--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
Form 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
-------------
Date of Report (Date of earliest event reported) August 27, 2002
CULP, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-12781 56-1001967
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) identification No.)
101 South Main Street
High Point, North Carolina 27260
(Address of principal executive offices)
(336) 889-5161
(Registrant's telephone number, including area code)
-------------------------------------------------------------
(Former name or former address, if changed since last report)
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Item 5. Other Events
See attached Press Release (3 pages) and Financial Information Release (12
pages), both dated August 27, 2002, related to the fiscal 2003 first quarter
ended July 28, 2002.
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. Such statements are inherently subject to risks and uncertainties.
Forward-looking statements are statements that include projections,
expectations or beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often characterized by
qualifying words such as "expect," "believe," "estimate," "plan" and "project"
and their derivatives. Factors that could influence the matters discussed in
such statements include the level of housing starts and sales of existing
homes, consumer confidence, trends in disposable income, and general economic
conditions. Decreases in these economic indicators could have a negative
effect on the company's business and prospects. Likewise, increases in
interest rates, particularly home mortgage rates, and increases in consumer
debt or the general rate of inflation, could affect the company adversely.
Because of the 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.
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 hereunto duly authorized.
CULP, INC.
(Registrant)
By: Franklin N. Saxon
----------------------------
Executive Vice President and
Chief Financial Officer
Dated: August 27, 2002
Culp Reports First Quarter 2003 Results
Page 3
August 27, 2002
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FOR IMMEDIATE RELEASE
CULP, INC. REPORTS FIRST QUARTER FISCAL 2003 RESULTS
----------------------
ANNOUNCES NEW RESTRUCTURING INITATIVES
EXPECTED TO RESULT IN OVER $12 MILLION IN ANNUAL SAVINGS
HIGH POINT, N. C. (August 27, 2002) -- Culp, Inc. (NYSE: CFI) today reported
financial and operating results for the first quarter of fiscal 2003. The
company also announced that it is undertaking additional restructuring
initiatives that are expected to lower manufacturing costs, increase asset
utilization and enhance manufacturing competitiveness in its Culp Decorative
Fabrics division.
For the three months ended July 28, 2002, Culp reported net sales of
$85.9 million compared with $86.5 million for the same period a year ago.
Excluding the cumulative effect of accounting change, net income for the first
quarter of fiscal 2003 was $915,000, or $0.08 per share diluted, compared with
a year-earlier loss of $1.1 million, or $0.10 per share diluted, excluding
restructuring and related charges and goodwill amortization. Including the
cumulative effect of accounting change, the company reported a net loss for
the first quarter of fiscal 2003 of $23.2 million, or $2.04 per share
diluted.
As a result of the adoption of a new accounting standard, "Goodwill and
Other Intangible Assets," the company recorded a non-cash goodwill impairment
charge, net of income taxes, of $24.2 million, or $2.12 per share diluted, in
the first quarter related to the goodwill associated with its Culp Decorative
Fabrics division. The charge, recorded as "cumulative effect of accounting
change," has no effect on operating income or cash flow from operations and
does not affect the company's compliance with the terms of its lending
agreements.
Robert G. Culp, III, chief executive officer of Culp, Inc., commented,
"The results for the first quarter of 2003 demonstrate the value of the actions
Culp has taken to increase sales, lower manufacturing costs, improve
productivity, and achieve a more profitable sales mix across all divisions.
Excluding the effect of the wet printed flock business that we exited in April
2002, we reported a 3% increase in sales compared with the year-earlier
period. Our considerable progress is primarily attributed to solid margin
gains in each of the upholstery fabrics divisions, especially from Culp
Decorative Fabrics. In addition, our ability to provide attractive fabrics
that our customers demand, and meet the delivery terms that today's market
requires, has contributed to the positive results.
"During the first quarter we generated $5.4 million in cash from
operations, allowing us to reduce our funded debt by $12.0 million and further
strengthen our balance sheet. At the end of the quarter we had $25.1 million
in cash and cash investments, a significant improvement over $549,000 at the
close of the first quarter a year ago. Having a solid financial foundation
continues to be a high priority for Culp.
"We have made significant progress over the past year due to the success
of our restructuring strategy and increased focus on achieving higher
productivity from our current asset configuration," Culp continued. "As a
result of this progress, we have now identified additional opportunities for
improvement within the Culp Decorative Fabrics division that we believe will
further enhance our competitive position. Our goal is to eliminate the least
efficient and higher cost elements of this division's manufacturing base and
realize greater utilization of its most productive assets. This restructuring
plan principally involves consolidation of the company's weaving, finishing,
yarn-making and distribution operations by closing our facility in
Chattanooga, Tennessee and integrating these functions into other plants. In
addition to reducing our overall production costs, another key part of the
restructuring plan will be a substantial reduction in the complexity of our
dobby upholstery product line. As a result, we expect to realize annual
savings of $12.0 to $15.0 million while maintaining the necessary capacity to
meet anticipated levels of demand for the foreseeable future. The
implementation of these initiatives will begin immediately and is expected to
be completed in the third quarter of fiscal 2003."
