2012A N N U A L
R E P O R T
C O M P A N Y
P R O F I L E
C U L P, I N C . ranks as one of the world’s largest marketers of mattress fabrics for bedding
and upholstery fabrics for furniture. The company’s fabrics are used principally in the
production of bedding products and residential and commercial upholstered furniture.
Shares in Culp, Inc. are traded on the New York Stock Exchange under the symbol CFI.
F I N A N C I A L H I G H L I G H T S
(Amounts in thousands, except per share data)
Net sales
Income before income taxes
Net income
Net income per share:
Basic
Diluted
Adjusted net income (1) (2)
Adjusted net income per share:
Basic
Diluted
Average shares outstanding:
Basic
Diluted
Cash Returned to Shareholders
Cost of shares repurchased
Number of shares repurchased
Percent of shares of repurchased
Balance Sheet
Cash and cash equivalents and short term investments
Capital employed at fiscal year end (1)
Return on capital
Total assets
Total debt (including current maturities and line of credit)
Shareholder’s equity
Debt as a percent of equity
Mattress Fabrics Segment Highlights (3)
Net sales
Operating income
Operating income margin
Capital employed (1)
Return on capital (1)
Upholstery Fabrics Segment Highlights (3)
Net sales
Operating income
Operating income margin
Capital employed (1)
Return on capital (1)
(1) See reconciliation tables at the end of this report
(2) Information not available for fiscal 2010
(3) See segment information beginning on page 28 of fiscal 2012 10-K
2012
2011
2010
$ 254,443
14,198
13,296
$ 216,806
15,062
16,164
$ 206,416
14,316
13,188
1.05
1.03
1.25
1.22
11,571
12,637
0.91
0.90
0.98
0.96
1.04
1.01
–
–
–
12,711
12,866
12,959
13,218
12,709
13,057
$
5,384
624
4.7%
–
–
–
–
–
–
$ 30,964
67,887
$ 30,880
62,521
$ 21,318
57,296
21.9%
24.9%
28.3%
144,716
10,012
89,000
130,051
11,547
80,341
112,598
11,687
63,047
11.2%
14.4%
18.5%
$ 145,519
15,764
$ 122,431
15,373
$ 114,848
15,474
10.8%
53,910
29.4%
12.6%
52,632
29.5%
13.5%
47,202
32.7%
$ 108,924
3,531
3.2%
14,518
25.7%
$94,375
4,359
4.6%
10.317
36.3%
$ 91,568
5,956
6.5%
11,861
56.3%
F E L L O W S H A R E H O L D E R S
We are very pleased to report that Fiscal 2012 was an outstanding year for Culp.
Our financial and operating results for the year demonstrate our ability to execute on market opportunities while
facing a challenging environment of economic uncertainty. We made substantial progress with our business strategy
and product development initiatives that will continue to shape Culp’s future and support our customers’ success.
Throughout the year, we built upon our strong foundation and further enhanced our leading competitive position in
both mattress fabrics and upholstery fabrics. We leveraged our outstanding creative abilities to offer a wide range of
innovative products that meet the changing style demands of our customers around the world.
Our commitment to product innovation, supported by our scalable and global manufacturing platforms and
outstanding customer service, are key advantages for Culp in today’s dynamic marketplace. Notably, our financial
position is the strongest in the company’s history, providing the flexibility to pursue our growth initiatives and create
new opportunities to enhance shareholder value.
Cash Returned to Shareholders
On June 13, 2012, we announced that our Board of Directors approved the payment of a quarterly cash dividend
of $.03 per share commencing in the first quarter of fiscal 2013. This implies an annual dividend of $0.12 per share.
At the same time, the Board approved a new authorization for the company to acquire up to $5.0 million of Culp
common stock. This action replaces a similar authorization to acquire up to $7.0 million of Culp common stock,
of which $5.4 million was used during fiscal 2012 to repurchase 624,459 shares at an average price of $8.62. These
purchases represented 4.7 percent of shares outstanding when the program began in June 2011.
The opportunity to initiate a quarterly dividend and to increase the share repurchase program reflects our solid and
consistent financial performance and strong balance sheet, along with the leadership position we have established
in each of our businesses. Both of these actions reinforce our confidence in Culp’s future and our commitment to
generating value for our shareholders.
Mattress Fabrics Segment
Our mattress fabrics business had a very strong performance in fiscal 2012, posting record annual sales with solid gains
across all major product categories. Overall, mattress fabric sales were up 19 percent over the prior year, driven by a
growing consumer demand for better bedding and a higher quality mattress fabric with certain segments of the mattress
industry demanding more decorative products. Culp is well positioned to meet this demand as a leading provider of an
innovative and diverse line of products in every major category, supported by exceptional customer service.
While we are pleased with the higher sales for the year, our operating margins in fiscal 2012 were affected by higher
raw material costs and greater pricing pressures compared with market conditions the prior year. We are encouraged
that raw material prices have come down from their peak levels and appear to have stabilized and we expect gradual
improvement in our raw material costs in fiscal 2013.
We have continued to look for opportunities to expand our current custom, value-added business platform and keep
pace with changing industry demand trends. At the end of fiscal 2012, we entered into a joint marketing agreement
with A. Lava & Son Co., a leading provider of mattress covers based in Chicago, to design, produce and market
mattress covers. This new venture, known as Culp-Lava Applied Sewn Solutions, represents a natural progression
of Culp’s growth strategy in our mattress fabrics business to capitalize on market opportunities in more innovative
product offerings. We will establish a new manufacturing facility with production expected to begin the second
quarter of fiscal 2013. As a result, we will have two mirrored manufacturing facilities to better serve our growing
customer base and meet current and expected demand trends.
We believe this new venture highlights our commitment to enhance Culp’s leadership position in the bedding
industry with an expanded and flexible manufacturing platform, supported by exceptional design, superior customer
service, reliable delivery performance and consistent quality and value.
1
Upholstery Fabrics Segment
We are encouraged by the continued growth in our upholstery fabrics business in fiscal 2012 with our annual sales up
over 15 percent from fiscal 2011. These results reflect improved industry demand and outstanding response to our
innovative designs and new product introductions from key customers. Sales of our China produced fabrics were the
main driver of our growth for the year, reflecting our strategic focus on offering high quality products at excellent
values. China produced fabrics now account for over 85 percent of all Culp’s upholstery fabrics sales. This platform
has played a significant role in our global development in fiscal 2012 with increased placements with key U.S.
customers, local China market customers and a growing list of international customers.
We were especially pleased with the sales and profit improvement from our U.S. operation over the past year with
increased demand for both velvets and woven texture fabrics. Our actions in the second quarter of fiscal 2012 to more
effectively align our U.S. capacity with expected demand and increase prices had a favorable impact on our profitability.
