CULP INC - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
1O-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended May 3, 2009
Commission
File No. 0-12597
CULP,
INC.
(Exact
name of registrant as specified in its charter)
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NORTH
CAROLINA
(State
or other jurisdiction of
incorporation
or other organization)
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56-1001967
(I.R.S.
Employer Identification No.)
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1823
Eastchester Drive, High Point, North Carolina
(Address
of principal executive offices)
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27265
(zip
code)
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(336)
889-5161
(Registrant’s
telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name
of Each Exchange
On Which Registered
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Common
Stock, par value $.05/ Share
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New
York Stock Exchange
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Rights
for Purchase of Series A Participating Preferred Shares
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES o NO
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934. YES o NO x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) 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
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
YES o NO
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer, accelerated filer, and smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large
Accelerated Filer o
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Accelerated
Filer o
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Non-Accelerated
Filer x
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Smaller
Reporting Company o
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||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). YES o NO x
As of May
3, 2009, 12,767,527 shares of common stock were outstanding. As of
November 2, 2008, the aggregate market value of the voting stock held by
non-affiliates of the registrant on that date was $30,251,514 based on the
closing sales price of such stock as quoted on the New York Stock Exchange
(NYSE), assuming, for purposes of this report, that all executive officers and
directors of the registrant are affiliates.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s Proxy Statement to be filed pursuant to Regulation 14A of
the Securities and Exchange Commission in connection with its Annual Meeting of
Shareholders to be held on September 22, 2009 are incorporated by reference into
Part III of this Form 10-K.
CULP,
INC.
FORM
10-K REPORT
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CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Parts I
and II of this report contain statements that may be deemed “forward-looking
statements” within the meaning of the federal securities laws, including the
Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities
Act of 1933 and Section 27A of the Securities and Exchange Act of
1934). Such statements are inherently subject to risks and
uncertainties. Further, forward-looking statements are intended to speak only as
of the date on which they are made. Forward-looking statements are
statements that include projections, expectations or beliefs about future events
or results or otherwise are not statements of historical fact. Such
statements are often but not always characterized by qualifying words such as
“expect,” “believe,” “estimate,” “plan” and “project” and their derivatives, and
include but are not limited to statements about expectations for the company’s
future operations or success, sales, gross profit margins, operating income,
SG&A or other expenses, and earnings, as well as any statements regarding
future economic or industry trends or future developments. Factors
that could influence the matters discussed in such statements include the level
of housing starts and sales of existing homes, consumer confidence, trends in
disposable income, and general economic conditions. Decreases in
these economic indicators could have a negative effect on the company’s business
and prospects. Likewise, increases in interest rates, particularly
home mortgage rates, and increases in consumer debt or the general rate of
inflation, could affect the company adversely. In addition, changes
in consumer preferences for various categories of furniture coverings, as well
as changes in costs to produce such products (including import duties and quotas
or other import costs) can have significant effect on demand for the company’s
products. Changes in the value of the U.S. dollar versus other
currencies can affect the company’s financial results because a significant
portion of the company’s operations are located outside the United
States. 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, and strengthening of currencies in Canada and
China can have a negative impact on the company’s sales of products produced in
those countries. Further, economic and political instability in
international areas could affect the company’s operations or sources of goods in
those areas, as well as demand for the company’s products in international
markets. Finally, unanticipated delays or costs in executing
restructuring actions could cause the cumulative effect of restructuring actions
to fail to meet the objectives set forth by management. Further
information about these factors, as well as other factors that could affect the
company’s future operations or financial results and the matters discussed in
forward-looking statements are included in the “Risk Factors” section of this
report in Item 1A.
1
Culp, Inc.
manufactures, sources, and markets mattress fabrics (also known as mattress
ticking) used for covering mattresses and box springs, and upholstery fabrics
primarily for use in production of upholstered furniture (residential and
commercial).
We believe
that Culp is the largest producer of mattress fabrics in North America, as
measured by total sales, and one of the largest marketers of upholstery fabrics
for furniture in North America, again measured by total sales. Our
mattress fabrics are used primarily in the production of bedding products,
including mattresses, box springs, and mattress sets. Our upholstery
fabrics are used in the production of residential and commercial upholstered
furniture, sofas, recliners, chairs, loveseats, sectionals, sofa-beds, and
office seating. Culp primarily markets fabrics that have broad appeal
in the “good” and “better” priced categories of furniture and
bedding.
We have
two operating segments - mattress fabrics and upholstery fabrics. The
mattress fabric business markets woven and knitted fabrics used by bedding
manufacturers. The upholstery fabrics segment markets a variety of
products in most categories of fabric used as coverings for
furniture.
Culp
markets a variety of fabrics in different categories, including fabrics produced
at our manufacturing facilities and fabrics produced by other
suppliers. The company had eight active manufacturing plants and
distribution facilities as of the end of fiscal 2009, which are located in North
and South Carolina, Quebec, Canada, and Shanghai, China. We also
source fabrics from other manufacturers, located primarily in China, Turkey and
in the U.S., with almost all of those fabrics being produced specifically for
the company and created by Culp designers. We operate distribution
centers in North Carolina and Shanghai, China to facilitate distribution of our
products. In recent years, the portion of total company sales
represented by fabrics produced outside of the U.S. and Canada has increased,
while sales of goods produced in the U.S. have decreased. This trend
is especially strong in the upholstery fabrics segment, where more than
three-fourths of our sales now consist of fabrics produced in Asia.
Total net
sales in fiscal 2009 were $204 million. The mattress fabrics segment
had net sales of $115 million (57% of total net sales), while the upholstery
fabrics segment had net sales of $89 million (43% of total net
sales). Fiscal 2008 was the first year that mattress
fabric sales exceeded upholstery fabric sales for a full year and the proportion
of sales represented by mattress fabric was even higher in fiscal
2009.
Sales
declined in both of our segments during fiscal 2009 as compared to fiscal
2008. These declines were mostly caused by extremely weak business
conditions in the home furnishings industry, which affects both of our business
segments. The decrease in mattress fabrics was smaller (at 16%),
while upholstery sales declined by 24%. The decline in mattress
fabrics sales reversed a trend of increasing sales in recent years, but the
upholstery fabrics decline continued a trend of decreasing sales that has
persisted over the last several years.
2
In
mattress fabrics, knitted fabrics has been a growing portion of our sales, as
consumer demand for this type of mattress panel covering has risen
significantly. During fiscal 2009, we acquired the knitted fabrics
business of Bodet & Horst USA, including its manufacturing operation in High
Point, North Carolina, which had served as our primary source of knitted
mattress fabrics for six years. This acquisition provided us with
more control over our ability to supply bedding customers with this increasingly
important fabric type.
During the
second half of fiscal 2009, we implemented a comprehensive profit improvement
plan in the upholstery fabrics segment, which built upon restructuring actions
and cost-savings measures we had taken in prior years. This plan had
the effect of improving our financial results significantly, despite the lower
sales environment. In the upholstery fabrics segment, a significant
and growing portion of our fabrics are now produced by other manufacturers, but
in most cases the company continues to control important components of the
production process, such as design, finishing, quality control and distribution.
Microdenier suedes and a variety of other fabrics are now sourced in China
through our sourcing, finishing and distribution operation located near
Shanghai.
Overall,
Culp faced a difficult business environment during all of fiscal 2009, as demand
for both bedding and furniture were weak. Management took action to
respond to these conditions by scaling back operations where appropriate,
controlling costs in other areas, and eliminating complexity from our business,
while maintaining a focus on providing customers with products that remain in
demand, upholding high levels of customer service, and pursuing a strategic
acquisition to secure a key product category. The company continues
to position itself as a more flexible fabric producer and marketer, with a
smaller fixed asset base than in prior years, and with a more variable cost
structure that will allow us to take advantage of opportunities in the bedding
and furniture industries as they occur.
Additional
information about trends and developments in each of our business segments is
provided in the “Segments” discussion below.
Culp, Inc.
was organized as a North Carolina corporation in 1972 and made its initial
public offering in 1983. Since 1997, our stock has been listed on the
New York Stock Exchange and traded under the symbol “CFI.” Our fiscal
year is the 52 or 53 week period ending on the Sunday closest to April
30. Our executive offices are located in High Point, North
Carolina.
Culp
maintains an Internet website at www.culpinc.com. We will make this
annual report and our other annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to these reports,
available free of charge on our Internet site as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission. Information included on our
website is not incorporated by reference into this annual report.
3
Our two
operating segments are mattress fabrics and upholstery fabrics. The
following table sets forth certain information for each of our
segments.
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Sales
by Fiscal Year ($ in Millions) and
Percentage
of Total Company Sales
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||||||||||||||||||||||||
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SEGMENT
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Fiscal
2009
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Fiscal
2008
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Fiscal
2007
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|||||||||||||||||||||
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Mattress
Fabrics
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$ | 115.4 | (57 | %) | $ | 138.1 | (54 | %) | $ | 107.8 | (43 | %) | ||||||||||||
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Upholstery
Fabrics
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||||||||||||||||||||||||
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Non-U.S.-Produced
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$ | 68.1 | (33 | %) | $ | 75.9 | (30 | %) | $ | 82.4 | (33 | %) | ||||||||||||
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U.S.-Produced
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$ | 20.4 | (10 | %) | $ | 40.0 | (16 | %) | $ | 60.3 | (24 | %) | ||||||||||||
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Total
Upholstery
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$ | 88.5 | (43 | %) | $ | 115.9 | (46 | %) | $ | 142.7 | (57 | %) | ||||||||||||
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Total
company
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$ | 203.9 | (100 | %) | $ | 254.0 | (100 | %) | $ | 250.5 | (100 | %) | ||||||||||||
Additional
financial information about our operating segments can be found in footnote 19
to the Consolidated Financial Statements included in Item 8 of this
report.
Mattress
Fabrics. The mattress fabrics segment manufactures and markets
mattress fabric to bedding manufacturers. These fabrics encompass
woven jacquard fabric, knitted fabric and, to a lesser extent, printed
fabric. Culp Home Fashions, as this business is known in the trade,
has manufacturing facilities located in Stokesdale and High Point, North
Carolina, and St. Jerome, Quebec, Canada. The Stokesdale and St.
Jerome plants manufacture and finish jacquard (damask) fabric, and the
Stokesdale plant also produces printed fabric. The Stokesdale plant
houses the division offices and finished goods distribution
capabilities. In August 2008, a third manufacturing plant facility
was added when we acquired the knitted mattress fabrics business of Bodet &
Horst USA, including its manufacturing facilities in High Point. We
have also maintained flexibility in our supply of the major categories of
mattress fabrics. All woven jacquard and knitted fabrics can be
produced in multiple facilities, (internal or external to the company) providing
us with mirrored, reactive capacity.
In recent
years, we have taken significant steps to enhance our competitive position in
this segment by consolidating all of our mattress fabrics manufacturing into
these three manufacturing facilities. The company had capital
expenditures during the period fiscal 2005 through 2009 totaling approximately
$20.0 million, most of which related to purchase of new weaving machines that
are faster and more efficient than the equipment they
replaced. Additionally, we had a $1.3 million capital project in
fiscal 2008 that significantly enhanced our finishing capabilities in this
segment. More recently, during fiscal 2009 we completed a $5.0
million capital project in Stokesdale and St. Jerome to enhance our weaving and
finishing capabilities and further increase our capacity and service
performance.
The Bodet
& Horst acquisition was another step to enhance and secure our competitive
position, as we invested $11.4 million to purchase the manufacturing operation
that had been serving as our primary source of knitted mattress fabrics for six
years. Knitted fabrics have been an increasingly important category
of mattress fabrics, with industry sales in this type of fabric growing much
faster than other categories. The completion of this acquisition
during fiscal 2009 not only secured our supply of knitted mattress fabrics, but
allowed for improved supply logistics, greater control of product development,
and accelerated responsiveness to our customers. The acquisition
included the purchase of equipment, inventory and intellectual property
associated with the business, as well as the assumption of a lease for the High
Point manufacturing facility. The transaction was financed by the
issuance of $11.0 million of unsecured notes with a term of seven
years.
4
Upholstery
Fabrics. The upholstery fabrics segment markets fabrics for
residential and commercial furniture, including jacquard woven fabrics, velvets,
microdenier suedes, woven dobbies, knitted fabrics, and piece-dyed woven
products. Historically, all of our upholstery fabrics had been
produced in our U.S. manufacturing plants. In fiscal year 2007,
however, sales of upholstery fabrics made in non-U.S. locations, including our
facilities in China, exceeded U.S.-produced sales for the first
time. This trend continued during the next two years, with non-U.S.
produced upholstery accounting for almost 77% of our upholstery sales for fiscal
2009 (81% in the fourth quarter).
The
upholstery segment operates fabric manufacturing facilities in Anderson, South
Carolina, and Shanghai, China. We market fabrics produced in these
two locations, as well as a variety of upholstery fabrics sourced from third
party producers, mostly in China.
As demand
for U.S.-produced upholstery has declined significantly, we took aggressive
steps to reduce our U.S. manufacturing costs, capacity, and selling, general and
administrative expenses. Our restructuring actions over the past
several years reduced our U.S. upholstery operations to the one manufacturing
plant in South Carolina and one upholstery distribution facility in Burlington,
North Carolina.
The
down-sizing of our U.S. upholstery operations represents the continuation of a
longer-term trend that has affected the company and the upholstery fabric
business for the past eight years. At the end of fiscal 2000, we had
fourteen manufacturing plants in the U.S. for upholstery fabrics, with total
sales in the segment of $382 million. Total segment sales for fiscal
2009 were $89 million.
During the
time that U.S. upholstery operations were shrinking, we established operations
in China and gradually expanded them over time to include a variety of
activities. The facilities near Shanghai began operations in 2004
with a finishing and inspection operation, where goods woven in China by
selected outside suppliers are treated with finishing processes and subjected to
U.S. quality control measures before being distributed to
customers. In subsequent years, a variety of finished goods (with no
further finishing needed) began to be sourced through our China operations, and
in fiscal 2006 the operation was expanded to include a facility where upholstery
fabrics are cut and sewn into “kits” that are made to the specifications of
furniture manufacturing customers in the U.S. Cut and sewn “kit” operations have
become an important method for furniture producers to reduce production costs by
moving a larger percentage of the labor component of furniture manufacturing to
lower cost environments. Other recent developments in our China
operations include expansion of our product development and design capabilities
in China and further strengthening of key strategic partnerships with
mills. We also expanded our marketing efforts to sell our China
products in countries other than the U.S., including the Chinese local
market.
5
As our
China operation increased the variety of its activities, we took steps to
maintain the flexibility of the operation to expand or contract with demand for
our products. As business conditions weakened during fiscal 2009 and
demand decreased dramatically, we took action to consolidate the China operation
and substantially reduce its scale and cost structure. During the
year, our China operation was reduced from six facilities to three, with cost
reductions of approximately $5 million on an annualized basis.
During
these changes in the size of our upholstery operations, our basic strategic
approach has not changed. We have moved our upholstery business from
one that relied on a large fixed capital base that is difficult to adjust to a
more flexible and scalable marketer of upholstery fabrics that meets changing
levels of customer demand. At the same time, we have attempted to
maintain control of the most important “value added” aspects of our business,
such as design, finishing, quality control, and logistics. This
strategic approach has allowed us to limit our investment of capital in fixed
assets and to lower the costs of our products significantly, while continuing to
leverage our design and finishing expertise, industry knowledge and important
relationships. In this way, we maintain our ability to provide
furniture manufacturers with products from every category of fabric used to
cover upholstered furniture, and to meet continually changing demand levels and
consumer preferences.
Culp
markets products primarily to manufacturers that operate in three principal
markets. The mattress fabrics segment supplies the bedding industry,
which produces mattress sets (mattresses, box springs, and
foundations). The upholstery fabrics segment supplies the residential
furniture industry and, to a lesser extent, the commercial furniture
industry. The residential furniture market includes upholstered
furniture sold to consumers for household use, including sofas, sleep sofas,
chairs, recliners and sectionals. The commercial furniture and
fabrics market includes upholstered office seating and modular office systems
sold primarily for use in offices and other institutional settings, and
commercial textile wall covering. The principal industries into which
the company sells products are described below.
After many
years of steady growth, both in unit volume and average selling prices, the
bedding industry experienced a decrease in overall sales in 2008, due to the
weak economy and an especially weak housing market. According to the
International Sleep Products Association (ISPA), a trade association, the U.S.
wholesale bedding industry accounted for an estimated $6.2 billion in sales in
2008, a 9.1% decrease from 2007. The industry is comprised of several
hundred manufacturers, but the largest four manufacturers accounted for more
than 59% of the total wholesale shipments in 2008, while the top fifteen
accounted for approximately 81%. Until recently, the bedding industry
has been mature and stable, averaging approximately 6% growth over a twenty year
period, with only one year in the twenty years before 2008 experiencing a
decline in revenue (by 0.3% in 2001). This stability has been partly
due to replacement purchases, which account for an estimated 70% of bedding
industry sales. During 2008, however, the U.S. mattress retail
environment slowed due to weakened economic conditions. This weakness
has persisted into 2009, with significant decreases in bedding sales being
reported for the first half of this calendar year.
6
Despite
the overall weakness in the bedding market, the trend toward higher average
selling prices for mattresses sold in the U.S. continued during
2008. According to ISPA, while wholesale sales of bedding decreased
9.1% in 2008, the number of units sold decreased by 11.0%. There are
indications, however, that sales of higher priced bedding have suffered
disproportionally in the current economic downturn. In particular,
sales of specialty bedding products, including foam and air-adjustable
mattresses, have experienced significant declines after enjoying a position as a
faster growing category of bedding prior to 2008. According to
industry statistics, specialty bedding producers, which produce mattresses that
do not use inner spring construction, saw sales decrease by 17.8% in
2008.
Unlike the
residential furniture industry, which has faced intense competition from
imports, the bedding industry has faced limited competition from
imports. The primary reasons for this fact
include: 1) the short lead times demanded by mattress
manufacturers and retailers, 2) the limited inventories carried by manufacturers
and retailers, 3) the customized nature of each manufacturer and retailer’s
product lines, 4) high shipping costs, 5) the relatively low direct labor
content in mattresses, and 6) strong brand recognition.
Other key
trends in the bedding industry include:
|
|
·
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Consumers
have become increasingly aware of and are concerned with the health
benefits of better sleep. This has caused an increased focus on
the quality of bedding products and an apparent willingness on the part of
consumers to pay more for bedding. The average selling price of
mattress sets has increased in recent years. In recent months, however,
due to the economic slowdown, consumers have begun to move toward more
value priced mattresses, which over time could lead to a lower overall
average price for mattress sets.
|
|
|
·
|
Mattress
manufacturers are using common SKUs and less expensive fabric for borders,
which is the ticking that goes around the side of the mattresses and box
springs. Virtually all of these border fabrics are woven damask
ticking of the type we manufacture, and this trend has caused significant
pricing pressures in this category of mattress
fabric.
|
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|
·
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The
production of flame-resistant materials for bedding is an increasingly
important issue for bedding manufacturers. A national standard
for flame resistance in bedding became effective July 1,
2007.
|
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·
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There
is increasing popularity of knitted mattress ticking, as opposed to woven
and printed ticking. Knitted ticking was initially used
primarily on premium mattresses, but these products are now being placed
increasingly on mattresses at mid-range retail price
points. Knitted fabric is typically used on the top panel of a
mattress, while woven ticking remains the predominant fabric on the
borders or sides of mattress sets.
|
7
The
residential furniture industry has been severely affected by the current
economic downturn, with sales declining sharply compared to years prior to
2008. Declines in consumer spending and a very weak housing market
led to significantly lower sales of residential furniture in 2008, a trend that
appears to be continuing into 2009. According to data published by
the American Home Furnishings Alliance (AHFA), a trade association, prior to
2008 the residential furniture industry has been mature and stable, with growth
rates at or below the overall growth rate of the U.S. economy. The
total value of residential furniture shipments in the U.S. declined slightly
during the five-year period through 2007 but had remained in a relatively narrow
range for each of those five years. Shipments had declined by 3.9% in
2007 compared to the prior year, and in 2008 retail furniture shipments dropped
14.8% compared to 2007. The overall decline in demand for residential
furniture is the dominant trend in the residential furniture industry today,
which has caused significant challenges for suppliers to the
industry.
Other
important trends and issues facing the residential furniture industry
include:
|
|
·
|
The
sourcing of components and fully assembled furniture from overseas
continues to play a major role in the residential furniture industry, and
sales of imported furniture have declined at a slower rate than the
overall industry. According to Furniture/Today, an industry
trade publication, imports of residential furniture into the U.S. fell by
6% in 2008, following an increase of 2% from 2006 to 2007. By
far, the largest source for these imports continues to be China, which now
accounts for approximately 54% of total U.S. furniture
imports. In past years, a large majority of furniture imports
from China were wooden “casegoods,” but there has been significant recent
growth in imports of upholstered furniture components, including
upholstery fabric and “cut and sewn kits” for furniture
covers. This trend has been especially strong for leather
furniture, and it now extends to other coverings, including microdenier
suedes and the more traditional types of fabrics manufactured by the
company. The shift to offshore sourcing has led to significant
deflation in retail furniture
prices.
|
|
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·
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Imports
of upholstery fabric, both in roll and in “kit” form, have increased in
recent years. Fabrics entering the U.S. from China and other
low labor cost countries are resulting in increased price competition in
the upholstery fabric and upholstered furniture
markets.
|
|
|
·
|
Leather
and suede upholstered furniture has been gaining market share over the
last ten years. This trend has increased over the last five
years in large part because selling prices of leather furniture have been
declining significantly over this time period. We believe,
however, that the rate of increase appears to be leveling off and this
trend may be weakening.
|
|
|
·
|
The
residential furniture industry has been consolidating at the manufacturing
level for several years. The result of this trend is fewer, but
larger, customers for marketers of upholstery
fabrics.
|
8
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|
·
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In
recent years, several of the nation’s larger furniture manufacturers have
opened retail outlets of their own. As top retailers shift
floor space to private label imports, manufacturers are focused on
distributing their own products. In addition, furniture
marketing by “lifestyle” retailers has increased, which has increased the
number of retail outlets for residential furniture but has also increased
the reliance on private brands or private
labels.
|
The market
for commercial furniture - furniture used in offices and other institutional
settings - declined approximately 2.3% from 2007 to 2008, following a 5.5%
increase the previous year. The decline in 2008 reflects economic
trends affecting businesses, which are the ultimate customers in this
industry. This trend appears to be continuing into 2009 along with
weak overall business conditions. According to the Business and
Institutional Furniture Manufacturer’s Association (BIFMA), a trade association,
the commercial furniture market in the U.S. totaled approximately $11.2 billion
in 2008 in wholesale shipments by manufacturers, a slight decline from the $11.4
billion total for 2007. This total represents a significant decrease
from the industry’s peak of $13.3 billion in 2000.
As
described above, our products include mattress fabrics and upholstery fabrics,
which are the company’s identified operating segments.
Mattress Fabrics
Segment
Mattress
fabrics segment sales constituted 57% of sales in fiscal 2009, and 54% in fiscal
2008. The company has emphasized fabrics that have broad appeal at
prices generally ranging from $1.35 to $7.50 per yard. The average
per yard selling prices for fiscal 2009, 2008, and 2007 were $2.46, $2.44, and
$2.35, respectively.
Upholstery Fabrics
Segment
Upholstery
fabrics segment sales totaled 43% of sales for fiscal 2009, and 46% in fiscal
2008. The company has emphasized fabrics that have broad appeal at
“good” and “better” prices, generally ranging from $2.75 to $8.00 per
yard. The average per yard selling prices for fiscal 2009, 2008, and
2007 were $4.30, $4.22, and $4.18, respectively.
We market
products in all categories of fabric that manufacturers currently use for
bedding and furniture. The following table indicates the product
lines within each segment, and a brief description of their
characteristics.
9
Culp Fabric Categories by
Segment
Mattress
Fabrics
|
Woven
jacquards
|
Florals
and other intricate designs. Woven on complex looms using a
variety of synthetic and natural yarns.
|
|
Specialty
|
Suedes,
Velours, and other specialty type products are sourced to offer diversity
for higher end mattresses.
|
|
Knitted
Ticking
|
Floral
and other intricate designs produced on special-width circular machines
utilizing a variety of synthetic and natural yarns. Knitted
ticking has inherent stretching properties and spongy softness, and
conforms well with layered foam packages.
|
| Prints | Variety of designs produced economically by screen printing onto a variety of base fabrics, including jacquards, knits, poly/cotton sheeting and non-wovens. |
Upholstery
Fabrics
|
Woven
jacquards
|
Elaborate,
complex designs such as florals and tapestries in traditional,
transitional and contemporary styles. Woven on intricate looms
using a wide variety of synthetic and natural yarns.
|
|
Woven
dobbies
|
Fabrics
that use straight lines to produce geometric designs such as plaids,
stripes and solids in traditional and country styles. Woven on
less complicated looms using a variety of weaving constructions and
primarily synthetic yarns.
|
|
Velvets
|
Soft
fabrics with a plush feel. Produced with synthetic yarns,
either by weaving or by “tufting” yarn into a base
fabric. Basic designs such as plaids in both traditional and
contemporary styles.
|
|
Suede
fabrics
|
Fabrics
woven or knitted using microdenier polyester yarns, which are piece dyed
and finished, usually by sanding. The fabrics are typically
plain or small jacquard designs, with some being printed. These
are sometimes referred to as microdenier suedes, and some are “leather
look” fabrics.
|
10
Mattress Fabrics
Segment
Our
mattress fabrics segment operates three manufacturing plants, located in
Stokesdale, North Carolina; High Point, North Carolina and St. Jerome, Quebec,
Canada. Over the past five fiscal years, we made capital expenditures
of approximately $20 million to consolidate all of our production of woven
jacquards, or damask ticking, to two of these plants and to modernize the
equipment and expand capacity in each of these facilities. The result
has been an increase in manufacturing efficiency and a substantial reduction in
operating costs. Also, during fiscal 2009 we invested $11.4 million
to acquire the U.S. knitted fabrics operation of our primary supplier of knitted
mattress fabrics, located in the High Point plant. Jacquard ticking
is woven at the Stokesdale and St. Jerome plants, and printed ticking is
produced at the Stokesdale facility. Most finishing and inspection
processes for mattress fabrics are conducted at the Stokesdale
plant.
In
addition to the mattress fabrics we manufacture, the company has important
supply arrangements in place that allow us to source mattress fabric from
strategic suppliers. A portion of our woven jacquard fabric and
knitted fabric is obtained from a supplier located in Turkey, based on designs
created by Culp designers, and we are sourcing certain specialty ticking
products (such as suedes and embroidered fabrics) through our China
platform.
Upholstery Fabrics
Segment
We
currently operate one upholstery manufacturing facility in the U.S. and three in
China. The U.S. plant is located in Anderson, South Carolina, and
mainly produces velvet upholstery fabrics with some production of certain
decorative fabrics.
Our
upholstery manufacturing facilities in China are all located within the same
industrial area near Shanghai. At these plants, we apply strategic
value-added finishing processes to fabrics sourced from a limited number of
strategic suppliers in China, and we inspect sourced fabric there as
well. In addition, the Shanghai operations include facilities where
sourced fabric is cut and sewn to provide “kits” that are designed to be placed
on specific furniture frames designated by our customers.
A large
portion of our upholstery fabric products, as well as certain elements of our
production processes, are now being sourced from outside
suppliers. The development of our facilities in China has provided a
base from which to access a variety of products, including some fabrics (such as
microdenier suedes) that are not produced anywhere within the U.S. We
have found opportunities to develop significant relationships with key overseas
suppliers that allow us to source products on a cost effective basis while at
the same time limiting our investment of capital in manufacturing
assets. We source unfinished and finished fabrics from a limited
number of strategic suppliers in China who are willing to work with us to commit
significant capacity to our needs while working with our product development
team to meet the demands of our customers. We also source a
substantial portion of our yarns, both for U.S. and China upholstery operations,
through our China facilities. The remainder of our yarn is obtained
from other suppliers around the world, as we have eliminated our internal yarn
production capabilities.
11
Consumer
tastes and preferences related to bedding and upholstered furniture change over
time. The use of new fabrics and designs remains an important
consideration for manufacturers to distinguish their products at retail and to
capitalize on changes in preferred colors, patterns and
textures. Culp’s success is largely dependent on our ability to
market fabrics with appealing designs and patterns.
The
process of developing new designs involves maintaining an awareness of broad
fashion and color trends both in the United States and
internationally. The company has developed an upholstery design and
product development team (with staff located in the U.S. and in China) that
searches continually for new ideas and for the best sources of raw materials,
yarns and fabrics, both domestic and international. The team then
develops product offerings using these ideas and materials, taking both fashion
trends and cost considerations into account, to offer products designed to meet
the needs of furniture manufacturers and ultimately the desires of
consumers. Upholstery fabric designs are introduced at major fabric
trade conferences that occur twice a year in the United States (June and
December). Recently we have become more aggressive in registering
copyrights for popular fabric patterns and in taking steps to discourage the
illegal copying of our proprietary designs.
Mattress
fabric designs are not introduced on a scheduled season. More
frequently, designs are introduced upon customer request as they plan
introduction to their retailers. Additionally, we work closely with
our customers on new design introductions around the major markets such as High
Point and Las Vegas.
Mattress Fabrics
Segment
All of our
shipments of mattress fabrics originate from our manufacturing facility in
Stokesdale. Through arrangements with major customers and in
accordance with industry practice, we maintain a significant inventory of
mattress fabrics at our distribution facility in Stokesdale (“make to stock”),
so that products may be shipped to customers with short lead times and on a
“just in time” basis.
Upholstery Fabrics
Segment
The
majority of our upholstery fabrics are marketed on a “make to order” basis and
are shipped directly from our distribution facilities in Burlington and
Shanghai. In addition, an inventory comprising a limited number of
sourced fabric patterns is held at our distribution facilities in Burlington and
Shanghai from which our customers can obtain quick delivery of sourced fabrics
through a program known as “Culp Express.” We have developed a
revised marketing strategy for our U.S.-produced upholstery products, providing
customers with very quick delivery on target products at key price
points. This program, known as “Store House,” is aimed at driving
higher sales volume per fabric pattern and thus should result in improved
manufacturing performance and lower unit costs for our U.S. upholstery
operations, while employing a smaller fixed asset base.
12
Mattress Fabrics
Segment
Raw
materials account for approximately 70% of mattress ticking production
costs. The mattress fabrics segment purchases synthetic yarns
(polypropylene, polyester and rayon), certain greige (unfinished) goods, latex
adhesives, laminates, dyes and other chemicals. Most of these
materials are available from several suppliers, and prices fluctuate based on
supply and demand, the general rate of inflation, and particularly on the price
of petrochemical products. The mattress fabrics segment has generally
not had significant difficulty in obtaining raw materials.
Upholstery Fabrics
Segment
Raw
materials account for approximately 50%-60% of upholstery fabric manufacturing
costs for products the company manufactures. This segment purchases
synthetic yarns (polypropylene, polyester, acrylic and rayon), acrylic staple
fiber, latex adhesives, dyes and other chemicals from various
suppliers.
The
upholstery fabric segment has now outsourced all of its yarn requirements, and
thus it has become more dependent upon suppliers for components
yarn. In addition, we have outsourced a number of our U.S. upholstery
fabric manufacturing services to suppliers, such as extrusion of yarn and
upholstery fabric finishing. Although U.S. produced fabrics are a
decreasing portion of our upholstery business, increased reliance by both our
U.S. and China upholstery operations on outside suppliers for basic production
needs such as base fabrics, yarns, and finishing services has caused the
upholstery fabrics segment to become more vulnerable to price increases, delays,
or production interruptions caused by problems within businesses that we do not
control.
Both
Segments
Many of
our basic raw materials are petrochemical products or are produced from such
products. For this reason, our material costs are especially
sensitive to changes in prices for petrochemicals and the underlying price of
oil. In addition, the financial condition and performance of a number
of U.S.-based yarn suppliers has been severely impacted by the reductions in the
overall size of the U.S. textile industry over the last several
years. These conditions have increased the risk of business failures
or further consolidations among the suppliers to the North American-based
portions of our business. We expect this situation to cause
additional disruptions and pricing pressures in our supply of certain raw
materials, yarns, and textile services obtained in the U.S. as overall demand
for textiles produced in the U.S. declines.
Mattress Fabrics
Segment
The
mattress fabrics business and the bedding industry in general are slightly
seasonal, with sales being the highest in late spring and late summer, with
another peak in mid-winter.
13
Upholstery Fabrics
Segment
The
upholstery fabrics business is somewhat seasonal, with increased sales during
our second and fourth fiscal quarters. This seasonality results from
one-week closings of our manufacturing facilities and the facilities of most of
our customers in the United States during our first and third fiscal quarters
for the holiday weeks of July 4th and Christmas. This effect is
becoming less pronounced as a larger portion of our fabrics are produced or sold
in locations outside the United States.
Competition
for our products is high and is based primarily on price, design, quality,
timing of delivery and service.
Mattress Fabrics
Segment
The
mattress fabrics market is concentrated in a few relatively large
suppliers. We believe our principal mattress fabric competitors are
Bekaert Textiles B.V., Blumenthal Print Works, Inc., Global Textile Alliance and
several smaller companies producing knitted and other fabric.
Upholstery Fabrics
Segment
In the
upholstery fabric market, we compete against a large number of companies,
ranging from a few large manufacturers comparable in size to the company to
small producers, and a growing number of “converters” of fabrics (companies who
buy and re-sell, but do not manufacture fabrics). We believe our
principal upholstery fabric competitors are Richloom Fabrics, Merrimack Fabrics
and Morgan Fabrics, and Specialty Textile, Inc. (or STI), plus a large number of
smaller competitors (both manufacturers and converters).
Until
approximately eight years ago, overseas producers of upholstery fabric had not
historically been a source of significant competition. Recent trends,
however, have shown significant increased competition in U.S. markets by foreign
producers of upholstery fabric, furniture components and finished upholstery
furniture, as well as increased sales in the U.S. of leather furniture produced
overseas (which competes with upholstered furniture for market
share). Imports of upholstery fabric from China have dramatically
increased. Foreign manufacturers often are able to produce upholstery
fabric and other components of furniture with significantly lower raw material
and production costs (especially labor) than those of our U.S. operations and
other U.S.-based manufacturers. We compete with lower cost foreign
goods on the basis of design, quality, reliability and speed of
delivery. In addition, our operations in China allow us to facilitate
the sourcing and marketing of goods produced in China.
The trend
in the upholstery fabrics industry to greater overseas competition and the entry
of more converters has caused the upholstery fabrics industry to become
substantially more fragmented in recent years, with lower barriers to
entry. This has resulted in a larger number of competitors selling
upholstery fabrics, with an increase in competition based on price.
14
We are
subject to various federal and state laws and regulations, including the
Occupational Safety and Health Act (“OSHA”) and federal and state environmental
laws, as well as similar laws governing our manufacturing facilities in China
and Canada. We periodically review our compliance with these laws and
regulations in an attempt to minimize the risk of violations.
Our
operations involve a variety of materials and processes that are subject to
environmental regulation. Under current law, environmental liability
can arise from previously owned properties, leased properties and properties
owned by third parties, as well as from properties currently owned and leased by
the company. Environmental liabilities can also be asserted by
adjacent landowners or other third parties in toxic tort
litigation.
In
addition, under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended (“CERCLA”), and analogous state statutes,
liability can be imposed for the disposal of waste at sites targeted for cleanup
by federal and state regulatory authorities. Liability under CERCLA
is strict as well as joint and several.
We are
periodically involved in environmental claims or litigation and requests for
information from environmental regulators. Each of these matters is
carefully evaluated, and the company provides for environmental matters based on
information presently available. Based on this information, we do not
believe that environmental matters will have a material adverse effect on either
the company’s financial condition or results of operations. However,
there can be no assurance that the costs associated with environmental matters
will not increase in the future. See the discussion of a current
environmental claim against the company below in Item 3 — “Legal
Proceedings.”
As of May
3, 2009, we had 1,047 employees, compared to 1,087 at the end of fiscal 2008,
and 1,140 at the end of fiscal 2007. The number of employees has
decreased substantially over the past several years in connection with our
restructuring initiatives and efforts to reduce U.S. upholstery fabrics
manufacturing costs, as well as initiatives to outsource certain
operations. The number of employees located in the U.S. has decreased
even more dramatically, while the number of employees in China has increased
(see table below).
The hourly
employees at our manufacturing facility in Canada (approximately 15% of the
company’s workforce) are represented by a local, unaffiliated
union. The collective bargaining agreement for these employees
expires on February 1, 2011. We are not aware of any efforts to
organize any more of our employees, and we believe our relations with our
employees are good.
15
The
following table illustrates the changes in the location of our workforce and
number of employees, as of year-end, over the past five years.
|
Number
of Employees
|
||||||||||||||||||||
|
Fiscal
2009
|
Fiscal
2008
|
Fiscal
2007
|
Fiscal
2006
|
Fiscal
2005
|
||||||||||||||||
|
Mattress
Fabrics Segment
|
420 | 373 | 361 | 351 | 372 | |||||||||||||||
|
Upholstery
Fabrics Segment
|
||||||||||||||||||||
|
United
States
|
119 | 230 | 297 | 659 | 1,404 | |||||||||||||||
|
China
|
504 | 481 | 479 | 270 | 109 | |||||||||||||||
|
Total
Upholstery Fabrics Segment
|
623 | 711 | 776 | 929 | 1,513 | |||||||||||||||
|
Unallocated
corporate
|
4 | 3 | 3 | 3 | 3 | |||||||||||||||
|
Total
|
1,047 | 1,087 | 1,140 | 1,283 | 1,888 | |||||||||||||||
Mattress Fabrics
Segment
Major
customers for our mattress fabrics include the leading bedding
manufacturers: Sealy, Serta (National Bedding), and
Simmons. The loss of one or more of these customers would have a
material adverse effect on the company. Our largest customer in the
mattress fabrics segment is Serta (National Bedding), accounting for
approximately 13% of the company’s overall sales in fiscal 2009. Our
mattress fabrics customers also include many small and medium-size bedding
manufacturers.
Upholstery Fabrics
Segment
Our major
customers for upholstery fabrics are leading manufacturers of upholstered
furniture, including Ashley, Bassett, Berkline/Benchcraft, Best Home
Furnishings, Flexsteel, Furniture Brands International (Broyhill, Thomasville,
and Lane), Klaussner Furniture and La-Z-Boy (La-Z-Boy Residential, Bauhaus, and
England). Major customers for the company’s fabrics for commercial
furniture include HON Industries. Our largest customer in the
upholstery fabrics segment is La-Z-Boy Incorporated, the loss of which would
have a material adverse effect on the company. Our sales to La-Z-Boy
accounted for approximately 12% of the company’s total net sales in fiscal
2009.
The
following table sets forth the company’s net sales by geographic area by amount
and percentage of total net sales for the three most recent fiscal
years.
(dollars
in thousands)
|
Fiscal 2009
|
Fiscal 2008
|
Fiscal 2007
|
||||||||||||||||||||||
|
United
States
|
160,290 | 78.6 | % | $ | 202,701 | 79.8 | % | $ | 197,748 | 78.9 | % | |||||||||||||
|
North
America
(Excluding
USA)
|
14,440 | 7.1 | % | 18,880 | 7.4 | 17,310 | 6.9 | |||||||||||||||||
|
Far
East and Asia
|
27,509 | 13.5 | 28,465 | 11.2 | 32,683 | 13.1 | ||||||||||||||||||
|
All
other areas
|
1,699 | 0.8 | 4,000 | 1.6 | 2,792 | 1.1 | ||||||||||||||||||
|
Subtotal
(International)
|
43,648 | 21.4 | 51,345 | 20.2 | 52,785 | 21.1 | ||||||||||||||||||
|
Total
|
203,938 | 100 | % | $ | 254,046 | 100.0 | % | $ | 250,533 | 100.0 | % | |||||||||||||
For
additional segment information, see note 19 in the consolidated financial
statements.
16
Mattress Fabrics
Segment
The
backlog for mattress fabric is not a reliable predictor of future shipments
because the majority of sales are on a just-in-time basis.
Upholstery Fabrics
Segment
Although
it is difficult to predict the amount of backlog that is “firm,” we have
reported the portion of the upholstery fabric backlog from customers with
confirmed shipping dates within five weeks of the end of the fiscal
year. On May 3, 2009, the portion of the upholstery fabric backlog
with confirmed shipping dates prior to June 7, 2009 was $8.3 million, all of
which are expected to be filled early during fiscal 2010, as compared to $8.8
million as of the end of fiscal 2008 (for confirmed shipping dates prior to June
1, 2008).
Our
business is subject to risks and uncertainties. In addition to the
matters described above under “Cautionary Statement Concerning Forward-Looking
Information,” set forth below are some of the risks and uncertainties that could
cause a material adverse change in our results of operations or financial
condition.
Restructuring
initiatives create short-term costs that may not be offset by increased savings
or efficiencies.