Culp noted, "The restructuring plan involves very difficult personnel
decisions. We recognize the dedication and contributions of the associates
employed at the Chattanooga facility, and we regret the impact of these
consolidation initiatives on our associates and the community."
The company expects the restructuring actions to result in a charge of
approximately $15.0 million, or $9.1 million on an after tax basis, or $0.78
per share. Approximately $4.3 million of the pre-tax amount is expected to be
non-cash items. The majority of the charges will be incurred in the second
fiscal quarter ending October 27, 2002, with approximately $750,000 incurred
in the second half of the fiscal year. Management will take steps to minimize
disruptions in production as assets are being moved and reconfigured, but it
is anticipated that the various restructuring actions will impact operating
earnings (before restructuring charges) during the second quarter by $500,000
to $900,000, or $0.03 to $0.05 per share. The company expects, however, that
these short-term transition costs will be recovered during the second half of
the current fiscal year. Management believes that the long-term gains
resulting from this restructuring will outweigh any short-term costs and the
restructuring and related charges.
Looking ahead, Culp concluded, "Although we remain confident in our
ability to execute and compete effectively in this environment, we have seen a
moderate slowdown in sales throughout the home furnishings industry beginning
in mid-July, particularly in furniture. Overall consumer spending patterns
have been hesitant in this uncertain economy, and, as a result, we expect our
domestic sales for the second fiscal quarter will be flat to slightly below
sales for the same period last year. However, we remain optimistic that we
will see more favorable trends in our business in the second half of the year,
and expect that our domestic sales for 2003 as a whole will increase over the
prior year. Additionally, we believe we will meet our objective to achieve
year-over-year improvement in quarterly net income, excluding the impact of
restructuring charges. We also expect to continue to make meaningful progress
in returning Culp's profit margins to their historical highs and to continue
generating free cash flow."
Culp, Inc. is one of the world's largest marketers of upholstery fabrics
for furniture and mattress fabrics for bedding. The company's fabrics are
used principally in the production of residential and commercial furniture and
bedding products.
This release contains statements that may be deemed "forward-looking
statements" within the meaning of the federal securities laws, including the
Private Securities Litigation Reform Act of 1995. Such statements are
inherently subject to risks and uncertainties. Forward-looking statements are
statements that include projections, expectations or beliefs about future
events or results or otherwise are not statements of historical fact. Such
statements are often characterized by qualifying words such as "expect,"
"believe," "estimate," "plan" and "project" and their derivatives. Factors
that could influence the matters discussed in such statements include the
level of housing starts and sales of existing homes, consumer confidence,
trends in disposable income and general economic conditions. Decreases in
these economic indicators could have a negative effect on the company's
business and prospects. Likewise, increases in interest rates, particularly
home mortgage rates, and increases in consumer debt or the general rate of
inflation, could affect the company adversely. Because of the 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.
CULP, INC.
Condensed Financial Highlights
(Unaudited)
Three Months Ended
---------------------------
July 28, July 29,
2002 2001
------------ ------------
Net sales $ 85,888,000 $ 86,463,000
Net income (loss) 915,000 (2,882,000)
Cumulative effect of accounting change, net of
income taxes (24,151,000) --
------------ ------------
Net loss $(23,236,000) $ (2,882,000)
============ ============
Basic income (loss) per share:
Before cumulative effect of accounting change: $ 0.08 (0.26)
Cumulative effect of accounting change (2.12) 0.00
------------- ------------
Net loss $ (2.04) $ (0.26)
============= ============
Diluted income (loss) per share:
Before cumulative effect of accounting change: $ 0.08 $ (0.26)
Cumulative effect of accounting change (2.12) 0.00
------------- ------------
Net loss $ (2.04) $ (0.26)
============= ============
Net income (loss) per share, excluding restructuring and
related charges, goodwill amortization and cumulative
effect of accounting change *$ 0.08 $ (0.10)
Average shares outstanding:
Basic 11,383,000 11,221,000
Diluted 11,765,000 11,221,000
* Excludes cumulative effect of accounting change, net of income taxes, of
$24.2 million ($2.12 per share diluted) for the three months ended July 28,
2002. Excludes restructuring and related charges of $2.3 million ($1.5
million, or $0.14 per share diluted, after taxes), and goodwill
amortization of $350,000 ($230,000, or $0.02 per share diluted, after
taxes) for the three months ended July 29, 2001.