We continue to make progress in the development of our Culp Europe operation, located in Poland. We are encouraged
by the initial response from several of the largest furniture manufacturers and retailers in Europe. For fiscal 2012,
Culp Europe sales accounted for approximately three percent of our total upholstery fabrics sales and we expect this
percentage to increase further over the next fiscal year. While we experienced a small operating loss for fiscal 2012 due
to start-up costs, we expect Culp Europe to make a more meaningful contribution in the next fiscal year.
Balance Sheet
We believe a strong balance sheet is an important advantage for Culp, especially in today’s economic environment,
and provides us with the financial flexibility to pursue our growth strategy. Throughout fiscal 2012, we continued to
generate significant cash flow and maintain a financial position that reflects our philosophy of conservative financial
management. As of April 29, 2012, we reported $31.0 million in cash and cash equivalents and short-term
investments, unchanged from the balance at the end of fiscal 2011. Total debt was $10.0 million, which includes
long-term debt plus current maturities of long-term debt and line of credit, compared with $11.5 million at the end
of last fiscal year. We are pleased with our ability to maintain the same cash balance compared with the end of fiscal
2011, even after spending $5.4 million for share repurchases, $5.9 million in capital expenditures and increasing
working capital by $6.9 million to meet greater business demands. We have since made a scheduled principal
payment of $2.2 million in August 2012.
Looking Ahead
Fiscal 2012 was an exciting period for Culp and we are very pleased with the momentum we have built in both of
our businesses. As we look ahead, the prevailing economic headwinds will continue to influence consumer behavior
and demand trends remain uncertain. However, we believe Culp is well positioned for further profitable growth as
the bedding and furniture industries gain traction and we have many reasons to be optimistic about Culp’s future.
Our ability to leverage our outstanding design capabilities, product innovation and a scalable global manufacturing
platform will continue to drive our success. Our strong competitive position and confidence going forward are both
due to the extraordinary work of our team of associates, a proven management team and board of directors, and
above all, our valued customers. We thank all of them for their dedication and we look forward to working together
in the year ahead to further advance Culp’s leadership position and build shareholder value.
Thanks you for your continued support.
Sincerely,
Franklin N. Saxon
President and Chief Executive Officer
Robert G. Culp, III
Chairman of the Board
August 14, 2012
2
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 April 29, 2012
Commission File No. 1-12597
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA
(State or other jurisdiction of
incorporation or other organization)
56-1001967
(I.R.S. Employer Identification No.)
1823 Eastchester Drive, High Point, North Carolina
(Address of principal executive offices)
27265
(zip code)
(336) 889-5161
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange
On Which Registered
Common Stock, par value $.05/ Share
New York Stock Exchange
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
NO
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
NO
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
NO
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
NO
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.
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):
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
NO
YES
As of April 29, 2012, 12,702,806 shares of common stock were outstanding. As of October 30, 2011, the
aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $87,350,477
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 18, 2012 are
incorporated by reference into Part III of this Form 10-K.
CULP, INC.
FORM 10-K REPORT
TABLE OF CONTENTS
PART I
Page
Business
Overview ........................................................................................................................... 2
General Information .......................................................................................................... 3
Segments ........................................................................................................................... 3
Overview of Industry and Markets ................................................................................... 6
Overview of Bedding Industry .......................................................................................... 6
Overview of Residential Furniture Industry ..................................................................... 7
Overview of Commercial Furniture Industry.................................................................... 7
Products ............................................................................................................................ 8
Manufacturing and Sourcing............................................................................................. 9
Product Design and Styling ............................................................................................ 10
Distribution ..................................................................................................................... 10
Sources and Availability of Raw Materials .................................................................... 11
Seasonality ...................................................................................................................... 11
Competition .................................................................................................................... 12
Environmental and Other Regulations ............................................................................ 12
Employees ....................................................................................................................... 13
Customers and Sales ....................................................................................................... 14
Net Sales by Geographic Area ........................................................................................ 15
Backlog ........................................................................................................................... 15
Risk Factors ........................................................................................................................ 15
Unresolved Staff Comments ............................................................................................... 19
Properties ............................................................................................................................ 19
Legal Proceedings ............................................................................................................... 20
Mine Safety Disclosure ....................................................................................................... 20
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities ............................................................................... 21
Selected Financial Data ...................................................................................................... 24
Management’s Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................................................................... 25
Item No.
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
Quantitative and Qualitative Disclosures About Market Risk ............................................ 47
8.
9.
Consolidated Financial Statements and Supplementary Data............................................. 48
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ......................................................................................................................... 84
9A(T).
Controls and Procedures ..................................................................................................... 84
9B.
Other Information ............................................................................................................... 86
Item No.
Page
PART III
10.
Directors, Executive Officers, and Corporate Governance................................................. 86
11.
Executive Compensation .................................................................................................... 86
12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ............................................................................................. 86
13.
Certain Relationships, Related Transactions, and Director Independence ......................... 87
14.
Principal Accountant Fees and Services ............................................................................. 87
PART IV
15.
Exhibits and Financial Statement Schedules ...................................................................... 88
Documents Filed as Part of this Report .............................................................................. 88
Exhibits ............................................................................................................................... 88
Financial Statement Schedules ........................................................................................... 88
Signatures ........................................................................................................................... 92
Exhibit Index ...................................................................................................................... 93
(This page intentionally left blank)
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
Parts I and II of this report contain “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, production levels, sales, gross profit
margins, operating income, SG&A or other expenses, earnings, other performance measures, 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 our 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. Changes in consumer tastes or preferences toward
products not produced by us could erode demand for our products. Changes in the value of the U.S. dollar
versus other currencies could 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 could
make our 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 our sales in the U.S. of
products produced in those places. Also, economic and political instability in international areas could
affect our operations or sources of goods in those areas, as well as demand for our products in
international markets. Further information about these factors, as well as other factors that could affect
our 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
PART 1
ITEM 1. BUSINESS
Overview
Culp, Inc. manufactures, sources, and markets mattress fabrics 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. We have two operating segments — mattress fabrics and upholstery fabrics.
The mattress fabric business markets fabrics that are used primarily in the production of bedding
products, including mattresses, box springs, and mattress sets. The upholstery fabric business markets a
variety of fabric products that 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.
Culp markets a variety of fabrics in different categories to its global customer base, including fabrics
produced at our manufacturing facilities and fabrics produced by other suppliers. We had twelve active
manufacturing plants and distribution facilities as of the end of fiscal 2012, which are located in North
and South Carolina; Quebec, Canada; Shanghai, China; and Poznan, Poland. We also source fabrics from
other manufacturers, located primarily in China and Turkey, with almost all of those fabrics being
produced specifically for Culp and created by Culp designers. We operate distribution centers in North
Carolina, and Shanghai, China, to facilitate distribution of our products, and early last year we opened a
new distribution facility in Poznan, Poland. 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 due primarily to the upholstery fabrics segment, where
more than 85% of our sales now consist of fabrics produced in China.