Over the
past several years, we have undertaken significant restructuring activities,
which have involved closing manufacturing plants, realigning manufacturing
assets, and changes in product strategy. These actions are intended
to lower manufacturing costs and increase efficiency, but they involve
significant costs, including inventory markdowns, the write-off or write-down of
assets, severance costs for terminated employees, contract termination costs,
equipment moving costs, and similar charges. These charges have
caused a decrease in earnings in the short-term. In addition, during
the time that restructuring activities are underway, manufacturing
inefficiencies are caused by moving equipment, realignment of assets, personnel
changes, and by the consolidation process for certain
functions. Unanticipated difficulties in restructuring activities or
delays in accomplishing our goals could cause the costs of our restructuring
initiatives to be greater than anticipated and the results achieved to be
significantly lower, which would negatively impact our results of operations and
financial condition.
17
Our
sales and profits have been declining in the upholstery fabrics
segment.
We may not
be able to restore the upholstery fabrics segment to consistent profitability.
Sales have continued to decline significantly, especially for U.S. produced
fabrics. We have undertaken a number of significant restructuring
actions in recent years to address our profitability, including (i) closing a
number of upholstery fabric manufacturing facilities, (ii) establishing
facilities in China to take advantage of a lower cost environment and greater
product diversity, and (iii) outsourcing certain production functions in the
U.S., including yarn production, finishing of decorative fabrics, and some
weaving. The success of our restructuring efforts depends on a number
of variables, including our ability to consolidate certain functions, manage
manufacturing processes with lower direct involvement, manage a longer supply
chain, and similar issues. Current market conditions in the furniture
industry are weak, and our sales of upholstery fabrics have continued to decline
in this economic environment. There is no assurance that we will be
able to manage our restructuring activities successfully or restore the
upholstery fabrics segment to consistent profitability, especially if the
economy does not recover in the near future.
Increased
reliance on offshore operations and foreign sources of products or raw materials
increases the likelihood of disruptions to our supply chain or our ability to
deliver products to our customers on a timely basis.
We now
rely significantly on operations in distant locations, particularly China, and
in addition we have been purchasing an increasing share of our products and raw
materials from offshore sources. At the same time, our domestic
manufacturing capacity for the upholstery fabrics segment has been greatly
reduced. These changes have caused us to place greater reliance on a
much longer supply chain and on a larger number of suppliers that we do not
control, both of which are inherently subject to greater risks of delay or
disruption. In addition, operations and sourcing in foreign areas are
subject to the risk of changing local governmental rules, taxes, changes in
import rules or customs, potential political unrest, or other threats that could
disrupt or increase the costs of operating in foreign areas or sourcing products
overseas. Changes in the value of the U.S. dollar versus other
currencies can affect our financial results because a significant portion of our
operations are located outside the United States. Strengthening of
the U.S. dollar against other currencies can have a negative impact on our sales
of products produced in those countries. Any of the risks associated
with foreign operations and sources could cause unanticipated increases in
operating costs or disruptions in business, which could negatively impact our
ultimate financial results.
We
may have difficulty managing the outsourcing arrangements increasingly being
used for products and services.
We are
relying more on outside sources for various products and services, including
yarn and other raw materials, greige (unfinished) fabrics, finished fabrics, and
services such as weaving and finishing. Increased reliance on
outsourcing lowers our capital investment and fixed costs, but it decreases the
amount of control that we have over certain elements of our production
capacity. Interruptions in our ability to obtain raw materials or
other required products or services from our outside suppliers on a timely and
cost effective basis, especially if alternative suppliers cannot be immediately
obtained, could disrupt our production and damage our financial
results.
18
Further
write-offs or write-downs of assets would result in a decrease in our earnings
and shareholders’ equity.
The
company has long-lived assets, consisting mainly of property, plant and
equipment and goodwill. SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” establishes an impairment accounting model
for long-lived assets such as property, plant, and equipment and requires the
company to assess for impairment whenever events or changes in circumstances
indicate that the carrying value of the asset may not be
recovered. SFAS No. 142, “Goodwill and Other Intangible Assets,”
requires that goodwill be tested at least annually for impairment or whenever
events or changes in circumstances indicate that the carrying value of the asset
may not be recovered. Restructuring activities and other tests for impairment
have resulted and could in the future result in the write-down of a portion of
our long-lived assets and a corresponding reduction in earnings and net
worth. In fiscal 2008, the company experienced asset write-downs of
property, plant and equipment of $792,000, of which $503,000 related to the
upholstery fabrics segment and $289,000 related to the mattress fabrics
segment. In fiscal 2009, we experienced an additional $8 million in
similar write-downs in the upholstery fabrics segment. In addition,
during fiscal 2009 we recorded a charge of $27.2 million for the establishment
of a valuation allowance against substantially all of our net deferred tax
assets. The valuation of this asset must be tested on a periodic
basis against the likelihood of realizing its full value, and our continued
ability to carry this asset at its full value was not justified due to
uncertainty in demand for furniture and mattresses and overall weak economic
condition.
Changes
in the price, availability and quality of raw materials could increase our costs
or cause production delays and sales interruptions, which would result in
decreased earnings.
We depend
upon outside suppliers for most of our raw material needs, and increasingly we
rely upon outside suppliers for component materials such as yarn and unfinished
fabrics, as well as for certain services such as finishing and
weaving. Fluctuations in the price, availability and quality of these
goods and services could have a negative effect on our production costs and
ability to meet the demands of our customers, which would affect our ability to
generate sales and earnings. In many cases, we are not able to pass
through increased costs of raw materials or increased production costs to our
customers through price increases. In particular, many of our basic
raw materials are petrochemical products or are produced from such
products. For this reason, our material costs are especially
sensitive to changes in prices for petrochemicals and the underlying price of
oil. Increases in prices for oil, petrochemical products or other raw
materials and services provided by outside suppliers could significantly
increase our costs and negatively affect earnings.
Increases
in energy costs would increase our operating costs and could adversely affect
earnings.
Higher
prices for electricity, natural gas and fuel increase our production and
shipping costs. A significant shortage, increased prices, or
interruptions in the availability of these energy sources would increase the
costs of producing and delivering products to our customers, and would be likely
to adversely affect our earnings. In many cases, we are not able to
pass along the full extent of increases in our production costs to customers
through price increases. During fiscal 2008, energy prices increased
significantly, in part due to increases in the price of oil and other
petrochemical products. Although some price increases were
implemented to offset the effect of these increased costs, we were not able to
fully recoup these costs, and operating margins were negatively
affected. Energy costs eased in fiscal 2009, but remain a volatile
element of our costs. Further increases in energy costs could have a
negative effect on our earnings.
19
Business
difficulties or failures of large customers could result in a decrease in our
sales and earnings.
We
currently have several customers that account for a substantial portion of our
sales. In the mattress fabric segment, several large bedding
manufacturers have large market shares and comprise a significant portion of our
mattress fabric sales, with Serta (National Bedding) accounting for
approximately 13% of consolidated net sales in fiscal 2009. In the
upholstery fabrics segment, La-Z-Boy Incorporated accounted for approximately
12% of consolidated net sales during fiscal 2009, and several other large
furniture manufacturers comprised a significant portion of sales. A
business failure or other significant financial difficulty by one or more of our
major customers could cause a significant loss in sales, an adverse effect on
our earnings, and difficulty in collection of our trade accounts
receivable.
If
we are unable to manage our cash effectively, we will not have funds available
to repay debt and to maintain the flexibility necessary for successful operation
of our business.
Our
ability to meet our cash obligations depends on our operating cash flow, access
to trade credit, and our ability to borrow under our debt
agreements. In addition to the cash needs of operating our business,
we have substantial debt repayments that are due over the next several years on
our unsecured senior notes and the debt we issued to acquire Bodet & Horst
during fiscal 2009 (see notes 2 and 12 to the consolidated financial
statements). Our ability to generate cash flow going forward will
depend upon our ability to generate profits from our business, and we have not
been able to generate earnings on a consistent basis in recent
years. If we are not able to generate cash during the coming year, we
may not be able to provide the funds needed to operate and maintain our business
or to make payments on our debt as they become due.
Further
loss of market share due to competition would result in further declines in
sales and could result in additional losses or decreases in
earnings.
Our
business is highly competitive, and in particular the upholstery fabric industry
is fragmented and is experiencing an increase in the number of
competitors. As a result, we face significant competition from a
large number of competitors, both foreign and domestic. We compete
with many other manufacturers of fabric, as well as converters who source
fabrics from various producers and market them to manufacturers of furniture and
bedding. In many cases, these fabrics are sourced from foreign
suppliers who have a lower cost structure than the company. The
highly competitive nature of our business means we are constantly subject to the
risk of losing market share. Our sales have decreased significantly
over the past six years due in part to the increased number of competitors in
the marketplace, especially foreign sources of fabric. As a result of
increased competition, there have been deflationary pressures on the prices for
many of our products, which make it more difficult to pass along increased
operating costs such as raw materials, energy or labor in the form of price
increases and puts downward pressure on our profit margins. Also, the
large number of competitors and wide range of product offerings in our business
can make it more difficult to differentiate our products through design,
styling, finish and other techniques.
20
If
we fail to anticipate and respond to changes in consumer tastes and fashion
trends, our sales and earnings may decline.
Demand for
various types of upholstery fabrics and mattress coverings change over time due
to fashion trends and changing consumer tastes for furniture and
bedding. Our success in marketing our fabrics depends upon our
ability to anticipate and respond in a timely manner to fashion trends in home
furnishings. If we fail to identify and respond to these changes, our
sales of these products may decline. In addition, incorrect
projections about the demand for certain products could cause the accumulation
of excess raw material or finished goods inventory, which could lead to
inventory mark-downs and further decreases in earnings.
A
continuation of the current economic downturn could result in a further decrease
in our sales and earnings.
Overall
demand for our products depends upon consumer demand for furniture and bedding,
which is subject to variations in the general economy. Because
purchases of furniture or bedding are discretionary purchases for most
individuals and businesses, demand for these products is sometimes more easily
influenced by economic trends than demand for other
products. Economic downturns can affect consumer spending habits and
demand for home furnishings, which reduces the demand for our products and
therefore could cause a decrease in our sales and earnings. The
recent economic slowdown has caused a decrease in consumer spending and demand
for home furnishings, including goods that incorporate our
products.
We
are subject to litigation and environmental regulations that could adversely
impact our sales and earnings.
We are,
and in the future may be, a party to legal proceedings and claims, including
environmental matters, product liability and employment disputes, some of which
claim significant damages. We face the continual business risk of
exposure to claims that our business operations have caused personal injury or
property damage. We maintain insurance against product liability
claims and in some cases have indemnification agreements with regard to
environmental claims, but there can be no assurance that these arrangements will
continue to be available on acceptable terms or that such arrangements will be
adequate for liabilities actually incurred. Given the inherent
uncertainty of litigation, there can be no assurance that claims against the
company will not have a material adverse impact on our earnings or financial
condition. We are also subject to various laws and regulations in our
business, including those relating to environmental protection and the discharge
of materials into the environment. We could incur substantial costs
as a result of noncompliance with or liability for cleanup or other costs or
damages under environmental laws or other regulations.
21
We
must comply with a number of governmental regulations applicable to our
business, and changes in those regulations could adversely affect our
business.
Our
products and raw materials are and will continue to be subject to regulation in
the United States by various federal, state and local regulatory
authorities. In addition, other governments and agencies in other
jurisdictions regulate the manufacture, sale and distribution of our products
and raw materials. For example, standards for flame resistance of
fabrics have been recently adopted on a nationwide basis. Also, rules
and restrictions regarding the importation of fabrics and other materials,
including custom duties, quotas and other regulations, are continually
changing. Environmental laws, labor laws, tax regulations and other
regulations continually affect our business. All of these rules and
regulations can and do change from time to time, which can increase our costs or
require us to make changes in our manufacturing processes, product mix, sources
of products and raw materials, or distribution. Changes in the rules
and regulations applicable to our business may negatively impact our sales and
earnings.
The
company’s market capitalization and shareholders equity have fallen below the
level required for continued listing on the New York Stock
Exchange.
Our common
stock is currently traded on the New York Stock Exchange
(NYSE). Under the NYSE’s current listing standards, we are required
to have market capitalization or shareholders equity of more than $50 million to
maintain compliance with continued listing standards, pursuant to a recently
enacted temporary rule that is expected to become permanent. At the
end of fiscal 2009, the company’s market capitalization and shareholders equity
are both now below $50 million. As a result, the company is listed as
“below compliance” with NYSE listing standards, and we have been required to
submit a plan regarding our ability to return to compliance with these
standards. This plan was submitted in the third quarter of fiscal 2009 and has
been approved by the NYSE. Regardless of this plan, if our average
market capitalization over a 30 trading-day period is below $15 million pursuant
to the temporary rule, under standard NYSE rules, the NYSE would be expected to
start immediate delisting procedures. If the company is not able to
return to and maintain compliance with the NYSE standards, our stock will be
delisted from trading on the NYSE, resulting in the need to find another market
on which our stock can be listed or causing our stock to cease to be traded on
an active market, which could result in a reduction in the liquidity for our
stock and a reduction in demand for our stock. At May 3, 2009, our
shareholders’ equity was $48 million and the consecutive 30 trading-day period
average market capitalization was $45.8 million.
None.
22
Our
headquarters are located in High Point, North Carolina. As of the end
of fiscal 2009, we owned or leased eight active manufacturing and distribution
facilities and our corporate headquarters. The following is a list of our
principal administrative, manufacturing and distribution
facilities. The manufacturing facilities and distribution centers are
organized by segment.
|
Approx.
|
|||||||
|
Total
Area
|
Expiration
|
||||||
|
Location
|
Principal Use
|
(Sq. Ft.)
|
of Lease (1)
|
||||
|
·
|
Administrative:
|
||||||
|
High
Point, North Carolina (2)
|
Upholstery
fabric division
|
56,880
|
2019
|
||||
|
offices
and corporate
|
|||||||
|
headquarters
|
|||||||
|
·
|
Mattress
Fabrics:
|
||||||
|
Stokesdale,
North Carolina
|
Manufacturing,
distribution,
|
230,000
|
Owned
|
||||
|
and
division offices
|
|||||||
|
High
Point, North Carolina
|
Manufacturing
|
63,522
|
2013
|
||||
|
St.
Jerome, Quebec, Canada
|
Manufacturing
|
202,500
|
Owned
|
||||
|
·
|
Upholstery
Fabrics:
|
||||||
|
Anderson,
South Carolina
|
Manufacturing
|
99,000
|
Owned
|
||||
|
Burlington,
North Carolina
|
Finished
goods distribution
|
132,000
|
2009
|
||||
|
Shanghai,
China
|
Manufacturing
and offices
|
69,000
|
2009
|
||||
|
Shanghai,
China
|
Manufacturing
and warehousing
|
90,000
|
2012
|
||||
|
Shanghai,
China
|
Manufacturing
and warehousing
|
101,632
|
2010
|
||||
____________________________________________________
|
(1)
|
Includes
all options to renew.
|
|
(2)
|
We
are currently occupying the entire building. In the event we elect to
renew the lease on April 1, 2012, the leased premises during any renewal
period (see note 4 to the consolidated financial statements) will be 1/3
of the current occupied space of 56,880 square
feet.
|
We believe
that our facilities are in good condition, well-maintained and suitable and
adequate for present utilization. Due to the continuation of
significant restructuring efforts in the upholstery fabrics segment during
fiscal 2009, including closing multiple plant locations, determining an accurate
measure of capacity in this segment is difficult. In the mattress
fabrics segment, however, management has estimated that the company has
manufacturing capacity to produce approximately 10% more products (measured in
yards) than it sold during fiscal 2009. In addition, the company has
the ability to source additional mattress ticking and upholstery fabrics from
outside suppliers, further increasing its ultimate output of finished
goods.
23
A lawsuit
was filed against the company and other defendants (Chromatex, Inc., Rossville
Industries, Inc., Rossville Companies, Inc. and Rossville Investments, Inc.) on
February 5, 2008 in United States District Court for the Middle District of
Pennsylvania. The plaintiffs are Alan Shulman, Stanley Siegel, Ruth Cherenson as
Personal Representative of Estate of Alan Cherenson, and Adrienne Rolla and M.F.
Rolla as Executors of the Estate of Joseph Byrnes. The plaintiffs were partners
in a general partnership that formerly owned a manufacturing plant in West
Hazleton, Pennsylvania (the “Site”). Approximately two years after this general
partnership sold the Site to defendants Chromatex, Inc. and Rossville
Industries, Inc. the company leased and operated the Site as part of the
company’s Rossville/Chromatex division. The lawsuit involves court judgments
that have been entered against the plaintiffs and against defendant Chromatex,
Inc. requiring them to pay costs incurred by the United States Environmental
Protection Agency (“USEPA”) responding to environmental contamination at the
Site, in amounts approximating $8.6 million. Neither USEPA nor any
other governmental authority has asserted any claim against the company on
account of these matters. The plaintiffs seek contribution from the company and
other defendants and a declaration that the company and the other defendants are
responsible for environmental response costs under environmental laws and
certain agreements. The company does not believe it has any liability for the
matters described in this litigation and intends to defend itself vigorously. In
addition, the company has an indemnification agreement with certain other
defendants in the litigation pursuant to which the other defendants agreed to
indemnify the company for any damages it incurs as a result of the environmental
matters that are subject of this litigation. For these reasons, no reserve has
been recorded.
VOTE
OF SECURITY HOLDERS
There were
no matters submitted to a vote of shareholders during the fourth quarter ended
May 3, 2009.
ITEM 5. MARKET FOR THE REGISTRANT’S
COMMON
EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER
PURCHASES OF EQUITY SECURITIES
Registrar
and Transfer Agent
Computershare
Trust Company, N.A.
c/o
Computershare Investor Services
Post
Office Box 43078
Providence,
Rhode Island 02940-3078
(800)
254-5196
(781)
575-2879 (Foreign shareholders)
www.computershare.com/investor
Stock
Listing
Culp, Inc.
common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol
CFI. As of May 3, 2009, Culp, Inc. had approximately 1,200
shareholders based on the number of holders of record and an estimate of
individual participants represented by security position listings.
On
December 11, 2008, the New York Stock Exchange (“NYSE’) provided formal notice
to the company that it was not in compliance with the NYSE’s continued listing
standards as the company’s consecutive 30 trading-day period average market
capitalization was less than $75 million and its most recently reported
shareholders’ equity was below $75 million ($46.5 million at November 2, 2008,
the most recently reported date prior to the NYSE notification). Under
applicable NYSE procedures, the company had 45 days from the date of its receipt
of the notice to submit a plan to the NYSE to demonstrate its ability to achieve
compliance with the continued listing standards within 18 months. The company
submitted its plan to demonstrate compliance with the listing standards within
the required 45 day time frame. On March 6, 2009, this plan was approved by the
NYSE. The NYSE will monitor the company on a quarterly basis and can deem the
plan period over prior to the end of the 18 months if a company is able to
demonstrate returning to compliance with the applicable continued listing
standards (which would mean the company would have to either increase its
shareholders’ equity to $75 million or demonstrate market capitalization of at
least $75 million), or achieve the ability to qualify under an original listing
standard, for a period of two consecutive quarters. Regardless of this plan, if
our average market capitalization over a 30 trading-day period is below $15
million pursuant to temporary rule, under standard NYSE rules, the NYSE would be
expected to start immediate delisting procedures.
24
Effective
May 12, 2009, the NYSE received approval from the SEC for a pilot program that
would lower the numeric thresholds in the above mentioned requirements to $50
million. This pilot program would be effective through October 31, 2009, with a
subsequent rule filing anticipated prior to this date to make this a permanent
continued listing standard change.
At May 3,
2009 our shareholders’ equity was $48.0 million and our consecutive 30
trading-day period average market capitalization was $45.8 million.
Analyst
Coverage
These
analysts cover Culp, Inc.:
Raymond,
James & Associates - Budd Bugatch, CFA
Value Line
- Craig Sirois
Dividends
and Share Repurchases
We have
not paid a cash dividend nor repurchased any of our common stock from our
shareholders during the past three years. Our agreements with our lenders
associated with the Bodet & Horst and existing unsecured term notes allow
the payment of dividends and common stock share repurchases if certain financial
tests are met as defined in these agreements.
Performance
Comparison
The
following graph shows changes over the five-year period ended May 3, 2009 in the
value of $100 invested in (1) the common stock of the company, (2) the Hemscott
Textile Manufacturing Group Index (formerly named Core Data Textile
Manufacturing Group Index) reported by Standard and Poor’s, consisting of twelve
companies (including the company) in the textile industry, and (3) the Standard
& Poor’s 500 Index.
The graph
assumes an initial investment of $100 at the end of fiscal 2004 and the
reinvestment of all dividends during the periods identified.
25
Market
Information
See Item
6, Selected Financial Data, and Selected Quarterly Data in Item 8, for market
information regarding the company’s common stock.
26
|
ITEM 6. SELECTED FINANCIAL DATA
|
||||||||||||||||||||||||
|
percent
|
||||||||||||||||||||||||
|
fiscal
|
fiscal
|
fiscal
|
fiscal
|
fiscal
|
change
|
|||||||||||||||||||
|
(amounts
in thousands, except per share amounts)
|
2009
|
2008
|
2007
|
2006
|
2005
|
2009/2008 | ||||||||||||||||||
|
INCOME (LOSS) STATEMENT
DATA
|
||||||||||||||||||||||||
|
net sales
|
$ | 203,938 | 254,046 | 250,533 | 261,101 | 286,498 | (19.7 | ) % | ||||||||||||||||
|
cost
of sales (6)
|
179,286 | 220,887 | 219,328 | 237,233 | 260,341 | (18.8 | ) | |||||||||||||||||
|
gross
profit
|
24,652 | 33,159 | 31,205 | 23,868 | 26,157 | (25.7 | ) | |||||||||||||||||
|
selling,
general, and administrative expenses (6)
|
19,751 | 23,973 | 27,030 | 28,954 | 35,357 | (17.6 | ) | |||||||||||||||||
|
goodwill
impairment
|
- | - | - | - | 5,126 | - | ||||||||||||||||||
|
restructuring
expense and asset impairment (6)
|
9,471 | 886 | 3,534 | 10,273 | 10,372 |
N.M.
|
||||||||||||||||||
|
(loss)
income from operations
|
(4,570 | ) | 8,300 | 641 | (15,359 | ) | (24,698 | ) |
N.M.
|
|||||||||||||||
|
interest
expense
|
2,359 | 2,975 | 3,781 | 4,010 | 3,713 | (20.7 | ) | |||||||||||||||||
|
interest
income
|
(89 | ) | (254 | ) | (207 | ) | (126 | ) | (134 | ) | (65.0 | ) | ||||||||||||
|
other
expense
|
43 | 736 | 68 | 634 | 517 | (94.2 | ) | |||||||||||||||||
|
(loss)
income before income taxes
|
(6,883 | ) | 4,843 | (3,001 | ) | (19,877 | ) | (28,794 | ) |
N.M.
|
||||||||||||||
|
income
taxes
|
31,959 | (542 | ) | (1,685 | ) | (8,081 | ) | (10,942 | ) |
N.M.
|
||||||||||||||
|
net
(loss) income
|
$ | (38,842 | ) | 5,385 | (1,316 | ) | (11,796 | ) | (17,852 | ) |
N.M.
|
|||||||||||||
|
depreciation
(7)
|
6,712 | 5,548 | 7,849 | 14,362 | 18,884 | 21.0 | ||||||||||||||||||
|
weighted
average shares outstanding
|
12,651 | 12,624 | 11,922 | 11,567 | 11,549 | 0.2 | ||||||||||||||||||
|
weighted
average shares outstanding, assuming dilution
|
12,651 | 12,765 | 11,922 | 11,567 | 11,549 | (0.9 | ) | |||||||||||||||||
|
PER SHARE
DATA
|
||||||||||||||||||||||||
|
net
income (loss) per share - basic
|
$ | (3.07 | ) | 0.43 | (0.11 | ) | (1.02 | ) | (1.55 | ) |
N.M.
|
|||||||||||||
|
net
income (loss) per share - diluted
|
$ | (3.07 | ) | 0.42 | (0.11 | ) | (1.02 | ) | (1.55 | ) |
N.M.
|
|||||||||||||
|
book
value
|
3.76 | 6.83 | 6.29 | 6.39 | 7.43 | (44.9 | ) | |||||||||||||||||
|
BALANCE SHEET
DATA
|
||||||||||||||||||||||||
|
operating
working capital (5)
|
$ | 23,503 | 38,368 | 46,335 | 44,907 | 56,471 | (38.7 | ) % | ||||||||||||||||
|
property,
plant and equipment, net
|
24,253 | 32,939 | 37,773 | 44,639 | 66,032 | (26.4 | ) | |||||||||||||||||
|
total
assets
|
95,294 | 148,029 | 159,946 | 157,467 | 176,123 | (35.6 | ) | |||||||||||||||||
|
capital
expenditures
|
3,160 | 6,928 | 4,227 | 6,470 | 14,360 | (54.4 | ) | |||||||||||||||||
|
long-term
debt and lines of credit (1)
|
16,368 | 21,423 | 40,753 | 47,722 | 50,550 | (23.6 | ) | |||||||||||||||||
|
shareholders'
equity
|
48,031 | 86,359 | 79,077 | 74,523 | 85,771 | (44.4 | ) | |||||||||||||||||
|
capital
employed (3)
|
52,602 | 102,868 | 109,661 | 112,531 | 131,214 | (48.9 | ) | |||||||||||||||||
|
RATIOS & OTHER
DATA
|
||||||||||||||||||||||||
|
gross
profit margin
|
12.1 | % | 13.1 | % | 12.5 | % | 9.1 | % | 9.1 | % | ||||||||||||||
|
operating
income (loss) margin
|
(2.2 | )% | 3.3 | % | 0.3 | % | (5.9 | )% | (8.6 | )% | ||||||||||||||
|
net
income (loss) margin
|
(19.0 | )% | 2.1 | % | (0.5 | )% | (4.5 | )% | (6.2 | )% | ||||||||||||||
|
effective
income tax rate
|
(464.3 | )% | (11.2 | )% | 56.1 | % | 40.7 | % | 38.0 | % | ||||||||||||||
|
long-term
debt to total capital employed ratio (1)
|
31.1 | % | 20.8 | % | 37.2 | % | 42.4 | % | 38.5 | % | ||||||||||||||
|
operating
working capital turnover (5)
|
6.4 | 5.8 | 5.3 | 5.0 | 4.8 | |||||||||||||||||||
|
days
sales in receivables
|
32 | 37 | 41 | 39 | 35 | |||||||||||||||||||
|
inventory
turnover
|
6.0 | 5.8 | 5.7 | 5.4 | 5.2 | |||||||||||||||||||
|
STOCK
DATA
|
||||||||||||||||||||||||
|
stock
price
|
||||||||||||||||||||||||
|
high
|
$ | 7.91 | 12.30 | 8.52 | 5.23 | 9.10 | ||||||||||||||||||
|
low
|
1.30 | 6.12 | 4.24 | 3.83 | 4.20 | |||||||||||||||||||
|
close
|
4.40 | 7.53 | 8.50 | 4.64 | 4.70 | |||||||||||||||||||
|
P/E
ratio (2)
|
||||||||||||||||||||||||
|
high (4)
|
N.M.
|
29 |
N.M.
|
N.M.
|
N.M.
|
|||||||||||||||||||
|
low (4)
|
N.M.
|
15 |
N.M.
|
N.M.
|
N.M.
|
|||||||||||||||||||
|
daily
average trading volume (shares)
|
19.2 | 38.3 | 17.8 | 12.5 | 21.1 | |||||||||||||||||||
|
(1) Long-term debt
includes long-term and current maturities of long-term debt and lines of
credit.
|
||||||||||||||||||||||||
|
(2) P/E ratios based on
trailing 12-month net income per share.
|
||||||||||||||||||||||||
|
(3) Capital employed
includes long-term and current maturities of long-term debt, lines of
credit, and shareholders’ equity, offset by cash and cash
equivalents.
|
||||||||||||||||||||||||
|
(4) N.M – Not
meaningful
|
||||||||||||||||||||||||
|
(5) Operating working
capital for this calculation is accounts receivable and inventories,
offset by accounts payable.
|
||||||||||||||||||||||||
|
(6)
The company incurred restructuring and related charges in
fiscal 2009, 2008, 2007, 2006 and 2005. See note 3 of the
company's consolidated financial statements
|
||||||||||||||||||||||||
|
(7)
Includes accelerated depreciation of $2.1 $1.2, $5.0 and $6.0 million for
fiscal 2009, 2007, 2006 and 2005, respectively.
|
||||||||||||||||||||||||
|
No accelerated depreciation was recorded in fiscal 2008.
|
||||||||||||||||||||||||
27
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following analysis of the financial condition and results of operations should
be read in conjunction with the consolidated financial statements and notes
attached thereto.
Overview
Our fiscal
year is the 52 or 53 week period ending on the Sunday closest to April
30. The year ended May 3, 2009 included 53 weeks. The years ended and
April 27, 2008 and April 29, 2007, each included 52 weeks. Our
operations are classified into two business segments: mattress fabrics and
upholstery fabrics. The mattress fabrics segment primarily
manufactures, sources, and sells fabrics to bedding
manufacturers. The upholstery fabrics segment sources, manufacturers
and sells fabrics primarily to residential and commercial (contract) furniture
manufacturers.
We
evaluate the operating performance of our segments based upon income (loss) from
operations before restructuring and related charges, certain unallocated
corporate expenses, and other non-recurring items. Cost of sales in
both segments include costs to manufacture or source our products, including
costs such as raw material and finished goods purchases, direct and indirect
labor, overhead and incoming freight charges. Unallocated corporate expenses
primarily represent compensation and benefits for certain executive officers and
all costs related to being a public company. Segment assets include
assets used in the operation of each segment and primarily consist of accounts
receivable, inventories, and property, plant and equipment. The mattress fabrics
segment also includes in segment assets, assets held for sale, goodwill, and
other current and non-current assets purchased during fiscal 2007 from the
International Textile Group, Inc. (ITG) related to its mattress product line and
purchased in fiscal 2009 from Bodet & Horst USA, LP and Bodet & Horst
GMBH & Co. KG (Bodet & Horst) related to its knitted mattress fabric
operation. The upholstery fabrics segment also includes assets held for sale in
segment assets.
For fiscal
2009, our overall net sales decreased 20% to $203.9 million, compared with
$254.0 million for fiscal 2008. This sales decrease reflects unprecedented weak
consumer demand in both the bedding and furniture industries and the planned
discontinuance of certain products in both segments. The company reported a
pre-tax loss of $6.9 million, which includes restructuring and related charges
of $13.1 million, for fiscal 2009. We reported pre-tax income of $4.8 million,
which includes restructuring and related charges of $2.9 million in fiscal 2008.
The change in the our pre-tax results primarily results from an increase in
restructuring and related charges in the upholstery fabrics segment of $13.1
million in fiscal 2009 compared with $2.9 million, in fiscal 2008. Of the $13.1
million restructuring and related charges in fiscal 2009, $11.5 million and $1.6
million represent non-cash and cash charges, respectively. Of the $2.9 million
restructuring and related charges in fiscal 2008, $1.5 million and $1.4 million
represent non-cash and cash charges, respectively.
We
reported a net loss of $38.8 million in fiscal 2009, or $3.07 per diluted share,
compared with net income of $5.4 million, or $0.42 per diluted share, for fiscal
2008. The net loss for fiscal 2009 included a $27.2 million non-cash
charge, or $2.15 per diluted share, for the establishment of a valuation
allowance against substantially all of our net deferred tax assets, and $13.1
million, or $1.03 per diluted share, in restructuring and related charges noted
above.
At the
segment level, mattress fabrics reported sales of $115.4 million in fiscal 2009
compared with $138.1 million for fiscal 2008. Operating income was $13.2 million
in fiscal 2009 compared with $14.1 million in fiscal 2008. Operating margins
improved to 11.5% in fiscal 2009 compared with 10.2% in fiscal 2008. Despite
lower sales, operating margins increased due to operational improvements made
possible by capital projects and the acquisition of the knitted mattress fabrics
operation of Bodet & Horst. For upholstery fabrics, net sales were $88.5
million in fiscal 2009 compared with $115.9 million for fiscal 2008. Operating
loss for fiscal 2009 was $1.5 million compared with operating income of $1.2
million in fiscal 2008. This decrease in earnings reflects the continued soft
demand industry wide for upholstery fabrics. Although the segment experienced an
operating loss for fiscal 2009, substantial improvement was achieved in the
second half of fiscal 2009, leading to an approximate $700,000 operating profit
in the third and fourth quarters.
28
From a
balance sheet perspective, in spite of the unprecedented weak consumer demand in
the bedding and furniture industries and the resulting net loss, our financial
position strengthened in fiscal 2009. Our cash and cash equivalents were $11.8
million at May 3, 2009 compared with $4.9 million at April 27, 2008. This
increase in cash and cash equivalents reflects cash flow from operations in
fiscal 2009 of $22.8 million compared with $16.4 million in fiscal 2008. The
increase in cash flow from operations is due to consistent profitability in the
mattress fabrics segment and working capital reductions in both segments. We
repaid $16.1 million in long-term debt in fiscal 2009, of which $4.6 million
related to principal payments due in March and June 2010. Our long-term debt
balance was $16.4 million and $21.4 million at May 3, 2009 and April 27, 2008,
respectively. The long-term debt balance of $16.4 million includes an $11.0
million unsecured term loan added in the second quarter of fiscal 2009 to
finance the purchase of the knitted mattress fabrics operation of Bodet &
Horst. Also, our long-term debt balance of $16.4 million is unsecured, with
scheduled principal payments of $4.7 million, $168,000, and $2.4 million in
fiscal 2010, 2011, and 2012, respectively.
Results
of Operations
The
following table sets forth certain items in the company’s consolidated
statements of net (loss) income as a percentage of net sales.
|
2009
|
2008
|
2007
|
||||||||||
|
Net
sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of sales
|
87.9 | 86.9 | 87.5 | |||||||||
|
Gross
profit
|
12.1 | 13.1 | 12.5 | |||||||||
|
Selling,
general and administrative expenses
|
9.7 | 9.4 | 10.8 | |||||||||
|
Restructuring
expense
|
4.6 | 0.3 | 1.4 | |||||||||
|
(Loss)
income from operations
|
(2.2 | ) | 3.3 | 0.3 | ||||||||
|
Interest
expense, net
|
1.2 | 1.1 | 1.4 | |||||||||
|
Other
expense
|
0.0 | 0.3 | 0.0 | |||||||||
|
(Loss)
income before income taxes
|
(3.4 | ) | 1.9 | (1.2 | ) | |||||||
|
Income
taxes *
|
(464.3 | ) | (11.2 | ) | 56.1 | |||||||
|
Net
(loss) income
|
(19.0 | )% | 2.1 | % | (0.5 | )% | ||||||
*
Calculated as a percentage of (loss) income before income taxes.
The
following tables set forth the company’s statements of operations by segment for
the fiscal years ended May 3, 2009, April 27, 2008, and April 29,
2007.
29
|
CULP,
INC.
|
||||||||||||||||||||||||||
|
STATEMENTS
OF OPERATIONS BY SEGMENT
|
||||||||||||||||||||||||||
|
FOR
THE TWELVE MONTHS ENDED MAY 3, 2009 AND APRIL 27, 2008
|
||||||||||||||||||||||||||
|
(Amounts
in thousands)
|
||||||||||||||||||||||||||
|
YEARS
ENDED
|
||||||||||||||||||||||||||
|
Amounts
|
Percent
of Total Sales
|
|||||||||||||||||||||||||
|
May
3,
|
April
27,
|
%
Over
|
May
3,
|
April
27,
|
||||||||||||||||||||||
|
Net
Sales by Segment
|
2009
|
2008
|
(Under)
|
2009
|
2008
|
|||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 115,396 | 138,064 | (16.4 | ) % | 56.6 | % | 54.3 | % | |||||||||||||||||
|
Upholstery
Fabrics
|
88,542 | 115,982 | (23.7 | ) % | 43.4 | % | 45.7 | % | ||||||||||||||||||
|
Net
Sales
|
$ | 203,938 | 254,046 | (19.7 | ) % | 100.0 | % | 100.0 | % | |||||||||||||||||
|
Gross
Profit by Segment
|
Gross
Profit Margin
|
|||||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 20,996 | 22,576 | (7.0 | ) % | 18.2 | % | 16.4 | % | |||||||||||||||||
|
Upholstery
Fabrics
|
7,253 | 12,829 | (43.5 | ) % | 8.2 | % | 11.1 | % | ||||||||||||||||||
|
Subtotal
|
28,249 | 35,405 | (20.2 | ) % | 13.9 | % | 13.9 | % | ||||||||||||||||||
|
Loss
on impairment of equipment
|
- | (289 | ) | (2 | ) | (100.0 | ) % | 0.0 | % | (0.1 | ) % | |||||||||||||||
|
Restructuring
related charges
|
(3,597 | ) | (1 | ) | (1,957 | ) | (1 | ) | 83.8 | % | (1.8 | ) % | (0.8 | ) % | ||||||||||||
|
Gross
Profit
|
$ | 24,652 | 33,159 | (25.7 | ) % | 12.1 | % | 13.1 | % | |||||||||||||||||
| Selling, General and Administrative expenses by Segment |
Percent
of Sales
|
|||||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 7,749 | 8,457 | (8.4 | ) % | 6.7 | % | 6.1 | % | |||||||||||||||||
|
Upholstery
Fabrics
|
8,756 | 11,650 | (24.8 | ) % | 9.9 | % | 10.0 | % | ||||||||||||||||||
|
Unallocated
Corporate
|
3,225 | 3,797 | (15.1 | ) % | 1.6 | % | 1.5 | % | ||||||||||||||||||
|
Subtotal
|
19,730 | 23,904 | (17.5 | ) % | 9.7 | % | 9.4 | % | ||||||||||||||||||
|
Restructuring
related charges
|
21 | (1 | ) | 69 | (1 | ) | (69.6 | ) % | 0.0 | % | 0.0 | % | ||||||||||||||
|
Selling, General and Administrative expenses
|
$ | 19,751 | 23,973 | (17.6 | ) % | 9.7 | % | 9.4 | % | |||||||||||||||||
|
Operating
Income (loss) by Segment
|
Operating
Income (Loss) Margin
|
|||||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 13,247 | 14,118 | (6.2 | ) % | 11.5 | % | 10.2 | % | |||||||||||||||||
|
Upholstery
Fabrics
|
(1,503 | ) | 1,180 |
N.M.
|
(1.7 | ) % | 1.0 | % | ||||||||||||||||||
|
Unallocated
Corporate
|
(3,225 | ) | (3,797 | ) | (15.1 | ) % | (1.6 | ) % | (1.5 | ) % | ||||||||||||||||
|
Subtotal
|
8,519 | 11,501 | (25.9 | ) % | 4.2 | % | 4.5 | % | ||||||||||||||||||
|
Loss
on impairment of equipment
|
- | (289 | ) | (2 | ) | (100.0 | ) % | 0.0 | % | (0.1 | ) % | |||||||||||||||
|
Restructuring
expense and restructuring related charges
|
(13,089 | ) | (1 | ) | (2,912 | ) | (1 | ) |
N.M.
|
(6.4 | ) % | (1.1 | ) % | |||||||||||||
|
Operating (loss) income
|
$ | (4,570 | ) | 8,300 |
N.M.
|
(2.2 | ) % | 3.3 | % | |||||||||||||||||
|
Depreciation
by Segment
|
||||||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 3,542 | 3,443 | 2.9 | % | |||||||||||||||||||||
|
Upholstery
Fabrics
|
1,080 | 2,105 | (48.7 | ) % | ||||||||||||||||||||||
|
Subtotal
|
4,622 | 5,548 | (16.7 | ) % | ||||||||||||||||||||||
|
Accelerated
Depreciation
|
2,090 | - | 100.0 | % | ||||||||||||||||||||||
|
Total
Depreciation
|
6,712 | 5,548 | 21.0 | % | ||||||||||||||||||||||
|
Notes:
|
||||||||||||||||||||||||||
|
(1)
See restructuring and related charges section of Management's Discussion
and Analysis for detailed explanation of charges.
|
||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||
|
(2)
The $289 represents an impairment loss on older and existing equipment
that is being replaced
by newer and more efficient equipment. This impairment loss pertains to
the mattress fabrics segment.
|
||||||||||||||||||||||||||
30
|
CULP,
INC.
|
|||||||||||||||||||||||||||
|
STATEMENTS
OF OPERATIONS BY SEGMENT
|
|||||||||||||||||||||||||||
|
FOR
THE TWELVE MONTHS ENDED APRIL 27, 2008 AND APRIL 29,
2007
|
|||||||||||||||||||||||||||
|
(Amounts
in thousands)
|
|||||||||||||||||||||||||||
|
YEARS
ENDED
|
|||||||||||||||||||||||||||
|
Amounts
|
Percent
of Total Sales
|
||||||||||||||||||||||||||
|
April
27,
|
April
29,
|
%
Over
|
April
27,
|
April
29,
|
|||||||||||||||||||||||
|
Net
Sales by Segment
|
2008
|
2007
|
(Under)
|
2008
|
2007
|
||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 138,064 | 107,797 | 28.1 | % | 54.3 |
%
|
43.0 | % | ||||||||||||||||||
|
Upholstery
Fabrics
|
115,982 | 142,736 | (18.7 | ) % | 45.7 |
%
|
57.0 | % | |||||||||||||||||||
|
Net
Sales
|
$ | 254,046 | 250,533 | 1.4 | % | 100.0 |
%
|
100.0 | % | ||||||||||||||||||
|
Gross
Profit by Segment
|
Gross
Profit Margin
|
||||||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 22,576 | 18,610 | 21.3 | % | 16.4 |
%
|
17.3 | % | ||||||||||||||||||
|
Upholstery
Fabrics
|
12,829 | 17,397 | (26.3 | ) % | 11.1 |
%
|
12.2 | % | |||||||||||||||||||
|
Subtotal
|
35,405 | 36,007 | (1.7 | ) % | 13.9 |
%
|
14.4 | % | |||||||||||||||||||
|
Loss
on impairment of equipment
|
(289 | ) | (2 | ) | - | (100.0 | ) % | (0.1 | ) |
%
|
0.0 | % | |||||||||||||||
|
Restructuring
related charges
|
(1,957 | ) | (1 | ) | (4,802 | ) | (1 | ) | (59.2 | ) % | (0.8 | ) |
%
|
(1.9 | ) % | ||||||||||||
|
Gross
Profit
|
$ | 33,159 | 31,205 | 6.3 | % | 13.1 |
%
|
12.5 | % | ||||||||||||||||||
| Selling, General and Administrative expenses by Segment |
Percent
of Sales
|
||||||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 8,457 | 7,856 | 7.7 | % | 6.1 |
%
|
7.3 | % | ||||||||||||||||||
|
Upholstery
Fabrics
|
11,650 | 15,065 | (22.7 | ) % | 10.0 |
%
|
10.6 | % | |||||||||||||||||||
|
Unallocated
Corporate expenses
|
3,797 | 4,051 | (6.3 | ) % | 1.5 |
%
|
1.6 | % | |||||||||||||||||||
|
Subtotal
|
23,904 | 26,972 | (11.4 | ) % | 9.4 |
%
|
10.8 | % | |||||||||||||||||||
|
Restructuring
related charges
|
69 | (1 | ) | 58 | (1 | ) | 19.0 | % | 0.0 |
%
|
0.0 | % | |||||||||||||||
|
Selling, General and Administrative expenses
|
$ | 23,973 | 27,030 | (11.3 | ) % | 9.4 |
%
|
10.8 | % | ||||||||||||||||||
|
Operating
Income (loss) by Segment
|
Operating
Income (Loss) Margin
|
||||||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 14,118 | 10,754 | 31.3 | % | 10.2 |
%
|
10.0 | % | ||||||||||||||||||
|
Upholstery
Fabrics
|
1,180 | 2,332 | (49.4 | ) % | 1.0 |
%
|
1.6 | % | |||||||||||||||||||
|
Unallocated
corporate expenses
|
(3,797 | ) | (4,051 | ) | (6.3 | ) % | (1.5 | ) |
%
|
(1.6 | ) % | ||||||||||||||||
|
Subtotal
|
11,501 | 9,035 | 27.3 | % | 4.5 |
%
|
3.6 | % | |||||||||||||||||||
|
Loss
on impairment of equipment
|
(289 | ) | (2 | ) | - | (100.0 | ) % | (0.1 | ) |
%
|
0.0 | % | |||||||||||||||
|
Restructuring
expense and restructuring related charges
|
(2,912 | ) | (1 | ) | (8,394 | ) | (1 | ) | (65.3 | ) % | (1.1 | ) |
%
|
(3.4 | ) % | ||||||||||||
|
Operating
income
|
$ | 8,300 | 641 |
N.M.
|
3.3 |
%
|
0.3 | % | |||||||||||||||||||
|
Depreciation
by Segment
|
|||||||||||||||||||||||||||
|
Mattress
Fabrics
|
$ | 3,443 | 3,679 | (6.4 | ) % | ||||||||||||||||||||||
|
Upholstery
Fabrics
|
2,105 | 2,923 | (28.0 | ) % | |||||||||||||||||||||||
|
Subtotal
|
5,548 | 6,602 | (16.0 | ) % | |||||||||||||||||||||||
|
Accelerated
Depreciation
|
- | 1,247 | (100.0 | ) % | |||||||||||||||||||||||
|
Total
Depreciation
|
$ | 5,548 | 7,849 | (29.3 | ) % | ||||||||||||||||||||||
|
Notes:
|
|||||||||||||||||||||||||||
|
(1)
See restructuring and related charges section of Management's Discussion
and Analysis for detailed explanation of charges.
|
|||||||||||||||||||||||||||
|
(2)
The $289 represents an impairment loss on older and existing equipment
that is being replaced
by newer and more efficient equipment. This impairment loss pertains to
the mattress fabrics segment.
|
|||||||||||||||||||||||||||
31
2009
compared with 2008
Segment
Analysis
Mattress Fabrics
Segment
Bodet
& Horst Asset Acquisition
Pursuant
to an Asset Purchase Agreement among the company, Bodet & Horst USA, LP and
Bodet & Horst GMBH & Co. KG (collectively “Bodet & Horst”) dated
August 11, 2008, we purchased certain assets and assumed certain liabilities of
the knitted mattress fabric operation of Bodet & Horst, including its
manufacturing operation in High Point, North Carolina. This purchase has allowed
us to have a vertically integrated manufacturing platform in all major product
categories of the mattress fabrics industry. The purchase involved the
equipment, inventory, and intellectual property associated with the High Point
manufacturing operation, which had served as our primary source of knitted
mattress fabric for the prior six years. Demand for this product line has grown
significantly, as knits are increasingly being utilized on mattresses at volume
retail price points. The purchase price for the assets was cash in the amount of
$11.4 million, which included an adjustment of $477,000 for changes in working
capital as defined in the asset purchase agreement, and the assumption of
certain liabilities. Also, in connection with the purchase, the we entered into
a six-year consulting and non-compete agreement with the principal owner of
Bodet & Horst, providing for payments to the owner in the amount of $75,000
per year to be paid in quarterly installments (of which $50,000 and $25,000 will
be allocated to the non-compete covenant and consulting fees, respectively) for
the agreement’s full six-year term.