-END-
CULP, INC. FINANCIAL INFORMATION RELEASE
CONSOLIDATED STATEMENTS OF LOSS
FOR THE THREE MONTHS ENDED JULY 28, 2002 AND JULY 29, 2001
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------
Amounts Percent of Sales
--------------------- ---------------------
July 28, July 29, % Over
2002 2001 (Under) 2003 2002
---------- ---------- --------- --------- -----------
Net sales $ 85,888 86,463 (0.7)% 100.0 % 100.0 %
Cost of sales 72,034 75,674 (4.8)% 83.9 % 87.5 %
---------- ---------- ----------------------------------
Gross profit 13,854 10,789 28.4 % 16.1 % 12.5 %
Selling, general and
administrative expenses 10,437 11,235 (7.1)% 12.2 % 13.0 %
Restructuring expense 0 1,303 (100.0)% 0.0 % 1.5 %
---------- ---------- ----------------------------------
Income (loss) from operations 3,417 (1,749) 295.4 % 4.0 % (2.0)%
Interest expense 1,903 2,068 (8.0)% 2.2 % 2.4 %
Interest income (150) (23) 552.2 % (0.2)% (0.0)%
Other expense (income), net 211 572 (63.1)% 0.2 % 0.7 %
---------- ---------- ----------------------------------
Income (loss) before income taxes 1,453 (4,366) 133.3 % 1.7 % (5.0)%
Income taxes * 538 (1,484) 136.3 % 37.0 % 34.0 %
---------- ---------- ----------------------------------
Income (loss) before cumulative effect of
accounting change 915 (2,882) 131.7 % 1.1 % (3.3)%
Cumulative effect of accounting change,
net of income taxes (24,151) 0
---------- ----------
Net loss $ (23,236) (2,882)
========== ==========
Basic income (loss) per share:
Income (loss) before cumulative
effect of accounting change $ 0.08 (0.26) 131.3 %
Cumulative effect of accounting change (2.12) 0.00 100.0 %
---------- ---------- --------
Net loss (2.04) (0.26) (694.8)%
========== ========== ========
Diluted income (loss) per share:
Income (loss) before cumulative
effect of accounting change $ 0.08 (0.26) 129.9 %
Cumulative effect of accounting change (2.12) 0.00 100.0 %
---------- ---------- --------
Net loss (2.04) (0.26) (686.1)%
========== ========== ========
Net income (loss) per share, excluding
restructuring and related charges,
goodwill amortization and cumulative
effect of accounting change (see
proforma statement on page 7) $0.08 ($0.10) 180.0 %
Average shares outstanding 11,383 11,221 1.4 %
Average shares outstanding, assuming dilution 11,765 11,221 4.8 %
* Percent of sales column for income taxes is calculated as a % of income (loss)
before income taxes.
CULP, INC. FINANCIAL INFORMATION RELEASE
CONSOLIDATED BALANCE SHEETS
JULY 28, 2002, JULY 29, 2001, AND APRIL 28, 2002
Unaudited
(Amounts in Thousands)
Amounts Increase
------------------------------ (Decrease)
July 28, July 29, ------------------------- *April 28,
2002 2001 Dollars Percent 2002
--------------- ------------ ------------ --------- ---------
Current assets
Cash and cash investments $ 25,071 549 24,522 4,466.7 % 31,993
Accounts receivable 34,719 52,353 (17,634) (33.7)% 43,366
Inventories 59,721 59,006 715 1.2 % 57,899
Other current assets 13,698 9,893 3,805 38.5 % 13,413
--------------- ------------ ------------ --------- ---------
Total current assets 133,209 121,801 11,408 9.4 % 146,671
Property, plant & equipment, net 89,201 109,417 (20,216) (18.5)% 89,772
Goodwill 9,503 48,129 (38,626) (80.3)% 47,083
Other assets 4,046 1,711 2,335 136.5 % 4,187
--------------- ------------ ------------ --------- ---------
Total assets $ 235,959 281,058 (45,099) (16.0)% 287,713
=============== ============ ============ ========= =========
Current liabilities
Current maturities of
long-term debt $ 455 2,130 (1,675) (78.6)% 1,483
Accounts payable 23,678 24,773 (1,095) (4.4)% 24,327
Accrued expenses 15,239 16,494 (1,255) (7.6)% 18,905
--------------- ------------ ------------ ------- ---------
Total current liabilities 39,372 43,397 (4,025) (9.3)% 44,715
Long-term debt 96,078 108,522 (12,444) (11.5)% 107,001
Deferred income taxes 3,502 10,330 (6,828) (66.1)% 16,932
--------------- ------------ ------------ --------- ---------
Total liabilities 138,952 162,249 (23,297) (14.4)% 168,648
Shareholders' equity 97,007 118,809 (21,802) (18.4)% 119,065
--------------- ------------ ------------ --------- ---------
Total liabilities and
shareholders' equity $ 235,959 281,058 (45,099) (16.0)% 287,713
=============== ============ ============ ========= =========
Shares outstanding 11,483 11,221 262 2.3 % 11,320
=============== ============ ============ ========= =========
* Derived from audited financial statements.