Total net sales in fiscal 2012 were $254.4 million. The mattress fabrics segment had net sales of $145.5
million (57.2% of total net sales), while the upholstery fabrics segment had net sales of $108.9 million
(42.8% of total net sales).
During fiscal 2011, our business was affected by continued weak business conditions, especially slow
sales of home furnishings. In addition, both segments were significantly affected by higher raw material
prices during the year, which led to an overall decline in profit margins. In spite of these conditions, the
company had an overall increase in sales of five percent compared to the prior year, as well as higher pre-
tax and net income.
Weak business conditions and slow sales of home furnishings, especially during the first half of the fiscal
year, continued to affect our business during fiscal 2012. However, industry demand improved somewhat
compared to the prior year, and we also had more positive responses from customers to innovative
designs and new products introduced during the year. Sales increased in both our business segments,
increasing 19% in mattress fabrics and 15% in upholstery fabrics. These sales levels represent our third
consecutive year of increased revenues, and our fiscal 2012 net sales were the highest level in the past six
years.
2
During fiscal 2012, both segments continued to build upon strategic initiatives and structural changes they
made over the last several years. The platforms created through these changes allowed for a sharp focus
on product innovation and introduction of new designs to drive sales growth and keep current with home
furnishing trends.
The mattress fabrics segment has invested $57 million over an eight year period in significant capital
expenditures and acquisitions. These expenditures provided increased manufacturing capacity and more
efficient equipment for this segment, as well as two successful acquisitions. Most recently, this segment
announced a new joint marketing agreement to market sewn mattress covers, which will include
establishment of a small production facility.
The upholstery fabrics segment underwent major changes over the past decade, transforming from a
primarily U.S.-based manufacturing operation with large amounts of fixed assets to a more flexible
variable cost model, with most fabrics sourced in China, while still maintaining control over the value-
added components of fabric production such as design, finishing, quality control and distribution. These
changes involved a multi-year restructuring process that ended in fiscal 2009, during which time our
upholstery fabric sales declined considerably. The trend of declining upholstery sales has reversed, and
sales in this segment have now increased for each of the past three fiscal years. Since the end of the
multi-year restructuring, we have focused on product development and marketing, including the
exploration of new markets. A part of this effort has been the establishment of a new marketing and
distribution operation in Poland, known as Culp Europe, which accounted for about three percent of
upholstery sales last year.
Additional information about trends and developments in each of our business segments is provided in the
“Segments” discussion below.
General Information
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.culp.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.
Segments
Our two operating segments are mattress fabrics and upholstery fabrics. The following table sets forth
certain information for each of our segments.
3
Sales by Fiscal Year ($ in Millions) and
Percentage of Total Company Sales
Segment
Mattress Fabrics
Upholstery Fabrics
Non-U.S.-Produced
U.S.-Produced
Total Upholstery
Total company
Fiscal 2012
$145.5
(57%)
Fiscal 2011
$122.4
$95.5
$13.4
$108.9
$254.4
(38%)
(5%)
(43%)
(100%)
$81.2
$13.2
$94.4
$216.8
(56%)
(37%)
(6%)
(44%)
(100%)
Fiscal 2010
$114.8
$77.3
$14.3
$91.6
$206.4
(56%)
(37%)
(7%)
(44%)
(100%)
Additional financial information about our operating segments can be found in Note 18 to the
Consolidated Financial Statements included in Item 8 of this report.
Mattress Fabrics. The mattress fabrics segment, known as Culp Home Fashions in the industry,
manufactures and markets mattress fabric to bedding manufacturers. These fabrics encompass woven
jacquard fabric, knitted fabric and some upholstery type fabrics. Culp Home Fashions has manufacturing
facilities located in Stokesdale and High Point, North Carolina, and St. Jerome, Quebec, Canada. The
Stokesdale and St. Jerome plants manufacture jacquard (damask) fabric. The Stokesdale plant also
finishes jacquard and knit fabric, and houses the division offices and finished goods distribution
capabilities. In fiscal 2009, 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. Almost all
woven jacquard and knitted fabrics can be produced in multiple facilities, (internal or external to the
company) providing us with mirrored, reactive capacity involving state-of-the art capabilities across plant
facilities.
Culp Home Fashions had capital expenditures during the period fiscal 2005 through 2012 totaling
approximately $38 million, which primarily provided for the purchase of faster and more efficient
weaving machines as well as increased knit machine capacity. These capital expenditures also provided
high technology finishing equipment for woven and knitted fabric. With most of these modernization and
expansion projects completed, we expect lower capital expenditures in the near term for this segment.
The Bodet & Horst USA, LP acquisition in fiscal 2009 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 fabric. The completion of this acquisition 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. Since the acquisition, we
made further investments in knitting machines and finishing equipment, increasing our internal
production capacity substantially.
Our recently announced joint marketing agreement for the production and marketing of sewn mattress
covers represents a further step in our efforts to respond to industry demands. The CHF division has
established a new venture to be known as Culp-Lava Applied Sewn Solutions, which is a joint marketing
effort with A. Lava & Son Co. of Chicago, a leading provider of mattress covers. We are establishing a
small manufacturing operation near our current plants in North Carolina, which will involve leased space
and a limited capital investment in equipment, to produce and market sewn mattress covers, a growing
4
product category in the bedding industry. Teaming with A. Lava & Son allows us to have two mirrored
manufacturing facilities and great flexibility in meeting demand from bedding producers for mattress
covers.
Upholstery Fabrics. The upholstery fabrics segment markets a wide variety of fabrics for residential
and commercial furniture customers. The upholstery fabrics 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.
In each of the past two fiscal years, sales of non-U.S. produced upholstery accounted for more than 85%
of our upholstery fabric sales.
Demand for U.S.-produced upholstery declined significantly over the past decade, and we took aggressive
steps to reduce our U.S. manufacturing costs, capacity, and selling, general and administrative expenses.
These restructuring actions reduced our U.S. upholstery operations to the one manufacturing plant in
South Carolina and one upholstery distribution facility in Burlington, North Carolina.
During the time that U.S. upholstery operations were being reduced, we established operations in China
and gradually expanded them over time to include a variety of activities. The facilities near Shanghai
now include fabric sourcing, finishing, quality control and inspection operations, as well as a plant where
sourced fabrics are cut and sewn into “kits” made to specifications of furniture manufacturing customers.
More 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.
We established a new subsidiary during fiscal 2011 called Culp Europe, which is a marketing and
distribution operation based in Poland, in an area with a high concentration of furniture suppliers. This
operation targets furniture manufacturers in the European market. We view this market as a significant
long-term opportunity for growth, with high living standards, fashion conscious consumers, and short
replacement cycles for upholstered furniture. Culp Europe accounted for approximately 3% for our
upholstery sales in fiscal 2012.
Over the past decade, 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 and tastes for various products. At the same time, we have
maintained 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.