The
acquisition was financed by $11.0 million of unsecured notes pursuant to a Note
Purchase Agreement (“2008 Note Agreement”) dated August 11, 2008. The 2008 Note
Agreement has a fixed interest rate of 8.01% and a term of seven years.
Principal payments of $2.2 million per year are due on the notes beginning three
years from the date of the 2008 Note Agreement. The 2008 Note Agreement contains
customary financial and other covenants as defined in the 2008 Note
Agreement.
In
connection with the 2008 Note Agreement, we entered into a Consent and Fifth
Amendment (the “Consent and Amendment”) that amends the previously existing
unsecured note purchase agreements. The purpose of the Consent and Amendment was
for the existing note holders to consent to the 2008 Note Agreement and to
provide that certain financial covenants in favor of the existing note holders
would be on the same terms as those contained in the 2008 Note
Agreement.
In
connection with the asset purchase agreement, we assumed the lease of the
building where the operation is located. This lease is with a partnership owned
by certain shareholders and officers of the company and their immediate
families. The lease provides for monthly payments of $12,704, expires on June
30, 2010, and contains a renewal option for an additional three years. As of May
3, 2009, the minimum lease payment requirements over the next two fiscal years
are: FY 2010 - $152,000 and FY 2011 - $25,000.
32
The
following table presents the allocation of the acquisition cost, including
professional fees and other related acquisition costs, to the assets acquired
and liabilities assumed based on their fair values. The allocation of the
purchase price is based on a preliminary valuation and could change when the
final valuation is obtained. Differences between the preliminary valuation and
the final valuation are not expected to be significant. The preliminary
acquisition cost allocation is as follows:
|
(dollars
in thousands)
|
Fair
Value
|
||||
|
Inventories
|
$ | 1,439 | |||
|
Other
current assets
|
17 | ||||
|
Property,
plant, and equipment
|
3,000 | ||||
|
Non-compete
agreement
|
756 | ||||
|
Goodwill
|
7,479 | ||||
|
Accounts
payable
|
(1,291 | ) | |||
| $ | 11,400 | ||||
Of the total consideration paid of $11,400, $11,365 and $35 were paid in fiscal 2009 and 2008, respectively.
We
recorded a non-compete agreement at its fair value based on various valuation
techniques. This non-compete agreement will be amortized on a straight-line
basis over the six-year life of the agreement. Property, plant, and equipment
will be depreciated on a straight-line basis over useful lives ranging from five
to fifteen years. Goodwill is deductible for income tax purposes over the
statutory period of fifteen years.
The
following unaudited pro forma consolidated results of operations for the years
ending May 3, 2009 and April 27, 2008 have been prepared as if the acquisition
of Bodet & Horst had occurred at April 30, 2007.
|
Years
ended
|
||||||||
|
(dollars
in thousands)
|
May
3, 2009
|
April
27, 2008
|
||||||
|
Net
Sales
|
$ | 203,938 | $ | 254,046 | ||||
|
(Loss)
income from operations
|
(3,625 | ) | 11,703 | |||||
|
Net
(loss) income
|
(38,607 | ) | 6,968 | |||||
|
Net
(loss) income per share, basic
|
(3.05 | ) | 0.55 | |||||
|
Net
(loss) income per share, diluted
|
(3.05 | ) | 0.55 | |||||
The
unaudited pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually would
have been achieved had the acquisition been consummated as of that time, nor is
it intended to be a projection of future results.
Net
Sales
For fiscal
2009, the mattress fabrics segment reported net sales of $115.4 million compared
with $138.1 million for fiscal 2008, a decrease of 16%. Mattress ticking yards
sold during fiscal 2009 were 46.8 million compared with 56.6 million yards sold
in fiscal 2008, a decrease of 17%. These trends reflect unprecedented weak
consumer demand in the bedding industry and planned discontinuance of certain
products from the ITG acquisition completed in January 2007. The average selling
price for fiscal 2009 was $2.46 per yard compared with $2.44 in fiscal 2008, an
increase of 1%. This trend reflects the continued shift in the product mix
toward knitted fabrics, which have a higher average selling price.
33
Gross
Profit
For fiscal
2009, the mattress fabrics segment reported gross profit of $21.0 million
compared with $22.6 million for fiscal 2008. Despite the significant decline in
net sales, gross profit margins increased to 18.2% in fiscal 2009 compared with
16.4% in fiscal 2008. During fiscal 2009 the company took major actions to
respond to the decrease in net sales. First, we completed a $5.0
million capital project to significantly strengthen our woven fabrics
manufacturing operations and provide further reactive capacity to our customers.
The expanded capacity this capital project provides should effectively position
the company to pursue further growth opportunities. Second, the acquisition of
the knitted mattress fabrics operation of Bodet & Horst has been
successfully integrated into our operations and further enhanced the company’s
strong service platform with improved supply logistics from pattern inception to
fabric delivery, allowing accelerated responsiveness and greater stability. With
the weaving expansion and the completion of the Bodet & Horst acquisition,
we now have a large and modern, vertically integrated manufacturing platform in
all major product categories of the mattress fabrics industry.
Operating
Income
For fiscal
2009, the mattress fabrics segment reported operating income of $13.2 million
compared with $14.1 million in fiscal 2008. Operating income margins
increased to 11.5% in fiscal 2009 compared with 10.2% in fiscal 2008 due to the
major actions noted above, a decrease in selling, general, and administrative
expenses, offset, in part, by declining business volumes.
Selling,
general, and administrative expenses were $7.7 million, or 6.7% of net sales, in
fiscal 2009 compared with $8.5 million, or 6.1% of net sales, in fiscal 2008.
This trend primarily reflects declining business volumes in fiscal 2009 compared
with fiscal 2008.
Segment
Assets
Segment
assets consist of accounts receivable, inventory, assets held for sale,
non-compete agreements associated with the ITG and Bodet & Horst
acquisitions, goodwill, and property, plant and equipment. As of May
3, 2009, accounts receivable and inventory totaled $21.8 million, compared to
$27.6 million at April 27, 2008. This decrease is primarily due to lower sales
volume in fiscal 2009 compared with fiscal 2008 and improved working capital
management.
At May 3,
2009 and April 27, 2008, this segment had assets held for sale with carrying
values totaling $20,000 and $35,000, respectively. Effective January 2, 2008, we
adopted a plan to sell certain older equipment related to the mattress fabrics
segment that was being replaced by newer and more efficient equipment. In
connection with the plan of disposal, we determined that the carrying value of
this equipment was $513,000, which exceeded its fair value of $224,000.
Consequently, we recorded an impairment loss of $289,000 in fiscal 2008. This
impairment loss of $289,000 was recorded in cost of sales in the 2008
Consolidated Statement of Operations. We received sales proceeds totaling
$189,000 in fiscal 2008. In fiscal 2009, an impairment loss of $15,000 was
recorded as the company determined that the fair value of the remaining
equipment classified as held for sale exceeded its fair value.
34
At May 3,
2009 and April 27, 2008, the carrying value of the non-compete agreements were
$1.2 million and $789,000, respectively. At May 3, 2009 and April 27, 2008, the
carrying value of the segment’s goodwill was $11.6 million and $4.1 million,
respectively. The increase in the carrying value of the non-compete agreements
and goodwill pertains to the Bodet & Horst acquisition.
At May 3,
2009 and April 27, 2008, property, plant and equipment totaled $23.7 million and
$21.7 million, respectively. This increase reflects the completion of the $5.0
million capital project and property, plant, and equipment purchased in
connection with the Bodet & Horst acquisition, offset by depreciation
expense of $3.5 million in fiscal 2009. The $23.7 million balance at
May 3, 2009, represents property, plant, and equipment located in the U.S. of
$16.4 million and located in Canada of $7.3 million.
Upholstery Fabrics
Segment
Restructuring
and Related Charges
During
fiscal 2009, total restructuring and related charges incurred were $13.1
million, of which $8.0 million was for write-downs of equipment and buildings,
$3.5 million for inventory markdowns, $786,000 for employee termination
benefits, $728,000 for lease termination and other exit costs, and $140,000 for
other operating costs associated with closed plant facilities. Of these total
charges, $3.6 million was recorded in cost of sales, $21,000 was recorded in
selling, general, and administrative expenses, and $9.5 million was recorded in
restructuring expense in the 2009 Consolidated Statement of Operations. Of these
total charges, $11.5 million and $1.6 million represent non-cash and cash
charges, respectively.
During
fiscal 2008, total restructuring and related charges incurred were $2.9 million,
of which $1.0 million related to inventory markdowns, $1.0 million for other
operating costs associated with closed plant facilities, $533,000 for lease
termination and other exit costs, $503,000 for write-downs of buildings and
equipment, $189,000 for asset movement costs, $23,000 for employee termination
benefits, and a credit of $362,000 for sales proceeds received on equipment with
no carrying value. Of these total charges, $1.9 million was recorded in cost of
sales, $69,000 was recorded in selling, general, and administrative expenses,
and $866,000 was recorded in restructuring expense in the 2008 Consolidated
Statement of Operations. Of these total charges, $1.4 million and $1.5 million
represent cash and non-cash charges, respectively.
A detailed
explanation of each of our significant restructuring plans for fiscal 2009 and
2008 is presented below.
September
2008 – Upholstery Fabrics
On
September 3, 2008, our board of directors approved changes to the upholstery
fabric operations, including the consolidation of plant facilities in China and
the reduction of excess manufacturing capacity. These actions were in response
to the extremely challenging industry conditions for upholstery fabrics. During
fiscal 2009, restructuring and related charges totaled $9.6 million, of which
$6.6 million related to impairment charges on equipment and leasehold
improvements, $2.1 million for accelerated depreciation, $502,000 for inventory
markdowns, $443,000 for lease termination and other exit costs, $25,000 for
other operating costs associated with closed plant facilities, and $10,000 for
employee termination benefits. The $2.1 million accelerated depreciation charge
represents the incremental depreciation expense to reflect revised depreciation
estimates and useful lives for certain fixed assets that were to be used over a
shortened useful life from the period the restructuring plan was announced until
the respective plant facility was closed and operations ceased. Of this total
charge, $7.0 million and $2.6 million were recorded in restructuring expense and
cost of sales in the 2009 Consolidated Statement of Operations.
35
December
2006-Upholstery Fabrics
On
December 12, 2006, our board of directors approved a restructuring plan within
the upholstery fabrics segment to consolidate the company’s U.S. upholstery
fabrics manufacturing facilities and outsource its specialty yarn production.
This process involved closing the company’s weaving plant located in Graham,
North Carolina, and closing the yarn plant located in Lincolnton, North
Carolina. We transferred certain production from the Graham plant to its
Anderson, South Carolina and Shanghai, China plant facilities as well as a small
portion to contract weavers. As a result of these two plant closures, the
company reduced the number of associates by approximately 185
people.
During
fiscal 2009, we further assessed the net realizable value of our inventory,
recoverability of our property, plant, and equipment, and selling, general, and
administrative expenses based on current demand trends related to our U.S.
upholstery fabric operations. This assessment was required based on the adverse
economic conditions resulting from the depressed housing market, credit crisis,
and decreased consumer spending that developed in the second quarter of fiscal
2009, and which was more severe than we anticipated at the end of fiscal 2008.
As a result, restructuring and related charges incurred were $3.5 million of
which $1.4 million related to impairment charges on a building and equipment,
$886,000 related to inventory markdowns, $798,000 related to employee
termination benefits, $271,000 related to lease termination and other exit
costs, and $116,000 related to other operating costs associated with closed
plant facilities. Of this total charge, $2.5 million was recorded in
restructuring expense, $980,000 was recorded in cost of sales, and $21,000 was
recorded in selling, general, and administrative expenses in the 2009
Consolidated Statement of Operations.
During
fiscal 2008, total restructuring and related charges incurred for this
restructuring plan were $2.9 million of which $1.0 million related to inventory
markdowns, $978,000 related to other operating costs associated with closed
plant facilities, $503,000 related to write-downs of buildings and equipment,
$467,000 related to lease termination and other exit costs, $189,000 related to
asset movement costs, $171,000 related to employee termination benefits, and a
credit of $362,000 related to sales proceeds received on equipment with no
carrying value. Of this total charge, $1.9 million was recorded in cost of
sales, $69,000 was recorded in selling, general, and administrative expenses,
and $968,000 was recorded in restructuring expense in the 2008 Consolidated
Statement of Operations.
Long-Lived
Asset Impairments
During
fiscal 2009, we incurred impairment charges on property, plant, and equipment in
connection with its restructuring activities. These impairment charges totaled
$8.0 million and were recorded in restructuring expense in the 2009 Consolidated
Statement of Operations. This $8.0 million impairment charge includes $2.2
million for fixed assets that were abandoned in connection with the
consolidation of certain plant facilities in China and $774,000 to reflect the
selling price of the company’s corporate headquarters of $4.0 million. Also,
during the course of the company’s strategic review in the second quarter of
fiscal 2009 of its upholstery fabrics business, the company assessed the
recoverability of the carrying value of its upholstery fabric fixed assets that
were being held and used in operations. This strategic review resulted in
impairment losses of $4.4 million and $543,000 for fixed assets located in China
and the U.S., respectively. In addition, the company incurred impairment losses
totaling $115,000 for assets held for sale associated with its U.S upholstery
fabric operations. These losses reflect the amounts by which the carrying values
of these fixed assets exceeded their estimated fair values determined by their
estimated future discounted cash flows and quoted market prices.
36
Net
Sales
For fiscal
2009, upholstery fabric net sales (which include both fabric and cut and sewn
kits) were $88.5 million compared with $115.9 million in fiscal 2008, a decrease
of 24%. On a unit volume basis, total yards sold for fiscal 2009
decreased by 28% compared with fiscal 2008. Average selling price was
$4.30 per yard for fiscal 2009 compared with $4.22 per yard in fiscal 2008, an
increase of 2%. Upholstery fabrics sales represented approximately 43% of total
net sales for fiscal 2009, down from 46% in fiscal 2008. Net sales of upholstery
fabrics produced outside the company’s U.S. manufacturing operations were $68.1
million in fiscal 2009, a decrease of 10% from $75.9 million in fiscal 2008. Net
sales of U.S. produced upholstery fabrics were $20.4 million in fiscal 2009, a
decrease of 49% from $40.0 million in fiscal 2008. Upholstery fabric sales
reflect worsening soft demand industry wide, as well as worsening demand for
U.S. produced upholstery fabrics driven by consumer preference for leather and
suede furniture and other imported furniture and fabrics.
Gross
Profit
For fiscal
2009, the upholstery fabrics segment reported gross profit of $7.3 million
compared with $12.8 million for fiscal 2008. Gross profit margins were 8.2% in
fiscal 2009 compared with 11.1% in fiscal 2008. In response to this decline in
net sales and profits, the company took the following major actions as part of
the profit improvement plan initiated during the second quarter of fiscal
2009:
|
·
|
Consolidated
our China operations into fewer facilities and reduced excess
manufacturing capacity. (See Restructuring and Related Charges section for
further details).
|
|
·
|
Significantly
reduced the cost structure of our U.S. velvet operations located in
Anderson, SC.
|
|
·
|
Implemented
a modest price increase on certain upholstery fabrics; and wherever
possible, obtained price concessions from suppliers on certain high volume
items where we could not increase our selling
prices
|
|
·
|
Continued
focus on improved inventory management. Inventory was $9.1 million at May
3, 2009, a decrease of 56% from $20.8 million at April 27,
2008.
|
As a
result of the major actions noted above, the upholstery fabrics segment reported
gross profit of $3.0 million, or 14%, in the fourth quarter of fiscal 2009
compared with $2.9 million, or 10%, for the fourth quarter of fiscal
2008.
Operating
(Loss) Income
The
upholstery fabrics segment reported an operating loss for fiscal 2009 of $1.5
million compared with operating income of $1.2 million in fiscal 2008. This
trend reflects the decline in net sales noted above.
Despite
the decline in net sales in the fourth quarter ($21.1 million in 2009 and $29.4
million in 2008), the upholstery fabrics segment reported operating income of
$666,000, or 3.1% of net sales in fiscal 2009, compared with $134,000, or 0.5%
of net sales, for fiscal 2008. The operating income for the fourth quarter of
fiscal 2009 reversed operating losses of $2.2 million in the first half of
fiscal 2009. These results reflect the major actions noted above as part of the
profit improvement plan and the implementation of a plan that reduced selling,
general, and administrative expenses by 25% compared to the previous year. This
plan included reductions of base compensation for senior management of the
upholstery fabrics segment.
37
Management
remains cautiously optimistic about the company’s prospects in the upholstery
fabrics business because of the following: a) we have been receiving
significantly higher fabric placements, including cut and sew kits,
with a broader base of key customers; b) we have established a mature, scalable
and low cost model in China that is vertically integrated by way of a network of
key manufacturing partners that we developed over several years; c) we have made
significant progress in the competitive position of our U.S. facility this year;
and d) we are now keenly focused on sales and marketing initiatives rather than
restructuring actions. Although we believe these factors are all favorable
indicators, management remains committed to taking additional steps if necessary
to address the low profitability of the company’s upholstery fabrics operations,
regardless of prevailing economic and business conditions. We could experience
additional inventory markdowns and further restructuring charges in the
upholstery fabric operations if sales and profitability continue to decline and
further restructuring actions become necessary.
Segment
Assets
Segment
assets consist of accounts receivable, inventory, property, plant and equipment,
and assets held for sale. As of May 3, 2009, accounts receivable and
inventory totaled $20.3 million, compared to $34.9 million at April 27, 2008.
This decline reflects lower sales and improved working capital management. At
May 3, 2009, the upholstery fabrics reported no carrying value associated with
property, plant and equipment. Property, plant, and equipment totaled $11.2
million at April 27, 2008. This decline reflects restructuring charges of $8.0
million for fixed asset impairments (see restructuring and related charges
section for more details), $2.1 million related to accelerated depreciation in
connection with the consolidation of plant facilities in China, and
reclassifications of property, plant, and equipment to assets held for
sale.
At May 3,
2009 and April 27, 2008, this segment had assets held for sale with a carrying
value of $1.2 million and $792,000, respectively. Assets held for sale represent
buildings and equipment associated with our U.S. upholstery fabric operations.
We expect that the final sale and disposal of these assets to be completed
within a year. The company determined that the carrying values of some of the
underlying assets exceeded their fair values. Consequently, the company recorded
an impairment charge totaling $115,000 and $20,000 in restructuring expense in
the 2009 and 2008 Consolidated Statement of Operations,
respectively.
Other
Income Statement Categories
Selling, General and
Administrative Expenses – Selling, general, and administrative expenses
(SG&A) for the company as a whole were $19.8 million, or 9.7% of net sales,
for fiscal 2009 compared with $24.0 million, or 9.4% of net sales, for fiscal
2008, a decrease of 17.6%. This trend primarily
reflects the company’s restructuring efforts
and profit improvement plan associated with its upholstery fabrics segment,
partially offset by an increase of $358,000 in the provision for doubtful
accounts in fiscal 2009.
Interest Expense (Income)
-- Interest expense for fiscal 2009 decreased to $2.4 million from $3.0
million in fiscal 2008. This trend primarily reflects lower outstanding balances
on existing long-term debt and a decrease in interest rates, partially offset by
interest expense incurred on the $11.0 million unsecured note used to finance
the Bodet & Horst acquisition. Interest income for fiscal
2009 decreased to $89,000 from $254,000 in fiscal 2008. This trend reflects
a significant reduction in money market interest rates during fiscal
2009.
Other
Expense – Other
expense for fiscal 2009 was $43,000 compared with $736,000 in fiscal 2008. This
change primarily reflects fluctuations in foreign currency exchange rates for
subsidiaries domiciled in China and Canada.
38
Income
Taxes
Significant
judgment is required in determining the provision for income taxes. During the
ordinary course of business, there are many transactions and calculations for
which the ultimate tax determination is uncertain. We account for income taxes
using the asset and liability approach as prescribed by SFAS No. 109,
“Accounting for Income Taxes.” This approach requires recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been included in the consolidated financial statements or income tax
returns. Using the enacted tax rates in the effect for the year in which
differences are expected to reverse, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax basis of
an asset or liability. If a change in the effective tax rate to be applied to a
timing difference is determined to be appropriate, it will affect the provision
for income taxes during the period that the determination is made.
Effective
Income Tax Rate
We
recorded income tax expense of $32.0 million, or 464.3% of loss before income
tax expense in fiscal 2009 compared to an income tax benefit of $542,000, or
11.2% of income before income taxes in fiscal 2008. Income tax expense for
fiscal 2009 is different from the amount obtained by applying our statutory rate
of 34% to loss before income taxes for the following reasons:
|
·
|
The
income tax rate increased 395% for a $27.2 million non-cash charge for the
establishment of a valuation allowance against substantially all of the
company’s net deferred tax assets.
|
|
·
|
The
income tax rate increased 50% for an increase in income tax reserves for
unrecognized tax benefits.
|
|
·
|
The
income tax rate increased 26% for the tax effects of foreign exchange
gains on U.S. denominated account balances in which income taxes are paid
in Canadian dollars. In fiscal 2008, the income tax rate decreased 23% for
the tax effects of foreign exchange losses on U.S. denominated account
balances in which income taxes are paid in Canadian dollars. In fiscal
2009 and 2008, the Canadian foreign exchange rate in relation to the U.S.
dollar has been very volatile due to changes in oil prices and current
global economic conditions.
|
|
·
|
The
income tax rate increased 23% for the recording of a deferred tax
liability for estimated U.S. income taxes that will be payable upon
anticipated future repatriation of undistributed earnings from the
company’s subsidiaries located in
China.
|
The income
tax benefit for fiscal 2008 is different from the amount obtained by applying
our statutory rate of 34% to income before income taxes for the following
reasons:
|
·
|
The
income tax rate was reduced by 23% for the tax effects of foreign exchange
losses on U.S. denominated account balances in which income taxes are paid
in Canadian dollars. The Canadian foreign exchange rate in relation to the
U.S. dollar has been very volatile due to changes in oil prices and the
current global economic conditions.
|
|
·
|
The
income tax rate was reduced by 19% for the tax effects of a tax holiday
for our subsidiaries located in China. Under a tax holiday in the People’s
Republic of China, the company was granted an exemption from income taxes
for two years commencing from the first profit-making year on a calendar
year basis and a 50% reduction in income tax rates for the following three
years. Calendar year 2004 was the first profit-making year. We were
entitled to a 50% income tax reduction through December 31, 2008. The
income tax rate was reduced by 0.4% for the tax effects of the tax holiday
in China in fiscal 2009. This decrease compared with fiscal
2008 to lower pre-tax income in fiscal 2009 for the company’s China
operations. The company’s pre-tax income in China was $1.4
million in calendar year 2008.
|
39
|
·
|
The
income tax rate was reduced by 12% for research and development credits
taken on our Canadian income tax returns for fiscal years 2006 through
2008. We engaged a consultant in fiscal 2008 to assist management in
documenting and determining the amount of these credits that could be
deducted on the company’s Canadian tax
returns.
|
|
·
|
The
income tax rate was reduced by 12% for income tax incentives granted by
the Chinese government for the start up of a cut and sew operation located
in Shanghai.
|
|
·
|
The
income tax rate was increased by 27% for an increase in income tax
reserves for unrecognized tax
benefits.
|
Deferred
Income Taxes
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes”, we evaluate our deferred income taxes to
determine if a valuation allowance is required. SFAS No. 109 requires that
companies assess whether a valuation allowance should be established based on
the consideration of all available evidence using a “more likely than not”
standard with significant weight being given to evidence that can be objectively
verified. The significant uncertainty in current and expected demand for
furniture and mattresses, along with the prevailing uncertainty in the overall
economic climate, has made it very difficult to forecast both short-term and
long-term financial results, and therefore, present significant negative
evidence as to whether we need to record a valuation allowance against our net
deferred tax assets. Based on this significant negative evidence, we recorded a
$27.2 million valuation allowance during fiscal 2009, of which $25.3 million and
$1.9 million were against the net deferred tax assets of our U.S. and China
operations, respectively. Our net deferred tax asset primarily resulted from the
recording of the income tax benefit of U.S. income tax loss carryforwards over
the last several years, which totals $71.3 million. This non-cash charge of
$27.2 million has no effect on the company’s operations, loan covenant
compliance, or the possible utilization of the U.S. income tax loss
carryforwards in the future. If and when the company utilizes any of these U.S.
income tax loss carryforwards to offset future U.S. taxable income, the income
tax benefit would be recognized at that time.
Federal
and state net operating loss carryforwards were $71.3 million with related
future tax benefits of $27.3 million at May 3, 2009. These carryforwards
principally expire in 13-19 years, fiscal 2022 through fiscal
2028. The company also has an alternative minimum tax credit
carryforward of approximately $1.4 million for federal income tax purposes that
does not expire.
At May 3,
2009, the remaining current deferred tax asset was $54,000 and noncurrent
deferred tax liability was $974,000, each of which, pertain to our operations in
Canada.
See Notes
1 and 11 in the Notes to the Consolidated Financial Statements for further
details.
2008
compared with 2007
Segment
Analysis
Mattress Fabrics
Segment
ITG
Asset Acquisition
40
In January
2007, we closed on an Asset Purchase Agreement (the “Agreement”) for the
purchase of certain assets from International Textile Group, Inc. (“ITG”)
related to the mattress fabrics product line of ITG’s Burlington House division.
We purchased ITG’s mattress fabrics finished goods inventory, a credit on future
purchases of inventory manufactured by ITG during the transition period, along
with certain proprietary rights (patterns, copyrights, artwork, and the like)
and other records that related to ITG’s mattress fabrics product line. The
company did not purchase any accounts receivable or property, plant, and
equipment, and did not assume any liabilities other than certain open purchase
orders.
The
consideration given for this transaction, after adjustments to the closing date
inventory as defined by the Agreement, was $8.1 million. Payment consisted of
$2.5 million in cash financed by a term loan and the issuance of 798,582 shares
of the company’s common stock with a fair value of $5.1 million. We also
incurred direct acquisition costs relating to legal, accounting, and other
professional fees of $515,000. This transaction did not constitute a business
combination within the criteria of EITF 98-3, Determining whether a Non-Monetary
Transaction involves Receipt of Productive Assets or of a Business. The
total transaction cost was allocated as follows:
|
(dollars
in thousands)
|
Fair
Value
|
||||
|
Inventories
|
$ | 4,754 | |||
|
Other
current assets (credit on future purchases of inventory)
|
2,210 | ||||
|
Non-compete
agreement
|
1,148 | ||||
| $ | 8,112 | ||||
The Agreement required ITG to provide certain transition services to the company and manufacture goods for a limited period of time to support our efforts to transition the former ITG mattress fabrics products into the company’s operations. In connection with the transition services provided by ITG, the company acquired a credit of $2.2 million on future purchases of finished goods inventory manufactured by ITG during the transition period. This credit was utilized as we purchased finished goods during the transition period and after the closing date of the purchase. This credit was fully utilized as of the end of the first quarter of fiscal 2008 and before the transition period expired as defined in the agreement. The company hired only one of ITG’s employees after the transition period was completed. ITG also agreed that it will not compete with the company in the mattress fabrics business for a period of four years, except for mattress fabrics production in China for final consumption in China (meaning the mattress fabric and the mattress on which it is used is sold only in China).
In
connection with the Agreement, the company issued 798,582 shares of common
stock. As a result, the company entered into a Registration Rights
and Shareholder Agreement (“the Registration Agreement”), which relates to the
shares of the common stock issued by the company to ITG (the “Shares”). Under
the terms of the Registration Agreement, ITG required the company to register
the Shares with the Securities and Exchange Commission, allowing the Shares to
be sold to the public after the registration statement became effective. The
Registration Agreement also contained provisions pursuant to which ITG agreed
not to purchase additional company shares or take certain other actions to
influence control of the company, and agreed to vote the Shares in accordance
with recommendations of the company’s board of directors. Pursuant to
a registration request by ITG, a registration statement was filed and became
effective April 10, 2007.
Net
Sales
For fiscal
2008, the mattress fabrics segment reported net sales of $138.1 million compared
with $107.8 million for fiscal 2007, an increase of 28%. Mattress
fabrics sales represented approximately 54% of total net sales for fiscal 2008,
up from 43% in fiscal 2007. Mattress ticking yards sold during fiscal
2008 were 56.6 million compared with 45.8 million yards sold in fiscal 2007, an
increase of 24%. These results primarily reflect the incremental sales related
to the ITG acquisition in January 2007. The average selling price for
fiscal 2008 was $2.44 per yard compared with $2.35 in fiscal 2007, an increase
of 4%. This trend reflects a shift in the product mix toward knitted fabrics,
which have a higher average selling price.
41
Gross
Profit
For fiscal
2008, the mattress fabrics segment reported gross profit of $22.6 million, or
16.4% of net sales, compared to $18.6 million, or 17.3% of net sales, for fiscal
2007. The increase in gross profit was primarily attributable to the incremental
sales related to the ITG acquisition. These results also reflect higher raw
material costs, increased Canadian operating expenses due to the strengthening
of the Canadian currency in fiscal 2008 as compared to fiscal 2007, the planned
discontinuance of certain ITG products that did not fit our business model, and
softer consumer bedding demand in the fourth quarter of fiscal
2008.
To offset
some of these higher costs, we implemented a price increase, effective March
2008. In addition, we made strategic investments ($5 million capital project) to
enhance its manufacturing platform and provide additional reactive capacity. As
a result of these actions, this segment’s gross profit margin increased to 18.2%
in fiscal 2009.
Operating
Income
For fiscal
2008, the mattress fabrics segment reported operating income of $14.1 million,
or 10.2% of net sales, compared with $10.8 million, or 10.0% of net sales, for
fiscal 2007. The increase in operating income was primarily
attributable to the factors noted in the gross profit section
above.
Selling,
general, and administrative expenses as a percentage of net sales were 6.1% in
fiscal 2008 compared with 7.3% in fiscal 2007. This downward trend primarily
reflects the incremental sales from the ITG acquisition, without a corresponding
increase to selling, general, and administrative expenses.
Segment
Assets- Segment assets consist of accounts receivable, inventory, a non-compete
agreement associated with the ITG acquisition, goodwill, assets held for sale,
and property, plant and equipment. As of April 27, 2008, accounts
receivable and inventory totaled $27.8 million, compared to $32.5 million at
April 29, 2007. This decrease is primarily due to lower sales volume in the
fourth quarter of fiscal 2008 compared with fiscal 2007 and improved inventory
management. The decrease in sales volume in the fourth quarter of fiscal 2008
compared with fiscal 2007 was attributable to softer consumer demand and the
planned discontinuance of certain ITG products that did not fit our business
model. At April 29, 2007, other current assets for this segment also include a
credit for future purchases of inventory associated with the ITG acquisition of
$527,000. This credit for future purchases of inventory was fully utilized at
April 27, 2008.
As of
April 27, 2008 and April 29, 2007 the carrying values of the ITG non-compete
agreement were $789,000 and $1.1 million, respectively. As of April 27, 2008 and
April 29, 2007, the carrying value of the segment’s goodwill was $4.1 million.
At April 27, 2008, this segment had assets held for sale with carrying values
totaling $35,000. At April 27, 2008, property, plant and equipment totaled $21.7
million, compared with $22.8 million at April 29, 2007.
42
Upholstery Fabrics
Segment
Restructuring
and Related Charges
During
fiscal 2008, total restructuring and related charges incurred were $2.9 million,
of which $1.0 million related to inventory markdowns, $1.0 million for other
operating costs associated with closed plant facilities, $533,000 for lease
termination and other exit costs, $503,000 for write-downs of buildings and
equipment, $189,000 for asset movement costs, $23,000 for employee termination
benefits, and a credit of $362,000 for sales proceeds received on equipment with
no carrying value. Of these total charges, $1.9 million was recorded in cost of
sales, $69,000 was recorded in selling, general, and administrative expenses,
and $866,000 was recorded in restructuring expense in the 2008 Consolidated
Statement of Operations. Of these total charges, $1.4 million and $1.5 million
represent cash and non-cash charges, respectively.
During
fiscal 2007, total restructuring and related charges incurred were $8.4 million,
of which $2.4 million related to inventory markdowns, $1.5 million for
write-downs of buildings and equipment, $1.4 million for asset movement costs,
$1.2 million for accelerated depreciation, $1.2 million for operating costs
associated with closed plant facilities, $909,000 for employee termination
benefits, $706,000 for lease termination and other exit costs, and a credit of
$930,000 for sales proceeds received on equipment with no carrying value. Of
these total charges, $4.8 million was recorded in cost of sales, $58,000 was
recorded in selling, general, and administrative expenses, and $3.5 million was
recorded in restructuring expense in the 2007 Consolidated Statement of
Operations. Of these total charges, $3.3 million and $5.1 million represent cash
and non-cash charges, respectively.
A detailed
explanation of each of our significant restructuring plans for fiscal 2008 and
2007 are presented below.
December
2006-Upholstery Fabrics
During
fiscal 2008, total restructuring and related charges incurred for this
restructuring plan were $2.9 million of which $1.0 million related to inventory
markdowns, $978,000 related to other operating costs associated with closed
plant facilities, $503,000 related to write-downs of buildings and equipment,
$467,000 related to lease termination and other exit costs, $189,000 related to
asset movement costs, $171,000 related to employee termination benefits, and a
credit of $362,000 related to sales proceeds received on equipment with no
carrying value. Of this total charge, $1.9 million was recorded in cost of
sales, $69,000 was recorded in selling, general, and administrative expenses,
and $968,000 was recorded in restructuring expense in the 2008 Consolidated
Statement of Operations.
During
fiscal 2007, total restructuring and related charges incurred for this
restructuring plan were $6.7 million of which $2.2 million related to inventory
markdowns, $1.3 million related to employee termination benefits, $1.2 million
related to accelerated depreciation, $1.0 million related to write-downs of
equipment, $461,000 related to asset movement costs, $241,000 related to lease
termination and other exit costs, and $212,000 related to operating costs
associated with the closed plant facilities. The $1.2 million accelerated
depreciation charge represents incremental depreciation expense to reflect
revised depreciation estimates and useful lives for certain fixed assets that
were to be used over a shortened useful life from the period the restructuring
plan was announced until the respective plant facility was closed and operations
were ceased. Of this total charge, $3.6 million was recorded in cost of sales
and $3.1 million was recorded in restructuring expense in the 2007 Consolidated
Statement of Operations.
April
2005-Upholstery Fabrics
In
April 2005, our board of directors approved a restructuring plan within the
upholstery fabrics segment designed to reduce costs, increase asset utilization,
and improve profitability. The restructuring plan included
consolidation of our velvet fabrics manufacturing operations, fixed
manufacturing cost reductions in the decorative fabrics operation, and
significant reductions in selling, general, and administrative expenses within
the upholstery fabrics segment. Also, we combined our sales, design,
and customer service activities within the upholstery fabrics
segment. As a result, on June 30, 2005 the company sold two
buildings, both located in Burlington, NC, consisting of approximately 140,000
square feet for proceeds of $2,850,000. Overall, these restructuring
actions reduced the number of associates by 350 people.
43
During
fiscal 2008, we recorded a restructuring credit of $35,000, of which a charge of
$32,000 related to lease termination and other exit costs and a credit of
$67,000 related to employee termination benefits. This credit of $35,000 was
recorded in restructuring expense in the 2008 Consolidated Statement of
Operations.