CULP, INC. FINANCIAL INFORMATION RELEASE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 28, 2002 AND JULY 29, 2001
Unaudited
(Amounts in Thousands)
THREE MONTHS ENDED
--------------------------
Amounts
--------------------------
July 28, July 29,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (23,236) (2,882)
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 3,641 4,473
Amortization of intangible assets 159 393
Amortization of stock based compensation 52 (13)
Restructuring expense 0 1,303
Changes in assets and liabilities:
Accounts receivable 8,647 5,496
Inventories (1,822) 991
Other current assets (114) (1,987)
Other assets (18) (3)
Accounts payable (2,366) (123)
Accrued expenses (3,666) (1,957)
Income taxes payable 0 (1,268)
------------ ------------
Net cash provided by operating activities 5,428 4,423
------------ ------------
Cash flows from investing activities:
Capital expenditures (3,070) (1,602)
------------ ------------
Net cash used in investing activities (3,070) (1,602)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 0 16
Principal payments of long-term debt (11,951) (1,020)
Change in accounts payable-capital expenditures 1,717 (2,475)
Proceeds from common stock issued 954 0
------------ ------------
Net cash used in financing activities (9,280) (3,479)
------------ ------------
Decrease in cash and cash investments (6,922) (658)
Cash and cash investments at beginning of period 31,993 1,207
------------ ------------
Cash and cash investments at end of period $ 25,071 549
============ ============
CULP, INC. FINANCIAL INFORMATION RELEASE
FINANCIAL ANALYSIS
JULY 28, 2002
FISCAL 02 FISCAL 03
------------ ------------------------------- -----------
Q1 Q1 Q2 Q3 Q4 LTM (3)
------------ ------------------------------- -----------
INVENTORIES
Inventory turns 5.1 4.9
RECEIVABLES
Days sales in receivables 51 34
Percent current & less than 30
days past due 91.9% 98.7%
WORKING CAPITAL
Current ratio 2.8 3.4
Operating working capital turnover (2) 4.1 4.7
Operating working capital (2) $86,586 $70,762
PROPERTY, PLANT & EQUIPMENT
Depreciation rate 7.2% 6.4%
Percent property, plant &
equipment are depreciated 56.2% 60.6%
Capital expenditures $4,729 (1) $3,070
PROFITABILITY
Net income (loss) per share (5) ($0.26) $0.08 $0.03
Net income (loss) per share (diluted) (5) ($0.26) $0.08 $0.03
Net income (loss) per share (diluted) (6) ($0.10) $0.08 $0.61
Return on average total capital (6) 0.5% 3.5% 5.3%
Return on average equity (6) (3.4%) 3.1% 6.1%
LEVERAGE
Total liabilities/equity 136.6% 143.2%
Funded debt/equity 93.1% 99.5%
Funded debt/capital employed 48.2% 49.9%
Funded debt $110,652 $96,533
Funded debt/EBITDA (LTM) (4) 4.26 2.71
OTHER
Book value per share $10.59 $8.45
Employees at quarter end 3,018 2,900
Sales per employee (annualized) $113,000 $116,163
Capital employed $229,461 $193,540
Effective income tax rate 34.0% 37.0%
EBITDA (4) $4,731 $7,356 $35,601
EBITDA/net sales (4) 5.6% 8.6% 9.3%
(1) Expenditures for entire year
(2) Working capital for this calculation is accounts receivable,
inventories and accounts payable
(3) LTM represents "Latest Twelve Months"
(4) 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
(5) Excludes cumulative effect of accounting change
(6) Excludes restructuring and related charges of $9.9 million ($5.9 million
or $0.51 per share diluted, after taxes) for the last twelve months,
$2.3 million ($1.5 million or $0.14 per share diluted, after taxes) for
the first quarter of fiscal 2002 and $24.1 million cumulative effect of
accounting change for the first quarter of fiscal 2003. Also, goodwill
amortization expense of $350,000 ($230,000 or $0.02 per share diluted,
after taxes) and $1.1 million ($690,000 or $0.06 per share diluted, after
taxes) was excluded for the first quarter of fiscal 2002 and the last
twelve months, respectively
CULP, INC. FINANCIAL INFORMATION RELEASE
SALES BY SEGMENT/DIVISION
FOR THE THREE MONTHS ENDED JULY 28, 2002 AND JULY 29, 2001
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------
Amounts Percent of Total Sales
--------------------- -----------------------
July 28, July 29, % Over
Segment/Division 2002 2001 (Under) 2003 2002
------------------------------ --------- ---------- ------------ ---------- ----------
Upholstery Fabrics
Culp Decorative Fabrics $ 34,731 35,160 (1.2)% 40.4 % 40.7 %
Culp Velvets/Prints 23,119 25,520 (9.4)% 26.9 % 29.5 %
Culp Yarn 2,100 967 117.2 % 2.4 % 1.1 %
--------- ---------- ------------ ---------- ----------
59,950 61,647 (2.8)% 69.8 % 71.3 %
Mattress Ticking
Culp Home Fashions 25,938 24,816 4.5 % 30.2 % 28.7 %
--------- ---------- ------------ ---------- ----------
* $ 85,888 86,463 (0.7)% 100.0 % 100.0 %
========= ========== ============ ========== ==========
* U.S. sales were $75,464 and $71,800 for the first quarter of fiscal 2003 and
fiscal 2002, respectively.