Even as economic conditions and furniture demand remained relatively weak during fiscal 2012, our
upholstery fabrics sales increased for the third consecutive year. These gains reversed a ten year trend of
declining upholstery sales that ended with fiscal 2009, as we substantially overhauled our operating
model. We believe our increased sales in the upholstery fabrics segment were achieved primarily through
implementation of a business strategy that included: 1) innovation in a low-cost environment, 2) speed to
market execution, 3) consistent quality, 4) reliable service and lead times, and 5) increased recognition of
and reliance on the Culp brand. A return to profitability in upholstery fabrics has been achieved through
development of a unique business model that has enabled the upholstery segment to execute a strategy
that we believe is clearly differentiated from competitors. In this way, we have maintained 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.
5
Overview of Industry and Markets
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, sofa-beds, chairs, recliners, loveseats, sectionals,
and office seating. 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. Currently the vast majority of our products are sold to manufacturers for end use in the U.S., and
thus the discussions below are focused on U.S. markets.
Overview of Bedding Industry
In calendar 2010 and 2011, the bedding industry experienced gains in both dollar and unit sales, reversing
a recent trend of declining sales over several years prior to that. According to the International Sleep
Products Association (ISPA), a trade association, the U.S. wholesale bedding industry increased dollar
sales by 7.7% to 6.3 billion in 2011. Unit volume sales increased only slightly (0.2%) in 2011 compared
to 2010, having experienced a 6.2% increase the previous year after four years of declines. Specialty
bedding manufacturers, which produce mattresses that do not use inner spring construction, now account
for about 30% of bedding dollar sales, but only 14% of the unit volume in the industry. This category of
bedding, which has a higher average selling price, has continued to increase its share of total bedding
sales, according to industry statistics. ISPA also reported that overall average unit prices in the bedding
industry increased 7.5% in 2011, reversing a trend of declines in the prior two years.
The bedding industry is comprised of several hundred manufacturers, but the largest five manufacturers
accounted for more than 70% of total wholesale shipments in 2011, while the top fifteen accounted for
approximately 86%. Until recently, the industry has been mature and stable, generally experiencing slow
and steady growth in sales. However, during the past few years sales have been more unpredictable, as
the economic downturn caused two years of sales declines, followed by a return to growth in 2010. On a
long-term basis, the stability of this market has been due in part to replacement purchases, which account
for the majority of bedding industry sales.
Unlike the residential furniture industry, which has faced intense competition from imports, the U.S.
bedding industry has largely remained a North American based business with limited competition from
imports. Imports of bedding into the U.S. have increased in recent years, but imports still represent only a
small fraction of total U.S. bedding sales. The primary reasons for this fact include: 1) the short lead
times demanded by mattress manufacturers and retailers due to their quick service delivery model, 2) the
limited inventories carried by manufacturers and retailers requires “just-in-time” delivery of product, 3)
the customized nature of each manufacturer and retailer’s product lines, 4) high shipping and import duty
costs, 5) the relatively low direct labor content in mattresses, and 6) strong brand recognition and
importance.
Other key trends in the bedding industry include:
• 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 upgrade their bedding.
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• While mattress fabrics serve the functional purpose of providing a soft and durable cover, there is
a growing emphasis on the design knitted or woven into the fabrics to appeal to the customer’s
visual attraction and perceived value of the mattress on the retail floor. Mattress fabric design
efforts are based on current trends in home decor and fashion.
• Growth in non-traditional sources for retail mattress sales is now an important factor in home
furnishings sales. These outlets, such as wholesale warehouse clubs and the internet, have the
potential to increase overall consumption of goods due to convenience and high traffic volume
which in turn result in higher turnover of product.
•
Increased popularity of knitted fabric has continued. Knitted fabric was initially used primarily
on premium mattresses, but these products are now being placed increasingly on mattresses at
mid-range retail price points.
Overview of Residential Furniture Industry
The residential furniture industry was severely affected by the global economic downturn and
experienced significant declines in sales for 2008 and 2009 due to lower consumer spending and a very
weak housing market. U.S. sales of residential furniture rebounded during the past two years and equaled
$15.1 billion in 2011. This level represents a 4.4% increase from 2010, but is still far below sales levels
experienced in the years prior to 2008. According to data published by the American Home Furnishings
Alliance (AHFA), a trade association, before 2008 the residential furniture industry was mature and more
stable, with generally modest yearly changes in sales levels that were at or below the overall growth rate
of the U.S. economy. However, shipments declined by 14.8% in 2008 compared to the prior year, and in
2009 retail furniture shipments dropped 18.1% compared to 2008. Although industry sales appeared to
have stabilized over the past two years, overall weak demand for residential furniture has continued to
affect the industry, creating significant challenges for suppliers to the residential furniture 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. By far, the largest source for these imports
continues to be China, which now accounts for approximately 56% of total U.S. furniture
imports.
•
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 to twelve
years. This trend has increased over the last seven years in large part because selling prices of
leather furniture have been declining significantly over this time period.
• 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.
Overview of Commercial Furniture Industry
The market for commercial furniture - furniture used in offices and other institutional settings - grew
approximately 13% from 2010 to 2011, following a 5.8% increase the previous year. The increases in
2010 and 2011 reflect economic trends affecting businesses, which are the ultimate customers in this
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industry. According to the Business and Institutional Furniture Manufacturer’s Association (BIFMA), a
trade association, the commercial furniture market in the U.S. totaled approximately $9.4 billion in 2011
in wholesale shipments by manufacturers, an increase from the $8.3 billion total for 2010. However, this
total represents a significant decrease from the industry’s peak of $13.3 billion in 2000.
Products
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 about 56-57% of our total net sales in each of the past three
fiscal years. The company has emphasized fabrics that have broad appeal at prices generally ranging
from $1.29 to $10.99 per yard.
Upholstery Fabrics Segment
Upholstery fabrics segment sales totaled 43-44% of our sales for each of the past three fiscal years. The
company has emphasized fabrics that have broad appeal at “good” and “better” prices, generally ranging
from $4.25 to $5.25 per yard.
Culp Fabric Categories by Segment
We market products in most 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.
Mattress Fabrics
Woven jacquards
Upholstery type
Knitted Fabric
Upholstery Fabrics
Woven jacquards
Various patterns and intricate designs. Woven on complex looms using a
variety of synthetic and natural yarns.
Suedes, pile and embroidered fabrics, and other specialty type products are
sourced to offer diversity for higher end mattresses.
Various patterns and intricate designs produced on special-width circular knit
machines utilizing a variety of synthetic and natural yarns. Knitted mattress
fabrics have inherent stretching properties and spongy softness, which
conforms well with layered foam packages.
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.
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Velvets
Suede fabrics
Soft fabrics with a plush feel. Produced with synthetic yarns, by weaving into
a base fabric. Basic designs such as plaids in both traditional and
contemporary styles.
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.
