addressed above.
Interest Expense (Income). Interest expense for the second quarter declined
to $1.5 million from $1.7 million the previous year due to lower borrowings
outstanding. Interest income of $121,000 was unchanged from the previous year.
The effect on interest income earned of a higher average invested cash balance
for fiscal 2004 was offset by lower interest rates earned in fiscal 2004 as
compared to the same period last year. Lower borrowings outstanding also
impacted interest expense for the first six months of fiscal 2004, which was
down 16% to $3.0 million compared to the year earlier period. Interest income
for the first six months of fiscal 2004 decreased 10.3% to $243,000 due
principally to lower interest rates earned on cash balances.
Other Expense. Other expense for the second quarter of fiscal 2004 totaled
$62,000 compared with $242,000 in the prior year. The decrease was principally
due to 1) lower amortization expense related to reduced amounts of debt issue
costs and 2) lower fees associated with foreign currency contracts for inventory
purchases, offset somewhat by 3) the unfavorable impact of a higher Canadian
exchange rate. Year-to-date other expense decreased 32.2% to $307,000 due
primarily to the reasons addressed above.
Income Taxes. The effective tax rate (taxes as a percentage of pretax
income (loss)) for the first six months of fiscal 2004 was 37%, compared with
39.9% for the first six months of fiscal 2003. The higher rate for the prior
year period reflects the increased tax benefits related to the company's loss in
the U.S. resulting from the restructuring charges recorded in the second
quarter.
Liquidity and Capital Resources
Liquidity - The company's sources of liquidity include cash, cash
equivalents, short-term investments, cash flow from operations and amounts
available under its revolving credit line. These sources have been adequate for
day-to-day operating and capital expenditures. The company expects these sources
of liquidity to continue to be adequate for the foreseeable future. Cash, cash
equivalents and short-term investments as of November 2, 2003 increased to $31.8
million from $24.4 million at the end of fiscal 2003, reflecting free cash flow
of $7.2 million for the first six months of fiscal 2004 (see discussion of free
cash flow below).
Accounts receivable as of November 2, 2003 decreased 4.6% from the
year-earlier level, principally due to an increase in the number of customers
taking the cash discount for shorter payment terms. Days sales outstanding
totaled 34 days at November 2, 2003 compared with 36 a year ago. Inventories at
the close of the second quarter decreased 1.3% from a year ago. Inventory turns
for the second quarter were 5.1 versus 4.9 for the year-earlier period.
Operating working capital (comprised of accounts receivable, inventory and
accounts payable-trade) was $61.3 million at November 2, 2003, down from $68.5
million a year ago.
Financing Arrangements -- The company's $76.6 million in long-term debt is
unsecured and is comprised of a $75.0 million term loan, with a fixed interest
rate of 7.76%, and a $1.6 million non-interest bearing term loan with the
Canadian government. Additionally, the company has a $15.0 million revolving
credit line with a bank, of which no balance is outstanding at November 2, 2003.
The bank agreement expires in August, 2004. The first scheduled principal
payment on the $75.0 million term loan is due March 2006 in the amount of $11.0
million. The Canadian government loan is repaid in annual installments of
approximately $500,000 per year.
The company's long-term debt to capital ratio was 43.7% compared with 51.7%
for the same period last year. The company was in compliance with all financial
covenants in its loan agreements as of November 2, 2003.
Capital Expenditures. -- Capital spending for the first six months of
fiscal 2004 was $3.0 million. Depreciation for the first six months of fiscal
2004 was $6.9 million, and is estimated at $14.0 million for the full fiscal
year. For fiscal 2004, the company's capital expenditures budget is $8.0
million, of which $3.0 million is related to the company's China operations. The
China investment includes manufacturing equipment and leasehold improvements.
Free Cash Flow. - Free cash flow is a non-GAAP performance measure that
management believes provides useful information to investors because it measures
the company's available cash flow for potential debt repayment, stock
repurchases and additions to cash, cash equivalents and short-term investments.
Free cash flow was $7.2 million for the first six months of fiscal 2004 compared
with $14.0 million for the same period last year. For fiscal 2004, the company
believes free cash flow will be substantially less than fiscal 2003 primarily
because the company does not expect the continued significant reduction in
working capital experienced in each of the previous three years. In addition,
the company will have higher payments on vendor-financed capital expenditures.
A reconciliation of net cash provided by operating activities to free cash
flow is set forth below:
(dollars in thousands) Six months ended
- --------------------------------------------------------------------------------
November 2, 2003 October 27, 2002
- --------------------------------------------------------------------------------
Net cash provided by operating activities $11,450 $17,829
Minus: Capital expenditures (2,954) (3,566)
Minus: Payments on vendor-financed capital
expenditures (1,254) (247)
- --------------------------------------------------------------------------------
Free Cash Flow $7, 242 $14,016
- --------------------------------------------------------------------------------
BUSINESS OUTLOOK
While the overall residential furniture and bedding industry demand
improved during the second quarter, as expected, there still does not appear to
be a sustainable trend in incoming business, particularly in upholstery fabrics.