The percentage increase in U.S. sales was 5.1% for the first quarter of
fiscal 2003.
CULP, INC. FINANCIAL INFORMATION RELEASE
INTERNATIONAL SALES BY GEOGRAPHIC AREA
FOR THE THREE MONTHS ENDED JULY 28, 2002 AND JULY 29, 2001
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------- -------------------------
July 28, July 29, % Over
Geographic Area 2002 2001 (Under) 2003 2002
---------------------------- ------------ ----------- ------------ ----------- ----------
North America (Excluding USA) $ 7,550 8,052 (6.2)% 72.4 % 54.9 %
Europe 123 705 (82.6)% 1.2 % 4.8 %
Middle East 887 2,903 (69.4)% 8.5 % 19.8 %
Far East & Asia 1,331 2,570 (48.2)% 12.8 % 17.5 %
South America 243 159 52.8 % 2.3 % 1.1 %
All other areas 289 274 5.5 % 2.8 % 1.9 %
------------ ----------- ------------ ----------- ----------
$ 10,423 14,663 (28.9)% 100.0 % 100.0 %
============ =========== ============ =========== ==========
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%). International sales for the first quarter
represented 12.1% and 17.0% for 2003 and 2002, respectively.
CULP, INC.
PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED JULY 28, 2002 AND JULY 29, 2001
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
---------------------------------------------------------------------------------
As Reported JULY 28, 2002 JULY 29, 2001
JULY 28, Reclassification Proforma Net % of Proforma Net % of % Over
2002 & Adjustments of Adjustments Net Sales of Adjustments Net Sales (Under)
----------- ---------- ------------- ------ ------------- ------ ---------
Net sales $ 85,888 0 85,887 100.0% 86,463 100.0% -0.7%
Cost of sales 72,034 72,033 83.9% 74,695 86.4% (4) -3.6%
----------- ---------- ------------- ------ ------------- ------ ---------
Gross profit 13,854 0 13,854 16.1% 11,768 13.6% 17.7%
Selling, general and
administrative expenses 10,437 0 10,437 12.2% 11,235 13.0% -7.1%
Restructuring expense 0 0 0 0.0% 0 0.0% (6) 0.0%
----------- ---------- ------------- ------ ------------- ------ ---------
Income from operations 3,417 0 3,417 4.0% 533 0.6% 541.1%
Interest expense 1,903 0 1,903 2.2% 2,068 2.4% -8.0%
Interest income (150) 0 (150) -0.2% (23) 0.0% 552.2%
Other expense (income), net 211 0 211 0.2% 222 0.3% (5) -5.0%
----------- ---------- ------------- ------ ------------- ------ ---------
Income (loss) before income taxes 1,453 0 1,453 1.7% (1,734) -2.0% 183.8%
Income taxes (1) 538 0 538 37.0% (590) 34.0% (2) 191.2%
----------- ---------- ------------- ------ ------------- ------ ---------
Income (loss) before cumulative
effect of accounting change $ 915 0 915 1.1% (1,144) -1.3% 180.0%
=========== ========== ============= ====== ============= ====== =========
Net income (loss) per share $0.08 $0.00 $0.08 ($0.10)
Net income (loss) per share,
assuming dilution $0.08 $0.00 $0.08 ($0.10)
Average shares outstanding 11,383 0 11,383 11,221
Average shares outstanding,
assuming dilution 11,765 0 11,765 (3) 11,221
Notes:
(1) Percent of sales column for income taxes is calculated as a % of income
(loss) before income taxes
(2) Pre-restructuring income tax rate was 34%
(3) Incremental shares of 382,000 for fiscal 2003 included in fully diluted
calculation
(4) Excludes $1.0 million (660,000 or $0.06 per share diluted, after taxes) of
Culp Decorative Fabrics (CDF) and Culp Yarn (CYN) restructuring related
charges from the cost of sales total
(5) Excludes $350,000 ($230,000 or $0.02 per share diluted, after taxes) of
goodwill amortization
(6) Excludes CDF and CYN restructuring charges of $1.3 million ($860,000 or
$0.08 per share diluted, after taxes)
CULP, INC. FINANCIAL INFORMATION RELEASE
FINANCIAL NARRATIVE
for the three months ended July 28, 2002 and July 29, 2001
OVERVIEW
GENERAL - For the first quarter, net sales decreased .7% to $85.9 million;
and the company reported net income, excluding the cumulative effect of
accounting change, of $915,000, or $0.08 per share diluted versus a net loss of
$1.1 million, or $0.10 per share diluted in the first quarter of fiscal 2002,
excluding restructuring and related charges, and goodwill amortization. The
earnings improvement is attributable to gross profit dollar and margin gains in
each of the divisions within the upholstery fabric segment, particularly in the
Culp Decorative Fabrics division, along with reductions in SG&A, interest and
other expenses. The company reported further improvement in its balance sheet by