During
fiscal 2007, the total restructuring and related charges incurred for this
restructuring plan were $1.1 million, of which approximately $671,000 related to
asset movement costs, $321,000 related to operating costs associated with closed
plant facilities, $238,000 related to inventory markdowns, $194,000 related to
lease termination costs, $59,000 related to write-downs of equipment, a credit
of $165,000 related to sales proceeds received on equipment with no carrying
value, and a credit of $195,000 related to employee termination benefits. Of
this total charge, $564,000 was recorded in restructuring expense, $501,000 was
recorded in cost of sales, and $58,000 was recorded in selling, general, and
administrative expenses in the 2007 Consolidated Statement of
Operations.
Net
Sales
In fiscal
2008, upholstery fabric net sales (which include both fabric and cut and sewn
kits) were $115.9 million compared with $142.7 million in fiscal 2007, a
decrease of 19%. On a unit volume basis, total yards sold for fiscal
2008 decreased by 24% compared with fiscal 2007. Average selling
price was $4.22 per yard for fiscal 2008 compared with $4.18 per yard in fiscal
2007. Upholstery fabrics sales represented approximately 46% of total net sales
for fiscal 2008, down from 57% in fiscal 2007. Net sales of upholstery fabrics
produced outside the company’s U.S. manufacturing operations were $75.9 million
in fiscal 2008, a decrease of 8% from $82.4 million in fiscal 2007. Net sales of
U.S. produced upholstery fabrics were $40.0 million in fiscal 2008, a decrease
of 34% compared with $60.3 million in fiscal 2007.
Upholstery
fabric sales reflect continued soft demand industry wide, as well as continued
weak demand for U.S. produced upholstery fabrics driven by consumer preference
for leather and suede furniture and other imported furniture and
fabrics.
Gross
Profit
For fiscal
2008, the upholstery fabrics segment reported gross profit of $12.8 million, or
11.1% of net sales, compared with $17.4 million, or 12.2% of net sales, for
fiscal 2007. Despite the significant decline in net sales, the company was able
to report a gross profit in this segment based on a significantly improved cost
structure with its China platform and very aggressive restructuring actions over
several years to bring its U.S. manufacturing costs and capacity in line with
current and expected demand trends.
Operating
Income
Operating
income for fiscal 2008 was $1.2 million, or 1.0%, of net sales compared to
operating income for fiscal 2007 of $2.3 million, or 1.6% of net sales. This
segment was able to report operating income as a result of the improved cost
structure with its China platform and restructuring actions regarding its U.S.
upholstery fabric operations.
44
In
addition, selling, general, and administrative expenses in fiscal 2008 decreased
$3.4 million or 23% compared with fiscal 2007. This reduction was due to
the company’s restructuring activities regarding its U.S. upholstery fabric
operations.
Segment
Assets -- Segment assets consist of accounts receivable, inventory, property,
plant and equipment, and assets held for sale. As of April 27, 2008,
accounts receivable and inventory totaled $34.9 million, compared to $37.5
million at April 29, 2007. This decline reflects lower sales and improved
working capital management. At April 27, 2008, property, plant and equipment
totaled $11.2 million, compared with $14.9 million at April 29,
2007.
At April
27, 2008, this segment had assets held for sale with a carrying value of
$792,000 for certain equipment related to the company’s U.S. upholstery fabric
operations. In connection with the plan of disposal, the company determined that
the carrying value of this equipment of $812,000 exceeded its fair value of
$792,000. Consequently, the company recorded an impairment loss of $20,000 in
restructuring expense in the 2008 Consolidated Statement of
Operations.
At April
29, 2007, this segment had assets held for sale with carrying values totaling
$2.5 million. These assets held for sale consisted of buildings and certain
equipment to be sold from the closure of the company’s Lincolnton, NC and
Graham, NC plant facilities. At April 27, 2008, all buildings and equipment
classified as held for sale at April 29, 2007 had been sold. The company
received sales proceeds totaling $1.9 million and recorded impairment losses of
$482,000 in restructuring expense on these assets held for sale in fiscal
2008.
Other
Income Statement Categories
Selling, General and
Administrative Expenses – Selling, general, and administrative expenses
(SG&A) for the company as a whole were $24.0 million, or 9.4% of net sales,
for fiscal 2008 compared with $27.0 million, or 10.8% of net sales, for fiscal
2007. These
trends primarily reflect our restructuring efforts associated with our U.S.
upholstery fabric operations and a decrease in bad debt expense of $438,000 in
fiscal 2008 compared with fiscal 2007.
We adopted
SFAS No. 123R in fiscal 2007, which requires all share-based payments to be
recognized as costs over the requisite service period based upon values as of
the grant dates. Under the provisions of SFAS No. 123R, total stock-based
compensation expense was $618,000 for fiscal 2008 and $525,000 for fiscal
2007.
Interest Expense (Income)
-- Interest expense for fiscal 2008 decreased to $3.0 million from $3.8
million in fiscal 2007. This trend primarily reflects lower outstanding balances
on our unsecured senior term notes. Interest income for fiscal 2008
increased to $254,000 from $207,000 in fiscal 2007. This trend primarily
reflects higher balances invested in money market funds throughout fiscal
2008.
Other Expense – Other expense for fiscal
2008 was $736,000 compared with $68,000 in fiscal 2007. This change
primarily reflects fluctuations in foreign currency exchange rates for
subsidiaries domiciled in China and Canada.
Income
Taxes
Effective
Income Tax Rate
We
recorded an income tax benefit of $542,000, or 11.2% of income before income tax
expense in fiscal 2008 compared to an income tax benefit of $1.7 million, or
56.1% of loss before income taxes in fiscal 2007. The income tax benefit for
fiscal 2008 is different from the amount obtained by applying our statutory rate
of 34% to income before income taxes for the following reasons:
45
|
·
|
The
income tax rate was reduced by 23% for the tax effects of foreign exchange
losses on U.S. denominated account balances in which income taxes are paid
in Canadian dollars. The Canadian foreign exchange rate in relation to the
U.S. dollar was more volatile in fiscal 2008 compared to fiscal 2007, due
to changes in oil prices and the current global economic
conditions.
|
|
·
|
The
income tax rate was reduced by 19% and 30% for the tax effects of a tax
holiday regarding the company’s subsidiaries located in China in fiscal
2008 and 2007, respectively. This decrease is primarily due to the
decrease in income before income taxes regarding our China operations in
fiscal 2008 compared to fiscal 2007. Income before income taxes regarding
our China operations was $4.5 million and $6.6 million in fiscal 2008 and
2007, respectively.
|
|
·
|
The
income tax rate was reduced by 12% for research and development credits
taken on our Canadian income tax returns for fiscal years 2006 through
2008. We engaged a consultant in fiscal 2008 to assist management in
documenting and determining the amount of these credits that could be
deducted on the company’s Canadian tax
returns.
|
|
·
|
The
income tax rate was reduced by 12% for income tax incentives granted by
the Chinese government for the start up of a cut and sew operation located
in China in fiscal 2008.
|
|
·
|
The
income tax rate was reduced by 10% for taxable income subject to lower
statutory income tax rates in foreign jurisdictions (Canada and China)
compared with the statutory income tax rate of 34% for the United States.
The income tax rate increased by 20% for taxable income subject to lower
statutory income taxes rates in foreign jurisdictions in fiscal 2007. The
decrease in fiscal 2008 compared to fiscal 2007 is primarily due to the
decrease in income before income taxes from foreign operations. Income
before income taxes from foreign operations was $8.6 million in fiscal
2007 compared to $6.9 million in fiscal
2008.
|
|
·
|
The
income tax rate was increased by 27% for an increase in income tax
reserves for unrecognized tax
benefits.
|
The income
tax benefit for fiscal 2007 is different from the amount obtained by applying
our statutory rate of 34% to loss before income taxes for the following
reasons:
|
·
|
The
income tax rate increased by 30% for the tax effects of a tax holiday for
our subsidiaries located in China.
|
|
·
|
The
income tax rate increased by 20% for taxable income subject to lower
statutory income tax rates in foreign jurisdictions (Canada and China)
compared with the statutory income tax rate of 34% for the United
States.
|
|
·
|
The
income tax rate increased by 15% for the income tax benefit on state loss
carryforwards in fiscal 2007. The income tax rate was reduced by 1% for
the income tax benefit on state loss carryforwards in fiscal 2008. This
change is primarily due the decrease in pre-tax losses in the U.S. in
fiscal 2008 compared to fiscal 2007. Pre-tax losses were $2.0 million and
$11.6 million in fiscal 2008 and 2007,
respectively.
|
|
·
|
The
income tax rate was reduced by 12% for an increase in income tax reserves
for unrecognized tax benefits.
|
|
·
|
The
income tax rate was reduced by 26% for the write-off of deferred tax
assets associated with a non-qualified stock option grant in which
participants exercised their stock options at a lower stock price than was
projected at the date of grant in which compensation expense for financial
reporting was recorded.
|
46
Unrecognized
Income Tax Benefits
We adopted
the provisions of FIN 48 on April 30, 2007. As a result of the implementation of
FIN 48, we recognized an increase of $847,000 to the April 30, 2007 balance of
retained earnings. The total amount of unrecognized tax benefits as of April 30,
2007, the date of adoption, was $3.4 million, of which $3.1 million represents
the amount of unrecognized tax benefits that, if recognized, would favorably
affect the income tax rate in future periods. As of the date of adoption, the
total amount of interest and penalties due to unrecognized tax benefits was
$98,000.
See Notes
1 and 11 in the Notes to the Consolidated Financial Statements for further
details.
Handling
Costs
The
company records warehousing costs in selling, general and administrative
expenses. These costs were $2.2 million, $3.0 million, and $3.7
million in fiscal 2009, 2008, and 2007, respectively. Warehousing
costs include the operating expenses of the company’s various finished goods
distribution centers, such as personnel costs, utilities, building rent and
material handling equipment, and lease expense. Had these costs been
included in cost of sales, gross profit would have been $22.5 million, or 11.0%,
in fiscal 2009, $30.2 million, or 11.9%, in fiscal 2008, and $27.5 million, or
11.0%, in fiscal 2007.
Liquidity
and Capital Resources
Liquidity – Our sources of
liquidity include cash and cash equivalents, cash flow from operations, assets
held for sale, and amounts available under our unsecured revolving credit
lines. These sources have been adequate for day-to-day operations. We
believe our sources of liquidity continue to be adequate to meet the company’s
needs.
Cash and
cash equivalents as of May 3, 2009 were $11.8 million compared with $4.9 million
as of April 27, 2008. The company’s cash position reflects cash flow from
operations in fiscal 2009 of $22.8 million compared with $16.4 million in fiscal
2008. The increase in cash flow from operations is due to consistent
profitability in the mattress fabrics segment and working capital reductions in
both segments. Key measures for working capital, such as days’ sales in
receivables and inventory turnover improved despite lower sales volume. Accounts
receivable was $18.1 million and $27.1 million at May 3, 2009 and April 27,
2008, respectively. Days’ sales in receivables were 32 days and 37 days in
fiscal 2009 and 2008, respectively. Inventory was $23.9 million at May 3, 2009
and $35.4 million at April 27, 2008. Inventory turnover was 6.0 in fiscal 2009
and 5.8 in fiscal 2008.
Our cash
position also reflects cash outlays for capital expenditures of $2.0 million,
payments on vendor-financed capital expenditures of $1.2 million, and payments
on a capital lease obligation of $754,000. In addition, the company paid $11.4
million for the acquisition of the knitted mattress fabrics operation of Bodet
& Horst, which was financed through $11.0 million in cash proceeds from the
issuance of long-term debt.
The cash
flow from operations and the sale of the corporate headquarters (proceeds of
$4.0 million) allowed us to substantially reduce total borrowings during fiscal
2009. During fiscal 2009, we repaid $16.1 million in long-term debt, of which
$4.6 million related to principal payments due in March and June 2010. Our
long-term debt balance was $16.4 million and $21.4 million at May 3, 2009 and
April 27, 2008, respectively. The long-term debt balance of $16.4 million
includes an $11.0 million unsecured term loan added in the second quarter of
fiscal 2009 to finance the Bodet & Horst acquisition. Also, our long-term
debt balance of $16.4 million is unsecured with scheduled principal payments of
$4.7 million, $168,000, and $2.4 million in fiscal 2010, 2011, and 2012,
respectively.
47
At May 3,
2009, we had unsecured revolving lines of credit of $6.5 million and $4.0
million in the U.S. and China, respectively. At May 3, 2009, there were no
borrowings under these revolving credit lines. At May 3, 2009, total debt
(current maturities of long-term debt and long-term debt, less current
maturities) less cash was $4.6 million compared with $12.3 million at the end of
the third quarter of fiscal 2009 and $23.7 million at the end of the second
quarter of fiscal 2009. This decrease resulted from cash flow from operations
and the sale of the company’s corporate headquarters (see section
below).
Our cash
position may be adversely affected by factors beyond its control, such as
weakening industry demand, delays in receipt of payment on accounts receivable,
the availability of trade credit, and income tax payments in foreign
jurisdictions (China and Canada) that are paid in its local
currency.
We expect
cash flow generated from working capital reductions to be substantially lower in
fiscal 2010.
Working
Capital
Accounts
receivable as of May 3, 2009 decreased $9.0 million or 33% from April 27, 2008.
Days’ sales in receivables were 32 days and 37 days at the end of fiscal 2009
and 2008, respectively. These trends primarily reflect lower sales volume in
fiscal 2009 compared with fiscal 2008 and customers associated with the mattress
fabric segment taking advantage of cash discounts for early
payments.
Inventories
at May 3, 2009, decreased $11.4 million or 32% from April 27, 2008. Inventory
turns for fiscal 2009 were 6.0 versus 5.8 for fiscal 2008. These trends
primarily reflect lower sales volume in fiscal 2009 compared with fiscal 2008
and improved inventory management in fiscal 2009.
Accounts
payable-trade as of May 3, 2009 decreased $4.1 million or 19% from April 27,
2008. This decrease is primarily due to a decrease in inventory purchases in
fiscal 2009. Operating working capital (comprised of accounts receivable and
inventories, less accounts payable) was $23.5 million at May 3, 2009, down from
$38.4 million at April 27, 2008. Operating working capital turnover was 6.4 in
fiscal 2009 compared to 5.8 in fiscal 2008. These trends primarily reflect the
decreases in accounts receivable and inventory purchases noted
above.
Corporate
Headquarters Office Space
Effective
October 29, 2007 we adopted a plan to sell our corporate headquarters. In
connection with the disposal plan, we determined that the carrying value of
its corporate headquarters was less than its fair value. Consequently, no
impairment loss was recorded in the 2008 Consolidated Statement of
Operations.
Effective
January 29, 2009, we sold our corporate headquarters building in High Point,
North Carolina for a purchase price of $4.0 million. The agreement allows the
company to lease the building back under an operating lease from the purchaser
for an initial term of approximately three years expiring on March 31, 2012 and
is payable in monthly installments of $30,020, plus approximately two-thirds of
the building’s normal occupancy costs. The contract contains renewal options as
defined in the agreement for periods from April 1, 2012 through September 30,
2015 and October 1, 2015 through March 31, 2019. As of May 3, 2009, the minimum
lease payments (excluding operating costs) under this operating lease are: FY
2010 - $360,240, FY 2011- $360,240, and FY 2012 - $330,220.
48
The
proceeds of the sale were used to pay off the remaining balance of a first
real estate loan totaling $3.7 million and $344,000 on the unsecured loan
associated with the ITG acquisition (see Note 12). In connection with this
sale, we determined that the carrying value of our corporate
headquarters was more than its fair value, less cost to sell. Consequently, the
company recorded an impairment charge of $774,000 in restructuring expense in
the 2009 Consolidated Statement of Operations.
Financing
Arrangements
Unsecured
Term Notes – Bodet & Horst
In
connection with the Bodet & Horst acquisition, we entered into the 2008 Note
Agreement dated August 11, 2008. The 2008 Note Agreement provides for the
issuance of $11.0 million of unsecured term notes with a fixed interest rate of
8.01% and a term of seven years. Principal payments of $2.2 million per year are
due on the notes beginning three years from the date of the 2008 Note Agreement
(August 11, 2008). The principal payments are payable over an average term of
6.2 years through August 11, 2015. The 2008 Note Agreement contains customary
financial and other covenants as defined in the agreement.
Unsecured
Term Notes - Existing
Our
unsecured senior term notes have a fixed interest rate of 8.80% (payable
semi-annually in March and September and subject to prepayment provisions each
fiscal quarter as defined in the agreement). The remaining principal payment of
$4.7 million is to be paid in March 2010.
In
connection with the 2008 Note Agreement, the company entered into a Consent and
Amendment that amends the previously existing unsecured note purchase
agreements. The purpose of the Consent and Amendment was for existing note
holders to consent to the 2008 Note Agreement and to provide that certain
financial covenants in favor of the existing note holders would be on the same
terms as those contained in the 2008 Note Agreement.
Government
of Quebec Loan
The
company has an agreement with the Government of Quebec to provide for a term
loan that is non-interest bearing and is payable in 48 equal monthly
installments commencing December 1, 2009. The proceeds were used to partially
finance capital expenditures at our Rayonese facility located in Quebec,
Canada.
Revolving
Credit Agreement –United States
We have an
unsecured credit agreement that provides for a revolving loan commitment of $6.5
million, including letters of credit up to $5.5 million. This agreement bears
interest at the one-month LIBOR plus an adjustable margin (all in rate of 3.41%
at May 3, 2009) based on the company’s debt/EBITDA ratio, as defined in the
agreement. As of May 3, 2009 there were $775,000 in outstanding letters of
credit (all of which related to workers compensation) under the agreement. At
May 3, 2009 and April 27, 2008, there were no borrowings outstanding under this
agreement. No borrowings under this agreement were made during fiscal
2009.
49
On
November 3, 2008, the company entered into a thirteenth amendment to this
revolving credit agreement. This amendment extended the expiration date to
December 31, 2009, amended the financial covenants as contained in the
agreement, and provided for a cross default based on an “Event of Default” under
our unsecured term note agreements (existing and Bodet &
Horst).
On July 15, 2009, the
company entered into a fourteenth amendment to this revolving credit agreement.
This amendment extended the expiration date to August 15, 2010.
Revolving Credit Agreement - China
Our China
subsidiary has an unsecured revolving credit agreement with a bank in China to
provide a line of credit of up to approximately $5 million, of which
approximately $1 million includes letters of credit. This agreement bears
interest at a rate determined by the Chinese government. At May 3, 2009 and
April 27, 2008, there were no borrowings outstanding under the agreement. No
borrowings under this agreement were made during fiscal 2009.
Overall
Our loan
agreements require, among other things, that we maintain compliance with certain
financial covenants. At May 3, 2009 the company was in compliance
with these financial covenants.
The
principal payment requirements of long-term debt during the next five fiscal
years are: 2010 – $4.7 million; 2011 – $168,000; 2012 – $2.4 million; 2013 –
$2.4 million; 2015 – $2.3 million; and thereafter – $4.4 million.
Commitments
The
following table summarizes the company’s contractual payment obligations and
commitments for each of the next five fiscal years (in thousands):
|
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
Total
|
||||||||||||||||||||||
|
Capital lease
obligation
|
626 | - | - | - | - | - | 626 | |||||||||||||||||||||
|
Accounts
payable – capital expenditures
|
923 | 638 | - | - | - | - | 1,561 | |||||||||||||||||||||
|
Operating
leases
|
1,600 | 886 | 630 | 97 | 53 | - | 3,266 | |||||||||||||||||||||
|
Interest
Expense (1)
|
1,368 | 909 | 754 | 578 | 402 | 275 | 4,286 | |||||||||||||||||||||
|
Long-term
debt – principal
|
4,764 | 168 | 2,369 | 2,369 | 2,298 | 4,400 | 16,368 | |||||||||||||||||||||
|
Total
(2)
|
9,281 | 2,601 | 3,753 | 3,044 | 2,753 | 4,675 | 26,107 | |||||||||||||||||||||
Note: Payment
Obligations by Fiscal Year Ending April
|
(1)
|
Interest
expense includes interest incurred on the capital lease obligation,
accounts payable-capital expenditures, and long-term
debt.
|
|
(2)
|
As
more fully disclosed in Notes 1 and 11 of the Notes to the Consolidated
Financial Statements, the company adopted FIN 48, “Accounting for
Uncertainty in Income Taxes”- an interpretation of FASB Statement No. 109,
“Accounting for Income Taxes.” At May 3, 2009, the company had $8.3
million of total gross unrecognized tax benefits, of which $5.0 million
and $3.3 million were classified as net non-current deferred income taxes
and income taxes payable – long-term. The final outcome of these tax
uncertainties is dependent upon various matters including tax
examinations, legal proceedings, competent authority proceedings, changes
in regulatory tax laws, or interpretations of those tax laws, or
expiration of statutes of limitation. As a result of these inherent
uncertainties, the company cannot reasonably estimate the timing of
payment of these amounts. Of the $8.3 million in total gross unrecognized
tax benefits, $5.0 million would not be subject to cash payments due to
the company’s U.S. federal and state net operating loss
carryforwards.
|
50
Capital
Expenditures
Capital
expenditures on an accrual and cash basis for fiscal 2009 were $3.2 million and
$2.0 million, respectively. The capital spending of $3.2 million consisted of
$2.8 million for the mattress fabrics segment, $400,000 for the upholstery
fabrics segment, and $13,000 of unallocated corporate expense. Depreciation
expense for fiscal 2009 was $6.7 million, of which $3.5 million relates to the
mattress fabrics segment and $3.2 million relates to the upholstery fabrics
segment. The $3.2 million depreciation expense related to the
upholstery fabrics segment includes $2.1 million of incremental depreciation
expense (accelerated depreciation) to reflect revised depreciation estimates and
useful lives for certain fixed assets that were to be used over a shortened
useful life from the period the September 2008 Upholstery Fabrics restructuring
plan was announced until the respective plant facility was closed and operations
ceased.
For fiscal
2010, the company currently expects capital expenditures on an accrual and cash
basis to be approximately $3.5 million and $2.5 million, respectively. Planned
capital expenditures for fiscal 2010 primarily relate to the mattress fabrics
segment. For fiscal 2010, depreciation expense is projected to be $4.0 million.
Expected depreciation expense for fiscal 2010 primarily relates to the mattress
fabrics segment.
Accounts
Payable – Capital Expenditures
The
company’s vendor financed arrangements on capital projects initiated prior to
fiscal 2010 bear interest with fixed interest rates ranging from 6% to 7.14%.
The principal payment requirements of accounts payable-capital expenditures
during the next two fiscal years are: 2010 – $923,000 and 2011 –
$638,000.
Capital
Lease Obligation
In May
2008, we entered into a capital lease to finance a portion of the construction
of certain equipment related to our mattress fabrics segment. The lease
agreement contains a bargain purchase option and bears interest at 8.5%. The
lease agreement requires total principal payments totaling $1.4 million which
commenced on July 1, 2008, and are being paid in quarterly installments through
April 2010. This agreement is secured by equipment with a carrying value of $2.4
million. The remaining principal payments of $626,000 are due in quarterly
installments in fiscal 2010.
Inflation
Any
significant increase in our raw material costs, utility/energy costs and general
economic inflation could have a material adverse impact on the company, because
competitive conditions have limited the company’s ability to pass significant
operating increases on to its customers.
51
Critical
Accounting Policies
U.S.
generally accepted accounting principles require us to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and accompanying notes. Some of these estimates require
difficult, subjective and/or complex judgments about matters that are inherently
uncertain, and as a result actual results could differ significantly from those
estimates. Due to the estimation processes involved, management
considers the following summarized accounting policies and their application to
be critical to understanding the company’s business operations, financial
condition and results of operations.
Accounts Receivable - Allowance for Doubtful
Accounts. Substantially all of our accounts receivable are due
from residential and commercial furniture and bedding
manufacturers. Ownership of these manufacturers is increasingly
concentrated and certain bedding manufacturers have a high degree of
leverage. As of May 3, 2009, accounts receivable from furniture
manufacturers totaled approximately $11.2 million, and accounts receivable from
bedding manufacturers totaled approximately $6.9
million. Additionally, as of May 3, 2009, the aggregate accounts
receivable balance of the company’s ten largest customers was $9.5 million, or
53% of trade accounts receivable. One customer within the upholstery fabrics
segment represented 26% of consolidated accounts receivable at May 3, 2009. No
customers within the mattress fabrics segment represented more than 10% of
consolidated accounts receivable at May 3, 2009.
We
continuously performs credit evaluations of its customers, considering numerous
inputs including customers’ financial position, past payment history, cash flows
and management capability; historical loss experience; and economic conditions
and prospects. Once evaluated, each customer is assigned a credit
grade. Credit grades are adjusted as
warranted. Significant management judgment and estimates must be used
in connection with establishing the reserve for allowance for doubtful
accounts. While management believes that adequate allowances for
doubtful accounts have been provided in the consolidated financial statements,
it is possible that we could experience additional unexpected credit
losses.
The
reserve balance for doubtful accounts was $1.5 million and $1.3 million at May
3, 2009 and April 27, 2008, respectively.
Inventory
Valuation. We operate as a “make-to-order” and “make-to-stock”
business. Although management closely monitors demand in each product
area to decide which patterns and styles to hold in inventory, the increasing
availability of low cost imports and the gradual shifts in consumer preferences
expose the company to markdowns of inventory.
Management
continually examines inventory to determine if there are indicators that the
carrying value exceeds its net realizable value. Experience has shown
that the most significant indicator of the need for inventory markdowns is the
age of the inventory. As a result, the company provides inventory
valuation markdowns based upon set percentages for inventory aging categories,
generally using six, nine, twelve and fifteen month categories. While
management believes that adequate markdowns for excess and obsolete inventory
have been made in the consolidated financial statements, significant
unanticipated changes in demand or changes in consumer tastes and preferences
could result in additional excess and obsolete inventory in the
future.
The
reserve for inventory markdowns was $3.0 million and $4.2 million at May 3, 2009
and April 27, 2008, respectively.
Long-lived
Assets. We follow the provisions of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
establishes an impairment accounting model for long-lived assets to be held and
used, disposed of by sale, or disposed of by abandonment or other
means.
Management
reviews long-lived assets, which consists of property, plant and equipment, for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset may not be recovered. Unforeseen events
and changes in circumstances and market conditions could negatively affect the
value of assets and result in an impairment charge.
52
During
fiscal 2009, we incurred impairment charges on property, plant, and equipment in
connection with our restructuring activities. These impairment charges totaled
$8.0 million and were recorded in restructuring expense in the 2009 Consolidated
Statement of Operations. This $8.0 million impairment charge represents $2.2
million for fixed assets that were abandoned in connection with the
consolidation of certain plant facilities in China and $774,000 to reflect the
selling price of our corporate headquarters of $4.0 million. Also, during the
course of our strategic review in the second quarter of fiscal 2009 of its
upholstery fabric business, the company assessed the recoverability of the
carrying value of its upholstery fabric fixed assets that were being held and
used in operations. This strategic review resulted in impairment losses of $4.4
million and $543,000 for fixed assets held in China and the U.S., respectively.
In addition, the company, incurred impairment losses totaling $115,000 for
assets held for sale associated with its U.S. upholstery fabric operations.
These losses reflect the amounts by which the carrying values for these fixed
assets exceeded their estimated fair values determined by their estimated future
undiscounted cash flows and quoted market prices.
The
determination of future operating cash flows involves considerable estimation
and judgment about future market conditions, future sales and profitability, and
future asset utilization. Although we believe it has based the
impairment testing on reasonable estimates and assumptions, the use of different
estimates and assumptions, or a decision to dispose of substantial portions of
these assets, could result in materially different results.
Goodwill. We apply
the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” which
requires goodwill to no longer be amortized and that goodwill be tested annually
for impairment by comparing each reporting unit’s carrying value to its fair
value.
As of May
3, 2009 and April 27, 2008, our goodwill was $11.6 million and $4.1 million,
respectively. This increase is due to the acquisition of the knitted mattress
fabric operation of Bodet & Horst. Our goodwill balance relates to the
mattress fabrics segment.
We engaged
an independent valuation specialist to assist us with our goodwill impairment
test as of May 3, 2009 for our mattress fabrics segment. The goodwill impairment
test is a two-step approach, in which, we first estimate the fair market values
our reporting units (mattress fabrics and upholstery fabrics) using
the present value of future cash flows approach, subject to a comparison for
reasonableness to its market capitalization at the date of valuation. The
company uses a discount rate equal to its average cost of funds to discount the
expected future cash flows. If the fair market value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is considered not impaired,
thus the second step of the impairment test is unnecessary. If the carrying
amount of the reporting unit exceeds its implied fair value, the second step of
the goodwill impairment test would be performed to measure the amount of the
impairment loss, if any. In the second step the implied fair market value of the
goodwill is estimated as the fair market value of the reporting unit used in the
first step less the fair values of all other net tangible and intangible assets
of the reporting unit. If the carrying amount of the goodwill exceeds it implied
fair market value, an impairment loss is recognized in an amount equal to that
excess, not to exceed the carrying amount of the goodwill. In addition, goodwill
of a reporting unit is tested for impairment between annual tests if an event
that occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying values.
This
impairment test did not indicate any impairment of goodwill for fiscal
2009.
53
Although
the company believes it has based the impairment testing on reasonable estimates
and assumptions, the use of different estimates and assumptions could result in
materially different results.
Restructuring
Charges. In June 2002, the FASB issued SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities.” This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and supersedes Emerging Issues Task Force
(EITF) Issue No. 94-3, “Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring).” Under SFAS No. 146, a liability for a cost
associated with an exit or disposal activity must be recognized and measured
initially at its fair value in the period in which the liability is incurred,
except for certain employee termination benefits that qualify under SFAS No.
112, “Employers’ Accounting for Postemployment Benefits.”
The
upholstery fabric segment continues to be under significant pressure from a
variety of external forces, such as the current consumer preference for leather
and suede furniture and the growing competition from imported fabrics and cut
and sewn kits. In an effort to reduce operating expenses and scale
U.S. productive capacity in line with current and expected demand trends, we
have undertaken restructuring initiatives during the past several
years. These restructuring initiatives have resulted in restructuring
charges related to the remaining lease costs of the closed facilities, the
write-down of property, plant and equipment, workforce reduction and elimination
of facilities.
Severance
and related charges are accrued at the date the restructuring is approved by the
board of directors based on an estimate of amounts that will be paid to affected
employees, in accordance with SFAS No. 112. Under SFAS No. 144, asset
impairment charges related to the consolidation or closure of manufacturing
facilities are based on an estimate of expected sales prices for the real estate
and equipment. Other exit costs, which principally consist of charges
for lease termination and losses from termination of existing contracts,
equipment relocation costs and inventory markdowns that are related to the
restructuring are accounted for in accordance with SFAS No. 146.
We
reassess the individual accrual requirements at the end of each reporting
period. If circumstances change, causing current estimates to differ
from original estimates, adjustments are recorded in the period of
change. Restructuring charges, and adjustments of those charges, are
summarized in Note 3 to the consolidated financial statements.
Income Taxes. We
are required to estimate our income tax exposure and to assess temporary
differences resulting from differing treatment of items for tax and accounting
purposes. At May 3, 2009, the company had net deferred tax assets
totaling $26.2 million. This $26.2 million represents net deferred tax assets
for income tax jurisdictions located in the U.S., Canada, and
China. A valuation allowance of $27.2 million was recorded to reduce
our net deferred tax assets located in the U.S. and China. Management concluded
that it is more likely than not that we would not be able to realize the benefit
of its net deferred tax assets.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes”, we evaluate our deferred income taxes to
determine if a valuation allowance is required. SFAS No. 109 requires that
companies assess whether a valuation allowance should be established based on
the consideration of all available evidence using a “more likely than not”
standard with significant weight being given to evidence that can be objectively
verified. The significant uncertainty in current and expected demand for
furniture and mattresses, along with the prevailing uncertainty in the overall
economic climate, has made it very difficult to forecast both short-term and
long-term financial results, and therefore, present significant negative
evidence as to whether we need to record a valuation allowance against our net
deferred tax assets. Based on this significant negative evidence, we recorded a
$27.2 million valuation allowance during fiscal 2009, of which $25.3 million and
$1.9 million were against our net deferred tax assets of our U.S. and China
operations, respectively. The company’s net deferred tax asset primarily
resulted from the recording of the income tax benefit of U.S. income tax loss
carryforwards over the last several years, which totals $71.3 million. This
non-cash charge of $27.2 million has no effect on the company’s operations, loan
covenant compliance, or the possible utilization of the U.S. income tax loss
carryforwards in the future. If and when the company utilizes any of the U.S.
income tax loss carryforwards to offset future U.S. taxable income, the income
tax benefit would be recognized at that time.
54
We adopted
FASB Interpretation No. 48,”Accounting for Uncertainty in Income Taxes- an
interpretation of FASB Statement No. 109, Accounting for Income Taxes,” (FIN 48)
on April 30, 2007. Under FIN 48 we must recognize the tax impact from an
uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the
technical merits of the position. The tax impact recognized in the financial
statements from such a position is measured based on the largest benefit that
has a greater than 50% likelihood of being realized upon ultimate resolution.
Penalties and interest related to uncertain tax positions are recorded as tax
expense. Significant judgment is required in the identification of uncertain tax
positions and in the estimation of penalties and interest on uncertain tax
positions.
At May 3,
2009, the company had $8.3 million of total gross unrecognized tax benefits, of
which $5.0 million and $3.3 million were classified as net non-current deferred
income taxes and income taxes payable – long-term, respectively, in the
accompanying consolidated balance sheets.
Adoption
of New Accounting Pronouncements
SFAS Nos. 157 and
159
We adopted
SFAS No. 157, Fair Value Measurements (“SFAS 157”) for financial assets and
liabilities and SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (“SFAS 159”), on April 28, 2008. SFAS 157 (1) creates a
single definition of fair value, (2) establishes a framework for measuring fair
value, and (3) expands disclosure requirements about items measured at fair
value. SFAS 157 applies to both items recognized and reported at fair value in
the financial statements and items disclosed at fair value in the notes to the
financial statements. SFAS 157 does not change existing accounting rules
governing what can or what must be recognized and reported at fair value in the
company’s financial statements, or disclosed at fair value in our notes to the
financial statements. Additionally, SFAS 157 does not eliminate practicability
exceptions that exist in accounting pronouncements amended by SFAS 157 when
measuring fair value. As a result, we will not be required to recognize any new
assets or liabilities at fair value.
Prior to
SFAS 157, certain measurements of fair value were based on the price that would
be paid to acquire an asset, or received to assume a liability (an entry price).
SFAS 157 clarifies the definition of fair value as the price that would be
received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date (that is, an
exit price). The exit price is based on the amount that the holder of the asset
or liability would receive or need to pay in an actual transaction (or in a
hypothetical transaction if an actual transaction does not exist) at the
measurement date. In some circumstances, the entry and exit price may be the
same; however, they are conceptually different.
Fair value
is generally determined based on quoted market prices in active markets for
identical assets or liabilities. If quoted market prices are not available, the
company uses valuation techniques that place greater reliance on observable
inputs and less reliance on unobservable inputs. In measuring fair value, the
company may make adjustments for risks and uncertainties, if a market
participant would include such an adjustment in its pricing.
55
SFAS 157
establishes a fair value hierarchy that distinguishes between assumptions based
on market data (observable inputs) and the company’s assumptions (unobservable
inputs). Determining where an asset or liability falls within that hierarchy
depends on the lowest level input that is significant to the fair measurement as
a whole. An adjustment to the pricing method used within either level 1 or level
2 inputs could generate a fair value measurement that effectively falls in a
lower level in the hierarchy. The hierarchy consists of three broad levels as
follows:
Level 1 –
Quoted market prices in active markets for identical assets or
liabilities;
Level 2 –
Inputs other than level 1 inputs that are either directly or indirectly
observable, and
Level 3 –
Unobservable inputs developed using the company’s estimates and assumptions,
which reflect those that market participants would use.
The
following table presents information about assets and liabilities measured at
fair value on a recurring basis:
|
Fair
value measurements at May 3, 2009 using:
|
||||||||
|
Quoted
prices in
active
markets
for
identical
assets
|
Significant
other
observable
inputs
|
Significant
unobservable
inputs
|
||||||
|
(amounts
in thousands)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||
|
Assets:
|
||||||||
|
Canadian
Dollar Fx Contract
|
Not
applicable
|
20
|
Not
applicable
|
20
|
||||
|
Liabilities:
None
|
Not applicable |
Not
applicable
|
Not
applicable
|
Not
applicable
|
||||
As shown
above, the Canadian foreign exchange contract derivative instrument is valued
based on fair value provided by the company’s bank and is classified within
level 2 of the fair value hierarchy. The determination of where an
asset or liability falls in the hierarchy requires significant judgment. The
company evaluates its hierarchy disclosures each quarter based on various
factors and it is possible that an asset or liability may be classified
differently from quarter to quarter. However, we expect that changes in
classifications between different levels will be rare.
Most
derivative contracts are not listed on an exchange and require the use of
valuation models. Consistent with SFAS 157, the company attempts to maximize the
use of observable market inputs in its models. When observable inputs are not
available, the company defaults to unobservable inputs. Derivatives valued based
on models with significant unobservable inputs and that are not actively traded,
or trade activity is one way, are classified within level 3 of the fair value
hierarchy.
Some
financial statement preparers have reported difficulties in applying SFAS 157 to
certain nonfinancial assets and nonfinancial liabilities, particularly those
acquired in business combinations and those requiring a determination of
impairment. To allow the time to consider the effects of the implementation
issues that have arisen, the FASB issued FSP FAS 157-2 (“FSP 157-2”) on February
12, 2008 to provide a one-year deferral of the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed in financial statements at fair value on a recurring
basis (that is, at least annually). As a result of FSP 157-2, we have not yet
adopted SFAS 157 for nonfinancial assets and liabilities that are valued at fair
value on a non-recurring basis. FSP 157-2 is effective for the company in fiscal
2010 and the company is evaluating the impact that the application of SFAS 157
to those nonfinancial assets and liabilities will have on its financial
statements.
56
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS 159 provides the company with an option
to elect fair value as the initial and subsequent measurement attribute for most
financial assets and liabilities and certain other items. The fair value option
election is applied on an instrument-by-instrument basis (with some exceptions),
is irrevocable, and is applied to an entire instrument. The election may be made
as of the date of initial adoption for existing eligible items. Subsequent to
initial adoption, the company may elect the fair value option at initial
recognition of eligible items, on entering into an eligible firm commitment, or
when certain specified reconsideration events occur. Unrealized gains and losses
on items for which the fair value option has been elected will be reported in
earnings.
Upon
adoption of SFAS 159 on April 28, 2008, we did not elect to account for any
assets and liabilities under the scope of SFAS 159 at fair value.
SFAS No.
161
The FASB
issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities, (“SFAS No. 161”). This objective of
this statement is to require enhanced disclosures about an entity’s derivative
and hedging activities and to improve the transparency of financial reporting.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows
requires disclosure of the fair values of derivative instruments and their gains
and losses in tabular format and derivative features that are credit risk
related. We adopted this statement in its fourth quarter of fiscal 2009. The
disclosure requirements were made in Note 16 to the notes to the consolidated
financial statements.
Recently
Issued Accounting Standards
FASB Statement of Financial
Accounting Standards No. 141(R)
In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007) “Business
Combinations.” SFAS No. 141(R) requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose all information required to evaluate and understand the
nature and financial effect of the business combination. This statement is
effective for acquisition dates on or after the beginning of the first annual
reporting period beginning after December 15, 2008. This statement is effective
for us in fiscal 2010 and is not expected to have a material effect on our
consolidated financial statements unless we enter into a business acquisition
subsequent to adoption.
FASB Statement of Financial
Accounting Standards No. 160
The FASB
issued SFAS No. 160,”Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51.” It is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Earlier application is prohibited.
SFAS No. 160 requires that accounting and reporting minority interests will be
re-characterized as non-controlling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements and disclosures
that clearly identify and distinguish between interests of the parent and the
interests of the non-controlling owners. This statement applies to all entities
that prepare consolidated financial statements, but will affect only those
entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement is effective for
interim periods beginning in fiscal 2010 and is not expected to have a material
effect on our consolidated financial statements to the extent we do not obtain a
non-controlling interest in an entity subsequent to adoption.
57
FASB Staff Position No.
142-3
In April
2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the
Useful Life of Intangible Assets” (FSP 142-3). The guidance is intended to
improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets”, and the period of
expected cash flows used to measure the fair value of the asset under SFAS No.
141(R), “Business Combinations”, and other guidance under U.S. generally
accepted accounting principles (GAAP). FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those years. This statement is effective for the company in
fiscal 2010 and is not expected to have a material effect on our consolidated
financial statements unless we enter into a business acquisition subsequent to
adoption.
FASB Staff Position EITF
03-6-1
In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities, (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires that
unvested share-based payment awards containing non-forfeited rights to dividends
be included in the computation of earnings per common share. The adoption of FSP
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and
interim periods within those years, retrospective application is
required.
This
statement will be effective beginning with our first quarter of fiscal 2010 and
will require us to include unvested shares of our share-based payment awards
containing non-forfeited rights to dividends into our calculation of earnings
per share. This statement is not expected to have a material
effect on our consolidated financial statements unless we enter share-based
payment awards that contain non-forfeited rights to dividends.
FASB Staff Position FAS
140-4 and FIN 46(R)-8:
In
December 2008, the FASB issued FASB Staff Position ("FSP") FAS 140-4 and FIN
46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities. This document
increases disclosure requirements for public companies and is effective for
reporting periods (interim and annual) that end after December 15, 2008.