Therefore, the company expects that third quarter sales will decrease moderately
from the same quarter of last year. Mattress ticking segment sales are expected
to increase in the third quarter, although at a lower rate than the 6.0% growth
in the second quarter. Upholstery fabric segment sales are expected to decline
from the same quarter of last year at a higher rate than the 4.3% in the second
quarter, due primarily to softness in incoming orders of the segment's Culp
Decorative Fabrics (CDF) division. With these sales expectations and industry
outlook, the company expects to report net income for the third quarter in the
range of $0.13 to $0.17 per diluted share, with actual results depending upon
the level of demand throughout the quarter.
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 2004 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 27, 2003.
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. 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 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. In addition,
strengthening of the U. S. dollar against other currencies could make the
company's products less competitive on the basis of price in markets outside the
United States. Also, economic and political instability in international areas
could affect the company's operations or sources of goods in those areas, as
well as demand for the company's products in international markets. Finally,
unanticipated delays or costs in executing restructuring actions could cause the
cumulative effect of restructuring actions to fail to meet the objectives set
forth by management. Other factors that could affect the matters discussed in
forward looking statements are included in the company's periodic reports filed
with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to market risk from changes in interest rates on
debt and foreign currency exchange rates. The company's market risk sensitive
instruments are not entered into for trading purposes. The company's exposure to
interest rate risk consists of floating rate debt based on the London Interbank
Offered Rate plus an adjustable margin under the company's revolving credit
agreement. As of November 2, 2003 there were no borrowings outstanding under the
company's revolving credit agreement. Additionally, approximately 98% of the
company's long-term debt is at a fixed rate. Thus, any reasonable forseeable
change in interest rates would have no material effect on the company's interest
expense.
The company's exposure to fluctuations in foreign currency exchange rates
is due primarily to a foreign subsidiary domiciled in Canada and firmly
committed and anticipated purchases of certain machinery, equipment and raw
materials in foreign currencies. The company's Canadian subsidiary uses the
United States dollar as its functional currency. The company generally does not
use financial derivative instruments to hedge foreign currency exchange rate
risks associated with the Canadian subsidiary. However, the company generally
enters into foreign exchange forward and option contracts as a hedge against its
exposure to currency fluctuations on firmly committed and anticipated purchases
of certain machinery, equipment and raw materials. The amount of
Canadian-denominated sales and manufacturing costs are not material to the
company's total sales and total manufacturing costs. Therefore, a 10% change in
the exchange rate at November 2, 2003 would not have a material 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 an increase in the value of the underlying exposure.
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 Chief Executive Officer and Chief Financial Officer as of November 2,
2003, and the Chief Executive Officer and Chief Financial Officer have concluded
that the company's disclosure controls and procedures are adequate and
effective.
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 23, 2003. Of the 11,515,459 shares of common stock
outstanding on the record date of July 25, 2003, 10,800,194 shares were present
in person or by proxy.
At the Annual Meeting, shareholders voted on:
o the election of three directors: Robert G. Culp, III, Patrick B. Flavin
and Patrick H. Norton
o ratification of the appointment of KPMG LLP as the independent auditors of
the company for the current fiscal year,
A. Proposal for Election of Directors:
Robert G. Culp, III Patrick B. Flavin
For 10,510,008 For 10,519,333
Abstain 290,186 Abstain 280,861
Patrick H. Norton
For 10,520,208
Abstain 279,986
B. Proposal to ratify the election of KPMG LLP as independent auditors of the
company for fiscal year 2004:
For 10,760,224
Against 37,157
Abstain 2,813
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
3(i) Articles of Incorporation of the company, as amended, were filed as
Exhibit 3(i) to the company's Form 10-Q for the quarter ended July 28,
2002, filed September 11, 2002, and are incorporated herein by reference.
3(ii) Restated and Amended Bylaws of the company, as amended June 12, 2001,
were filed as Exhibit 3(ii) to the company's Form 10-Q for the quarter
ended July 29, 2001, filed September 12, 2001, and are incorporated herein
by reference.
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.
(b) Reports on Form 8-K:
The following reports on Form 8-K were furnished during the period covered by
this report:
Form 8-K dated August 26, 2003, included under Item 12, Results of
Operations and Financial Condition, the Company's press release for
quarterly earnings and the Financial Information Release relating to
certain financial information for the quarter ended August 3, 2003.
Form 8-K dated October 15, 2003 containing a press release updating
projected earnings for the second quarter ended November 2, 2003.
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 17, 2003 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 sign-
ing as principal financial officer)