reducing funded debt by $12.0 million during the quarter and ending the quarter
with $25.1 million in cash and cash investments.
ADOPTION OF SFAS No. 142 - 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 be 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. Although operating results improved during the second half
of fiscal 2002, they have been significantly below the division's historical
level of profitability. As a result of the adoption of SFAS No. 142, the company
recorded a non-operating, non-cash goodwill impairment charge of $37.6 million
($24.1 million net of taxes of $13.5 million), or $2.12 per share diluted,
related to the goodwill associated with the Culp Decorative Fabrics division.
PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS) -- The company has
included, within this financial information release, proforma income statements
which reconcile the reported income statements with proforma results. See
PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS) on page 7 of this financial
information release.
FISCAL 2003 RESTRUCTURING INITIATIVE IN CULP DECORATIVE FABRICS DIVISION --
As a result of successful restructuring and productivity enhancement initiatives
during the past year, the company has identified a significant opportunity for
further restructuring within its Culp Decorative Fabrics ("CDF") division that
is expected to:
- substantially lower manufacturing costs;
- dramatically simplify its dobby upholstery fabric product line;
- significantly increase asset utilization; and
- enhance the division's manufacturing competitiveness
While the company's recent profit improvement actions have resulted in
substantial gains in productivity and margins at certain CDF locations, the
division's gross profit margins still have significant room for improvement, and
are below management's targeted levels. The progress made at certain CDF plants
over the past year, however, has allowed for higher production outputs at these
locations while using the same asset base. In addition, management has focused
attention within this division to materially reduce manufacturing complexity by:
(1) simplifying raw material components; (2) eliminating low volume finished
goods SKUs; and (3) configuring manufacturing for greater flexibility. The
progress to date has resulted in the identification of additional opportunities
to eliminate the least efficient and higher cost elements of the division's
manufacturing base and to make higher use of the division's most productive
assets. Based upon these considerations, management has approved a plan to
significantly simplify dobby upholstery fabric offerings and consolidate the
operations of the division's Chattanooga, Tennessee facility into other CDF
plants, mainly the weaving plant in Pageland, South Carolina and the finishing
plant in Burlington, North Carolina. The restructuring is expected to reduce
annual expenses by $12 million to $15 million when fully implemented, while
still maintaining capacity within the division's manufacturing assets to meet
anticipated levels of demand for the foreseeable future. The benefit of the cost
savings is expected to be partially realized beginning in the third quarter of
fiscal 2003, with most or all of the benefit being experienced by the fourth
quarter.
The restructuring action will involve the closing of the Chattanooga
facility, which contains weaving, finishing, yarn-making and distribution
operations. This facility incurred about $20 million in manufacturing labor and
overhead costs during fiscal 2002. Some of the newest equipment located there
will be moved to Pageland and other CDF facilities, while other equipment will
be sold or retired. As an initial step, the forty most modern weaving looms
located in Chattanooga will be moved to Pageland during the company's second
quarter, beginning in September. Also during the second quarter, the finishing,
yarn-making and distribution operations will be consolidated into other CDF
facilities.
As a further part of the restructuring plan, the company will construct a
small addition to the Pageland plant to allow for the increased output at the
facility. The company also plans to purchase twenty (20) high speed weaving
machines to be located at the Pageland facility. Finally, certain jacquard looms
located at CDF's other weaving locations will be modified in ways that will
allow them to produce some of the dobby products now produced at Chattanooga.