Manufacturing and Sourcing
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 eight fiscal years, we made
capital expenditures of approximately $38 million to consolidate all of our production of woven
jacquards, or damask fabric, to these plants and to modernize the equipment, enhance and provide
finishing capabilities and expand capacity in each of these facilities. The result has been an increase in
manufacturing efficiency and reductions in operating costs. Jacquard mattress fabric is woven at the
Stokesdale and St. Jerome plants, and knitted fabrics are produced at the High Point facility. Most
finishing and inspection processes for mattress fabrics are conducted at the Stokesdale plant.
In addition to the mattress fabrics we manufacture, we have 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 converted fabric products (such as suedes, pile fabrics and embroidered
fabrics) through our China platform.
We recently announced a new joint marketing arrangement with a producer of sewn mattress covers for
bedding. This effort will result in the establishment of an additional manufacturing facility to produce
and market sewn mattress covers.
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 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 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 certain 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 commit significant
capacity to meet our needs while working with our product development team to meet the demands of our
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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.
Product Design and Styling
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.
Mattress Fabrics Segment
Design is an increasingly important element of producing mattress fabrics. Price point delineation is
accomplished through fabric quality as well as variation in design. Additionally, consumers are drawn to
the mattress that is most visually appealing when walking into a retail showroom. Fibers also play an
important part in design. For example, rayon, organic cotton and other special fibers are incorporated into
the design process to allow the retailer to offer consumers additional benefits related to their sleeping
experience. Similarly, many fabrics contain special production finishes that enhance fabric performance.
Mattress fabric designs are not introduced on a scheduled season. Designs are typically introduced upon
the request of customer as they plan introduction to their retailers. Additionally, we work closely with
our customers on new design offerings around the major furniture markets such as High Point and Las
Vegas.
Upholstery Fabrics Segment
The company has developed an upholstery fabrics design and product development team (with staff
located in the U.S. and in China) with focus on designing for value primarily on body cloths, while
promoting style leadership with pillow fabrics and color. The team searches continually for new ideas
and for the best sources of raw materials, yarns and fabrics, utilizing a China supply network. Using
these design elements, they develop product offerings using ideas and materials which take 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). In recent years
we have become more aggressive in registering copyrights for popular fabric patterns and taking steps to
discourage the illegal copying of our proprietary designs.
Distribution
Mattress Fabrics Segment
All of our shipments of mattress fabrics originate from our manufacturing facility in Stokesdale, North
Carolina. 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.
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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. Also, we are now beginning to distribute
upholstery fabrics from our new facilities in Poznan, Poland. In addition to “make to order” distribution,
an inventory comprising of a limited number of fabric patterns is held at our distribution facilities in
Burlington and Shanghai from which our customers can obtain quick delivery of fabrics through a
program known as “Culp Express.” We also have a marketing strategy for our U.S.-produced upholstery
products, providing customers with very quick delivery on target products at key price points. Beginning
in fiscal 2010 and continuing through fiscal 2012, market share opportunities have been expanded
through strategic selling partnerships.
Sources and Availability of Raw Materials
Mattress Fabrics Segment
Raw materials account for approximately 60%-70% of mattress fabric 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, although increases in raw material
prices materially affected our profitability during the past two fiscal years.
Upholstery Fabrics Segment
Raw materials account for approximately 65% 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.
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. Significant increases in raw material prices had a
negative effect on our upholstery fabrics profits during the past two fiscal years.
Both Segments
Many of our basic raw materials are petrochemical products or are produced from such products. For this
reason, our material costs can be sensitive to changes in prices for petrochemicals and the underlying
price of oil. Additionally, basic raw material prices recently have been greatly affected recently by
general worldwide demand, especially fiber demand from China.
Seasonality
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.
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Upholstery Fabrics Segment
The upholstery fabrics business is somewhat seasonal, with increased sales during our first and fourth
fiscal quarters. Sales also tend to be lower in our second fiscal quarter.
Competition
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., 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, Morgan Fabrics, and
Specialty Textile, Inc. (or STI), plus a large number of smaller competitors (both manufacturers and
converters).
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.
Environmental and Other Regulations
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.
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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.
The U.S. Congress is currently considering legislation to address climate change that is intended to reduce
overall green house gas emissions, including carbon dioxide. In addition, the U.S. Environmental
Protection Agency has made a determination that green house gas emissions may be a threat to human
health and the environment. International agreements may also result in new regulations on green house
gas emissions. It is uncertain if, when, and in what form, a mandatory carbon dioxide emissions
reduction program may be enacted either through legislation or regulation. However, if enacted, this type
of program could materially increase our operating costs, including costs of raw materials, transportation
and electricity. It is difficult to predict the extent to which any new rules or regulations would impact our
business, but we would expect the effect on our operations to be similar to that for other manufacturers,
particularly those in our industry.
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.”
Employees
As of April 29, 2012, we had 1,114 employees, compared to 1,149 at the end of fiscal 2011. Overall, our
total number of employees has remained fairly steady over the past five years, with increases in the
mattress fabrics segment and decreases in the upholstery segment during that period.
The hourly employees at our manufacturing facility in Canada (approximately 14% of the company’s
workforce) are represented by a local, unaffiliated union. The collective bargaining agreement for these
employees expires on February 1, 2014. We are not aware of any efforts to organize any more of our
employees, and we believe our relations with our employees are good.
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The following table illustrates the changes in the location of our workforce and number of employees, as
of year-end, over the past five fiscal years.
Number of Employees
Fiscal
2011
466
130
543
6
679
4
1,149
Fiscal
2010
439
125
537
-
662
4
1,105
Fiscal
2009
420
119
504
-
623
4
1,047
Fiscal
2008
373
230
481
-
711
3
1,087
Fiscal
2012
492
113
497
8
618
4
1,114
Mattress Fabrics Segment
Upholstery Fabrics Segment
United States
China
Poland
Total Upholstery Fabrics Segment
Unallocated corporate
Total
Customers and Sales
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 two largest customers in the mattress fabrics segment are (1) the
parent company of Serta and Simmons (controlled by Ares Management, LLC and Ontario
Teachers&apos), accounting for approximately 12% of the company’s overall sales in fiscal 2012, and
(2) Sealy, Inc., accounting for approximately 10% of our overall sales last year. The loss of either of
these customers would have a material adverse effect on the company. 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, Best Home Furnishings, Flexsteel, Furniture Brands International (Broyhill and Lane),
Klaussner Furniture, La-Z-Boy (La-Z-Boy Residential, Bauhaus, and England) Man Wah Furniture and
Southern Motion. 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 13% of the company’s total net sales in fiscal 2012.
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The following table sets forth our net sales by geographic area by amount and percentage of total net sales
for the three most recent fiscal years.
Net Sales by Geographic Area
(dollars in thousands)
United States
North America
(Excluding USA)
Far East and Asia
All other areas
Subtotal
(International)
Total
Fiscal 2012
Fiscal 2011
Fiscal 2010
$200,394
78.8% $168,212
77.5%
$160,360
77.7%
10,417
4.1
10,505
4.8
11,654
5.6
38,279
5,353
15.0
2.1
36,587
1,502
17.0
0.7
31,856
2,546
15.4
1.2
54,049
21.2
48,594
22.5
46,056
22.3
$254,443
100.00% $216,806
100.0% $206,416
100.0%
For additional segment information, see Note 18 in the consolidated financial statements.