The purpose of this FSP is to promptly improve disclosures by public entities
and enterprises until the pending amendments to FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, and FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, are finalized and approved by the
FASB. The FSP amends Statement 140 to require public entities to provide
additional disclosures about transferors' continuing involvements with
transferred financial assets. It also amends Interpretation 46(R) to
require public enterprises, including sponsors that have a variable interest in
a variable interest entity, to provide additional disclosures about their
involvement with variable interest entities.
These
requirements had no impact on our consolidated financial statements or
disclosures.
58
FASB Staff Position FAS
132R-1
In
December 2008, FASB issued FASB Staff Position (“FSP”) FAS 132R-1, Employers’
Disclosures about Postretirement Benefit Plan Assets. This document
expands the disclosures related to postretirement benefit plan assets to include
disclosures concerning a company’s investment policies for benefit plan assets
and categories of plan assets. This document further expands the
disclosure requirements to include fair value of plan assets, including the
levels within the fair value hierarchy and other related disclosures under SFAS
No. 157, Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13, and any
concentrations of risk related to the plan assets.
This
statement is effective for our fiscal 2010 year end and is not expected to
impact our consolidated financial statements or disclosures.
FASB Staff Position FAS
157-4
In April
2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, (“FSP
157-4”). FSP 157-4 provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the asset
or liability have significantly decreased. FSP 157-4 also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FSP 157-4
requires the disclosure of the inputs and valuation technique used to measure
fair value and a discussion of changes in valuation techniques and related
inputs, if any, during the period. FSP 157-4 also requires that the entity
define major categories for equity securities and debt securities to be major
security types. FSP 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009.
We are
required to adopt FSP 157-4 in our first quarter of fiscal 2010. We do not
currently believe that adopting this FSP will have a material impact on our
consolidated financial statements.
FASB Staff Position FAS
115-2 and FAS 124-2: Recognition and Presentation of Other-Than-Temporary
Impairments
In April
2009, the FASB issued FASB Staff Position No. 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, (“FSP 115-2 and FSP 124-2”). This FSP
amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. FSP 115-2 and 124-2 requires the entity to assess whether the
impairment is other-than-temporary if the fair value of a debt security is less
than its amortized cost basis at the balance sheet date. This statement also
provides guidance to assessing whether or not the impairment is
other-than-temporary and guidance on determining the amount of the
other-than-temporary impairment should be recognized in earnings or other
comprehensive income. FSP 115-2 and 124-2 also requires an entity to disclose
information that enables users to understand the types of securities held,
including those investments in an unrealized loss position for which the
other-than-temporary impairment has or has not been recognized. FSP 115-2 and
124-2 are effective for interim and annual reporting periods ending after June
15, 2009.
59
We are
required to adopt FSP 115-2 and 124-2 in our first quarter of fiscal 2010. We do
not currently believe that adopting these FSPs will have a material impact on
our consolidated financial statements.
FASB Statement of Financial
Accounting Standards No. 165
In May
2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No.
165 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date, but before financial statements are
issued or are available to be issued. SFAS No. 165 is effective for interim and
annual fiscal periods ending after June 15, 2009.
We are
required to adopt SFAS No. 165 in our first quarter of fiscal 2010. We do not
currently believe that adopting SFAS No. 165 will have a material impact on our
consolidated financial statements.
60
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES
ABOUT
MARKET RISK
The
company is exposed to market risk from changes in interest rates on its
revolving credit lines. The company’s revolving credit line in the United States
bears interest at the one-month LIBOR plus an adjustable margin based on the
company’s debt/EBITDA ratio, as defined in the credit agreement. The company’s
revolving credit line associated with its China subsidiaries bears interest at a
rate determined by the Chinese government. At May 3, 2009, there were no
borrowings outstanding under these revolving credit lines.
The
company is not exposed to market risk from changes in interest rates on its
long-term debt. The company’s unsecured term notes issued in
connection with the Bodet & Horst acquisition have a fixed interest rate of
8.01%, the existing unsecured term notes have a fixed interest rate of 8.80%,
and the loan associated with the Government of Quebec is non-interest
bearing.
The
company is exposed to market risk from changes in the value of foreign
currencies for its subsidiaries domiciled in China and Canada. On January 21,
2009, the company entered into a Canadian dollar foreign exchange contract
associated with its loan from the Government of Quebec. The agreement
effectively converts the Canadian dollar principal debt payments at a fixed
Canadian dollar foreign exchange rate versus the United States dollar of
1.21812. The agreement expires November 1, 2013 and is secured by cash deposits
totaling $200,000. The company’s foreign subsidiaries use the United States
dollar as their functional currency. A substantial portion of the company’s
imports purchased outside the United States are denominated in U.S. dollars. A
10% change in either exchange rate at May 3, 2009, would not have had a
significant impact on the company’s results of operations or financial
position.
61
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND
SUPPLEMENTARY DATA
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED
FINANCIAL STATEMENTS
To the
Board of Directors and Shareholders
Culp,
Inc.:
We have
audited the accompanying consolidated balance sheets of Culp, Inc. (a North Carolina
corporation) and
Subsidiaries as of May 3, 2009, and April 27, 2008, and the related
consolidated statements of net income, shareholders’ equity and cash flows for
the fiscal years then ended. These financial statements are the
responsibility of the company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Culp, Inc. and subsidiaries
as of May 3, 2009, and April 27, 2008, and the results of its operations and its
cash flows for the fiscal years then ended in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in Note 11 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Statement (FASB) Interpretation No.
48, “Accounting for Uncertainty in Income Taxes”, as of April 30,
2007.
/s/ GRANT
THORNTON LLP
Greensboro,
North Carolina
July 16,
2009
62
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Culp,
Inc.:
We have
audited the accompanying consolidated statements of operations, shareholders’
equity, and cash flows of Culp, Inc. and subsidiaries for the year ended
April 29, 2007. These consolidated financial statements are the
responsibility of the company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of Culp,
Inc. and subsidiaries for the year ended April 29, 2007, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG
LLP
Charlotte,
North Carolina
July 19,
2007
63
|
CONSOLIDATED
BALANCE SHEETS
|
||||||||
|
May
3, 2009 and April 27, 2008 (dollars in thousands)
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
current
assets:
|
||||||||
|
cash
and cash equivalents
|
$ | 11,797 | $ | 4,914 | ||||
|
accounts
receivable, net
|
18,116 | 27,073 | ||||||
|
inventories
|
23,978 | 35,394 | ||||||
|
deferred
income taxes
|
54 | 4,380 | ||||||
|
assets
held for sale
|
1,209 | 5,610 | ||||||
|
income
taxes receivable
|
210 | 438 | ||||||
|
other
current assets
|
1,264 | 1,328 | ||||||
|
total
current assets
|
56,628 | 79,137 | ||||||
|
property,
plant and equipment, net
|
24,253 | 32,939 | ||||||
|
goodwill
|
11,593 | 4,114 | ||||||
|
deferred
income taxes
|
- | 29,430 | ||||||
|
other
assets
|
2,820 | 2,409 | ||||||
|
total
assets
|
$ | 95,294 | $ | 148,029 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
current
liabilities:
|
||||||||
|
current
maturities of long-term debt
|
$ | 4,764 | $ | 7,375 | ||||
|
current
portion of a obligation under capital lease
|
626 | - | ||||||
|
accounts
payable - trade
|
17,030 | 21,103 | ||||||
|
accounts
payable - capital expenditures
|
923 | 1,547 | ||||||
|
accrued
expenses
|
6,504 | 8,300 | ||||||
|
accrued
restructuring costs
|
853 | 1,432 | ||||||
|
income
taxes payable
|
83 | 150 | ||||||
|
total
current liabilities
|
30,783 | 39,907 | ||||||
|
accounts
payable - capital expenditures
|
638 | 1,449 | ||||||
|
income
taxes payable - long-term
|
3,264 | 4,802 | ||||||
|
deferred
income taxes
|
974 | 1,464 | ||||||
|
long-term
debt, less current maturities
|
11,604 | 14,048 | ||||||
|
total
liabilities
|
47,263 | 61,670 | ||||||
|
commitments
and contingencies (notes 7, 12, 13, and 14)
|
||||||||
|
shareholders'
equity:
|
||||||||
|
preferred
stock, $.05 par value, authorized 10,000,000
|
||||||||
|
shares
|
- | - | ||||||
|
common
stock, $.05 par value, authorized 40,000,000
|
||||||||
|
shares,
issued and outstanding 12,767,527 at
|
||||||||
|
May
3, 2009 and 12,648,027 at April 27, 2008
|
638 | 632 | ||||||
|
capital
contributed in excess of par value
|
47,728 | 47,288 | ||||||
|
accumulated
earnings (deficit)
|
(355 | ) | 38,487 | |||||
|
accumulated
other comprehensive income (loss)
|
20 | (48 | ) | |||||
|
total
shareholders' equity
|
48,031 | 86,359 | ||||||
|
total
liabilities and shareholders' equity
|
$ | 95,294 | $ | 148,029 | ||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||
64
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
|
For
the years ended May 3, 2009, April 27, 2008 and April 29,
2007
|
||||||||||||
|
(dollars
in thousands, except per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
net
sales
|
$ | 203,938 | $ | 254,046 | $ | 250,533 | ||||||
|
cost
of sales
|
179,286 | 220,887 | 219,328 | |||||||||
|
gross
profit
|
24,652 | 33,159 | 31,205 | |||||||||
|
selling,
general and administrative expenses
|
19,751 | 23,973 | 27,030 | |||||||||
|
restructuring
expense (note 3)
|
9,471 | 886 | 3,534 | |||||||||
|
(loss)
income from operations
|
(4,570 | ) | 8,300 | 641 | ||||||||
|
interest
expense
|
2,359 | 2,975 | 3,781 | |||||||||
|
interest
income
|
(89 | ) | (254 | ) | (207 | ) | ||||||
|
other
expense, net
|
43 | 736 | 68 | |||||||||
|
(loss)
income before income taxes
|
(6,883 | ) | 4,843 | (3,001 | ) | |||||||
|
income
tax expense (benefit) (note 11)
|
31,959 | (542 | ) | (1,685 | ) | |||||||
|
net
(loss) income
|
$ | (38,842 | ) | $ | 5,385 | $ | (1,316 | ) | ||||
|
net
(loss) income per share-basic
|
$ | (3.07 | ) | $ | 0.43 | $ | (0.11 | ) | ||||
|
net
(loss) income per share-diluted
|
$ | (3.07 | ) | $ | 0.42 | $ | (0.11 | ) | ||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||
65
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||
|
capital
|
accumulated
|
|||||||||||||||||||||||
|
common
|
common
|
contributed
|
other
|
total
|
||||||||||||||||||||
|
For
the years ended May 3, 2009
|
stock
|
stock
|
in
excess of
|
Accumulated
|
comprehensive
|
shareholders'
|
||||||||||||||||||
|
April
27, 2008 and April 29, 2007
|
shares
|
amount
|
par
value
|
earnings
(deficit)
|
income
(loss)
|
equity
|
||||||||||||||||||
|
balance,
April 30, 2006
|
11,654,959 | $ | 584 | $ | 40,350 | $ | 33,571 | $ | 18 | $ | 74,523 | |||||||||||||
|
net
loss
|
- | - | - | (1,316 | ) | - | (1,316 | ) | ||||||||||||||||
|
stock-based
compensation
|
- | - | 525 | - | - | 525 | ||||||||||||||||||
|
loss
on cash flow hedge, net of taxes
|
- | - | - | - | (22 | ) | (22 | ) | ||||||||||||||||
|
common
stock issued in connection
|
||||||||||||||||||||||||
|
with
the acquisition of assets (note 2)
|
798,582 | 40 | 5,043 | - | - | 5,083 | ||||||||||||||||||
|
common
stock issued in connection
|
||||||||||||||||||||||||
|
with
stock option plans
|
115,750 | 5 | 279 | - | - | 284 | ||||||||||||||||||
|
balance,
April 29, 2007
|
12,569,291 | 629 | 46,197 | 32,255 | (4 | ) | 79,077 | |||||||||||||||||
|
cumulative
effect of adopting FASB
|
||||||||||||||||||||||||
|
interpretation
No. 48
|
- | - | - | 847 | - | 847 | ||||||||||||||||||
|
net
income
|
- | - | - | 5,385 | - | 5,385 | ||||||||||||||||||
|
stock-based
compensation
|
- | - | 618 | - | - | 618 | ||||||||||||||||||
|
loss
on cash flow hedge, net of taxes
|
- | - | - | - | (44 | ) | (44 | ) | ||||||||||||||||
|
excess
tax benefit related to stock options
|
||||||||||||||||||||||||
|
exercised
|
- | - | 17 | - | - | 17 | ||||||||||||||||||
|
common
stock issued in connection
|
||||||||||||||||||||||||
|
with
stock option plans
|
78,736 | 3 | 456 | - | - | 459 | ||||||||||||||||||
|
balance,
April 27, 2008
|
12,648,027 | 632 | 47,288 | 38,487 | (48 | ) | 86,359 | |||||||||||||||||
|
net
loss
|
- | - | - | (38,842 | ) | - | (38,842 | ) | ||||||||||||||||
|
stock-based
compensation
|
- | - | 425 | - | - | 425 | ||||||||||||||||||
|
gain
on cash flow hedges, net of taxes
|
- | - | - | - | 68 | 68 | ||||||||||||||||||
|
restricted
stock granted
|
115,000 | 5 | (5 | ) | - | - | - | |||||||||||||||||
|
common
stock issued in connection
|
||||||||||||||||||||||||
|
with
stock option plans
|
4,500 | 1 | 20 | - | - | 21 | ||||||||||||||||||
|
balance,
May 3, 2009
|
12,767,527 | $ | 638 | $ | 47,728 | $ | (355 | ) | $ | 20 | $ | 48,031 | ||||||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||||||||||||||
66
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
||||||||||||
|
For
the years ended May 3, 2009, April 27, 2008 and April 29,
2007
|
||||||||||||
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
cash
flows from operating activities:
|
||||||||||||
|
net
(loss) income
|
$ | (38,842 | ) | 5,385 | (1,316 | ) | ||||||
|
adjustments
to reconcile net (loss) income to net cash
|
||||||||||||
|
provided
by operating activities:
|
||||||||||||
|
depreciation
|
6,712 | 5,548 | 7,849 | |||||||||
|
amortization
of other assets
|
488 | 373 | 150 | |||||||||
|
stock-based
compensation
|
425 | 618 | 525 | |||||||||
|
excess
tax benefit related to stock options exercised
|
- | (17 | ) | - | ||||||||
|
deferred
income taxes
|
33,231 | (919 | ) | (3,763 | ) | |||||||
|
(gain)
loss on impairment of equipment
|
(32 | ) | 289 | - | ||||||||
|
restructuring
expenses, net of gain on sale of related assets
|
7,960 | 140 | 536 | |||||||||
|
changes
in assets and liabilities, net of effects of acquisition of
assets:
|
||||||||||||
|
accounts
receivable
|
8,957 | 2,242 | (241 | ) | ||||||||
|
inventories
|
12,855 | 5,236 | 817 | |||||||||
|
other
current assets
|
46 | 496 | 1,673 | |||||||||
|
other
assets
|
10 | (188 | ) | (42 | ) | |||||||
|
accounts
payable-trade
|
(5,365 | ) | (924 | ) | 3,133 | |||||||
|
accrued
expenses
|
(1,721 | ) | (445 | ) | 825 | |||||||
|
accrued
restructuring
|
(579 | ) | (1,926 | ) | (772 | ) | ||||||
|
income
taxes
|
(1,377 | ) | 456 | 2,091 | ||||||||
|
net
cash provided by operating activities
|
22,768 | 16,364 | 11,465 | |||||||||
|
cash
flows from investing activities:
|
||||||||||||
|
capital
expenditures
|
(1,970 | ) | (4,846 | ) | (3,762 | ) | ||||||
|
net
cash paid for acquistion of assets (note 2)
|
(11,365 | ) | - | (2,500 | ) | |||||||
|
proceeds
from the sale of buildings and equipment
|
4,607 | 2,723 | 3,315 | |||||||||
|
net
cash used in investing activities
|
(8,728 | ) | (2,123 | ) | (2,947 | ) | ||||||
|
cash
flows from financing activities:
|
||||||||||||
|
proceeds
from lines of credit
|
- | 1,339 | 2,593 | |||||||||
|
payments
on lines of credit
|
- | (3,932 | ) | - | ||||||||
|
payments
on vendor-financed capital expenditures
|
(1,236 | ) | (642 | ) | (1,356 | ) | ||||||
|
payments
on a capital lease obligation
|
(754 | ) | - | - | ||||||||
|
payments
on long-term debt
|
(16,055 | ) | (16,737 | ) | (12,062 | ) | ||||||
|
proceeds
from the issuance of long-term debt (notes 2 and 12)
|
11,000 | - | 2,500 | |||||||||
|
debt
issuance costs
|
(133 | ) | - | - | ||||||||
|
proceeds
from common stock issued
|
21 | 459 | 262 | |||||||||
|
excess
tax benefit related to stock options exercised
|
- | 17 | - | |||||||||
|
net
cash used in financing activities
|
(7,157 | ) | (19,496 | ) | (8,063 | ) | ||||||
|
increase
(decrease) in cash and cash equivalents
|
6,883 | (5,255 | ) | 455 | ||||||||
|
cash
and cash equivalents at beginning of year
|
4,914 | 10,169 | 9,714 | |||||||||
|
cash
and cash equivalents at end of year
|
$ | 11,797 | 4,914 | 10,169 | ||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
||||||||||||
67
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
1.
|
GENERAL
AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Description of Business –
Culp, Inc. manufactures and markets mattress fabrics and upholstery fabrics
primarily for the furniture and bedding industries, with the majority of its
revenues derived in North America. The company has mattress fabric operations
located in Stokesdale, NC, High Point, NC, and Quebec, Canada. The company has
upholstery fabric manufacturing operations located in Shanghai, China and
Anderson, SC.
Basis of Presentation – The
consolidated financial statements of the company have been prepared in
accordance with U.S. generally accepted accounting principles.
Principles of Consolidation –
The consolidated financial statements include the accounts of the company and
its subsidiaries, which are wholly-owned. All significant
intercompany balances and transactions have been eliminated in consolidation.
The accounts of the company’s subsidiaries located in Shanghai, China are
consolidated as of April 30 (calendar month end), as required by the Chinese
government. No events occurred related to the difference between the company’s
fiscal year end on the Sunday closest to April 30 and the company’s China
subsidiaries year end of April 30 that materially affected the company’s
financial position, results of operations, or cash flows for fiscal years 2009,
2008, and 2007.
Fiscal Year – The company’s
fiscal year is the 52 or 53 week period ending on the Sunday closest to
April 30. Fiscal 2009 included 53 weeks and fiscal 2008 and 2007
each included 52 weeks.
Use of Estimates – The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Cash and Cash Equivalents –
Cash and cash equivalents include demand deposit and money market
accounts. The company considers all highly liquid instruments with
original maturities of three months or less to be cash equivalents. The
company’s Chinese subsidiaries had cash and cash equivalents of $5.1 million and
$1.7 million at May 3, 2009 and April 27, 2008, respectively. The company’s
Canadian subsidiary had cash and cash equivalents of $575,000 and $475,000 at
May 3, 2009 and April 27, 2008, respectively. Throughout the year, we have cash
balances regarding our U.S. operations in excess of federally insured amounts on
deposit with a financial institution.
Accounts Receivable –
Substantially all of the company’s accounts receivable are due from
manufacturers in the bedding and furniture industries. The company
grants credit to customers, a substantial number of which are located in North
America and generally does not require collateral. The company
records an allowance for doubtful accounts that reflects estimates of probable
credit losses. Management continuously performs credit evaluations of its
customers, considering numerous inputs including financial position, past
payment history, cash flows, management ability, historical loss experience and
economic conditions and prospects. The company does not have any
off-balance sheet credit exposure related to its customers.
Inventories – The company
accounts for inventories at the lower of first-in, first-out (FIFO) cost or
market. Management continually examines inventory to determine if
there are indicators that the carrying value exceeds its net realizable
value. Experience has shown that the most significant indicator of
the need for inventory markdowns is the age of the inventory. As a
result, the company provides inventory valuation write-downs based upon
established percentages that are continually evaluated as events and market
conditions require. The company’s inventory aging categories are six, nine,
twelve, and fifteen months.
Property, Plant and Equipment
– Property, plant and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Major renewals and
betterments are capitalized. Maintenance, repairs and minor renewals
are expensed as incurred. When properties are retired or otherwise
disposed of, the related cost and accumulated depreciation are removed from the
accounts. Amounts received on disposal less the book value of assets
sold are charged or credited to income (loss).
68
Management
reviews long-lived assets, which consist principally of property, plant and
equipment, for impairment whenever events or changes in circumstances indicate
that the carrying value of the asset may not be
recovered. Recoverability of long-lived assets to be held and used is
measured by a comparison of the carrying amount of the asset to future net
undiscounted cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, the related
cost and accumulated depreciation are removed from the accounts and an
impairment charge is recognized for the excess of the carrying amount over the
fair value of the asset. After the impairment loss is recognized, the adjusted
carrying amount shall be its new accounting basis. Assets to be disposed of by
sale are reported at the lower of the carrying value or fair value less cost to
sell when the company has committed to a disposal plan, and are reported
separately as assets held for sale in the consolidated balance
sheets.
Interest
costs of $42,000 and $139,000 for the construction of qualifying fixed assets
were capitalized and are being amortized over the related assets’ estimated
useful lives for the years ended May 3, 2009 and April 27, 2008, respectively.
No interest was capitalized for the year ended April 29, 2007.
Foreign Operations – The
company’s future operations and earnings will be significantly impacted by the
results of the company’s operations in China and Canada. There can be no
assurance that the company will be able to successfully conduct such operations,
and a failure to do so could have a material adverse effect on the company’s
financial position, results of operations, and cash flows. Also, the success of
the company’s operations will be subject to numerous contingencies, some of
which may be beyond management’s control. These contingencies include general
and regional economic conditions, prices for the company’s products,
competition, changes in regulation, and various additional political, economic,
governmental, and other uncertainties. Among other risks, the company’s
operations will be subject to the risks of restrictions on transfer of funds,
export duties, quotas and embargoes, domestic and international customs and
tariffs, changing taxation policies, and foreign exchange fluctuations and
restrictions.
Foreign Currency Adjustments –
The United States dollar is the functional currency for the company’s Canadian
and Chinese subsidiaries. All foreign currency asset and liability accounts are
remeasured into the U.S. dollars at year-end exchange rates, except for
property, plant, and equipment, which are recorded at historical exchange rates.
Foreign currency revenues and expenses are remeasured at average exchange rates
in effect during the year, except for certain expenses related to balance sheet
amounts remeasured at historical exchange rates. Exchange gains and losses from
remeasurement of foreign currency denominated monetary assets and liabilities
are recorded in the other expense, net line item in the Consolidated Statements
of Operations in the period in which they occur. The company’s Canadian
subsidiary had a foreign currency remeasurement gain of $151,000 for the fiscal
year ended May 3, 2009. Foreign currency remeasurement losses for the Canadian
subsidiary were $381,000, and $105,000 for the fiscal years ended April 27,
2008, and April 29, 2007, respectively. Foreign currency remeasurement gains for
the Chinese subsidiaries were $42,000 and $286,000 for the fiscal years ended
May 3, 2009 and April 29, 2007, respectively. The company’s Chinese subsidiaries
had a remeasurement loss of $51,000 for the fiscal year ended April 27,
2008.
Goodwill – Management assesses goodwill for
impairment whenever facts and circumstances indicate that the carrying amount
may not be fully recoverable. Each year, the company tests for impairment of
goodwill according to a two-step approach. In the first step, the company
estimates the fair market values of its reporting units (mattress fabrics and
upholstery fabrics) using the present value of future cash flows approach,
subject to a comparison for reasonableness to its market capitalization at the
date of valuation. The company uses a discount rate equal to its average cost of
funds to discount the expected future cash flows. If the fair market value of a
reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired, thus the second step of the impairment test is
unnecessary. If the carrying amount of the reporting unit exceeds its implied
fair value, the second step of the goodwill impairment test would be performed
to measure the amount of the impairment loss, if any. In the second step the
implied fair market value of the goodwill is estimated as the fair market value
of the reporting unit used in the first step less the fair values of all other
net tangible and intangible assets of the reporting unit. If the carrying amount
of the goodwill exceeds it implied fair market value, an impairment loss is
recognized in an amount equal to that excess, not to exceed the carrying amount
of the goodwill. In addition, goodwill of a reporting unit is tested for
impairment between annual tests if an event that occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying values.
69
No
impairment of goodwill resulted in fiscal years 2009, 2008, and 2007. The
company’s remaining goodwill at May 3, 2009, of $11.6 million relates to the
mattress fabrics segment.
Income Taxes – Income taxes are accounted for
under the asset and liability method. Deferred income taxes are
recognized for temporary differences between the financial statement carrying
amounts and the tax bases of the company’s assets and liabilities and operating
loss and tax credit carryforwards at income tax rates expected to be in effect
when such amounts are realized or settled. The effect on deferred
income taxes of a change in tax rates is recognized in income (loss) in the
period that includes the enactment date.
The
company has not recorded deferred income taxes applicable to undistributed
earnings of the company’s subsidiary located in Canada. Generally,
such earnings become subject to U.S. income tax upon the remittance of dividends
from undistributed earnings of a company’s foreign subsidiaries. It is the
present intention of management to reinvest the undistributed earnings of its
subsidiary located in Canada indefinitely. At May 3, 2009, the company’s
subsidiary located in Canada had undistributed earnings totaling $35.1 million.
If these undistributed earnings were not indefinitely reinvested, an additional
deferred tax liability of approximately $12.9 million would have been required
at May 3, 2009.
At May 3,
2009, the company’s subsidiaries located in China had undistributed earnings
totaling $14.6 million. As a result of management’s assessment of the company’s
future cash requirements, the company recorded a deferred tax liability of $1.3
million for the estimated U.S. income taxes that will be payable upon the
anticipated future repatriation of approximately $3.6 million of undistributed
earnings from the company’s subsidiaries located in China. The $3.6 million of
undistributed earnings are not subject to withholding taxes as authorized by the
Chinese government.
On April
30, 2007, the company adopted Financial Accounting Standards Board (FASB)
Interpretation No.48 “Accounting for Uncertainty in Income Taxes” (FIN 48) which
supplements SFAS No. 109, “Accounting for Income Taxes”, by defining the
confidence level that a tax position must meet in order to be recognized in the
financial statements. FIN 48 requires that the tax effects of a position be
recognized only if it is “more-likely-than-not” to be sustained based solely on
its technical merits as of the reporting date. The more-likely-than-not
threshold represents a positive assertion by management that a company is
entitled to the economic benefits of a tax position. If a tax position is not
considered more-likely-than-not to be sustained based solely on its technical
merits, no benefits of the tax position are to be recognized. Moreover, the
more-likely-than-not threshold must continue to be met in each reporting period
to support continued recognition of the benefit. With the adoption of FIN 48,
entities are required to adjust their financial statements to reflect only those
tax positions that are more-likely-than-not to be sustained. Any necessary
adjustment would be recorded directly to retained earnings and reported as a
change in accounting principle. Upon adoption, the company recorded an increase
to retained earnings of $847,000 as a cumulative effect of a change in
accounting principle. Refer to Note 11 for more information regarding the impact
of adopting FIN 48. Adjustments subsequent to initial adoption are reflected
within the company’s income tax benefit or expense.
In May
2007, FASB issued FASB Staff Position FIN 48-1, “Definition of Settlement in
FASB Interpretation No. 48” (“FSP FIN 48-1). FSP FIN 48-1 provides guidance on
whether a tax position is effectively settled for the purpose of recognizing
previously unrecognized tax benefits. No adjustment was made upon adoption of
FSP FIN 48-1.
Revenue Recognition – Revenue
is recognized upon shipment, when title and risk of loss pass to the customer.
Provision is made currently for estimated product returns, claims and
allowances. Management considers historical claims and return
experience, among other things, when establishing the allowance for returns and
allowances.
Shipping and Handling Costs –
Revenue received for shipping and handling costs, which is immaterial for all
periods presented, is included in net sales. Shipping costs,
principally freight, that comprise payments to third-party shippers are
classified as cost of sales. Handling costs represent finished goods
warehousing costs incurred to store, move, and prepare products for shipment in
the company’s various distribution facilities. Handling costs were $2.2 million,
$3.0 million and $3.7 million in 2009, 2008 and 2007, respectively, and are
included in selling, general and administrative expenses.
70
Sales and Other Taxes – Sales
and other taxes collected from customers and remitted to governmental
authorities are presented on a net basis and, as such, are excluded from
revenues.
Stock-Based Compensation –
Effective May 1, 2006, the company started to record compensation expense
associated with its stock option plans in accordance with SFAS No. 123R,
“Share-Based Payment” which requires the measurement of the cost of employee
services received in exchange for an award of an equity instrument based on the
grant date fair value of the award. The company adopted the modified prospective
transition method provided for under SFAS No. 123R, and consequently did not
retroactively adjust results from prior periods. Under this transition method,
compensation expense associated with stock options recognized in fiscal 2009,
2008 and 2007 includes amortization related to the remaining unvested portion of
all stock option awards granted prior to May 1, 2006, based on their grant date
fair value estimated in accordance with the original provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation.”
In
accordance with the provisions of SFAS No. 123R, the company recorded $425,000,
$618,000 and $525,000 of compensation expense for its equity based
awards within selling, general, and administrative expense for fiscal 2009,
2008 and 2007, respectively.
Prior to
the adoption of SFAS No. 123R, the benefit of tax deductions in excess of
recognized compensation costs were reported as an operating cash flow. SFAS No.
123R requires such benefits to be recorded as a financing cash flow
rather than a reduction of income taxes paid within operating cash flow. The
company adopted the short-cut method provided in SFAS No. 123R to use for
calculating the beginning balance of the additional paid-in capital pool (“APIC
pool”) related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Statement of Cash Flows of
the tax effects of employee stock-based compensation awards that are outstanding
upon adoption of SFAS No. 123R. The company recognized $17,000 in excess tax
benefits related to employee stock-based compensation in fiscal 2008. No tax
benefits in excess of recognized compensation costs were realized from option
exercises in fiscal 2009 and 2007.
Fair Value Measurements - The
company adopted SFAS No. 157, Fair Value Measurements (“SFAS 157”) for financial
assets and liabilities and SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), on April 28, 2008. SFAS 157 (1)
creates a single definition of fair value, (2) establishes a framework for
measuring fair value, and (3) expands disclosure requirements about items
measured at fair value. SFAS 157 applies to both items recognized and reported
at fair value in the financial statements and items disclosed at fair value in
the notes to the financial statements. SFAS 157 does not change existing
accounting rules governing what can or what must be recognized and reported at
fair value in the company’s financial statements, or disclosed at fair value in
the company’s notes to the financial statements. Additionally, SFAS 157 does not
eliminate practicability exceptions that exist in accounting pronouncements
amended by SFAS 157 when measuring fair value. As a result, the company will not
be required to recognize any new assets or liabilities at fair
value.
Prior to
SFAS 157, certain measurements of fair value were based on the price that would
be paid to acquire an asset, or received to assume a liability (an entry price).
SFAS 157 clarifies the definition of fair value as the price that would be
received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date (that is, an
exit price). The exit price is based on the amount that the holder of the asset
or liability would receive or need to pay in an actual transaction (or in a
hypothetical transaction if an actual transaction does not exist) at the
measurement date. In some circumstances, the entry and exit price may be the
same; however, they are conceptually different.
Fair value
is generally determined based on quoted market prices in active markets for
identical assets or liabilities. If quoted market prices are not available, the
company uses valuation techniques that place greater reliance on observable
inputs and less reliance on unobservable inputs. In measuring fair value, the
company may make adjustments for risks and uncertainties, if a market
participant would include such an adjustment in its pricing.
71
SFAS 157
establishes a fair value hierarchy that distinguishes between assumptions based
on market data (observable inputs) and the company’s assumptions (unobservable
inputs). Determining where an asset or liability falls within that hierarchy
depends on the lowest level input that is significant to the fair measurement as
a whole. An adjustment to the pricing method used within either level 1 or level
2 inputs could generate a fair value measurement that effectively falls in a
lower level in the hierarchy. The hierarchy consists of three broad levels as
follows:
Level 1 –
Quoted market prices in active markets for identical assets or
liabilities;
Level 2 –
Inputs other than level 1 inputs that are either directly or indirectly
observable, and
Level 3 –
Unobservable inputs developed using the company’s estimates and assumptions,
which reflect those that market participants would use.
The
following table presents information about assets and liabilities measured at
fair value on a recurring basis:
| Fair value measurements at May 3, 2009 using: | ||||||||
|
Quoted
prices in
active
markets
for
identical
assets
|
Significant
other
observable
inputs
|
Significant
unobservable
inputs
|
||||||
|
(amounts
in thousands)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||
|
Assets:
|
||||||||
|
Canadian
Dollar Fx Contract
|
Not
applicable
|
20 |
Not
applicable
|
20 | ||||
|
Liabilities:
None
|
Not applicable | Not applicable | Not applicable | Not applicable | ||||
As shown
above, the Canadian foreign exchange contract derivative instrument is valued
based on fair value provided by the company’s bank and is classified within
level 2 of the fair value hierarchy. The determination of where an
asset or liability falls in the hierarchy requires significant judgment. The
company evaluates its hierarchy disclosures each quarter based on various
factors and it is possible that an asset or liability may be classified
differently from quarter to quarter. However, the company expects that changes
in classifications between different levels will be rare.
Most
derivative contracts are not listed on an exchange and require the use of
valuation models. Consistent with SFAS 157, the company attempts to maximize the
use of observable market inputs in its models. When observable inputs are not
available, the company defaults to unobservable inputs. Derivatives valued based
on models with significant unobservable inputs and that are not actively traded,
or trade activity is one way, are classified within level 3 of the fair value
hierarchy.
Some
financial statement preparers have reported difficulties in applying SFAS 157 to
certain nonfinancial assets and nonfinancial liabilities, particularly those
acquired in business combinations and those requiring a determination of
impairment. To allow the time to consider the effects of the implementation
issues that have arisen, the FASB issued FSP FAS 157-2 (“FSP 157-2”) on February
12, 2008 to provide a one-year deferral of the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed in financial statements at fair value on a recurring
basis (that is, at least annually). As a result of FSP 157-2, the company has
not yet adopted SFAS 157 for nonfinancial assets and liabilities that are valued
at fair value on a non-recurring basis. FSP 157-2 is effective for the company
in fiscal 2010 and the company is evaluating the impact that the application of
SFAS 157 to those nonfinancial assets and liabilities will have on its financial
statements.
72
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS 159 provides the company with an option
to elect fair value as the initial and subsequent measurement attribute for most
financial assets and liabilities and certain other items. The fair value option
election is applied on an instrument-by-instrument basis (with some exceptions),
is irrevocable, and is applied to an entire instrument. The election may be made
as of the date of initial adoption for existing eligible items. Subsequent to
initial adoption, the company may elect the fair value option at initial
recognition of eligible items, on entering into an eligible firm commitment, or
when certain specified reconsideration events occur. Unrealized gains and losses
on items for which the fair value option has been elected will be reported in
earnings.
Upon
adoption of SFAS 159 on April 28, 2008, the company did not elect to account for
any assets and liabilities under the scope of SFAS 159 at fair
value.
Fair Value of Financial
Instruments – The carrying amount of cash and cash equivalents, accounts
receivable, other current assets, accounts payable and accrued expenses
approximates fair value because of the short maturity of these financial
instruments.
The fair
value of the company’s long-term debt is estimated by discounting the future
cash flows at rates currently offered to the company for similar debt
instruments of comparable maturities. At May 3, 2009 the carrying
value of the company’s long-term debt was $16.4 million and the fair value was
$15.4 million. At April 27, 2008, the carrying value of the company’s
long-term debt was $21.4 million and the fair value was $21.0
million.
|
2.
|
ASSET
ACQUISITIONS
|
|
Bodet
& Horst
|
Pursuant
to an Asset Purchase Agreement among the company, Bodet & Horst USA, LP and
Bodet & Horst GMBH & Co. KG (collectively “Bodet & Horst”) dated
August 11, 2008, the company purchased certain assets and assumed certain
liabilities of the knitted mattress fabric operation of Bodet & Horst,
including its manufacturing operation in High Point, North Carolina. This
purchase has allowed the company to have a vertically integrated manufacturing
platform in all major product categories of the mattress fabrics industry. The
purchase involved the equipment, inventory, and intellectual property associated
with the High Point manufacturing operation, which has served as the company’s
primary source of knitted mattress fabric for six years. Demand for this product
line has grown significantly, as knits are increasingly being utilized on
mattresses at volume retail price points. The purchase price for the assets was
cash in the amount of $11.4 million, which included an adjustment of $477,000
for changes in working capital as defined in the Asset Purchase Agreement, and
the assumption of certain liabilities. Also, in connection with the purchase,
the company entered into a six-year consulting and non-compete agreement with
the principal owner of Bodet & Horst, providing for payments to the owner in
the amount of $75,000 per year to be paid in quarterly installments (of which
$50,000 and $25,000 will be allocated to the non-compete covenant and consulting
fees, respectively) for the agreement’s full six-year term.
The
acquisition was financed by $11.0 million of unsecured notes pursuant to a Note
Purchase Agreement (“2008 Note Agreement”) dated August 11, 2008. The 2008 Note
Agreement has a fixed interest rate of 8.01% and a term of seven years.
Principal payments of $2.2 million per year are due on the notes beginning three
years from the date of the 2008 Note Agreement. The 2008 Note Agreement contains
customary financial and other covenants as defined in the 2008 Note
Agreement.
In
connection with the 2008 Note Agreement, the company entered into a Consent and
Fifth Amendment (the “Consent and Amendment”) that amends the previously
existing unsecured note purchase agreements. The purpose of the Consent and
Amendment was for the existing note holders to consent to the 2008 Note
Agreement and to provide that certain financial covenants in favor of the
existing note holders would be on the same terms as those contained in the 2008
Note Agreement.
73
In
connection with the asset purchase agreement, the company assumed the lease of
the building where the operation is located. This lease is with a partnership
owned by certain shareholders and officers of the company and their immediate
families. The lease provides for monthly payments of $12,704, expires on June
30, 2010, and contains a renewal option for an additional three years. As of May
3, 2009, the minimum lease payment requirements over the next two fiscal years
are: FY 2010 - $152,000 and FY 2011 - $25,000.
The
following table presents the allocation of the acquisition cost, including
professional fees and other related acquisition costs, to the assets acquired
and liabilities assumed based on their fair values. The allocation of the
purchase price is based on a preliminary valuation and could change when the
final valuation is obtained. Differences between the preliminary valuation and
the final valuation are not expected to be significant. The preliminary
acquisition cost allocation is as follows:
|
(dollars
in thousands)
|
Fair
Value
|
||||
|
Inventories
|
$ | 1,439 | |||
|
Other
current assets
|
17 | ||||
|
Property,
plant, and equipment
|
3,000 | ||||
|
Non-compete
agreement (Note 9)
|
756 | ||||
|
Goodwill
|
7,479 | ||||
|
Accounts
payable
|
(1,291 | ) | |||
| $ | 11,400 | ||||
Of the
total consideration paid of $11,400, $11,365 and $35 were paid in fiscal 2009
and 2008, respectively.
The
company recorded the non-compete agreement at its fair value based on various
valuation techniques. This non-compete agreement will be amortized on a
straight-line basis over the six-year life of the agreement. Property, plant,
and equipment will be depreciated on a straight-line basis over useful lives
ranging from five to fifteen years. Goodwill is deductible for income tax
purposes over the statutory period of fifteen years.
The
following unaudited pro forma consolidated results of operations for the years
ending May 3, 2009 and April 27, 2008 have been prepared as if the acquisition
of Bodet & Horst had occurred at April 30, 2007.
|
Years
ended
|
||||||||
|
(dollars
in thousands)
|
May
3, 2009
|
April
27, 2008
|
||||||
|
Net
Sales
|
$ | 203,938 | $ | 254,046 | ||||
|
(Loss)
income from operations
|
(3,625 | ) | 11,703 | |||||
|
Net
(loss) income
|
(38,607 | ) | 6,968 | |||||
|
Net
(loss) income per share, basic
|
(3.05 | ) | 0.55 | |||||
|
Net
(loss) income per share, diluted
|
(3.05 | ) | 0.55 | |||||
The
unaudited pro forma information is presented for informational purposes only and
is not necessarily indicative of the results of operations that actually would
have been achieved had the acquisition been consummated as of that time, nor is
it intended to be a projection of future results.
|
|
International
Textile Group, Inc.
|
In January
2007, the company closed on an Asset Purchase Agreement (the “Agreement”) for
the purchase of certain assets from International Textile Group, Inc. (“ITG”)
related to the mattress fabrics product line of ITG’s Burlington House division.
The company purchased ITG’s mattress fabrics finished goods inventory, a credit
on future purchases of inventory manufactured by ITG during the transition
period, along with certain proprietary rights (patterns, copyrights, artwork,
and the like) and other records that related to ITG’s mattress fabrics product
line. The company did not purchase any accounts receivable, property, plant, and
equipment, and did not assume any liabilities other than certain open purchase
orders.