This will also aid production during the transition period while equipment is
being moved and installed. Weaving operations at the Chattanooga plant will be
scaled back over time, beginning in the second quarter, and are expected to be
completely terminated by the end of the third quarter.
A key part of the restructuring is a substantial reduction in the
complexity of the company's dobby upholstery fabric product line, which is
expected to increase the efficiency of operations and greatly simplify the raw
material components for this category of fabrics. As part of the changes being
announced, the company plans to discontinue approximately 70% of its stock
keeping units (SKUs) of dobby fabrics by the end of the second quarter. These
discontinued SKUs represented only 10%, or $4 million, of the dobby product line
sales for the twelve months ended July 28, 2002. To minimize the impact on its
customers, the company plans to offer one final production run of the
discontinued products.
The construction at the Pageland facility and new loom purchases are
expected to cost approximately $4 million, and it is anticipated that these
assets will be placed into production by the end of fiscal 2003. The Chattanooga
plant currently has approximately 350 employees, and all of those positions will
be eliminated in the restructuring initiative. It is anticipated that the
current actions will lead to the addition of approximately 50 positions in other
CDF plants. Therefore, CDF expects to reduce its overall headcount by 25% with
this plan.
Once fully implemented, the restructuring plan is expected to significantly
improve gross margins within CDF, while allowing the division the ability to
meet foreseeable levels of demand, all on a substantially lower cost base.
Management expects that the restructuring actions will reduce CDF's annual fixed
manufacturing costs by approximately $8 million, or 29%, from the $29 million
spent in fiscal 2002. The remaining cost savings of $4 - 7 million are expected
to come from reduced variable production costs, as a result of greater
utilization of an asset base that has significantly better efficiency and
employs substantially fewer people. By consolidating the best assets from the
Chattanooga plant into other CDF locations, in combination with transferring
some production to the additional high speed looms that will be added to CDF's
asset base, management anticipates that the average speed and the average
utilization of the weaving and finishing equipment within the division will be
substantially increased.
The actions described above are expected to result in restructuring and
related charges of approximately $15.0 million, which amounts to $9.1 million on
an after-tax basis, or $0.78 per share. The charges will be incurred mostly in
the second quarter ending October 27, 2002, with approximately $750,000 expected
to be incurred in the second half of fiscal 2003. These restructuring charges,
of which $4.3 million are expected to be non-cash items, will principally
involve building lease termination costs, severance costs, equipment
write-downs, inventory markdowns and equipment relocation costs.
Management will take steps to minimize disruptions in production as the CDF
assets are being moved and re-configured, but it is anticipated that the
restructuring actions will impact operating earnings (before restructuring
charges) during the second quarter by $500,000 to $900,000, or $0.03 to $0.05
per share. The company expects, however, that these short-term transition costs
will be recovered during the third and fourth quarters of this fiscal year.
Management believes that the long-term gains resulting from this restructuring
will outweigh any short-term costs and the restructuring and related charges.
INCOME STATEMENT COMMENTS
NET SALES - Upholstery fabric sales for the first quarter of fiscal 2003
decreased 2.8% to $59.9 million (see sales by Segment/Division on page 5).
Domestic upholstery fabric sales increased $2.8 million, or 5.5%, to $53.0
million, while international sales of this category declined $4.5 million, or
39.2%, due primarily to the exiting of the wet printed flock fabric product line
as of April 28, 2002.
Mattress fabric sales for the first quarter of fiscal 2003 increased 4.5% to
$25.9 million. Sales to U.S. bedding manufacturers increased 4.1% while
international sales gained 7.3%.
In line with apparent overall furniture and bedding industry trends, domestic
sales declined by 3.2% for the month of July after being ahead of the prior year
through the first two months of the quarter by 8.8%. It appears that the sales
softness, which began in mid July, has continued into August, and the company
now believes domestic sales for the second quarter ending October 27, 2002 will
be flat to slightly down in comparison with the second quarter of last year. The
company believes that domestic sales for fiscal 2003, as a whole, will increase
over the fiscal 2002 total of $328.4 million.