Backlog
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 April 29, 2012 the portion of the upholstery fabric backlog with confirmed shipping
dates prior to June 3, 2012 was $12.2 million, all of which are expected to be filled early during fiscal
2013, as compared to $8.0 million as of the end of fiscal 2011 (for confirmed shipping dates prior to
June 5, 2011).
ITEM 1A. RISK FACTORS
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.
Continued economic weakness could negatively affect 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
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therefore can cause a decrease in our sales and earnings. Continuing weak economic conditions have
caused a decrease in consumer spending and demand for home furnishings, including goods that
incorporate our products. If these conditions persist, our business will be negatively affected.
It has been difficult to maintain and increase sales levels in the upholstery fabrics segment.
Although sales have stabilized in recent years for our upholstery fabrics segment, we experienced
declines in sales for this business for many years prior to the last three fiscal years. Increased competition
and fragmentation of the upholstery fabrics business, including a dramatic shift to imported fabrics and
resulting price deflation for upholstery fabrics, have led to a significant reduction in the size of our
upholstery business. Opportunities for growth and profitability gains for this segment are encouraging,
but there is no assurance that we will be able to maintain or consistently grow this business in the 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 rely 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.
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.
ASC Topic 360 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. ASC Topic 350 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-
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lived assets and a corresponding reduction in earnings and net worth. Although no significant write-
downs were experienced in the past three fiscal years, there is no assurance that future write-downs of
fixed assets or goodwill will not occur if business conditions deteriorate.
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 market prices for certain fibers and yarns had a material adverse
impact on our profit margins during fiscal 2011 and 2012. Although some of our raw material costs have
recently begun to stabilize, higher raw material prices can have a negative effect on our profits in the
future.
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. Energy costs have varied significantly during recent fiscal years,
and remain a volatile element of our costs. Further increases in energy costs could have a negative effect
on our earnings.
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
fabrics segment, several large bedding manufacturers have large market shares and comprise a significant
portion of our mattress fabric sales, with the parent company of Serta (National Bedding) and Simmons
accounting for approximately 12% of consolidated net sales, and Sealy, Inc. accounting for approximately
10% of net sales, in fiscal 2012. In the upholstery fabrics segment, La-Z-Boy Incorporated accounted for
approximately 13% of consolidated net sales during fiscal 2012, 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.
Loss of market share due to competition would result in declines in sales and could result in 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
17
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 of upholstery fabrics have decreased
significantly over the past ten fiscal 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.
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 changes 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.
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.
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.
18
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in High Point, North Carolina. As of the end of fiscal 2012, we owned or
leased twelve 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.
Location
Principal Use
• Administrative:
High Point, North Carolina
• Mattress Fabrics:
Stokesdale, North Carolina
Stokesdale, North Carolina (2)
High Point, North Carolina (2)
High Point, North Carolina
St. Jerome, Quebec, Canada
• Upholstery Fabrics:
Anderson, South Carolina
Burlington, North Carolina
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Poznan, Poland
Upholstery fabric division
offices and corporate
headquarters
Manufacturing, distribution,
and division offices
Warehouse
Manufacturing
Warehouse and offices
Manufacturing
Manufacturing
Finished goods distribution
Manufacturing and offices
Manufacturing and warehousing
Manufacturing and warehousing
Warehouse
Finished goods distribution
____________________________________________________
(1) Includes all options to renew.
(2) This lease agreement is currently on a month to month basis.
Approx.
Total Area
(Sq. Ft.)
Expiration
of Lease (1)
29,812
2025
230,000
Owned
30,800
63,522
65,886
202,500
99,000
67,330
69,000
90,000
101,632
12,917
26,160
-
-
2014
Owned
Owned
2012
2013
2015
2013
2013
2015
We believe that our facilities are in good condition, well-maintained and suitable and adequate for present
utilization. In the upholstery fabrics segment, we have the ability to source upholstery fabric from outside
suppliers to meet current and expected demand trends and further increase our output of finished goods. This
ability to source upholstery fabric is part of our long-term strategy to have a low-cost platform that is
scalable, but not capital intensive. In the mattress fabrics segment, management has estimated that it is
currently performing at near capacity. In response, we had capital expenditures of $17.2 million in fiscal
2012, 2011 and 2010 for modernizing and expanding our woven and knit capacities. Also, we have the ability
to source additional mattress fabric from outside suppliers to further increase our ultimate output of finished
goods.
19
ITEM 3. LEGAL PROCEEDINGS
A lawsuit was filed against us 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., we leased and
operated the Site as part of our 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, plus unspecified future environmental
costs. We understand that the USEPA’s costs now exceed $13 million, but are not expected to increase
significantly in the future. Neither USEPA nor any other governmental authority has asserted any claim
against us on account of these matters. The plaintiffs seek contribution from us 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 plaintiffs also assert that we tortiously interfered
with contracts between them and other defendants in the case and diverted assets to prevent the plaintiffs
from being paid monies owed to them. We do not believe we have any liability for the matters described in
this litigation and intend to defend ourselves vigorously. In addition, we have an indemnification agreement
with certain other defendants in the litigation pursuant to which the other defendants agreed to indemnify us
for any damages we incur as a result of the environmental matters that are the subject of this litigation,
although it is unclear whether the indemnitors have significant assets at this time. Since the loss is not
probable and cannot be estimated, no reserve has been recorded.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
20
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
PART II
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 April 29, 2012, Culp, Inc. had approximately 1,775 shareholders based on the number of holders of
record and an estimate of individual participants represented by security position listings.
Analyst Coverage
These analysts cover Culp, Inc.:
Raymond, James & Associates - Budd Bugatch, CFA
Value Line – Craig Sirois
Sidoti & Company, LLC – Steve Shaw
Dividends and Share Repurchases; Sales of Unregistered Securities
Share Repurchases
ISSUER PURCHASES OF EQUITY SECURITIES
(a)
(b)
Total Number
of Shares
Purchased
-
Average Price
Paid per Share
$ -
(c)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
(d)
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1) (2)
-
$1,617,983
Period
January 30, 2012 to
March 4, 2012
March 5, 2012
April 1, 2012
to
-
$ -
-
$1,617,983
April 2, 2012 to April
29, 2012
-
$ -
-
$1,617,983
Total
-
$ -
-
$1,617,983
21
(1) On June 16, 2011, our board of directors authorized the expenditure of $5.0 million for the repurchase of
our common stock. On August 29, 2011, our board of directors authorized the expenditure of an additional
$2.0 million (a cumulative total of $7.0 million) for the repurchase of our common stock. The amounts
determined in column (d) above are based on the cumulative authorized amount of $7.0 million as of
August 29, 2011.