74
The
consideration given for this transaction, after adjustments to the closing date
inventory as defined by the Agreement, was $8.1 million. Payment consisted of
$2.5 million in cash financed by a term loan, the issuance of 798,582 shares of
the company’s common stock with a fair value of $5.1 million, and the company
also incurred direct acquisition costs relating to legal, accounting, and other
professional fees of $515,000. This transaction did not constitute a business
combination within the criteria of EITF 98-3, Determining whether a Non-Monetary
Transaction involves Receipt of Productive Assets or of a Business. The
total transaction cost was allocated as follows:
|
(dollars
in thousands)
|
Fair
Value
|
||||
|
Inventories
|
$ | 4,754 | |||
|
Other
current assets (credit on future purchases of inventory)
|
2,210 | ||||
|
Non-compete
agreement
|
1,148 | ||||
| $ | 8,112 | ||||
The
Agreement required ITG to provide certain transition services to the company and
manufacture goods for the company for a limited period of time to support the
company’s efforts to transition the former ITG mattress fabrics products into
the company’s operations. In connection with the transition services required by
ITG, the company acquired a credit of $2.2 million on future purchases of
finished goods inventory manufactured by ITG during the transition period. This
credit was utilized as we purchased finished goods during the transition period
and after the closing date of the purchase. This credit was fully utilized as of
the end of the first quarter of fiscal 2008 and before the transition period
expired as defined in the agreement. The company hired only one of ITG’s
employees after the transition period was completed. ITG also agreed that it
will not compete with the company in the mattress fabrics business for a period
of four years, except for mattress fabrics production in China for final
consumption in China (meaning the mattress fabric and the mattress on which it
is used is sold only in China).
In
connection with the Agreement, the company issued 798,582 shares of common
stock. As a result, the company entered into a Registration Rights
and Shareholder Agreement (“the Registration Agreement”), which relates to the
shares of the common stock issued by the company to ITG (the “Shares”). Under
the terms of the Registration Agreement, ITG required the company to register
the Shares with the Securities and Exchange Commission, allowing the Shares to
be sold to the public after the registration statement became effective. The
Registration Agreement also contained provisions pursuant to which ITG agreed
not to purchase additional company shares or take certain other actions to
influence control of the company, and agreed to vote the shares in accordance
with recommendations of the company’s board of directors. Pursuant to
a registration request by ITG, a registration statement was filed and became
effective April 10, 2007.
|
3.
|
RESTRUCTURING
AND ASSET IMPAIRMENTS
|
A summary of accrued restructuring
costs follows:
|
(dollars
in thousands)
|
May
3, 2009
|
April
27, 2008
|
||||||
|
September
2008 Upholstery Fabrics
|
$ | 43 | - | |||||
|
December
2006 Upholstery Fabrics
|
494 | 990 | ||||||
|
September
2005 Upholstery fabrics
|
81 | 178 | ||||||
|
August
2005 Upholstery Fabrics
|
- | 2 | ||||||
|
April
2005 Upholstery Fabrics
|
- | 27 | ||||||
|
Fiscal
2003 Culp Decorative Fabrics
|
235 | 235 | ||||||
| $ | 853 | 1,432 | ||||||
75
September
2008 Upholstery Fabrics
On
September 3, 2008, the board of directors approved changes to the upholstery
fabric operations, including the consolidation of plant facilities in China and
the reduction of excess manufacturing capacity. These actions were in response
to the extremely challenging industry conditions for upholstery
fabrics. Restructuring and related charges for fiscal 2009 totaled
$9.6 million, of which $6.6 million related to impairment charges on equipment
and leasehold improvements, $2.1 million for accelerated depreciation, $502,000
for inventory markdowns, $443,000 for lease termination and other exit costs,
$25,000 for other operating costs associated with closed plant facilities, and
$10,000 for employee termination benefits. The $2.1 million accelerated
depreciation charge represents the incremental depreciation expense to reflect
revised depreciation estimates and useful lives for certain fixed assets that
were to be used over a shortened useful life from the period the restructuring
plan was announced until the respective plant facility was closed and operations
ceased. Of this total charge, $7.0 million and $2.6 million were recorded in
restructuring expense and cost of sales in the 2009 Consolidated Statement of
Operations.
The
following summarizes the activity in the restructuring accrual (dollars in
thousands):
|
Employee
Termination
Benefits
|
Lease
Termination
and
Other
Exit
Costs
|
|
Total
|
|||||||||
|
accrual
established in fiscal 2009
|
$ | 35 | 425 | 460 | ||||||||
|
adjustments
in fiscal 2009
|
(25 | ) | 18 | (7 | ) | |||||||
|
paid
in fiscal 2009
|
(10 | ) | (400 | ) | (410 | ) | ||||||
|
balance,
May 3, 2009
|
$ | - | 43 | 43 | ||||||||
December
2006 Upholstery Fabrics
On
December 12, 2006, the company’s board of directors approved a restructuring
plan within the upholstery fabrics segment to consolidate the company’s U.S.
upholstery fabrics manufacturing facilities and outsource its specialty yarn
production. This process involved closing the company’s weaving plant located in
Graham, NC, and closing the yarn plant located in Lincolnton, NC. The company
transferred certain production from the Graham, NC plant facility to its
Anderson, SC and Shanghai, China, plant facilities as well as a small portion to
contract weavers. As a result of these two plant closures, the
company reduced the number of associates by approximately 185
people.
During
fiscal 2009, we further assessed the net realizable value of our inventory,
recoverability of our property, plant, and equipment, and selling, general, and
administrative expenses based on current demand trends related to our U.S.
upholstery fabric operations. This assessment was required based on the adverse
economic conditions resulting from the depressed housing market, credit crisis,
and decreased consumer spending that developed in the second quarter of fiscal
2009, and which was more severe than we anticipated at the end of fiscal 2008.
As a result, restructuring and related charges incurred totaled $3.5 million of
which $1.4 million related to impairment charges on a building and equipment,
$886,000 related to inventory markdowns, $798,000 related to employee
termination benefits, $271,000 related to lease termination and other exit
costs, and $116,000 related to other operating costs associated with closed
plant facilities. Of this total charge, $2.5 million was recorded in
restructuring expense, $980,000 was recorded in cost of sales, and $21,000 was
recorded in selling, general, and administrative expenses in the 2009
Consolidated Statement of Operations.
During
fiscal 2008, total restructuring and related charges incurred were $2.9 million
of which $1.0 million related to inventory markdowns, $978,000 related to other
operating costs associated with closed plant facilities, $503,000 related to
write-downs of buildings and equipment, $467,000 related to lease termination
and other exit costs, $189,000 related to asset movement costs, $171,000 related
to employee termination benefits, and a credit of $362,000 related to sales
proceeds received on equipment with no carrying value. Of the total charge, $1.9
million was recorded in cost of sales, $69,000 was recorded in selling, general,
and administrative expenses, and $968,000 was recorded in restructuring expense
in the 2008 Consolidated Statement of Operations.
76
During
fiscal 2007, total restructuring and related charges incurred were $6.7 million
of which $2.2 million related to inventory markdowns, $1.3 million related to
employee termination benefits, $1.2 million related to accelerated depreciation,
$1.0 million related to write-downs of equipment, $461,000 related to asset
movement costs, $241,000 related to lease termination and other exit costs, and
$212,000 related to operating costs associated with closed of plant facilities.
The $1.2 million accelerated depreciation charge represents the incremental
depreciation expense to reflect revised depreciation estimates and useful lives
for certain fixed assets that were to be used over a shortened useful life from
the period the restructuring plan was announced until the respective plant
facility was closed and operations were ceased. Of the total charge, $3.6
million was recorded in cost of sales and $3.1 million was recorded in
restructuring expense in the 2007 Consolidated Statement of
Operations.
The
following summarizes the activity in the restructuring accrual (dollars in
thousands):
|
Employee
Termination
Benefits
(1)
|
Lease
Termination
and
Other
Exit
Costs
|
Total
|
||||||||||
|
accrual
established in fiscal 2007
|
$ | 1,284 | - | 1,284 | ||||||||
|
adjustments
in fiscal 2007
|
63 | 241 | 304 | |||||||||
|
paid
in fiscal 2007
|
(43 | ) | - | (43 | ) | |||||||
|
balance,
April 29, 2007
|
1,304 | 241 | 1,545 | |||||||||
|
adjustments
in fiscal 2008
|
171 | 467 | 638 | |||||||||
|
paid
in fiscal 2008
|
(796 | ) | (397 | ) | (1,193 | ) | ||||||
|
balance,
April 27, 2008
|
$ | 679 | 311 | 990 | ||||||||
|
adjustments
in fiscal 2009
|
798 | 271 | 1,069 | |||||||||
|
paid
in fiscal 2009
|
(1,088 | ) | (477 | ) | (1,565 | ) | ||||||
|
Balance,
May 3, 2009
|
389 | 105 | 494 | |||||||||
|
(1)
|
Employee
termination benefit payments are net of cobra premiums received from
participants.
|
September
2005 Upholstery Fabrics
On
September 27, 2005, the company’s board of directors approved a strategic
alliance with Synthetics Finishing, a division of TSG Incorporated, to provide
finishing services to the company for its domestically produced decorative
upholstery fabrics. As a result, the company closed its finishing plant in
Burlington, NC, thereby reducing the number of associates by approximately 100
people.
No
restructuring and related charges related to this restructuring plan were
incurred during fiscal 2009.
During
fiscal 2008, as a result of management’s continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by $34,000 to
reflect current estimates of future health care claims. This $34,000 decrease in
the restructuring accrual was recorded as a credit to restructuring expense in
the 2008 Consolidated Statement of Operations.
During
fiscal 2007, total restructuring and related charges incurred were $494,000 of
which $450,000 related to other operating costs associated with a closed plant
facility, $284,000 related to lease termination and other exit costs, $212,000
related to asset movement costs, a credit of $177,000 related to employee
termination benefits, and a credit of $275,000 related to sales proceeds
received on equipment with no carrying value. Of this total charge,
$44,000 was recorded in restructuring expense and $450,000 was recorded in cost
of sales in the 2007 Consolidated Statement of Operations.
77
The
following summarizes the activity in the restructuring accrual (dollars in
thousands):
|
Employee
Termination
Benefits
(1)
|
Lease
Termination
and
Other
Exit
Costs
|
Total
|
||||||||||
|
Balance,
April 30, 2006
|
$ | 439 | - | 439 | ||||||||
|
accrual
established in fiscal 2007
|
- | 282 | 282 | |||||||||
|
adjustments
in fiscal 2007
|
(177 | ) | 2 | (175 | ) | |||||||
|
paid
in fiscal 2007
|
(231 | ) | (57 | ) | (288 | ) | ||||||
|
balance,
April 29, 2007
|
31 | 227 | 258 | |||||||||
|
adjustments
in fiscal 2008
|
(34 | ) | - | (34 | ) | |||||||
|
paid
in fiscal 2008
|
3 | (49 | ) | (46 | ) | |||||||
|
balance,
April 27, 2008
|
- | 178 | 178 | |||||||||
|
paid
in fiscal 2009
|
- | (97 | ) | (97 | ) | |||||||
|
balance,
May 3, 2009
|
$ | - | 81 | 81 | ||||||||
|
(1)
|
Employee
termination benefit payments are net of cobra premiums received from
participants.
|
August
2005 Upholstery Fabrics
In August
2005, the company’s board of directors approved a restructuring plan within the
upholstery fabrics segment designed to reduce the company’s U.S. yarn
manufacturing operations. The company sold its polypropylene yarn
extrusion equipment (with a carrying value of $2.3 million) located in Graham,
NC to the company’s supplier for polypropylene yarn, for $1.1 million payable in
cash. Pursuant to terms of the sale agreement, the company has a
long-term supply contract with the supplier to continue to provide the company
with polypropylene yarn at prices tied to a published index.
The
company’s board of directors also approved further reductions in the company’s
yarn operations by closing the company’s facility in Shelby, NC and
consolidating the yarn operations into the Lincolnton, NC
facility. The company is outsourcing the open-end yarns previously
produced at the Shelby, NC facility. Overall, these actions reduced
the number of associates by approximately 100 people.
During
fiscal 2009, as a result of management’s continual evaluations of the
restructuring accrual, the restructuring accrual was increased by $5,000 to
reflect current estimates of future health care claims. This $5,000 increase in
the restructuring accrual was recorded in restructuring expense in the 2009
Consolidated Statement of Operations.
During
fiscal 2008, total restructuring charges incurred were $80,000 of which $100,000
related to lease termination and other exit costs and a credit of $20,000
related to employee termination benefits. This total charge was recorded in
restructuring expense in the 2008 Consolidated Statement of
Operations.
During
fiscal 2007, total restructuring and related charges incurred were $63,000 of
which $412,000 related to write-downs of a building and equipment, $167,000
related to operating costs associated with a closed plant facility, $49,000
related to asset movement costs, $6,000 related to lease termination costs, a
credit of $40,000 related to employee termination benefits, and a credit of
$531,000 related to sales proceeds on equipment with no carrying
value. Of this total net charge, a credit of $104,000 was recorded in
restructuring expense and a charge of $167,000 was recorded in cost of sales in
the 2007 Consolidated Statement of Operations.
78
The
following summarizes the activity in the restructuring accrual (dollars in
thousands):
|
Employee
Termination
Benefits
(1)
|
Lease
Termination
and
Other
Exit
Costs
|
Total
|
||||||||||
|
Balance,
April 30, 2006
|
$ | 127 | 7 | 134 | ||||||||
|
adjustments
in fiscal 2007
|
(40 | ) | 6 | (34 | ) | |||||||
|
paid
in fiscal 2007
|
(69 | ) | (13 | ) | (82 | ) | ||||||
|
balance,
April 29, 2007
|
18 | - | 18 | |||||||||
|
adjustments
in fiscal 2008
|
(20 | ) | 100 | 80 | ||||||||
|
paid
in fiscal 2008
|
4 | (100 | ) | (96 | ) | |||||||
|
balance,
April 27, 2008
|
2 | - | 2 | |||||||||
|
adjustments
in fiscal 2009
|
5 | - | 5 | |||||||||
|
paid
in fiscal 2009
|
(7 | ) | - | (7 | ) | |||||||
|
balance,
May 3, 2009
|
$ | - | - | - | ||||||||
|
(1)
|
Employee
termination benefit payments are net of cobra premiums received from
participants.
|
April
2005 Upholstery Fabrics
In April
2005, the company’s board of directors approved a restructuring plan within the
upholstery fabrics segment designed to reduce costs, increase asset utilization,
and improve profitability. The restructuring plan included the
consolidation of the company’s velvet fabrics manufacturing operations,
additional fixed manufacturing cost reductions in the decorative fabrics
operation, and significant reductions in selling, general and administrative
expenses within the upholstery fabrics segment. Also, the company combined its
sales, design, and customer service activities within the upholstery fabrics
segment. As a result, the company sold two buildings in Burlington,
NC consisting of approximately 140,000 square feet for proceeds of
$2,850,000. Overall, these restructuring actions reduced the number
of associates by 350 people.
During
fiscal 2009, as a result of management’s continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by approximately
$27,000 to reflect current estimates of future health care claims. This $27,000
decrease in the restructuring accrual was recorded as a credit to restructuring
expense in the 2009 Consolidated Statement of Operations.
During
fiscal 2008, the company recorded a restructuring credit of $35,000, of which a
charge of $32,000 related to lease termination and other exit costs and a credit
of $67,000 related to employee termination benefits. This credit of $35,000 was
recorded in restructuring expense in the 2008 Consolidated Statement of
Operations.
During
fiscal 2007, the total restructuring and related charges incurred were $1.1
million, of which approximately $671,000 related to asset movement costs,
$321,000 related to operating costs associated with the closed plant facilities,
$238,000 related to inventory markdowns, $194,000 related to lease termination
costs, $59,000 related to write-downs of equipment, a credit of $165,000 related
to sales proceeds received on equipment with no carrying value, and a credit of
$195,000 related to employee termination benefits. Of this total
charge, $564,000 was recorded in restructuring expense, $501,000 was recorded in
cost of sales, and $58,000 was recorded in selling, general and administrative
expenses in the 2007 Consolidated Statement of Operations.
The
following summarizes the activity in the restructuring accrual (dollars in
thousands):
|
Employee
Termination
Benefits
(1)
|
Lease
Termination
and
Other
Exit
Costs
|
Total
|
||||||||||
|
balance,
April 30, 2006
|
799 | 201 | 1,000 | |||||||||
|
additions
in fiscal 2007
|
- | 184 | 184 | |||||||||
|
adjustments
in fiscal 2007
|
(195 | ) | 10 | (185 | ) | |||||||
|
paid
in fiscal 2007
|
(517 | ) | (341 | ) | (858 | ) | ||||||
|
balance,
April 29, 2007
|
87 | 54 | 141 | |||||||||
|
adjustments
in fiscal 2008
|
(67 | ) | 32 | (35 | ) | |||||||
|
paid
in fiscal 2008
|
7 | (86 | ) | (79 | ) | |||||||
|
balance,
April 27, 2008
|
$ | 27 | - | 27 | ||||||||
|
adjustments
in fiscal 2009
|
(27 | ) | - | (27 | ) | |||||||
|
Balance,
May 3, 2009
|
$ | - | - | - | ||||||||
|
(1)
|
Employee
termination benefit payments are net of cobra premiums received from
participants.
|
79
October
2004 Upholstery Fabrics
In October
2004, the company’s board of directors approved a restructuring plan within the
upholstery fabrics segment aimed at reducing costs, increasing asset utilization
and improving profitability. The restructuring plan involved the consolidation
of the company’s decorative fabrics weaving operations by closing the company’s
facility in Pageland, SC, and consolidating those operations into the Graham, NC
facility. Additionally, the company consolidated its yarn operations
by integrating the production of the Cherryville, NC plant into the company’s
Shelby, NC facility. Overall, these restructuring actions reduced the number of
associates by approximately 250 people.
No
restructuring and related charges were incurred during fiscal 2009.
During
fiscal 2008, as a result of management’s continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by $13,000 to
reflect current estimates of future health care claims. This $13,000 decrease in
the restructuring accrual was recorded as a credit to restructuring expense in
the 2008 Consolidated Statement of Operations.
During
fiscal 2007, as a result of management’s continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by $22,000 to
reflect current estimates of future health care claims. This $22,000 decrease in
the restructuring accrual was recorded as a credit to restructuring expense in
the 2007 Consolidated Statement of Operations.
The
following summarizes the activity in the restructuring accrual (dollars in
thousands):
|
Employee
Termination
Benefits
(1)
|
Lease
Termination
and
Other
Exit
Costs
|
Total
|
||||||||||
|
balance,
April 30, 2006
|
64 | - | 64 | |||||||||
|
additions
in fiscal 2007
|
- | - | - | |||||||||
|
adjustments
in fiscal 2007
|
(22 | ) | - | (22 | ) | |||||||
|
paid
in fiscal 2007
|
(29 | ) | - | (29 | ) | |||||||
|
balance,
April 29, 2007
|
13 | - | 13 | |||||||||
|
adjustments
in fiscal 2008
|
(13 | ) | - | (13 | ) | |||||||
|
balance,
April 27, 2008
|
$ | - | - | - | ||||||||
|
(1)
|
Employee
termination benefit payments are net of cobra premiums received from
participants.
|
Fiscal
2003 Culp Decorative Fabrics Restructuring
In August
2002, the company’s board of directors approved a restructuring plan in the
upholstery fabrics segment aimed at lowering manufacturing costs, simplifying
the dobby fabric upholstery line, increasing asset utilization and enhancing the
division’s manufacturing competitiveness. The restructuring plan
involved closing a facility in Chattanooga, TN and integrating these functions
into other plants, a significant reduction in the number of stock keeping units,
or SKUs, offered in the dobby product line, and a net reduction in workforce of
approximately 300 positions.
During
fiscal 2009, total restructuring charges were $14,000 and related to other exit
costs regarding the company's closed plant facility in Chattanooga, TN. This
$14,000 charge was recorded in restructuring expense in the 2009 Consolidated
Statement of Operations.
80
During
fiscal 2008, as a result of management’s continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by approximately
$79,000, of which $66,000 related to lease termination and other exit costs and
$13,000 related to employee termination benefits. This $79,000 decrease in the
restructuring accrual was recorded as a credit to restructuring expense in the
2008 Consolidated Statement of Operations. Additionally, the company recorded a
restructuring related charge of $44,000 for operating costs associated with a
closed plant facility. This $44,000 restructuring related charge was recorded in
cost of sales in the 2008 Consolidated Statement of Operations.
During
fiscal 2007, as a result of management’s continual evaluation of the
restructuring accrual, the restructuring accrual was decreased by approximately
$17,000 in lease termination and other exit costs to reflect current estimates
of sub-lease income and other exit costs. This $17,000 decrease in the
restructuring accrual was recorded as a credit to restructuring expense in the
2007 Consolidated Statement of Operations. Additionally, the company recorded a
restructuring related charge of $38,000 for operating costs associated with the
closed plant facility. This $38,000 restructuring related charge was recorded in
cost of sales in the 2007 Consolidated Statement of Operations.
The
following summarizes the activity in the restructuring accrual (dollars in
thousands):
|
Employee
Termination
Benefits
(1)
|
Lease
Termination
and
Other
Exit
Costs
|
Total
|
||||||||||
|
balance,
April 30, 2006
|
88 | 2,324 | 2,412 | |||||||||
|
adjustments
in fiscal 2007
|
- | (17 | ) | (17 | ) | |||||||
|
paid
in fiscal 2007
|
(45 | ) | (1,043 | ) | (1,088 | ) | ||||||
|
balance,
April 29, 2007
|
43 | 1,264 | 1,307 | |||||||||
|
adjustments
in fiscal 2008
|
(13 | ) | (66 | ) | (79 | ) | ||||||
|
paid
in fiscal 2008
|
(30 | ) | (963 | ) | (993 | ) | ||||||
|
balance,
April 27, 2008
|
- | 235 | 235 | |||||||||
|
adjustments
in fiscal 2009
|
- | 14 | 14 | |||||||||
|
paid
in fiscal 2009
|
- | (14 | ) | (14 | ) | |||||||
|
Balance,
May 3, 2009
|
- | 235 | 235 | |||||||||
|
(1)
|
Employee
termination benefit payments are net of cobra premiums received from
participants.
|
Long-Lived
Asset Impairments
During
fiscal 2009, the company incurred impairment charges on property, plant, and
equipment in connection with its restructuring activities. These impairment
charges totaled $8.0 million and were recorded in restructuring expense in the
2009 Consolidated Statement of Operations. This $8.0 million impairment charge
includes $2.2 million for fixed assets that were abandoned in connection with
the consolidation of certain plant facilities in China and $774,000 to reflect
the selling price of the company’s corporate headquarters of $4.0 million (Note
4). Also, during the course of the company’s strategic review in the second
quarter of fiscal 2009 of its upholstery fabrics business, the company assessed
the recoverability of the carrying value of its upholstery fabric fixed assets
that are being held and used in operations. This strategic review resulted in
impairment losses of $4.4 million and $543,000 for fixed assets located in China
and the U.S., respectively. In addition, the company incurred impairment losses
totaling $115,000 for assets held for sale associated with its U.S. upholstery
fabric operations. These losses reflect the amounts by which the carrying values
of these fixed assets exceeded their estimated fair values determined by their
estimated future discounted cash flows and quoted market
prices.
81
|
4.
|
ASSETS
HELD FOR SALE AND RELATED
IMPAIRMENTS
|
A summary
of assets held for sale follows:
|
(dollars
in thousands)
|
May
3, 2009
|
April
27, 2008
|
||||||
|
Corporate
headquarters office space
|
$ | - | $ | 4,783 | ||||
|
U.S.
upholstery fabrics
|
1,189 | 792 | ||||||
|
Mattress
fabrics
|
20 | 35 | ||||||
| $ | 1,209 | $ | 5,610 | |||||
The
carrying value of these assets held for sale are presented separately in the May
3, 2009 and April 27, 2008, consolidated balance sheets and are no longer being
depreciated.
Corporate
Headquarters Office Space
Effective
October 29, 2007, the company adopted a plan to sell its corporate headquarters.
In connection with the disposal plan, the company determined that the carrying
value of its corporate headquarters was less than its fair value. Consequently,
no impairment loss was recorded in the 2008 Consolidated Statement of
Operations.
Effective
January 29, 2009, the company sold its corporate headquarters building in High
Point, North Carolina for a purchase price of $4.0 million. The agreement allows
the company to lease the building back under an operating lease from the
purchaser for an initial term of approximately three years expiring on March 31,
2012 and is payable in monthly installments of $30,020, plus approximately
two-thirds of the building’s normal occupancy costs. The contract contains
renewal options as defined in the agreement for periods from April 1, 2012
through September 30, 2015 and October 1, 2015 through March 31, 2019. As of May
3, 2009, the minimum lease payments (excluding operating costs) under this
operating lease are: FY 2010 - $360,240, FY 2011- $360,240, and FY 2012 -
$330,220.
The
proceeds of the sale were used to pay off the remaining balance of the first
real estate loan totaling $3.7 million and $344,000 on the unsecured loan
associated with the ITG acquisition (see Note 12). In connection with this sale,
the company determined that the carrying value of their corporate headquarters
was more than its fair value, less cost to sell. Consequently, the company
recorded an impairment charge of $774,000 in restructuring expense in the 2009
Consolidated Statement of Operations.
U.S.
Upholstery Fabrics
At May 3,
2009 and April 27, 2008, and in connection with the company’s restructuring
actions, buildings and equipment related to its U.S. upholstery fabric
operations are classified as held for sale. The company expects that the final
sale and disposal of these assets will be completed within a year. The company
determined that the carrying values of some of the underlying assets exceeded
their fair values. Consequently, the company recorded an impairment charge
totaling $115,000 and $20,000 in restructuring expense in the 2009 and 2008
Consolidated Statements of Operations, respectively.
Mattress
Fabrics
Effective
January 2, 2008, the company adopted a plan to sell certain older equipment
related to its mattress fabrics segment that is being replaced by newer and more
efficient equipment. In connection with the plan of disposal, the company
determined that the carrying value of this equipment of $513,000 exceeded its
fair value of $224,000. Consequently, the company recorded an impairment loss of
$289,000. This impairment loss of $289,000 was recorded in cost of sales in the
2008 Consolidated Statement of Operations. The company received sales proceeds
totaling $189,000 in fiscal 2008. In fiscal 2009, an impairment loss of $15,000
was recorded as the company determined that the fair value of the remaining
equipment classified as held for sale exceeded its fair
value.
82
|
5.
|
ACCOUNTS
RECEIVABLE
|
A summary
of accounts receivable follows:
|
May
3,
|
April
27,
|
|||||||
|
(dollars in thousands)
|
2009
|
2008
|
||||||
|
customers
|
$ | 20,093 | 28,830 | |||||
|
allowance
for doubtful accounts
|
(1,535 | ) | (1,350 | ) | ||||
|
reserve
for returns and allowances and discounts
|
(442 | ) | (407 | ) | ||||
| $ | 18,116 | 27,073 | ||||||
A summary
of the activity in the allowance for doubtful accounts follows:
|
(dollars in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
beginning
balance
|
$ | (1,350 | ) | (1,332 | ) | (1,049 | ) | |||||
|
provision
for bad debts
|
(538 | ) | (180 | ) | (618 | ) | ||||||
|
write-offs,
net of recoveries
|
353 | 162 | 335 | |||||||||
|
ending
balance
|
$ | (1,535 | ) | (1,350 | ) | (1,332 | ) | |||||
A summary
of the activity in the allowance for returns and allowances and discounts
follows:
|
(dollars in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
beginning
balance
|
$ | (407 | ) | (570 | ) | (826 | ) | |||||
|
provision
for returns and allowances discounts
|
(1,999 | ) | (2,512 | ) | (1,429 | ) | ||||||
|
cash
discounts taken
|
1,964 | 2,675 | 1,685 | |||||||||
|
ending
balance
|
$ | (442 | ) | (407 | ) | (570 | ) | |||||
|
6.
|
INVENTORIES
|
A summary
of inventories follows:
|
(dollars in thousands)
|
May 3,
2009
|
April
27,
2008
|
||||||
|
raw
materials
|
$ | 5,987 | 9,939 | |||||
|
work-in-process
|
1,254 | 1,682 | ||||||
|
finished
goods
|
16,737 | 23,773 | ||||||
| $ | 23,978 | 35,394 | ||||||
|
7.
|
PROPERTY,
PLANT AND EQUIPMENT
|
A summary
of property, plant and equipment follows:
|
(dollars
in thousands)
|
depreciable
lives
(in
years)
|
May
3,
2009
|
April
27,
2008
|
|||||||||
|
land
and improvements
|
10 | $ | 652 | 1,061 | ||||||||
|
buildings
and improvements
|
7-40 | 10,292 | 13,166 | |||||||||
|
leasehold
improvements
|
life
of lease
|
92 | 6,206 | |||||||||
|
machinery
and equipment
|
3-12 | 46,336 | 60,076 | |||||||||
|
office
furniture and equipment
|
3-10 | 4,656 | 5,475 | |||||||||
|
capital
projects in progress
|
333 | 4,515 | ||||||||||
| 62,361 | 90,499 | |||||||||||
|
accumulated
depreciation and amortization
|
(38,108 | ) | (57,560 | ) | ||||||||
| $ | 24,253 | 32,939 | ||||||||||
83
The
company financed $1.4 million of its capital expenditures through a capital
lease (see note 13) in fiscal 2009. The company financed $2.1 million of its
capital expenditures through vendor financing arrangements in fiscal
2008. The company did not finance any of its capital expenditures for
fiscal 2007. The company’s vendor financed arrangements bear interest
with fixed interest rates ranging from 6% to 7.14%.
The
principal payment requirements of accounts payable-capital expenditures during
the next two fiscal years are: 2010 – $923,000 and 2011 –
$638,000.
8. GOODWILL
A summary
of the change in the carrying amount of goodwill follows:
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
beginning
balance
|
$ | 4,114 | 4,114 | 4,114 | ||||||||
|
Bodet & Horst acquisition (Note
2)
|
7,479 | - | - | |||||||||
|
ending
balance
|
$ | 11,593 | 4,114 | 4,114 | ||||||||
The
goodwill balance relates to the mattress fabrics segment.
|
9.
|
OTHER
ASSETS
|
A summary
of other assets follows:
|
(dollars
in thousands)
|
May
3,
2009
|
April
27,
2008
|
||||||
|
cash
surrender value – life insurance
|
$ | 1,294 | 1,269 | |||||
|
non-compete
agreements, net (note 2)
|
1,164 | 789 | ||||||
|
other
|
362 | 351 | ||||||
| $ | 2,820 | 2,409 | ||||||
The
company recorded non-compete agreements in connection with the company’s asset
purchase agreements with ITG and Bodet & Horst at their fair values based on
valuation techniques. These non-compete agreements pertain to the company’s
mattress fabrics segment. The non-compete agreement associated with ITG is
amortized on a straight line basis over the four year life of the agreement. The
non-compete agreement associated with Bodet & Horst is amortized on a
straight-line basis over the six year life of the agreement and requires
quarterly payments of $12,500 over the life of the agreement (Note 2). As of May
3, 2009, the total remaining non-compete payments were
$262,500.
At May 3,
2009 and April 27, 2008, the gross carrying amount of these non-compete
agreements was $1.9 million and $1.1 million, respectively. At May 3, 2009 and
April 27, 2008, accumulated amortization for these non-compete agreements was
$777,000 and $359,000, respectively. Amortization expense for these non-compete
agreements was $419,000 in fiscal 2009. Amortization expense for the ITG
non-compete agreement was $287,000 and $72,000 for fiscal 2008 and 2007,
respectively. No amortization expense was recorded for the Bodet & Horst
non-compete agreement in fiscal 2008 and 2007 as the asset purchase agreement
was effective August 11, 2008. The remaining amortization expense (which
includes the total remaining Bodet & Horst non-compete payments
of $262,500) for the next five fiscal years follows: FY 2010 - $463,000; FY 2011
- $391,000; FY 2012 - $176,000; FY 2013 – $176,000; FY 2014 – $176,000; and
thereafter $44,000. The weighted average amortization period for these
non-compete agreements is 5 years as of May 3, 2009.
The
company’s cash surrender value – life insurance balances at May 3, 2009 and
April 27, 2008 are payable upon death of the respective
beneficiary.
84
|
10.
|
ACCRUED
EXPENSES
|
A summary
of accrued expenses follows:
|
(dollars
in thousands)
|
May 3,
2009
|
April
27,
2008
|
||||||
|
compensation,
commissions and related benefits
|
$ | 4,770 | 5,690 | |||||
|
interest
|
243 | 186 | ||||||
|
accrued
rebates
|
166 | 241 | ||||||
|
other
|
1,325 | 2,183 | ||||||
| $ | 6,504 | 8,300 | ||||||
|
11.
|
INCOME
TAXES
|
Total
income taxes (benefits) were allocated as follows:
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
income
(loss) from operations
|
$ | 31,959 | (542 | ) | (1,685 | ) | ||||||
|
shareholders’
equity, related to the tax benefit arising from the exercise of stock
options
|
- | (17 | ) | (16 | ) | |||||||
|
shareholders’
equity, related to tax effect of cash flow hedges
|
27 | (25 | ) | (13 | ) | |||||||
| $ | 31,986 | (584 | ) | (1,714 | ) | |||||||
Income tax
expense (benefit) attributable to income (loss) from operations consists
of:
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
current
|
||||||||||||
|
federal
|
$ | 83 | - | - | ||||||||
|
state
|
- | - | - | |||||||||
|
foreign
(1)
|
(1,355 | ) | 377 | 2,091 | ||||||||
| (1,272 | ) | 377 | 2,091 | |||||||||
|
deferred
|
||||||||||||
|
federal
|
2,986 | (408 | ) | (3,100 | ) | |||||||
|
state
|
225 | (36 | ) | (344 | ) | |||||||
|
foreign
(1)
|
2,841 | (475 | ) | (332 | ) | |||||||
|
valuation allowance
|
27,179 | - | - | |||||||||
| 33,231 | (919 | ) | (3,776 | ) | ||||||||
| $ | 31,959 | (542 | ) | (1,685 | ) | |||||||
|
(1)
|
Foreign
current income tax expense includes a U.S. income tax (benefit) expense on
income tax reserves pertaining to foreign sources of taxable income of
$(4,990,000), $1,165,000 and $702,000 in fiscal 2009, 2008 and 2007,
respectively. Foreign deferred income tax expense includes U.S. income tax
expense on income tax reserves pertaining to foreign sources of taxable
income of $4,990,000. Also, foreign income tax expense in 2008 includes
research and development credits with regards to the company’s Canadian
subsidiary of $593,000 and income tax incentives granted by the Chinese
government of $592,000. No income tax incentives from the Chinese
government were obtained in fiscal 2009 and
2007.
|
(Loss)
income before income taxes related to the company’s foreign operations for the
years ended May 3, 2009, April 27, 2008, and April 29, 2007 was $(10.9) million,
$6.9 million and $8.6 million, respectively. Income (loss) before income taxes
related to the company’s domestic operations for the years ended May 3, 2009,
April 27, 2008, and April 29, 2007 was $4.1 million, $(2.1) million, and $(11.6)
million, respectively.
85
Under a
tax holiday in the People’s Republic of China, the company was granted an
exemption from income taxes for two years commencing from the first
profit-making year on a calendar year basis and a 50% reduction in the income
tax rates for the following three years. Calendar year 2004 was the
first profit-making year. The company was entitled to a 50% income
tax reduction for the calendar years 2007 and 2008. The applicable
income tax rate before the tax holiday reduction was 25% in fiscal 2009 and 27%
in fiscal 2008 and 2007. Had the company not been entitled to the tax holiday,
the consolidated income tax expense (benefit) for fiscal years 2009, 2008, and
2007 would have been $31,985,000, $(4,000) and $(830,000),
respectively.
The
following schedule summarizes the principal differences between the income tax
expense (benefit) at the federal income tax rate and the effective income tax
rate reflected in the consolidated financial statements:
|
2009
|
2008
|
2007 | ||||||||||
|
federal
income tax rate
|
(34.0 | )% | 34.0 | % | (34.0 | )% | ||||||
|
state
income taxes, net of federal
|
||||||||||||
|
income
tax benefit
|
- | (1.5 | ) | (14.6 | ) | |||||||
|
foreign
tax rate differential
|
2.2 | (10.3 | ) | (19.6 | ) | |||||||
|
increase
in tax reserves
|
50.0 | 26.9 | 11.5 | |||||||||
|
tax
effects of Canadian fx gain (loss)
|
25.7 | (23.2 | ) | (2.1 | ) | |||||||
|
undistributed
earnings from foreign subsidiaries
|
22.8 | - | - | |||||||||
|
tax
effects of China tax holiday
|
(0.4 | ) | (18.8 | ) | (29.8 | ) | ||||||
|
Canadian
research and development credits
|
(1.4 | ) | (12.2 | ) | - | |||||||
|
China
income tax incentives
|
- | (12.2 | ) | - | ||||||||
|
non-deductible
stock option expense
|
3.0 | 1.7 | 25.6 | |||||||||
|
non-deductible
expenses
|
0.2 | 1.6 | 3.3 | |||||||||
|
valuation
allowance on net deferred tax assets
|
394.8 | - | - | |||||||||
|
other
|
1.4 | 2.8 | 3.6 | |||||||||
| 464.3 | % | (11.2 | )% | (56.1 | )% |
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities consist of the following:
| (dollars in thousands) |
2009
|
2008
|
||||||
|
deferred
tax assets:
|
||||||||
|
accounts
receivable
|
$ | 676 | 587 | |||||
|
inventories
|
2,044 | 2,290 | ||||||
|
compensation
|
703 | 735 | ||||||
|
liabilities
and other
|
599 | 977 | ||||||
|
alternative
minimum tax
|
1,403 | 1,320 | ||||||
|
property,
plant and equipment (1)
|
1,847 | - | ||||||
|
loss
carryforwards – U.S.
|
27,316 | 28,786 | ||||||
|
loss
carryforwards – foreign
|
19 | 169 | ||||||
|
valuation
allowances
|
(27,170 | ) | - | |||||
|
total deferred
tax assets
|
7,437 | 34,864 | ||||||
|
deferred
tax liabilities:
|
||||||||
|
property,
plant and equipment (2)
|
(1,922 | ) | (2,383 | ) | ||||
|
undistributed
earnings from foreign subsidiaries
|
(1,332 | ) | - | |||||
|
unrecognized
tax benefits – U.S.
|
(4,990 | ) | - | |||||
|
other
|
(113 | ) | (135 | ) | ||||
|
total
deferred tax liabilities
|
(8,357 | ) | (2,518 | ) | ||||
|
Net
deferred tax (liability) asset
|
(920 | ) | $ | 32,346 | ||||
|
(1)
|
Pertains
to the company’s operations located in
China.
|
|
(2)
|
Pertains
to the company’s operations located in the U.S. and
Canada.
|
86
Federal
and state net operating loss carryforwards were $71.3 million with related
future tax benefits of $27.3 million at May 3, 2009. These carryforwards
principally expire in 13-19 years, fiscal 2022 through fiscal
2028. The company also has an alternative minimum tax credit
carryforward of approximately $1.4 million for federal income tax purposes that
does not expire.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes”, we evaluate our deferred income taxes to
determine if a valuation allowance is required. SFAS No. 109 requires that
companies assess whether a valuation allowance should be established based on
the consideration of all available evidence using a “more likely than not”
standard with significant weight being given to evidence that can be objectively
verified. The significant uncertainty in current and expected demand for
furniture and mattresses, along with the prevailing uncertainty in the overall
economic climate, has made it very difficult to forecast both short-term and
long-term financial results, and therefore, present significant negative
evidence as to whether we need to record a valuation allowance against our net
deferred tax assets. Based on this significant negative evidence, we recorded a
$27.2 million valuation allowance during fiscal 2009, of which $25.3 million and
$1.9 million were against the net deferred tax assets of our U.S. and China
operations, respectively. The company’s net deferred tax asset primarily
resulted from the recording of the income tax benefit of U.S. income tax loss
carryforwards over the last several years, which totals $71.3 million. This
non-cash charge of $27.2 million has no effect on the company’s operations, loan
covenant compliance, or the possible utilization of the U.S. income tax loss
carryforwards in the future. If and when the company utilizes any of these U.S.
income tax loss carryforwards to offset future U.S. taxable income, the income
tax benefit would be recognized at that time.
At May 3,
2009, the remaining current deferred tax asset was $54,000 and noncurrent
deferred tax liability was $974,000, each of which pertain to our operations in
Canada.
The
following table sets forth the change in the company’s unrecognized tax
benefit:
|
(dollars
in thousands)
|
2009
|
2008
|
||||
|
beginning
balance
|
$
|
4,802
|
3,409
|
|||
|
increases
from prior period tax positions
|
1,119
|
1,329
|
||||
|
decreases
from prior period tax positions
|
(210
|
) |
(92
|
) | ||
|
increases
from current period tax positions
|
2,543
|
156
|
||||
|
ending
balance
|
$
|
8,254
|
4,802
|
Upon
adoption of FIN 48 as of April 30, 2007, the company had $3.4 million of total
gross unrecognized tax benefits, of which $3.1 million represents the amount of
gross unrecognized tax benefits that, if recognized, would favorably affect the
income tax rate in future periods. At April 27, 2008, the company had $4.8
million of total gross unrecognized tax benefits, of which $4.4 million
represents the amount of gross unrecognized tax benefits that, if recognized,
would favorably affect the income tax rate in future periods. At May 3, 2009,
the company had $8.3 million of total gross unrecognized tax benefits, of which
$3.2 million would favorably affect the income tax rate in future
periods.