GROSS PROFIT - Gross profit increased $2.1 million, or 17.7%, compared with
the year-earlier period, excluding restructuring and related charges, and
increased as a percentage of net sales to 16.1% from 13.6%. This significant
improvement reflects gross profit dollar and margin gains in each of the
upholstery fabrics divisions, particularly Culp Decorative Fabrics (CDF). The
key factors behind these gains were: (1) a more profitable sales mix across the
divisions; (2) the elimination of the losses related to the wet printed flock
business; and (3) the increasing productivity benefits from the 2001
restructuring actions taken in CDF. The first quarter represented the second
consecutive quarter of higher year-over-year gross profit dollars and margins
for CDF. The company is optimistic that gross margin in CDF can be improved
significantly over the next one to two years. In order to continue the positive
margin trend and reach targeted margin levels, the company is focusing its
efforts to: (1) improve the profitability of the current sales mix by several
gross margin points; (2) substantially improve asset utilization (i.e. the same
or more yards produced on a lower asset base); (3) improve manufacturing
performance, in terms of productivity and inventory obsolescence, and (4)
successfully implement the restructuring plan discussed above.
Partially offsetting these gains, Culp Home Fashions reported slightly lower
gross profit dollars and margins, due solely to a supply agreement under which
products are sourced in Europe, both because of the higher intrinsic cost of
these European goods, and because of the weakening of the U.S. dollar against
the euro (since the products purchased under the agreement are priced in euros).
The division 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. or Canadian plants in order to meet the agreement's
minimum purchase levels. The margin impact of this European sourcing will be
substantially completed in the second quarter, which ends October 27, 2002. The
company estimates the impact for the second quarter will approximate $800,000 or
$0.04 per share, after taxes. 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.
SG&A EXPENSES - SG&A expenses for the first quarter declined $798,000, or
7.1%, from the prior year, and as a percent of net sales, SG&A expenses declined
to 12.2% from 13.0%. SG&A expenses in the first quarter include bad debt expense
of $347,000 compared with $800,000 in the year-earlier period.
INTEREST EXPENSE (INCOME)- Interest expense for the first quarter declined
to $1.9 million from $2.1 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 $150,000 from $23,000 due to
significantly higher invested cash as compared with the prior year.
OTHER EXPENSE (INCOME), NET - Other expense (income) for the first quarter
of fiscal 2003 totaled $211,000 compared with $572,000 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 first quarter fiscal
2002 was $350,000. Also, during first quarter of fiscal 2003 debt issue cost
totaling $113,700 was expensed due to the repayment of $10.9 million in
industrial revenue bonds (IRBs).
INCOME TAXES - Excluding the cumulative effect of accounting change and
restructuring and related charges, the effective tax rate for the first quarter
of fiscal 2003 was 37.0% compared to 34.0% the prior year.
EBITDA - EBITDA for the first quarter of fiscal 2003 was $7.4 million
compared with $4.7 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.
BALANCE SHEET COMMENTS
CASH AND CASH INVESTMENTS - Cash and cash investments as of July 28, 2002
decreased to $25.1 million from $32.0 million at fiscal year end, reflecting
cash flow from operations of $5.4 million, capital expenditures of $3.1 million,
debt repayment of $12.0 million, stock issuance of $1.0 million and an increase
in accounts payable for capital expenditures of $1.7 million.
WORKING CAPITAL - Accounts receivable as of July 28, 2002 decreased 33.7%
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 34 days at July 28, 2002 compared with 51 a year ago and 36
at last fiscal year end. The aging of accounts receivable was 98.7% current and
less than 30 days past due versus 91.9% a year ago. Inventories at the close of
the first quarter increased 1.2% from a year ago. Inventory turns for the first
quarter were 4.9 versus 5.1 for the year-earlier period. Operating working
capital (comprised of accounts receivable, inventory and accounts payable) was
$70.8 million at July 28, 2002, down from $86.6 million a year ago.
PROPERTY, PLANT AND EQUIPMENT - Capital spending for the first quarter of
fiscal 2003 was $3.1 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 the Culp Decorative
Fabric's division (see discussion above), the company increased the budget by
$4.5 million to $13.0 million. Depreciation for the first quarter of fiscal 2003
totaled $3.6 million, and is estimated at $15.0 million for the full fiscal
year.
INTANGIBLE ASSETS - Goodwill is the company's only intangible asset. As of
July 28, 2002, goodwill was $9.5 million, a decrease of $37.6 million from last
fiscal year end due to the adoption of SFAS No. 142 (see discussion above).
LONG-TERM DEBT - The company reduced funded debt by $12.0 million from last
fiscal year end. Funded debt equals long-term debt plus current maturities.
Funded debt was $96.5 million at July 28, 2002, compared with $108.5 million at
fiscal 2002 year end. The company's funded debt-to-capital ratio was 49.9% at
July 28, 2002.
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 (IRB's), (2) lower interest rates based upon a pricing matrix, and
(3) improved financial covenants. The agreement specifically allows for the Culp
Decorative Fabrics restructuring and related charges (see discussion above). The
company was in compliance with all convenants contained in its loan agreements
as of July 28, 2002.