(2) On June 13, 2012, we announced that our board of directors approved a new authorization for us to acquire
up to $5.0 million of our common stock. This action replaces the authorization to acquire up to $7.0 million
of our common stock noted in footnote 1 above.
Dividends
We did not pay any cash dividends during fiscal 2012, 2011, and 2010.
On June 13, 2012, we announced that our board of directors approved the payment of a quarterly cash
dividend of $0.03 per share, to be paid on or about July 16, 2012, to shareholders of record as of the close
of business on July 2, 2012. We anticipate paying a cash dividend each quarter, with expected payment
dates in October, January, April, and July. Future dividend payments are subject to board approval and
may be adjusted at the board’s discretion as business needs or market conditions change.
Sales of Unregistered Securties
There were no sales of unregistered securities during fiscal 2012, 2011, or 2010.
Performance Comparison
The following graph shows changes over the five fiscal years ending April 29, 2012 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 2007 and the reinvestment of all
dividends during the periods identified.
22
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Culp, Inc., the S&P 500 Index, and Hemscott Textile Industrial Group
$140
$120
$100
$80
$60
$40
$20
$0
4/07
4/08
4/09
4/10
4/11
4/12
Culp, Inc.
S&P 500
Hemscott Textile Industrial Group
*$100 invested on 4/30/07 in stock or index, including reinvestment of dividends.
Fiscal year ending April 30.
Copyright© 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
Market Information
See Item 6, Selected Financial Data, and Selected Quarterly Data in Item 8, for market information
regarding the company’s common stock.
23
ITEM 6. SELECTED FINANCIAL DATA
(amounts in thousands)
INCOME (LOSS) STATEMENT DATA
net sales
cost of sales (5)
gross profit
selling, general, and administrative expenses (5)
restructuring expense (credit) (5)
income (loss) from operations
interest expense
interest income
other expense
income (loss) before income taxes
income taxes
net income (loss)
depreciation (6)
weighted average shares outstanding
weighted average shares outstanding, assuming dilution
PER SHARE DATA
net income (loss) per share - basic
net income (loss) per share - diluted
book value
BALANCE SHEET DATA
operating working capital (4)
property, plant and equipment, net
total assets
capital expenditures
long-term debt, current maturities of long-term debt and line of credit (1)
shareholders' equity
capital employed (3)
RATIOS & OTHER DATA
gross profit margin
operating income (loss) margin
net income (loss) margin
effective income tax rate
debt to total capital employed ratio (1)
operating working capital turnover (4)
days sales in receivables
inventory turnover
STOCK DATA
stock price
high
low
close
P/E ratio (2)
high
low
daily average trading volume (shares)
fiscal
2012
fiscal
2011
fiscal
2010
fiscal
2009
fiscal
2008
percent
change
2012/2011
%
17.4
19.3
7.9
18.8
(100.0)
(6.6)
(11.5)
111.7
490.0
(5.7)
N.M.
(17.7)
11.3
(1.9)
(2.7)
(16.1)
(15.5)
15.5
27.9
%
3.2
11.3
(6.1)
(13.3)
10.8
8.6
$
$
$
$
$
$
$
254,443
214,711
39,732
25,026
-
14,706
780
(508)
236
14,198
902
13,296
4,865
12,711
12,866
1.05
1.03
7.00
216,806
179,966
36,840
21,069
28
15,743
881
(240)
40
15,062
(1,102)
16,164
4,372
12,959
13,218
1.25
1.22
6.06
206,416
167,639
38,777
22,805
(370)
16,342
1,314
(116)
828
14,316
1,128
13,188
4,010
12,709
13,057
1.04
1.01
4.83
30,596
31,279
23,921
30,296
22,979
28,403
144,716
130,051
112,598
5,919
10,012
89,000
67,887
15.6%
5.8%
5.2%
6.4%
14.7%
8.9
36
6.6
11.81
7.05
11.05
11
7
30.6
6,302
11,547
80,341
62,521
17.0%
7.3%
7.5%
(7.3)%
18.5%
8.8
34
6.6
14.10
6.56
10.08
12
5
58.0
7,397
11,687
63,047
57,296
18.8%
7.9%
6.4%
7.9%
20.4%
9.0
35
6.7
16.98
3.50
11.94
17
3
80.1
203,938
179,286
24,652
19,751
9,471
(4,570)
2,359
(89)
43
(6,883)
31,959
(38,842)
6,712
12,651
12,651
(3.07)
(3.07)
3.76
23,503
24,253
95,294
3,160
16,368
48,031
56,659
12.1%
(2.2)%
(19.0)%
(464.3)%
28.9%
6.4
32
6.0
7.91
1.30
4.40
N.M.
N.M.
19.2
254,046
220,887
33,159
23,973
886
8,300
2,975
(254)
736
4,843
(542)
5,385
5,548
12,624
12,765
0.43
0.42
6.83
38,368
32,939
148,029
6,928
21,423
86,359
75,036
13.1%
3.3%
2.1%
(11.2)%
28.6%
5.8
37
5.8
12.30
6.12
7.53
29
15
38.3
(1) Debt includes long-term and current maturities of long-term debt and line of credit.
(2) P/E ratios based on trailing 12-month net income per share.
(3) Capital employed represents long-term and current maturities of long-term debt, lines of credit, current and noncurrent
deferred income tax liabilities, current and long-term income taxes payable, stockholders' equity, offset by cash and cash equivalents,
short-term investments, current and noncurrent deferred income tax assets, and income taxes receivable.
(4) Operating working capital for this calculation is accounts receivable and inventories, offset by accounts payable-trade and capital expenditures.
(5) The company incurred restructuring and related charges (credits) in fiscal 2008 through 2011. See note 2 of the company's consolidated financial statements.
(6) Includes accelerated depreciation of $2.1 in fiscal 2009. No accelerated depreciation was recorded in fiscal 2012, 2011, 2010, and 2008.
24
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.
General
Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30. Fiscal 2012, 2011
and 2010 each included 52 weeks. Our operations are classified into two business segments: mattress
fabrics and upholstery fabrics. The mattress fabrics segment 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 from operations before
restructuring and related charges (credits), 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 non-compete agreements associated with certain acquisitions. The upholstery
fabrics segment also includes assets held for sale in segment assets.
Executive Summary
Net sales were $254.4 million in fiscal 2012, an increase of 17.4%, compared with $216.8 million for
fiscal 2011. Also, net sales were $75.7 million in the fourth quarter of fiscal 2012, an increase of 25.4%,
compared with $60.4 million in the fourth quarter of fiscal 2011. The $75.7 million reported in the fourth
quarter of fiscal 2012 is the highest quarterly net sales level in eight years. These results reflect improved
industry demand and the benefits of our outstanding design capabilities and lean global manufacturing
platform.