As of May
3, 2009, the company had $8.3 million of total gross unrecognized tax benefits,
of which $5.0 million and $3.3 million were classified as net non-current
deferred income taxes and income taxes payable- long-term in the accompanying
consolidated balance sheets. At April 27, 2008, the company’s $4.8 million of
total unrecognized tax benefits were classified as income taxes payable-
long-term in the accompanying consolidated balance sheets.
The
company has elected to classify interest and penalties, accrued as required by
FIN 48, as part of income tax expense. At May 3, 2009 and April 27, 2008, the
gross amount of interest and penalties due to unrecognized tax benefits was
$159,000 and $115,000, respectively. Upon adoption of FIN 48 as of April 30,
2007 the gross amount of interest and penalties due to unrecognized tax benefits
was $98,000.
The
liability for uncertain tax positions includes $5.0 million related to tax
positions for which significant change is reasonably possible in fiscal 2010.
This amount relates to double taxation under applicable tax treaties with
foreign tax jurisdictions. United States federal and state income tax returns
filed by the company remain subject to examination for tax years 2002 and
subsequent due to loss carryforwards. Canadian federal returns remain subject to
examination for tax years 2004 and subsequent. Canadian provincial returns
remain subject to examination for tax years 2005 and subsequent. Income tax
returns for the company’s China subsidiaries are subject to examination for tax
years 2006 and subsequent.
87
Income tax
payments, net of income tax refunds, were $69,000 in fiscal 2009, $360,000 in
fiscal 2008, and $393,000 in fiscal 2007.
|
12.
|
LONG-TERM
DEBT AND LINES OF CREDIT
|
A summary
of long-term debt follows:
| May 3, | April 27, | ||||||||
|
(dollars
in thousands)
|
2009 | 2008 | |||||||
|
unsecured
senior term notes – Bodet & Horst
|
$ | 11,000 | - | ||||||
|
unsecured
term notes – existing
|
4,694 | 14,307 | |||||||
|
real
estate loan – I
|
- | 3,828 | |||||||
|
real
estate loan – II
|
- | 2,500 | |||||||
|
canadian
government loan
|
674 | 788 | |||||||
| 16,368 | 21,423 | ||||||||
|
current
maturities of long-term debt
|
(4,764 | ) | (7,375 | ) | |||||
|
long-term
debt, less current maturities
|
$ | 11,604 | $ | 14,048 |
Unsecured
Term Notes – Bodet & Horst
In
connection with the Bodet & Horst acquisition, we entered into the 2008 Note
Agreement dated August 11, 2008. The 2008 Note Agreement provides for the
issuance of $11.0 million of unsecured term notes with a fixed interest rate of
8.01% and a term of seven years. Principal payments of $2.2 million per year are
due on the notes beginning three years from the date of the 2008 Note Agreement
(August 11, 2008). The principal payments are payable over an average term of
6.2 years through August 11, 2015. The 2008 Note Agreement contains customary
financial and other covenants as defined in the agreement.
Unsecured
Term Notes - Existing
Our
unsecured senior term notes have a fixed interest rate of 8.80% (payable
semi-annually in March and September and subject to prepayment provisions each
fiscal quarter as defined in the agreement). The remaining principal payment of
$4.7 million is to be paid in March 2010.
In
connection with the 2008 Note Agreement, the company entered into a Consent and
Amendment that amends the previously existing unsecured note purchase
agreements. The purpose of the Consent and Amendment was for existing note
holders to consent to the 2008 Note Agreement and to provide that certain
financial covenants in favor of the existing note holders would be on the same
terms as those contained in the 2008 Note Agreement.
Government
of Quebec Loan
The
company has an agreement with the Government of Quebec to provide for a term
loan that is non-interest bearing and is payable in 48 equal monthly
installments commencing December 1, 2009. The proceeds were used to partially
finance capital expenditures at our Rayonese facility located in Quebec,
Canada.
Revolving
Credit Agreement –United States
We have an
unsecured credit agreement that provides for a revolving loan commitment of $6.5
million, including letters of credit up to $5.5 million. This agreement bears
interest at the one-month LIBOR plus an adjustable margin (all in rate of 3.41%
at May 3, 2009) based on the company’s debt/EBITDA ratio, as defined in the
agreement. As of May 3, 2009 there were $775,000 in outstanding letters of
credit (all of which related to workers compensation) under the agreement. At
May 3, 2009 and April 27, 2008, there were no borrowings outstanding under this
agreement.
88
On
November 3, 2008, the company entered into a thirteenth amendment to this
revolving credit agreement. This amendment extended the expiration date to
December 31, 2009, amended the financial covenants as contained in the
agreement, and provided for a cross default based on an “Event of Default” under
the company’s unsecured term note agreements (existing and Bodet &
Horst).
On July
15, 2009, the company entered into a fourteenth amendment to this revolving
credit agreement. This amendment extended the expiration date to August 15,
2010.
Revolving
Credit Agreement - China
Our China
subsidiary has an unsecured revolving credit agreement with a bank in China to
provide a line of credit of up to approximately $5 million, of which
approximately $1 million includes letters of credit. This agreement bears
interest at a rate determined by the Chinese government. At May 3, 2009 and
April 27, 2008, there were no borrowings outstanding under this
agreement.
Overall
Our loan
agreements require, among other things, that we maintain compliance with certain
financial covenants. At May 3, 2009 the company was in compliance
with these financial covenants.
The
principal payment requirements of long-term debt during the next five fiscal
years are: 2010 – $4.7 million; 2011 – $168,000; 2012 – $2.4 million; 2013 –
$2.4 million; 2015 – $2.3 million; and thereafter – $4.4 million.
Interest
paid during 2009, 2008 and 2007 totaled $2.5 million, $3.2 million and $3.9
million, respectively.
|
13.
|
CAPITAL
LEASE OBLIGATION
|
|
|
In
May 2008, the company entered into a capital lease to finance a portion of
the construction of certain equipment related to its mattress fabrics
segment. The lease agreement contains a bargain purchase option and bears
interest at 8.5%. The lease agreement requires principal payments totaling
$1.4 million which commenced on July 1, 2008, and are being paid in
quarterly installments through April 2010. This agreement is secured by
equipment with a carrying value of $2.4 million. The remaining principal
payments of $626,000 will be paid in quarterly installments in fiscal
2010.
|
|
|
The
company has recorded $1.4 million in equipment under capital leases. This
balance is reflected in property, plant, and equipment in the accompanying
consolidated balance sheet as of May 3, 2009. Depreciation expense on the
carrying value of $2.4 million associated with this capital lease
obligation was $139,000 in fiscal 2009. The equipment under this capital
lease obligation was placed into service in the company’s second quarter
of fiscal 2009.
|
|
14.
|
COMMITMENTS
AND CONTINGENCIES
|
The
company leases certain office, manufacturing and warehouse facilities and
equipment, primarily computers and vehicles, under noncancellable operating
leases. Lease terms related to real estate range from one to three
years with renewal options for additional periods ranging up to seven
years. The leases generally require the company to pay real estate
taxes, maintenance, insurance and other expenses. Rental expense for
operating leases was $2.3 million in fiscal 2009, $2.8 million in fiscal 2008,
and $3.2 million in fiscal 2007. Future minimum rental commitments
for noncancellable operating leases are $1.6 million in fiscal 2010; $886,000 in
fiscal 2011; $630,000 in fiscal 2012; $97,000 in fiscal 2013, and $53,000 in
fiscal 2014. Management expects that in the normal course of business, these
leases will be renewed or replaced by other operating leases, with the exception
of lease commitments associated with closed plant facilities.
The
company leased a manufacturing facility in Chattanooga, Tennessee from Joseph E.
Proctor d/b/a Jepco Industrial Warehouses (the “Landlord’) for a term of 10
years. This lease expired on April 30, 2008. The company closed this facility
approximately five years ago and has not occupied the facility except to provide
supervision and security. The company continued to make its lease payments to
the landlord as required by the lease. A $1.4 million lawsuit was filed by the
Landlord on April 10, 2008, in the Circuit Court for Hamilton County
Tennessee to collect the remainder of the rent due under the lease
for the months of March and April of 2008, additional expenses to be
paid by the company for March and April 2008, including utilities, insurance,
property taxes, and other tenant-paid expenses that would result in the triple
net rent due the Landlord, and for extensive repairs, refitting, renovation, and
capital improvement items the Landlord alleges he is entitled to have the
company pay for. The Landlord unilaterally took possession of the leased
premises on or about March 10, 2008, even though the lease was in good standing
and the company was entitled to complete possession. Consequently, the company
paid lease payments through March 10, 2008 but the Landlord has not accepted the
company’s position. The company will assert the repossessory action of the
Landlord as a bar to his further action under the lease to collect any items
from the company. A significant portion of the Landlord’s claim relates to the
company’s alleged liability for physical damage to the premises, costs to refit
the premises to its original condition, and to make physical improvements or
alterations to the premises. The company disputes the claims alleged in this
litigation and intends to defend itself vigorously.
89
A lawsuit
was filed against the company and other defendants (Chromatex, Inc., Rossville
Industries, Inc., Rossville Companies, Inc. and Rossville Investments, Inc.) on
February 5, 2008 in United States District Court for the Middle District of
Pennsylvania. The plaintiffs are Alan Shulman, Stanley Siegel, Ruth Cherenson as
Personal Representative of Estate of Alan Cherenson, and Adrienne Rolla and M.F.
Rolla as Executors of the Estate of Joseph Byrnes. The plaintiffs were partners
in a general partnership that formerly owned a manufacturing plant in West
Hazleton, Pennsylvania (the “Site”). Approximately two years after this general
partnership sold the Site to defendants Chromatex, Inc. and Rossville
Industries, Inc. the company leased and operated the Site as part of the
company’s Rossville/Chromatex division. The lawsuit involves court judgments
that have been entered against the plaintiffs and against defendant Chromatex,
Inc. requiring them to pay costs incurred by the United States Environmental
Protection Agency (“USEPA”) responding to environmental contamination at the
Site, in amounts approximating $8.6 million. Neither USEPA nor any
other governmental authority has asserted any claim against the company on
account of these matters. The plaintiffs seek contribution from the company and
other defendants and a declaration that the company and the other defendants are
responsible for environmental response costs under environmental laws and
certain agreements. The company does not believe it has any liability for the
matters described in this litigation and intends to defend itself vigorously. In
addition, the company has an indemnification agreement with certain other
defendants in the litigation pursuant to which the other defendants agreed to
indemnify the company for any damages it incurs as a result of the environmental
matters that are subject of this litigation. For these reasons, no reserve has
been recorded.
The
company is involved in legal proceedings and claims which have arisen in the
ordinary course of business. These actions, when ultimately concluded and
settled, will not, in the opinion of management, have a material adverse effect
upon the financial position, results of operations or cash flows of the
company.
|
15.
|
STOCK-BASED
COMPENSATION
|
Equity
Incentive Plans
On
September 20, 2007, the company’s shareholders approved a new equity incentive
plan entitled the Culp, Inc. 2007 Equity Incentive Plan (the “2007 Plan”). The
2007 Plan expanded the types of equity based awards available for grant by the
company’s Compensation Committee. The types of equity based awards available for
grant include stock options, stock appreciation rights, restricted stock and
restricted stock units, performance units, and other discretionary awards as
determined by the Compensation Committee. An aggregate of 1,200,000 shares of
common stock were authorized for issuance under the 2007 Plan. In conjunction
with the approval of the 2007 Plan, the company’s 2002 Stock Option Plan was
terminated (with the exception of currently outstanding options) and no
additional options will be granted under the 2002 Stock Plan. At May 3, 2009
there were 888,000 shares available for future equity based grants under the
company’s 2007 Plan.
90
Under the
company’s prior stock option plans (terminated with the approval of the 2007
Plan) and the 2007 Plan, employees and directors were and may be granted options
to purchase shares of common stock at the fair market value on the date of
grant. Options granted to employees in fiscal 2009 and 2008 vest in 20%
increments each year during a total five year vesting period. Options granted to
employees in fiscal 2009 and 2008 expire in ten years. Options granted to
employees in fiscal 2007 vest in 25% increments each year during a total four
year vesting period. Options granted to employees in fiscal 2007 expire in five
years. Options granted to outside directors under these plans vest immediately
on the date of grant (October each fiscal year) and expire ten years after the
date of grant. The company recorded compensation expense of $397,000, $618,000,
and $525,000 within selling, general, and administrative expense for incentive
stock options in fiscal 2009, 2008, and 2007, respectively.
The fair
value of each option award was estimated on the date of grant using a
Black-Scholes option-pricing model. The fair value of stock options granted to
employees under the 2007 equity incentive plan during fiscal 2009 was $5.00 per
share and $1.32 per share on the June 17, 2008 and January 7, 2009 grant dates,
respectively. The fair value of stock options granted to employees under the
2002 stock option plan during fiscal 2008 and 2007 was $4.74 and $2.43 per
share, respectively. The stock option grant dates for fiscal 2008 and 2007 were
June 25, 2007 and June 14, 2006, respectively. The fair values of these stock
option grants were determined using the following assumptions:
|
2009
|
2008
|
2007
|
||||||||||
|
Risk-free
interest rate
|
2.52% - 4.23 | % | 4.92% - 5.09 | % | 5.03 | % | ||||||
|
Dividend
yield
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Expected
volatility
|
66.18%-68.71 | % | 38.59% - 65.74 | % | 67.03 | % | ||||||
|
Expected
term (in years)
|
8 | 2 – 8.0 | 2.6 - 5 | |||||||||
Expected
volatility was a range of 66.18% - 68.71% in fiscal 2009 compared with 38.59% -
65.74% in fiscal 2008. The expected term in fiscal 2009 was 8 years compared
with 2 to 8 years in fiscal 2008. These changes reflect that stock options
granted in fiscal 2009 were only granted to executive officers who exhibit long
exercise patterns. Stock options granted in fiscal 2008 were granted to
executive officers and other members of management. Employees who represent
other members of management exhibit shorter exercise patterns than executive
officers.
Expected
volatility was a range of 38.59% - 65.74% in fiscal 2008 compared with 67.03% in
fiscal 2007. The expected term was a range of 2 to 8 years in fiscal 2008
compared with 2.6 to 5 years in fiscal 2007. These changes reflect that stock
options granted in fiscal 2008, which had an original vesting period of 2
years and expired 10 years from the date of grant compared with stock options
granted in fiscal 2007, which had a vesting period of 4 years and expired 5
years from the date of grant. Due to the significant change in the original
vesting and expiration periods, management reassessed the expected term of the
options granted to employees in fiscal 2008 and reviewed the
historical experience of exercise patterns between executive officers
who had stock option grants with an expiration period of 10 years and other
members of management who had “in-the-money” stock option grants. As a result of
this assessment, the expected term was determined to be a range of 2 to 3 years
for other members of management and 8 years for executive employees in fiscal
2008. The expected volatility percentage for other members of management was
38.59% and was based on a total expected term of 3 years in fiscal 2008. The
expected volatility percentage for executive officers was 65.74% and was based
on a total expected term of 8 years in fiscal 2008. The expected volatility
percentage of 67.03% in fiscal 2007 was the same for both other members of
management and executive officers due to the relatively short expiration period
of 5 years.
The fair
value of stock options granted to outside directors at each grant date under the
2007 Plan during fiscal 2009 and 2008 and the 2002 stock option plan during
fiscal 2007 were $4.14, $7.19, and $3.68 per share, respectively, using the
following assumptions:
|
2009
|
2008
|
2007
|
||||||||||
|
Risk-free
interest rate
|
3.77 | % | 4.56 | % | 4.57 | % | ||||||
|
Dividend
yield
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
|
Expected
volatility
|
64.12 | % | 66.28 | % | 68.36 | % | ||||||
|
Expected
term (in years)
|
10.0 | 8.0 | 6.8 | |||||||||
91
The
assumptions utilized in the model are evaluated and revised, as necessary, to
reflect market conditions, actual historical experience, and groups of employees
(executives and non-executives) that have similar exercise patterns that are
considered separately for valuation purposes. The risk-free interest rate for
periods within the contractual life of the option was based on the U.S. Treasury
yield curve in effect at the time of grant. The dividend yield was calculated
based on the company’s annual dividend as of the option grant date. The expected
volatility was derived using a term structure based on historical volatility and
the volatility implied by exchange-traded options on the company’s common stock.
The expected term of the options is based on the contractual term of the stock
options, expected employee exercise and post-vesting employment termination
trends.
The
following table summarizes stock option activity for fiscal 2009, 2008, and
2007:
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
||||||||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||||||||
|
outstanding
at beginning
|
||||||||||||||||||||||||
|
of
year
|
792,765 | $ | 6.19 | 926,000 | $ | 7.22 | 993,875 | $ | 7.11 | |||||||||||||||
|
granted
|
71,000 | 4.02 | 145,500 | 8.81 | 228,000 | 4.56 | ||||||||||||||||||
|
exercised
|
(4,500 | ) | 4.56 | (78,736 | ) | 5.84 | (115,750 | ) | 2.30 | |||||||||||||||
|
canceled/expired
|
(123,500 | ) | 6.99 | (199,999 | ) | 13.04 | (180,125 | ) | 6.38 | |||||||||||||||
|
outstanding
at end of year
|
735,765 | 5.85 | 792,765 | 6.19 | 926,000 | 7.22 | ||||||||||||||||||
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||
|
Number
|
Weighted-Avg.
|
Number
|
|||||||||||||
|
Range
of
|
Outstanding
|
Remaining
|
Weighted-Avg.
|
Exercisable
|
Weighted-Avg.
|
||||||||||
|
Exercise
Prices
|
at
5/03/09
|
Contractual
Life
|
Exercise
Price
|
at
5/03/09
|
Exercise
Price
|
||||||||||
| $ | 1.88 - $ 1.88 | 40,000 |
9.7
years
|
$ | 1.88 | - | $ | - | |||||||
| $ | 3.05 - $ 5.56 | 407,015 |
2.2
|
$ | 4.56 | 259,768 | $ | 4.56 | |||||||
| $ | 7.08 - $ 7.44 | 113,250 |
2.7
|
$ | 7.15 | 88,250 | $ | 7.17 | |||||||
| $ | 8.75 - $ 10.11 | 175,500 |
6.8
|
$ | 8.93 | 72,300 | $ | 9.18 | |||||||
| 735,765 |
3.8
|
$ | 5.85 | 420,318 | $ | 5.90 | |||||||||
At May 3,
2009, outstanding options to purchase 420,318 were exercisable, had a weighted
average exercise price of $5.90 per share, an aggregate intrinsic value of
$13,000, and a weighted average contractual term of 2.5 years. At May 3, 2009,
the aggregate intrinsic value for options outstanding was $114,000 with a
weighted average contractual term of 3.8 years.
The
aggregate intrinsic value for options exercised was $9,000, $277,000, and
$329,000 in fiscal 2009, 2008, and 2007, respectively.
The
remaining unrecognized compensation costs related to unvested awards at May 3,
2009 was $651,000 which is expected to be recognized over a weighted average
period of 2.8 years.
Stock
Option Modifications
On
December 12, 2007, the compensation committee of the board of directors approved
a modification of the June 25, 2007 stock option grant to change the vesting
period from 2 to 5 years from the original date of grant. There were no other
changes to the original stock option grant and no inducements were given to the
participating employees in exchange for this modification. The option
modification agreements were agreed to by all of the participating employees (20
in total) and were effective January 22, 2008 (modification date). No
incremental compensation cost was recognized for this modification as the fair
value of the revised award was less than the fair value of the original award as
of the modification date.
92
Effective
December 31, 2007, an executive officer resigned from the company and agreed to
a separation agreement. As part of the separation agreement, the exercise period
for this individual’s vested stock options was extended from 90 days from the
date of resignation (terms stated in the original option agreements) to
September 28, 2009. The incremental compensation cost recognized from this
modification approximated $54,000 in fiscal 2008.
Time
Vested Restricted Stock Awards
On January
7, 2009, and under the company’s 2007 Plan, certain key management employees and
a non-employee were granted 115,000 shares of time vested restricted common
stock (all of which are outstanding as of May 3, 2009). This restricted stock
award vests in equal one-third installments on May 1, 2012, 2013, and 2014.
Compensation expense is recognized from the date of grant through the end of the
vesting period on a straight-line basis. The fair value of these restricted
stock awards for key management employees is measured at the date of grant
(January 7, 2009) and was $1.88 per share. The fair value of this restricted
stock award for the non-employee is measured at the end of each reporting period
(May 3, 2009) and was $4.40 per share.
The
company recorded compensation expense of $15,000 within selling, general, and
administrative expense for restricted stock awards in fiscal 2009. There were
not any restricted stock awards granted in fiscal 2008 and 2007, and, therefore,
no compensation expense was recorded.
As of May
3, 2009, the remaining unrecognized compensation cost related to the unvested
restricted stock awards was $226,000, which is expected to be recognized over a
weighted average vesting period of 5.0 years.
Performance
Based Restricted Stock Units
On January
7, 2009, and under the company’s 2007 Plan, certain key management employees and
a non-employee were granted 120,000 shares of performance based restricted stock
units (all of which are outstanding as of May 3, 2009). This award contingently
vests in one third increments, if in any discreet period of two consecutive
quarters from February 2, 2009 through April 30, 2012, certain performance goals
are met. The fair value of these restricted stock awards for key management
employees is measured at the date of grant (January 7, 2009) was $1.88 per
share. The fair value of this restricted stock award for the non-employee is
measured at the end of each reporting period (May 3, 2009) and was $4.40 per
share.
The
company recorded compensation expense of $13,000 within selling, general, and
administrative expense for restricted stock awards in fiscal 2009. There were
not any restricted stock awards granted in fiscal 2008 and 2007, and, therefore,
no compensation expense was recorded. Compensation expense is recorded based on
an assessment each reporting period of the probability of certain performance
goals being met during the contingent vesting period. If performance goals are
not probable of being met, no compensation cost will be recognized and any
recognized compensation cost will be reversed.
As of May
3, 2009, the remaining unrecognized compensation cost related to the unvested
restricted stock units was $121,000, which is expected to be recognized over a
weighted average vesting period of 3.0 years.
Other
Share-Based Arrangements
The
company has a stock-based compensation agreement with a non-employee that
requires the company to settle in cash and is indexed by shares of the company’s
common stock as defined in the agreement. The cash settlement is based on a
30-day average closing price of the company’s common stock at the time of
payment. At May 3, 2009, this agreement was indexed by approximately 68,260
shares of the company’s common stock. The fair value of this agreement is
included in accrued expenses and was approximately $259,000 and $660,000 at May
3, 2009 and April 27, 2008, respectively. The company recorded a decrease in the
reserve of $288,000 and $49,000 to reflect the change in fair value for fiscal
2009 and 2008, respectively. Payments made under this arrangement
were $113,000 and $161,000 in fiscal 2009 and 2008, respectively.
93
|
16.
|
DERIVATIVES
|
In
accordance with the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and as amended by SFAS No. 137, SFAS
No. 138 and SFAS No. 149, the company’s Canadian Dollar Foreign Exchange
Contract and its interest rate swap agreement are designated as cash flow
hedges, with the fair value of these financial instruments recorded in other
assets or accrued expenses and changes in fair value recorded in accumulated
other comprehensive income (loss). In February 2009, the company adopted SFAS
No. 161, Disclosures about
Derivative Instruments and Hedging Activities (“SFAS 161”). This new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. SFAS 161 requires disclosure of gains and losses on
derivative instruments in a tabular format.
|
(Amounts
in Thousands)
|
||||||||||
|
Fair
Values of Derivative Instruments As of,
|
||||||||||
|
May
3, 2009
|
April
27, 2008
|
|||||||||
|
Derivatives
designated as hedging instruments under Statement 133
|
Balance
Sheet
Location
|
Fair
Value
|
Balance
Sheet
Location
|
Fair
Value
|
||||||
|
Canadian
dollar foreign exchange contract
|
Other
assets
|
$ |
20
|
N/A
|
-
|
|||||
|
|
|
|||||||||
| Interest rate swap agreement |
N/A
|
- |
Accrued
expenses
|
$ | 75 | |||||
|
Derivatives
in
Statement
133
Net
Investment
Hedging
Relationships
|
Amt
of Gain (Loss)
(net
of tax)
Recognized
in OCI on
Derivative
(Effective
Portion)
and recorded
in
Other assets
and
Accrued Expenses
at
Fair Value
|
Location
of
Gain
or (Loss)
Reclassified
from
Accumulated
OCI
into
Income
(Effective
Portion)
|
Amount
of Gain or
(Loss)
Reclassified
from
Accumulated
OCI
into Income
(Effective
Portion)
|
Location
of
Gain
or (Loss)
Recognized
in
Income
on
Derivative
(Ineffective
Portion
and
Amount
Excluded
from
Effectiveness
Testing)
|
Amount
of Gain (net
of
tax) or (Loss)
Recognized
in Income
on
Derivative
(Ineffective
Portion
and
Amount Excluded
from
Effectiveness
Testing)
|
|||||||||||||||||||||||||||
|
May
3,
2009
|
April
27,
2008
|
May
3,
2009
|
April
27,
2008
|
May
3,
2009
|
April
27,
2008
|
|||||||||||||||||||||||||||
|
Canadian
Dollar
Foreign
Exchange
Contract
|
$ | 20 | - | N/A | - | - | N/A | N/A | N/A | |||||||||||||||||||||||
|
Interest
Rate Swap
Agreement
|
$ | 48 | $ | (44 | ) | N/A | - | - | N/A | N/A | N/A | |||||||||||||||||||||
Canadian
Dollar Foreign Exchange Rate
On January
21, 2009, the company entered into a Canadian dollar foreign exchange contract
associated with its loan with the Government of Quebec. The agreement
effectively converts the Canadian dollar principal payments at a fixed Canadian
dollar foreign exchange rate compared with the United States dollar of 1.21812.
This agreement expires November 1, 2013 and is secured by cash deposits totaling
$200,000. These cash deposits of $200,000 are recorded in cash and cash
equivalents in 2009 Consolidated Balance Sheet.
94
Interest
Rate Swap Agreement
In
connection with the company’s first real estate loan on its corporate
headquarters building, the company was required to have an agreement to hedge
the interest rate risk exposure on the real estate loan. The company entered
into a $2,170,000 notional principal interest rate swap agreement, which
represented 50% of the principal amount of the real estate loan, and effectively
converted the floating rate LIBOR based interest payments to fixed payments at
4.99% plus the spread calculated under the real estate loan
agreement.
In
connection with the sale of the company’s headquarters in the third quarter of
fiscal 2009 (see note 4), the company’s interest rate swap agreement to hedge
the interest rate exposure on the first real estate loan was transferred to an
unsecured term loan associated with the ITG acquisition (see note 2). In the
fourth quarter of fiscal 2009, the company paid off the unsecured term loan
associated with the ITG acquisition and the related interest rate swap
agreement.
|
17.
|
NET
(LOSS) INCOME PER SHARE
|
Basic net
(loss) income per share is computed using the weighted-average number of shares
outstanding during the period. Diluted net (loss) income per share
uses the weighted-average number of shares outstanding during the period plus
the dilutive effect of stock-based compensation calculated using the treasury
stock method. Weighted average shares used in the computation of
basic and diluted net (loss) income per share are as follows:
|
(in
thousands)
|
2009
|
2008
|
2007
|
||||||
|
weighted-average
common
|
|||||||||
|
shares
outstanding, basic
|
12,651 | 12,624 | 11,922 | ||||||
|
dilutive
effect of stock-based compensation
|
- | 141 | - | ||||||
|
weighted-average
common
|
|||||||||
|
shares
outstanding, diluted
|
12,651 | 12,765 | 11,922 |
Options to
purchase 680,765, 46,500 and 467,459 shares of common stock were not included in
the computation of diluted net (loss) income per share for fiscal 2009, 2008 and
2007, respectively, because the exercise price of the options was greater than
the average market price of the common shares. Options to purchase
3,784 and 3,665 shares were not included in the computation of diluted net loss
per share for fiscal 2009 and 2007, respectively, because the company incurred a
net loss for these fiscal years.
|
18.
|
BENEFIT
PLANS
|
|
|
The
company has a defined contribution plan which covers substantially all
employees and provides for participant contributions on a pre-tax basis
and matching contributions by the company. Company contributions to the
plan were $436,000, $575,000 and $672,000 in fiscal 2009, 2008, and 2007,
respectively.
|
|
|
In
addition to the defined contribution plan, the company has a nonqualified
deferred compensation plan covering officers and certain other associates.
The plan provides for participant deferrals on a pre-tax basis and
non-elective contributions made by the company. Company
contributions to the plan were $64,000 for fiscal 2009, $80,000 for fiscal
2008, and $72,000 for fiscal 2007, respectively. The company’s
nonqualified plan liability of $992,000 and $882,000 at May 3, 2009 and
April 27, 2008, respectively, is included in accrued expenses in the
Consolidated Balance Sheets.
|
|
19.
|
SEGMENT
INFORMATION
|
The
company’s operations are classified into two business
segments: mattress fabrics and upholstery fabrics. The
mattress fabrics segment manufactures and sells fabrics to bedding
manufacturers. The upholstery fabrics segment manufactures and sells
fabrics primarily to residential and commercial (contract) furniture
manufacturers.
95
Net sales
denominated in U.S. dollars accounted for 86%, 88% and 86% of total consolidated
net sales in 2009, 2008 and 2007, respectively. International sales accounted
for 21%, 20% and 21% of net sales in 2009, 2008 and 2007, respectively, and are
summarized by geographic area as follows:
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
north
america (excluding USA)
|
$ | 14,440 | 18,880 | 17,310 | ||||||||
|
far
east and asia
|
27,509 | 28,465 | 32,683 | |||||||||
|
all
other areas
|
1,699 | 4,000 | 2,792 | |||||||||
| $ | 43,648 | 51,345 | 52,785 | |||||||||
The
company evaluates the operating performance of its segments based upon income
(loss) from operations before restructuring and related charges, certain
unallocated corporate expenses, and other non-recurring items. Cost of sales in
both segments include costs to manufacture or source our products, including
costs such as raw material and finished goods purchases, direct and indirect
labor, overhead and incoming freight charges. Unallocated corporate expenses
primarily represent compensation and benefits for certain executive officers and
all costs related to being a public company. Segment assets include assets used
in operations of each segment and primarily consist of accounts receivable,
inventories, and property, plant, and equipment. The mattress fabrics segment
also includes in segment assets, assets held for sale, goodwill, and other
non-current assets associated with the ITG and Bodet & Horst acquisitions
(see Note 2). The upholstery fabrics segment also includes assets held for sale
in segment assets.
|
|
Statements
of operations for the company’s operating segments are as
follows:
|
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||
|
net
sales:
|
||||||||||
|
upholstery
fabrics
|
$ | 88,542 | 115,982 | 142,736 | ||||||
|
mattress
fabrics
|
115,396 | 138,064 | 107,797 | |||||||
| $ | 203,938 | 254,046 | 250,533 | |||||||
|
gross
profit:
|
||||||||||
|
upholstery
fabrics
|
$ | 7,253 | 12,829 | 17,397 | ||||||
|
mattress
fabrics
|
20,996 | 22,576 | 18,610 | |||||||
|
total
segment gross profit
|
28,249 | 35,405 | 36,007 | |||||||
|
loss
on impairment of equipment
|
- | (289 | ) (3) | - | ||||||
|
restructuring related
charges
|
(3,597 | ) (1) | (1,957 | ) (4) | (4,802 | ) (6) | ||||
| $ | 24,652 | 33,159 | 31,205 | |||||||
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||
|
selling,
general, and administrative expenses:
|
||||||||||
|
upholstery
fabrics
|
$ | 8,756 | 11,650 | 15,065 | ||||||
|
mattress
fabrics
|
7,749 | 8,457 | 7,856 | |||||||
|
unallocated
corporate
|
3,225 | 3,797 | 4,051 | |||||||
|
total
segment selling, general, and administrative
|
||||||||||
|
expenses
|
19,730 | 23,904 | 26,972 | |||||||
|
restructuring related
charges
|
21 | (1) | 69 | (4) | 58 | (6) | ||||
| $ | 19,751 | 23,973 | 27,030 | |||||||
|
(loss)
income from operations:
|
||||||||||
|
upholstery
fabrics
|
$ | (1,503 | ) | 1,180 | 2,332 | |||||
|
mattress
fabrics
|
13,247 | 14,118 | 10,754 | |||||||
|
total
segment income from operations
|
11,744 | 15,298 | 13,086 | |||||||
|
unallocated
corporate expenses
|
(3,225 | ) | (3,797 | ) | (4,051 | ) | ||||
|
loss
on impairment of equipment
|
- | (289 | ) (3) | - | ||||||
|
restructuring and related
charges
|
(13,089 | ) (2) | (2,912 | ) (5) | (8,394 | ) (7) | ||||
|
total
(loss) income from operations
|
(4,570 | ) | 8,300 | 641 | ||||||
|
interest
expense
|
(2,359 | ) | (2,975 | ) | (3,781 | ) | ||||
|
interest
income
|
89 | 254 | 207 | |||||||
|
other
expense
|
(43 | ) | (736 | ) | (68 | ) | ||||
|
(loss)
income before income taxes
|
$ | (6,883 | ) | 4,843 | (3,001 | ) | ||||
96
|
1)
|
The
$3.6 million restructuring related charge represents $3.5 million for
inventory markdowns and $119 for other operating costs associated with
closed plant facilities. The $21 restructuring related charge represents
other operating costs associated with closed plant facilities. These
charges relate to the upholstery fabrics
segment.
|
|
2)
|
The
$13.1 million represents $8.0 million for write-downs of equipment and
buildings, $3.5 million for inventory markdowns, $786 for employee
termination benefits, $728 for lease termination and other exit costs, and
$140 for other operating costs associated with closed plant facilities. Of
this total charge, $3.6 million was recorded in cost of sales, $21 was
recorded in selling, general, and administrative expenses, and $9.5
million was recorded in restructuring expense in the 2009 Consolidated
Statement of Operations. These charges relate to the upholstery fabrics
segment.
|
|
3)
|
The
$289 represents impairment losses on older and existing equipment that is
being replaced by newer and more efficient equipment. This impairment loss
pertains to the mattress fabrics
segment.
|
|
4)
|
The
$1.9 million restructuring related charge represents $1.0 million for
inventory markdowns and $954 for other operating costs associated with
closed plant facilities. The $69 restructuring related charge represents
other operating costs associated with closed plant facilities. These
charges relate to the upholstery fabrics
segment.
|
|
5)
|
The
$2.9 million represents $1.0 million for inventory markdowns, $1.0 million
for other operating costs associated with closed plant facilities, $533
for lease termination and other exit costs, $503 for write-downs of
buildings and equipment, $189 for asset movement costs, $23 for employee
termination benefits, and a credit of $362 for sales proceeds received on
equipment with no carrying value. Of this total charge $1.9 million was
recorded in cost of sales, $69 was recorded in selling, general, and
administrative expenses, and $886 was recorded in restructuring expense in
the 2008 Consolidated Statement of Operations. These charges relate to the
upholstery fabrics segment.
|
|
6)
|
The
$4.8 million represents restructuring related charges of $2.4 million for
inventory markdowns, $1.2 million for accelerated depreciation, and $1.2
million for other operating costs associated with closed plant facilities.
The $58 represents other operating costs associated with closed plant
facilities. These charges relate to the upholstery fabrics
segment.
|
|
7)
|
The
$8.4 million represents restructuring related charges of $2.4 million of
inventory markdowns, $1.5 million for write-downs of buildings and
equipment, $1.4 million for asset movement costs, $1.2 million for
accelerated depreciation, $1.2 million for other operating costs
associated with closed plant facilities, $909 for employee termination
benefits, $706 for lease termination and other exit costs, and a credit of
$930 for sales proceeds received on equipment with no carrying value. Of
this total charge $4.8 million was recorded in cost of sales, $58 was
recorded in selling, general, and administrative expenses, $3.5 million
was recorded in restructuring expense in the 2007 Consolidated Statement
of Operations. These charges relate to the upholstery fabrics
segment.
|
One
customer within the upholstery fabrics segment represented 12%, 11% and 11% of
consolidated net sales in fiscal 2009, 2008 and 2007,
respectively. Two customers within the mattress fabrics segment
represented 24% of consolidated net sales in fiscal 2009. One customer within
the mattress fabrics segment represented 11% of consolidated net sales in fiscal
2008. No customers within the mattress fabrics segment represented 10% or more
of consolidated net sales in fiscal 2007. One customer within the upholstery
fabrics segment represented 26% of net accounts receivable at May 3, 2009. No
customers within the mattress fabrics accounted for 10% or more of net accounts
receivable as of May 3, 2009. One customer within the upholstery
fabrics segment represented 10% of net accounts receivable at April 27, 2008.
One customer within the mattress fabrics segment represented 11% of net accounts
receivable at April 27, 2008. No customers accounted for 10% or more of net
accounts receivable at April 29, 2007.
97
Balance
sheet information for the company’s operating segments follow:
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
segment
assets
|
||||||||||||
|
mattress
fabrics
|
||||||||||||
|
current
assets (8)
|
$ | 21,823 | 27,572 | 32,990 | ||||||||
|
assets
held for sale
|
20 | 35 | - | |||||||||
|
non-compete
agreements, net
|
1,164 | 789 | 1,076 | |||||||||
|
goodwill
|
11,593 | 4,114 | 4,114 | |||||||||
|
property,
plant, and equipment
|
23,674 | (9) | 21,687 | (10) | 22,849 | (10) | ||||||
|
total mattress fabrics
assets
|
$ | 58,274 | 54,197 | 61,029 | ||||||||
|
upholstery
fabrics
|
||||||||||||
|
current
assets (11)
|
$ | 20,271 | 34,895 | 37,457 | ||||||||
|
assets
held for sale
|
1,189 | 792 | 2,499 | |||||||||
|
property,
plant, and equipment
|
- | (12) | 11,214 | (13) | 14,880 | (13) | ||||||
|
total upholstery fabrics
assets
|
$ | 21,460 | 46,901 | 54,836 | ||||||||
|
total
segment assets
|
79,734 | 101,098 | 115,865 | |||||||||
|
non-segment
assets
|
||||||||||||
|
cash
and cash equivalents
|
11,797 | 4,914 | 10,169 | |||||||||
|
assets
held for sale
|
- | 4,783 | - | |||||||||
|
income
taxes receivable
|
210 | 438 | - | |||||||||
|
deferred
income taxes
|
54 | 33,810 | 31,059 | |||||||||
|
other
current assets
|
1,264 | 1,328 | 1,297 | |||||||||
|
property,
plant, and equipment
|
579 | (14) | 38 | (14) | 44 | (14) | ||||||
|
other
assets
|
1,656 | 1,620 | 1,512 | |||||||||
|
total
assets
|
$ | 95,294 | 148,029 | 159,946 | ||||||||
|
capital
expenditures (15):
|
||||||||||||
|
mattress
fabrics
|
$ | 2,747 | 4,425 | 2,963 | ||||||||
|
upholstery
fabrics
|
400 | 2,458 | 1,264 | |||||||||
|
unallocated
corporate
|
13 | 45 | - | |||||||||
| $ | 3,160 | 6,928 | 4,227 | |||||||||
|
depreciation
expense
|
||||||||||||
|
mattress
fabrics
|
$ | 3,542 | 3,443 | 3,679 | ||||||||
|
upholstery
fabrics
|
1,080 | 2,105 | 2,923 | |||||||||
|
total
segment depreciation expense
|
4,622 | 5,548 | 6,602 | |||||||||
|
accelerated depreciation –
upholstery fabrics
|
2,090 | - | 1,247 | |||||||||
| $ | 6,712 | 5,548 | 7,849 | |||||||||
|
8)
|
Current
assets represent accounts receivable and inventory. At April 29, 2007
current assets also included a credit of future purchases of inventory
associated with the ITG acquisition (Note 2). This credit of future
purchases of inventory was fully utilized by April 27,
2008.
|
|
9)
|
The
$23.7 million at May 3, 2009, represents property plant, and equipment
located in the U.S. of $16.4 million and located in Canada of $7.3
million. The increase in this segment’s property, plant, and equipment
balance at May 3, 2009 compared with April 27, 2008 is primarily due to
the acquisition of the knitted mattress fabrics operation of Bodet &
Horst (note 2) and equipment purchased under a capital lease (note 13).
The $23.7 million does not include corporate allocations of property,
plant, and equipment associated with corporate departments shared by both
the mattress and upholstery fabric segments. Property, plant, and
equipment associated with corporate departments shared by both the
mattress and upholstery fabric segments are included in the corporate
property, plant, and equipment balance of
$579,000.
|
98
|
10)
|
The
$21.7 million at April 27, 2008, represents property, plant, and equipment
located in the U.S. of $13.1 million, located in Canada of $8.4 million,
and corporate allocations of $168,000. The $22.8 million at April 29,
2007, represents property, plant, and equipment located in the U.S. of
$10.9 million, located in Canada of $10.0 million, and various corporate
allocations of $1.9 million. The corporate allocations of $168,000 at
April 27, 2008 and $1.9 million at April 29, 2007 represent property,
plant, and equipment associated with corporate departments shared by both
the mattress and upholstery fabric segments. The decrease in the corporate
allocation at April 27, 2008 compared with April 29, 2007 relates to the
corporate headquarters building being classified into assets held for sale
in fiscal 2008 (note 4).
|
|
11)
|
Current
assets represent accounts receivable and
inventory.
|
|
12)
|
The
upholstery fabrics segment does not have a property, plant, and equipment
balance as of May 3, 2009 due to impairment charges incurred in fiscal
2009 (note 3) and classification of property, plant, and equipment to
assets held for sale (note 4).
|
|
13)
|
The
$11.2 million at April 27, 2008 represents property, plant, and equipment
located in China of $9.0 million, located in the U.S. of $1.7 million, and
corporate allocations of $501,000. The $14.9 million at April 29, 2007
represents property, plant, and equipment located in China of $7.7
million, located in the U.S. of $3.4 million, and various corporate
allocations of $3.8 million. The decrease in the corporate allocation at
April 27, 2008 compared with April 29, 2007 relates to the corporate
headquarters building being classified into assets held for sale in fiscal
2008 (note 4).
|
|
14)
|
The
$579,000 balance at May 3, 2009, represents property, plant, and equipment
associated with unallocated corporate departments and corporate
departments shared by both the mattress and upholstery fabric segments.
Property, plant, and equipment associated with corporate departments
shared by both the mattress and upholstery fabrics segments were not
allocated due to explanation at 12) above. The $38,000 at April 27, 2008
and $44,000 at April 29, 2007, represent property, plant, and equipment
associated with unallocated corporate
departments.
|
|
15)
|
Capital
expenditure amounts are stated on an accrual basis. See Consolidated
Statement of Cash Flows for capital expenditure amounts on a cash
basis.
|
|
20.
|
RELATED
PARTY TRANSACTIONS
|
Rents paid
to entities owned by certain shareholders and officers of the company and their
immediate families totaled $102,000 in fiscal 2009 (see Note 3) and $46,500 in
fiscal 2007. No rents were paid to entities owned by certain shareholders and
officers of the company and their immediate families in fiscal
2008.
|
21.
|
STATUTORY
RESERVES
|
The
company’s subsidiaries located in China are required to transfer 10% of their
net income, as determined in accordance with the People’s Republic of China
(PRC) accounting rules and regulations, to a statutory surplus reserve fund
until such reserve balance reaches 50% of the company’s registered
capital.
The
transfer to this reserve must be made before distributions of any dividend to
shareholders. As of May 3, 2009, the company’s statutory surplus reserve was
$1.7 million, representing 10% of accumulated earnings and profits determined in
accordance with PRC accounting rules and regulations. The surplus reserve fund
is non-distributable other than during liquidation and can be used to fund
previous years’ losses, if any, and may be utilized for business expansion or
converted into share capital by issuing new shares to existing shareholders in
proportion to their shareholding or by increasing the par value of the shares
currently held by them provided that the remaining reserve balance after such
issue is not less than 25% of the registered capital.
99
The
company’s subsidiaries located in China can transfer funds to the parent company
with the exception of the statutory surplus reserve of $1.7 million to assist
with debt repayment, capital expenditures, and other expenses of the company’s
business.
|
22.
|
COMPREHENSIVE
(LOSS) INCOME
|
Comprehensive
(loss) income is the total of net (loss) income and other changes in equity,
except those resulting from investments by shareholders and distributions to
shareholders not reflected in net (loss) income.
A summary
of comprehensive income (loss) follows:
|
(dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||
|
net
(loss) income
|
$ | (38,842 | ) | 5,385 | (1,316 | ) | ||||
|
gain
(loss) on cash flow hedges, net of taxes
|
68 | (44 | ) | (22 | ) | |||||
| $ | (38,774 | ) | 5,341 | (1,338 | ) | |||||
23. RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
FASB Statement of Financial
Accounting Standards No. 141(R)
In
December 2007, the FASB issued SFAS No. 141(R) (revised 2007) “Business
Combinations.” SFAS No. 141(R) requires the acquiring entity in a business
combination to recognize all assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose all information required to evaluate and understand the
nature and financial effect of the business combination. This statement is
effective for acquisition dates on or after the beginning of the first annual
reporting period beginning after December 15, 2008. This statement is effective
for the company in fiscal 2010 and is not expected to have a material effect on
our consolidated financial statements unless we enter into a business
acquisition subsequent to adoption.
FASB Statement of Financial
Accounting Standards No. 160
The FASB
issued SFAS No. 160,”Noncontrolling Interests in Consolidated Financial
Statements – an amendment of ARB No. 51.” It is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Earlier application is prohibited.
SFAS No. 160 requires that accounting and reporting minority interests will be
re-characterized as non-controlling interests and classified as a component of
equity. SFAS No. 160 also establishes reporting requirements and disclosures
that clearly identify and distinguish between interests of the parent and the
interests of the non-controlling owners. This statement applies to all entities
that prepare consolidated financial statements, but will affect only those
entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement is effective for
interim periods beginning in fiscal 2010 and is not expected to have a material
effect on our consolidated financial statements to the extent we do not obtain a
non-controlling interest in an entity subsequent to adoption.
FASB Staff Position No.
142-3
In April
2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the
Useful Life of Intangible Assets” (FSP 142-3). The guidance is intended to
improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets”, and the period of
expected cash flows used to measure the fair value of the asset under SFAS No.
141(R), “Business Combinations”, and other guidance under U.S. generally
accepted accounting principles (GAAP). FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and interim
periods within those years. This statement is effective for the company in
fiscal 2010 and is not expected to have a material effect on our consolidated
financial statements unless we enter into a business acquisition subsequent to
adoption.
100
FASB Staff Position EITF
03-6-1
In
June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities , (“FSP EITF 03-6-1”). FSP EITF 03-6-1 requires that
unvested share-based payment awards containing non-forfeited rights to dividends
be included in the computation of earnings per common share. The adoption of FSP
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 and
interim periods within those years, retrospective application is
required.
This
statement will be effective beginning with our first quarter of fiscal 2010 and
will require us to include unvested shares of our share-based payment awards
containing non-forfeited rights to dividends into our calculation of earnings
per share. This statement is not expected to have a material
effect on our consolidated financial statements unless we enter share-based
payment awards that contain non-forfeited rights to dividends.
FASB Staff Position FAS
140-4 and FIN 46(R)-8:
In
December 2008, the FASB issued FASB Staff Position ("FSP") FAS 140-4 and FIN
46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities. This document
increases disclosure requirements for public companies and is effective for
reporting periods (interim and annual) that end after December 15, 2008.
The purpose of this FSP is to promptly improve disclosures by public entities
and enterprises until the pending amendments to FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, and FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, are finalized and approved by the
FASB. The FSP amends Statement 140 to require public entities to provide
additional disclosures about transferors' continuing involvements with
transferred financial assets. It also amends Interpretation 46(R) to
require public enterprises, including sponsors that have a variable interest in
a variable interest entity, to provide additional disclosures about their
involvement with variable interest entities.
These
requirements had no impact on our consolidated financial statements or
disclosures.
FASB Staff Position FAS
132R-1
In
December 2008, FASB issued FASB Staff Position (“FSP”) FAS 132R-1, Employers’
Disclosures about Postretirement Benefit Plan Assets. This document
expands the disclosures related to postretirement benefit plan assets to include
disclosures concerning a company’s investment policies for benefit plan assets
and categories of plan assets. This document further expands the
disclosure requirements to include fair value of plan assets, including the
levels within the fair value hierarchy and other related disclosures under SFAS
No. 157, Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13, and any
concentrations of risk related to the plan assets.
This
statement is effective for our fiscal 2010 year end and is not expected to
impact our consolidated financial statements or disclosures.
FASB Staff Position FAS
157-4
In April
2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, (“FSP
157-4”). FSP 157-4 provides additional guidance for estimating fair value in
accordance with SFAS No. 157 when the volume and level of activity for the asset
or liability have significantly decreased. FSP 157-4 also includes guidance on
identifying circumstances that indicate a transaction is not orderly. FSP 157-4
requires the disclosure of the inputs and valuation technique used to measure
fair value and a discussion of changes in valuation techniques and related
inputs, if any, during the period. FSP 157-4 also requires that the entity
define major categories for equity securities and debt securities to be major
security types. FSP 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009.
101
We are
required to adopt FSP 157-4 in our first quarter of fiscal 2010. We do not
currently believe that adopting this FSP will have a material impact on our
consolidated financial statements.
FASB Staff Position FAS
115-2 and FAS 124-2: Recognition and Presentation of Other-Than-Temporary
Impairments
In April
2009, the FASB issued FASB Staff Position No. 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, (“FSP 115-2 and FSP 124-2”). This FSP
amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. FSP 115-2 and 124-2 requires the entity to assess whether the
impairment is other-than-temporary if the fair value of a debt security is less
than its amortized cost basis at the balance sheet date. This statement also
provides guidance to assessing whether or not the impairment is
other-than-temporary and guidance on determining the amount of the
other-than-temporary impairment should be recognized in earnings or other
comprehensive income. FSP 115-2 and 124-2 also requires an entity to disclose
information that enables users to understand the types of securities held,
including those investments in an unrealized loss position for which the
other-than-temporary impairment has or has not been recognized. FSP 115-2 and
124-2 are effective for interim and annual reporting periods ending after June
15, 2009.
We are
required to adopt FSP 115-2 and 124-2 in our first quarter of fiscal 2010. We do
not currently believe that adopting these FSPs will have a material impact on
our consolidated financial statements.
FASB Statement of Financial
Accounting Standards No. 165
In May
2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No.
165 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date, but before financial statements are
issued or are available to be issued. SFAS No. 165 is effective for interim and
annual fiscal periods ending after June 15, 2009.
We are
required to adopt SFAS No. 165 in our first quarter of fiscal 2010. We do not
currently believe that adopting this SFAS No.165 will have a material impact on
our consolidated financial statements.
102
|
SELECTED
QUARTERLY DATA (UNAUDITED)
|
||||||||||||||||||||||||||||||||
|
fiscal
|
fiscal
|
fiscal
|
fiscal
|
fiscal
|
fiscal
|
fiscal
|
fiscal
|
|||||||||||||||||||||||||
|
2009
|
2009
|
2009
|
2009
|
2008
|
2008
|
2008
|
2008
|
|||||||||||||||||||||||||
|
(amounts
in thousands, except per share amounts)
|
4th
quarter
|
3rd
quarter
|
2nd
quarter
|
1st
quarter
|
4th
quarter
|
3rd
quarter
|
2nd
quarter
|
1st
quarter
|
||||||||||||||||||||||||
|
INCOME
(LOSS) STATEMENT DATA
|
||||||||||||||||||||||||||||||||
|
net
sales
|
$ | 47,762 | 44,592 | 52,263 | 59,321 | 63,998 | 60,482 | 64,336 | 65,230 | |||||||||||||||||||||||
|
cost
of sales
|
39,408 | 38,843 | 49,115 | 51,919 | 55,093 | 53,706 | 55,914 | 56,174 | ||||||||||||||||||||||||
|
gross
profit
|
8,354 | 5,749 | 3,148 | 7,402 | 8,905 | 6,776 | 8,422 | 9,056 | ||||||||||||||||||||||||
|
selling,
general and administrative expenses
|
5,252 | 4,676 | 4,439 | 5,384 | 6,698 | 5,117 | 5,838 | 6,321 | ||||||||||||||||||||||||
|
restructuring
expense (credit) and asset impairments
|
33 | 402 | 8,634 | 402 | 127 | 412 | (84 | ) | 432 | |||||||||||||||||||||||
|
income
(loss) from operations
|
3,069 | 671 | (9,925 | ) | 1,616 | 2,080 | 1,247 | 2,668 | 2,303 | |||||||||||||||||||||||
|
interest
expense
|
620 | 646 | 663 | 431 | 595 | 753 | 809 | 818 | ||||||||||||||||||||||||
|
interest
income
|
(14 | ) | (20 | ) | (21 | ) | (34 | ) | (57 | ) | (77 | ) | (63 | ) | (58 | ) | ||||||||||||||||
|
other
(income) expense
|
251 | 28 | (250 | ) | 14 | 112 | (72 | ) | 463 | 232 | ||||||||||||||||||||||
|
income
(loss) before income taxes
|
2,212 | 17 | (10,317 | ) | 1,205 | 1,430 | 643 | 1,459 | 1,311 | |||||||||||||||||||||||
|
income
taxes
|
517 | 467 | 30,551 | 424 | (647 | ) | (260 | ) | (95 | ) | 460 | |||||||||||||||||||||
|
net
income (loss)
|
$ | 1,695 | (450 | ) | (40,868 | ) | 781 | 2,077 | 903 | 1,554 | 851 | |||||||||||||||||||||
|
depreciation
|
$ | 957 | 1,033 | 3,465 | 1,258 | 1,283 | 1,371 | 1,445 | 1,447 | |||||||||||||||||||||||
|
weighted
average shares outstanding
|
12,653 | 12,653 | 12,650 | 12,648 | 12,642 | 12,635 | 12,635 | 12,583 | ||||||||||||||||||||||||
|
weighted
average shares outstanding,
|
||||||||||||||||||||||||||||||||
|
assuming
dilution
|
12,694 | 12,653 | 12,650 | 12,736 | 12,729 | 12,738 | 12,809 | 12,723 | ||||||||||||||||||||||||
|
PER
SHARE DATA
|
||||||||||||||||||||||||||||||||
|
net
income (loss) per share - basic
|
$ | 0.13 | (0.04 | ) | (3.23 | ) | 0.06 | 0.16 | 0.07 | 0.12 | 0.07 | |||||||||||||||||||||
|
net
income (loss) per share - diluted
|
0.13 | (0.04 | ) | (3.23 | ) | 0.06 | 0.16 | 0.07 | 0.12 | 0.07 | ||||||||||||||||||||||
|
book
value
|
3.76 | 3.61 | 3.68 | 6.90 | 6.83 | 6.66 | 6.58 | 6.44 | ||||||||||||||||||||||||
|
BALANCE
SHEET DATA
|
||||||||||||||||||||||||||||||||
|
operating
working capital (3)
|
$ | 23,503 | 27,011 | 33,896 | 35,482 | 38,368 | 42,257 | 43,279 | 48,067 | |||||||||||||||||||||||
|
property,
plant and equipment, net
|
24,253 | 24,763 | 26,802 | 33,950 | 32,939 | 32,218 | 37,887 | 36,901 | ||||||||||||||||||||||||
|
total
assets
|
95,294 | 97,856 | 110,927 | 142,790 | 148,029 | 153,326 | 158,914 | 154,076 | ||||||||||||||||||||||||
|
capital
expenditures
|
463 | 53 | 372 | 2,272 | 2,887 | 931 | 2,264 | 846 | ||||||||||||||||||||||||
|
long-term
debt and lines of credit (1)
|
16,368 | 28,113 | 32,186 | 21,358 | 21,423 | 33,378 | 38,970 | 38,584 | ||||||||||||||||||||||||
|
shareholders'
equity
|
48,031 | 46,124 | 46,507 | 87,244 | 86,359 | 84,118 | 83,125 | 81,345 | ||||||||||||||||||||||||
|
capital
employed (2)
|
52,602 | 58,428 | 70,171 | 102,250 | 102,868 | 101,996 | 105,265 | 110,912 | ||||||||||||||||||||||||
|
RATIOS
& OTHER DATA
|
||||||||||||||||||||||||||||||||
|
gross
profit margin
|
17.5 | % | 12.9 | % | 6.0 | % | 12.5 | % | 13.9 | % | 11.2 | % | 13.1 | % | 13.9 | % | ||||||||||||||||
|
operating
income (loss) margin
|
6.4 | 1.5 | (19.0 | ) | 2.7 | 3.3 | 2.1 | 4.1 | 3.5 | |||||||||||||||||||||||
|
net
income (loss) margin
|
3.5 | (1.0 | ) | (78.2 | ) | 1.3 | 3.2 | 1.5 | 2.4 | 1.3 | ||||||||||||||||||||||
|
effective
income tax rate
|
23.4 |
N.M.
|
(296.1 | ) | 35.2 | (45.2 | ) | (40.4 | ) | (6.5 | ) | 35.1 | ||||||||||||||||||||
|
long-term
debt-to-total capital employed ratio (1)
|
31.1 | 48.1 | 45.9 | 20.9 | 20.8 | 32.7 | 37.0 | 34.8 | ||||||||||||||||||||||||
|
operating
working capital turnover (3)
|
6.4 | 6.2 | 6.1 | 6.0 | 5.8 | 5.7 | 5.4 | 5.2 | ||||||||||||||||||||||||
|
days
sales in receivables
|
34 | 27 | 33 | 31 | 38 | 32 | 32 | 31 | ||||||||||||||||||||||||
|
inventory
turnover
|
6.4 | 6.0 | 5.1 | 5.9 | 6.0 | 5.6 | 5.4 | 5.4 | ||||||||||||||||||||||||
|
STOCK
DATA
|
||||||||||||||||||||||||||||||||
|
stock
price
|
||||||||||||||||||||||||||||||||
|
high
|
$ | 4.85 | 3.57 | 7.57 | 7.91 | 8.30 | 10.02 | 12.19 | 12.30 | |||||||||||||||||||||||
|
low
|
1.85 | 1.30 | 2.84 | 6.10 | 6.47 | 6.12 | 8.47 | 8.17 | ||||||||||||||||||||||||
|
close
|
4.40 | 1.88 | 2.88 | 6.15 | 7.53 | 7.47 | 9.52 | 11.30 | ||||||||||||||||||||||||
|
daily
average trading volume (shares)
|
12.5 | 27.5 | 20.4 | 16.8 | 30.0 | 33.2 | 38.7 | 51.2 | ||||||||||||||||||||||||
|
(1)
Long-term debt includes long-term and current maturities of long-term debt
and lines of credit.
|
||||||||||||||||||||||||||||||||
|
(2)
Capital employed includes long-term and current maturities of long-term
debt, lines of credit, shareholders; equity, offset by cash and cash
equivalents.
|
||||||||||||||||||||||||||||||||
|
(3)
Operating working capital for this calculation is accounts receivable,
inventories offset by accounts payable
|
||||||||||||||||||||||||||||||||
103
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the
three years ended May 3, 2009, there were no disagreements on any matters of
accounting principles or practices or financial statement
disclosures.
Evaluation
of Disclosure Controls and Procedures
We have
conducted an evaluation of the effectiveness of our disclosure controls and
procedures as of May 3, 2009. This evaluation was conducted under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation, we
have concluded that these disclosure controls and procedures were effective, in
all material respects, to ensure that information required to be disclosed in
the reports filed by us and submitted under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) is recorded, processed, summarized and reported
as and when required. Further we concluded that our disclosure controls and
procedures have been designed to ensure that information required to be
disclosed in reports filed by us under the Exchange Act is accumulated and
communicated to management, including our Chief Executive Officer and Chief
Financial Officer, in a manner to allow timely decisions regarding the required
disclosure.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of our
financial reporting for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes: (1)
maintaining records that in reasonable detail accurately and fairly reflect the
transactions and disposition of assets; (2) providing reasonable assurance that
the transactions are recorded as necessary for preparation of financial
statements, and that receipts and expenditures are made in accordance with
authorizations of management and directors; and (3) providing reasonable
assurance that unauthorized acquisition, use or disposition of assets that could
have a material effect on financial statements would be prevented or detected on
a timely basis. Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of financial statements would be prevented or detected. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management
assessed the effectiveness of our internal control over financial reporting
based on the criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission in Internal Control – Integrated Framework. Based on
this assessment, management concluded that our internal control over financial
reporting was effective at May 3, 2009.
Grant
Thornton LLP, an independent registered public accounting firm, has audited the
consolidated financial statements as of and for the years ended May 3, 2009 and
April 27, 2008. This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report. During the quarter ended May 3, 2009, there were no
changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
104
ITEM 9B. OTHER INFORMATION
The
company has agreed to indemnify and hold KPMG LLP (KPMG) harmless against and
from any and all legal costs and expenses incurred by KPMG in successful defense
of any legal action proceeding that arises as a result of KPMG’s consent to the
inclusion (or incorporation by reference) of its audit report on the company’s
past financial statements included (or incorporated by reference) in this
registration statement.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
Information
with respect to executive officers and directors of the company is included in
the company’s definitive Proxy Statement to be filed within 120 days after the
end of the company’s fiscal year pursuant to Regulation 14A of the Securities
and Exchange Commission, under the captions “Nominees, Directors and Executive
Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate
Governance - Code of Business Conduct and Ethics,” “Board Committees and
Attendance - Audit Committee” which information is herein incorporated by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information
with respect to executive compensation is included in the company’s definitive
Proxy Statement to be filed within 120 days after the end of the company’s
fiscal year pursuant to Regulation 14A of the Securities and Exchange
Commission, under the captions “Executive Compensation” and “Compensation
Committee Interlocks and Insider Participation” which information is herein
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Information
with respect to the security ownership of certain beneficial owners and
management is included in the company’s definitive Proxy Statement to be filed
within 120 days after the end of the company’s fiscal year pursuant to
Regulation 14A of the Securities and Exchange Commission, under the captions
“Equity Compensation Plan Information” and “Voting Securities,” which
information is herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Information
with respect to certain relationships and related transactions is included in
the company’s definitive Proxy Statement to be filed within 120 days after the
end of the company’s fiscal year pursuant to Regulation 14A of the Securities
and Exchange Commission, under the captions “Corporate Governance - Director
Independence” and “Certain Relationships and Related Transactions” which
information is herein incorporated by reference.
105
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Information
with respect to accountants fees and services is included in the company’s
definitive Proxy Statement to be filed within 120 days after the end of the
company’s fiscal year pursuant to Regulation 14A of the Securities and Exchange
Commission, under the caption “Fees Paid to Independent Registered Public
Accounting Firm,” which information is herein incorporated by
reference.
106
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
a) DOCUMENTS FILED AS PART OF THIS REPORT:
1. Consolidated
Financial Statements
The following consolidated financial
statements of Culp, Inc. and its subsidiaries are filed as part of this
report.
|
Page
of Annual
|
||
|
Report
on
|
||
|
Item
|
Form 10-K
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
62
|
|
|
Consolidated
Balance Sheets – May 3, 2009 and
|
||
|
April
27, 2008
|
64
|
|
|
Consolidated
Statements of Operations -
|
||
|
for
the years ended May 3, 2009,
|
||
|
April
27, 2008 and April 29, 2007
|
65
|
|
|
Consolidated
Statements of Shareholders’ Equity -
|
||
|
for
the years ended May 3, 2009,
|
||
|
April
27, 2008 and April 29, 2007
|
66
|
|
|
Consolidated
Statements of Cash Flows -
|
||
|
for
the years ended May 3, 2009,
|
||
|
April
27, 2008 and April 29, 2007
|
67
|
|
|
Notes
to Consolidated Financial Statements
|
68
|
2. Financial
Statement Schedules
All financial statement schedules are
omitted because they are not applicable, or not required, or because the
required information is included in the consolidated financial statements or
notes thereto.
3. Exhibits
The following exhibits are attached
at the end of this report, or incorporated by reference
herein. Management contracts, compensatory plans, and arrangements
are marked with an asterisk (*).
|
|
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 November 12, 2007, were
filed as Exhibit 3.1 to the company’s Form 8-K dated November 12, 2007,
and are incorporated herein by
reference.
|
|
|
10.1
|
1993
Stock Option Plan was filed as Exhibit 10(o) to the company’s Form 10-K
for the year ended May 2, 1993, filed on July 29, 1993, and is
incorporated herein by
reference. (*)
|
107
|
|
10.2
|
Amendments
to 1993 Stock Option Plan dated September 26, 2000. These
amendments were filed as Exhibit 10(rr) to the company’s Form 10-Q for the
quarter ended October 29, 2000, and are incorporated herein by
reference. (*)
|
|
|
10.3
|
Form
of Note Purchase Agreement (providing for the issuance by Culp, Inc. of
its $20 million 6.76% Series A Senior Notes due 3/15/08 and its $55
million 6.76% Series B Senior Notes due 3/15/10), each dated March 4,
1998, between Culp, Inc. and each of the
following:
|
|
1.
|
Connecticut
General Life Insurance Company;
|
|
2.
|
The
Mutual Life Insurance Company of New
York;
|
|
3.
|
United
of Omaha Life Insurance Company;
|
|
4.
|
Mutual
of Omaha Insurance Company;
|
|
5.
|
The
Prudential Insurance Company of
America;
|
|
6.
|
Allstate
Life Insurance Company;
|
|
7.
|
Life
Insurance Company of North
America; and
|
|
8.
|
CIGNA
Property and Casualty Insurance
Company
|
|
|
|
This
agreement was filed as Exhibit 10(ll) to the company’s Form 10-K for the
year ended May 3, 1998, filed on July 31, 1998, and is incorporated herein
by reference.
|
|
|
10.4
|
First
Amendment, dated January 31, 2002 to Note Purchase Agreement (providing
for the issuance by Culp, Inc. of its $20 million 6.76% Series A Senior
Notes due 3/15/08 and its $55 million 6.76% Series B Senior Notes due
3/15/10), each dated March 4, 1998, between Culp, Inc. and each of the
following:
|
|
1.
|
Connecticut
General Life Insurance Company;
|
|
2.
|
Life
Insurance Company of North America;
|
|
3.
|
ACE
Property and Casualty;
|
|
4.
|
J.
Romeo & Co.;
|
|
5.
|
United
of Omaha Life Insurance Company;
|
|
6.
|
Mutual
of Omaha Insurance Company;
|
|
7.
|
The
Prudential Insurance of America;
and
|
|
8.
|
Allstate
Life Insurance Company
|
|
|
|
This
amendment was filed as Exhibit 10(a) to the company’s Form 10-Q for the
quarter ended January 27, 2002, and is incorporated herein by
reference.
|
|
|
10.5
|
Rights
Agreement, dated as of October 8, 1999, between Culp, Inc. and EquiServe
Trust Company, N.A., as Rights Agent, including the form of Articles of
Amendment with respect to the Series A Participating Preferred Stock
included as Exhibit A to the Rights Agreement, the forms of Rights
Certificate included as Exhibit B to the Rights Agreement, and the form of
Summary of Rights included as Exhibit C to the Rights
Agreement. The Rights Agreement was filed as Exhibit 99.1 to
the company’s Form 8-K dated October 12, 1999, and is incorporated herein
by reference.
|
|
|
10.6
|
2002
Stock Option Plan was filed as Exhibit 10(a) to the company’s Form 10-Q
for the quarter ended January 26, 2003, filed on March 12, 2003, and is
incorporated herein by
reference. (*)
|
|
|
10.7
|
Amended
and Restated Credit Agreement dated as of August 23, 2002 among Culp, Inc.
and Wachovia Bank, National Association, as Agent and as Bank, was filed
as Exhibit 10(a) to the company’s Form10-Q for the quarter ended July 28,
2002, filed September 11, 2002, and is incorporated herein by
reference.
|
|
|
10.8
|
First
Amendment to Amended and Restated Credit Agreement dated as of March 17,
2003 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank, was filed as exhibit 10(p) to the company’s Form 10-K for the
year ended April 27, 2003, filed on July 25, 2003, and is
incorporated here by reference.
|
|
|
10.9
|
Second
Amendment to Amended and Restated Credit Agreement dated as of June 3,
2003 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank, was filed as exhibit 10(q) to the company’s Form 10-K for the
year ended April 27, 2003, filed on July 25, 2003, and is incorporated
here by reference.
|
108
|
|
10.10
|
Third
Amendment to Amended and Restated Credit Agreement dated as of August 23,
2004 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank., was filed as Exhibit 10 to the Current Report on Form 8-K
dated August 26, 2004, and is incorporated herein by
reference.
|
|
|
10.11
|
Fourth
Amendment to Amended and Restated Credit Agreement dated as of December 7,
2004 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank, was filed as Exhibit 10(b) to the company’s Form 10-Q for the
quarter ended October 31, 2004, filed on December 9, 2004, and is
incorporated here by reference.
|
|
|
10.12
|
Fifth
Amendment to Amended and Restated Credit Agreement dated as of February
18, 2005 among Culp, Inc. and Wachovia Bank, National Association, as
Agent and as Bank., was filed as Exhibit 99(c) to Current Report on Form
8-K dated February 18, 2005, and is incorporated herein by
reference.
|
|
|
10.13
|
Sixth
Amendment to Amended and Restated Credit Agreement dated as of August 30,
2005 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank., was filed as Exhibit 99(c) to Current Report on Form 8-K
dated August 30, 2005, and is incorporated herein by
reference.
|
|
|
10.14
|
Seventh
Amendment to Amended and Restated Credit Agreement dated as of December 7,
2005 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank., was filed as Exhibit 10(c) to the company’s Form 10-Q for
the quarter ended October 30, 2005, filed December 9, 2005, and is
incorporated herein by reference.
|
|
|
10.15
|
Eighth
Amendment to Amended and Restated Credit Agreement dated as of January 29,
2006 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank., was filed as Exhibit 10(a) to the company’s Form 10-Q for
the quarter ended January 29, 2006, filed March 10, 2006, and is
incorporated herein by reference.
|
|
|
10.16
|
Ninth
Amendment to Amended and Restated Credit Agreement dated as of July 20,
2006 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank, was filed as Exhibit 10.1 to the company’s Form 8-K filed
July 25, 2006, and is incorporated herein by
reference.
|
|
|
10.17
|
Second
Amendment, dated December 6, 2006 to Note Purchase Agreement (providing
for the issuance by Culp, Inc. of its $20 million 6.76% Series A Senior
Notes due 3/15/08 and its $55 million 6.76% Series B Senior Notes due
3/15/10), each dated March 4, 1998, between Culp, Inc. and each of the
following:
|
|
1.
|
Connecticut
General Life Insurance Company;
|
|
2.
|
Life
Insurance Company of North America;
|
|
3.
|
ACE
Property and Casualty;
|
|
4.
|
J.
Romeo & Co.;
|
|
5.
|
Hare
& Co.;
|
|
6.
|
United
of Omaha Life Insurance Company;
|
|
7.
|
Mutual
of Omaha Insurance Company;
|
|
8.
|
The
Prudential Insurance of America;
|
|
9.
|
Prudential
Retirement Insurance Annuity; and
|
|
10.
|
Allstate
Life Insurance Company;
|
|
|
|
This
amendment was filed as Exhibit 99(c) to the company’s Form 8-K filed
December 7, 2006, and is incorporated herein by
reference.
|
109
|
|
10.18
|
Tenth
Amendment to Amended and Restated Credit Agreement dated as of January 22,
2007 among Culp, Inc. and Wachovia Bank, National Association, as Agent
and as Bank, was filed as Exhibit 10.3 to the company’s Form 8-K filed
January 26, 2007, and is incorporated herein by
reference.
|
|
|
10.19
|
Written
description of compensation arrangement for non-employee
directors.
|
|
|
10.20
|
Form
of stock option agreement for options granted to executive officers on
June 25, 2007 pursuant to 2002 Stock Option Plan. This agreement was filed
as Exhibit 10.1 to the company’s Form 10-Q for the quarter ended July 29,
2007, and is incorporated herein by reference.
(*)
|
|
|
10.21
|
2007
Equity Incentive Plan was filed as Annex A to the company’s 2007 Proxy
Statement, filed on August 14, 2007, and is incorporated herein by
reference. (*)
|
|
|
10.22
|
Separation
Agreement and Waiver of Claims between the company and Kenneth M. Ludwig
dated December 11, 2007, filed as Exhibit 10.1 to the company’s Form 10-Q
for the quarter ended October 28, 2007, and incorporated herein by
reference. (*)
|
|
|
10.23
|
Form
of stock option agreement for options granted to non-employee directors
pursuant to the 2007 Equity Incentive Plan. This agreement was filed as
Exhibit 10.2 to the company’s Form 10-Q for the quarter ended October 28,
2007, and incorporated herein by reference.
(*)
|
|
|
10.24
|
Form
of change in control and noncompetition agreement. This agreement was
filed as Exhibit 10.3 to the company’s Form 10-Q for the quarter ended
October 28, 2007, and incorporated herein by reference.
(*)
|
|
|
10.25
|
Twelfth
Amendment to Amended and Restated Credit Agreement dated as of December
27, 2007 among Culp, Inc. and Wachovia Bank, National Association as Agent
and as Bank, filed as Exhibit 10.1 to the company’s Form 8-K dated
December 27, 2007, and incorporated herein by
reference.
|
|
|
10.26
|
Form
of stock option agreement for options granted to executive officers on
June 17, 2008 pursuant to the 2007 Equity Incentive Plan, filed as Exhibit
10.1 to the company’s Form 10-Q dated September 10, 2008, and incorporated
herein by reference. (*)
|
|
|
10.27
|
Written
Summary of Culp Home Fashions Division Management Incentive Plan, filed as
Exhibit 10.2 to the company’s Form 10-Q dated September 10, 2008, and
incorporated herein by reference.
(*)
|
|
|
10.28
|
Written
Summary of Culp Inc. Corporate Management Incentive Plan, filed as Exhibit
10.3 to the company’s Form 10-Q dated September 10, 2008, and incorporated
herein by reference. (*)
|
|
|
10.29
|
Note
Purchase Agreement among Culp, Inc., Mutual of Omaha Insurance Company and
United Omaha Insurance Company dated August 11, 2008, filed as Exhibit
10.2 to the company’s Form 8-K dated August 11, 2008, and incorporated
herein by reference.
|
|
|
10.30
|
Consent
and Fifth Amendment to Note Purchase Agreement dated August 11, 2008, by
and among Culp, Inc., Life Insurance Company of North America, Connecticut
General Life Insurance Company, Beachside & Co., MONY Life Insurance
Company, United of Omaha Life Insurance Company, Mutual of Omaha Life
Insurance Company, and Prudential Retirement Insurance and Annuity
Company, filed as Exhibit 10.3 to the company’s Form 8-K dated August 11,
2008, and incorporated herein by
reference.
|
|
|
10.31
|
Thirteenth
Amendment to Amended and Restated Credit Agreement dated as of November 3,
2008 among Culp, Inc. and Wachovia Bank, National Association as Agent and
as Bank, filed as Exhibit 10.1 to the company’s Form 8-K dated November 6,
2008, and incorporated herein by
reference.
|
110
|
|
10.32
|
Restricted
Stock Agreement between the company and Franklin N. Saxon on January 7,
2009 pursuant to the 2007 Equity Incentive Plan, filed as Exhibit 10.6 to
the company’s Form 10-Q dated March 13, 2009, and incorporated herein by
reference. (*)
|
|
|
10.33
|
Restricted
Stock Agreement between the company and Robert G. Culp, IV on January 7,
2009 pursuant to the 2007 Equity Incentive Plan, filed as Exhibit 10.7 to
the company’s Form 10-Q dated March 13, 2009, and incorporated herein by
reference. (*)
|
|
|
10.34
|
Restricted
Stock Agreement between the company and Kenneth R. Bowling on January 7,
2009 pursuant to the 2007 Equity Incentive Plan, filed as Exhibit 10.8 to
the company’s Form 10-Q dated March 13, 2009, and incorporated herein by
reference. (*)
|
|
|
10.35
|
Form
of restricted stock unit agreement for restricted stock units granted
pursuant to the 2007 Equity Incentive Plan, filed as Exhibit 10.10 to the
company’s Form 10-Q dated March 13, 2009, and incorporated herein by
reference. (*)
|
|
|
10.36
|
Culp,
Inc. Deferred Compensation Plan for Selected Key
Employees
|
|
|
10.37
|
Fourteenth
Amendment to Amended and Restated Credit Agreement dated as of July 15,
2009 among Culp, Inc. and Wachovia Bank, National Association as Agent and
as Bank.
|
|
|
21
|
List
of subsidiaries of the company
|
|
|
23(a)
|
Consent
of Independent Registered Public Accounting Firm in connection with the
registration statements of Culp, Inc. on Form S-8 (File Nos. 33-13310,
33-37027, 33-80206, 33-62843, 333-27519, 333-59512, 333-59514, 333-101805,
333-147663), dated March 20, 1987, September 18, 1990, June 13, 1994,
September 22, 1995, May 21, 1997, April 26, 2001, April 25, 2001,
December 12, 2002, and November 27, 2007 and on Form S-3 and S-3/A
(File No. 333-141346).
|
|
|
23(b)
|
Consent
of Independent Registered Public Accounting Firm in connection with the
registration statements of Culp, Inc. on Form S-8 (File Nos. 33-13310,
33-37027, 33-80206, 33-62843, 333-27519, 333-59512, 333-59514, 333-101805,
333-147663), dated March 20, 1987, September 18, 1990, June 13, 1994,
September 22, 1995, May 21, 1997, April 26, 2001, April 25, 2001,
December 12, 2002, and November 27, 2007 and on Form S-3 and S-3/A
(File No. 333-141346).
|
|
|
24(a)
|
Power
of Attorney of Patrick B. Flavin, dated July 16,
2009
|
|
|
24(b)
|
Power
of Attorney of Kenneth R. Larson, dated July 16,
2009
|
|
|
24(c)
|
Power
of Attorney of Kenneth W. McAllister, dated July16,
2009
|
|
|
31(a)
|
Certification
of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
|
|
|
31(b)
|
Certification
of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
|
|
|
32(a)
|
Certification
of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
|
|
|
32(b)
|
Certification
of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
|
111
b) Exhibits:
The exhibits to this Form 10-K are
filed at the end of this Form 10-K immediately preceded by an
index. A list of the exhibits begins on page 107 under the
subheading “Exhibit Index.”
c) Financial Statement Schedules:
None
112
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, CULP,
INC. has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 16th day of
July 2009.
|
CULP,
INC.
|
|||
|
By /s/
|
Franklin N. Saxon
|
||
|
Franklin
N. Saxon
|
|||
|
Chief
Executive Officer
|
|||
|
(principal
executive
officer)
|
|||
|
/s/
|
Robert G. Culp, III
|
/s/
|
Kenneth R.
Larson *
|
|
Robert
G. Culp, III
|
Kenneth
R. Larson
|
||
|
(Chairman
of the Board of Directors)
|
(Director)
|
||
|
/s/
|
Franklin N. Saxon
|
/s/
|
Kenneth R. Bowling
|
|
Franklin
N. Saxon
|
Kenneth
R. Bowling
|
||
|
Chief
Executive Officer
|
Chief
Financial Officer
|
||
|
(principal
executive officer)
|
(principal
financial officer)
|
||
|
(Director)
|
|||
|
/s/
|
Patrick B.
Flavin*
|
/s/
|
Thomas B. Gallagher, Jr.
|
|
Patrick
B. Flavin
|
Thomas
B. Gallagher, Jr.
|
||
|
(Director)
|
Corporate
Controller
|
||
|
(principal
accounting officer)
|
|||
|
/s/
|
Kenneth W.
McAllister*
|
||
|
Kenneth
W. McAllister
|
|||
|
(Director)
|
|
*
|
By
Kenneth R. Bowling, Attorney-in-Fact, pursuant to Powers of Attorney filed
with the Securities and Exchange
Commission.
|
113
Exhibit
Number Exhibit
|
|
10.19
|
Compensation
Agreement with non-employee
directors
|
|
|
10.36
|
Culp,
Inc. Deferred Compensation Plan for Selected Key
Employees
|
|
|
10.37
|
Fourteenth
Amendment to Amended and Restated Credit Agreement dated as of July 15,
2009 among Culp, Inc. and Wachovia Bank, National Association as Agent and
as Bank.
|
|
|
21
|
List
of subsidiaries of the company
|
|
|
23(a)
|
Consent
of Independent Registered Public Accounting Firm in connection with the
registration statements of Culp, Inc. on Form S-8 (File Nos. 33-13310,
33-37027, 33-80206, 33-62843, 333-27519, 333-59512,
333-59514, 333-101805, 333-147663), dated March 20, 1987,
September 18, 1990, June 13, 1994, September 22, 1995, May 21, 1997, April
26, 2001, April 25, 2001, December 12, 2002, and November 27,
2007 and on Form S-3 and S-3/A (File No.
333-141346).
|
|
|
23(b)
|
Consent
of Independent Registered Public Accounting Firm in connection with the
registration statements of Culp, Inc. on Form S-8 (File Nos. 33-13310,
33-37027, 33-80206, 33-62843, 333-27519, 333-59512,
333-59514, 333-101805, 333-147663), dated March 20, 1987,
September 18, 1990, June 13, 1994, September 22, 1995, May 21, 1997, April
26, 2001, April 25, 2001, December 12, 2002, and November 27,
2007 and on Form S-3 and S-3/A (File No.
333-141346).
|
|
|
24(a)
|
Power
of Attorney of Patrick B. Flavin, dated July 16,
2009
|
|
|
24(b)
|
Power
of Attorney of Kenneth R. Larson, dated July 16,
2009
|
|
|
24(c)
|
Power
of Attorney of Kenneth W. McAllister, dated July 16,
2009
|
|
|
31(a)
|
Certification
of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
|
|
|
31(b)
|
Certification
of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
Act of 2002.
|
|
|
32(a)
|
Certification
of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
|
|
|
32(b)
|
Certification
of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act
of 2002.
|
114