Income before income taxes was $14.2 million in fiscal 2012, a decrease of 5.7% compared with
$15.1 million in fiscal 2011. Despite the increase in net sales, income before income taxes declined
primarily because of significant increases in raw material costs in both business segments and higher
selling, general, and administrative expenses (SG&A). To help partially offset the increased raw material
costs, we implemented price increases in both business segments. While the increased raw material costs
affected our operating margins for the full fiscal year for 2012, raw material prices stabilized in the fourth
quarter of fiscal 2012.
SG&A was higher in fiscal 2012 compared to fiscal 2011 due to start-up expenses associated with our
Culp Europe operations and an increase in incentive compensation accruals reflecting stronger financial
results in relation to pre-established performance targets. SG&A as a percent of net sales was 9.8% and
9.7% in fiscal 2012 and 2011, respectively.
We reported net income of $13.3 million, or $1.03 per diluted share, in fiscal 2012 compared with net
income of $16.2 million, or $1.22 per diluted share, in fiscal 2011. Net income for fiscal 2012 included
income tax expense of $902,000 and net income for fiscal 2011 included an income tax benefit of $1.1
million. The income tax expense of $902,000 in fiscal 2012 includes an income tax benefit of $4.8
25
million for the reduction of our valuation allowance against our U.S. net deferred tax assets. The income
tax benefit of $1.1 million in fiscal 2011 includes an income tax benefit of $6.4 million for the reduction
of our valuations allowances against our U.S. and China net deferred tax assets.
At April 29, 2012, our cash and cash equivalents and short-term investments totaled $31.0 million
compared with $30.9 million at May 1, 2011. Our cash and cash equivalents and short-term investments
remained unchanged despite common stock repurchases of $5.4 million, capital expenditures of $5.9
million, long-term debt payments of $2.4 million, and working capital spending of $6.9 million to meet
increasing business needs. Our cash and cash equivalents and short-term investments of $31.0 million
exceeded our total debt (current maturities of long-term debt, long-term debt, and line of credit) of $10.0
million. Our next scheduled significant principal payment of $2.2 million is due August 2012.
During fiscal 2012, our board of directors authorized the expenditure of up to $7.0 million for the
repurchase of shares of our common stock. Under the common stock repurchase program, shares may be
purchased from time to time in open market transactions, block trades, and through plans established
under the Securities Exchange Act Rule 10b5-1. The amount of shares purchased and the timing of such
purchases is based on working capital requirements, market and general business conditions and other
factors including alternative investment opportunities. Since the initial authorization of this program on
June 16, 2011, we repurchased approximately 624,000 shares of our common stock at a cost of $5.4
million through April 29, 2012.
On June 13, 2012, we announced that our board of directors approved a new authorization to repurchase
up to $5.0 million of our common stock. This action replaces the authorization to acquire up to $7.0
million of our common stock noted above.
On June 13, 2012, we announced that our board of directors approved the payment of a quarterly cash
dividend of $0.03 per share to be paid on or about July 16, 2012, to shareholders of record as of the close
of business on July 2, 2012. Our last dividend payment was over eleven years ago. We anticipate paying a
cash dividend each quarter, with expected payment dates in October, January, April, and July. Future
dividend payments are subject to board approval and may be adjusted at the board’s discretion as business
needs or market conditions change.
26
Results of Operations
The following table sets forth certain items in our consolidated statements of net income as a percentage
of net sales.
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Restructuring expense (credit)
Income from operations
Interest expense, net
Other expense
Income before income taxes
Income taxes *
Net income
Fiscal Fiscal
2011
100.0%
83.0
17.0
9.7
0.0
7.3
0.3
0.0
6.9
(7.3)
7.5%
2012
100.0%
84.4
15.6
9.8
0.0
5.8
0.1
0.1
5.6
6.4
5.2%
Fiscal
2010
100.0%
81.2
18.8
11.0
(0.2)
7.9
0.5
0.4
6.9
7.9
6.4%
* Calculated as a percentage of income before income taxes.
The tables on the following two pages set forth the company’s statements of operations by segment for
the fiscal years ended April 29, 2012, May 1, 2011, and May 2, 2010.
27
CULP, INC.
STATEMENTS OF OPERATIONS BY SEGMENT
FOR THE TWELVE MONTHS ENDED APRIL 29, 2012 AND MAY 1, 2011
(Amounts in thousands)
Net Sales by Segment
Mattress Fabrics
Upholstery Fabrics
Net Sales
Gross Profit by Segment
Mattress Fabrics
Upholstery Fabrics
Subtotal
Other non-recurring charges
Gross Profit
Selling, General and Administrative expenses by Segment
Mattress Fabrics
Upholstery Fabrics
Unallocated Corporate expenses
Subtotal
Operating Income (loss) by Segment
Mattress Fabrics
Upholstery Fabrics
Unallocated corporate expenses
Subtotal
Other non-recurring charges
Operating income
Depreciation by Segment
Mattress Fabrics
Upholstery Fabrics
Subtotal
Notes:
TWELVE MONTHS ENDED (UNAUDITED)
Amounts
April 29,
2012
145,519
108,924
May 1,
2011
122,431
94,375
% Over
(Under)
18.9 %
15.4 %
Percent of Total Sales
May 1,
2011
April 29,
2012
57.2 %
42.8 %
56.5 %
43.5 %
254,443
216,806
17.4 %
100.0 %
100.0 %
Gross Profit Margin
24,825
14,984
39,809
23,248
13,592
36,840
6.8 %
10.2 %
8.1 %
17.1 %
13.8 %
15.6 %
19.0 %
14.4 %
17.0 %
(77) (1)
-
100.0 %
(0.0) %
0.0 %
39,732
36,840
7.9 %
15.6 %
17.0 %
Percent of Sales
7,875
9,233
3,961
21,069
15.1 %
24.0 %
13.9 %
18.8 %
6.2 %
10.5 %
1.8 %
9.8 %
6.4 %
9.8 %
1.8 %
9.7 %
Operating Income (Loss) Margin
15,373
4,359
(3,961)
15,771
2.5 %
(19.0) %
13.9 %
(6.3) %
10.8 %
3.2 %
(1.8) %
5.8 %
12.6 %
4.6 %
(1.8) %
7.3 %
9,061
11,453
4,512
25,026
15,764
3,531
(4,512)
14,783
(77) (1)
(28) (2)
175.0 %
(0.0) %
(0.0) %
14,706
15,743
(6.6) %
5.8 %
7.3 %
4,275
590
4,865
3,820
552
4,372
11.9 %
6.9 %
11.3 %
$
$
$
$
$
$
$
(1) The $77 represents employee termination benefits associated with our Anderson, SC plant facility.
(2) This $28 represents an impairment charge of $28 related to equipment associated with the upholstery fabrics segment
that is classified as held for sale, a charge of $24 for lease termination and other exit costs, offset by a credit of $14
for employee termination benefits, and a credit of $10 for sales proceeds received on equipment with no carrying value.
28
CULP, INC.
STATEMENTS OF OPERATIONS BY SEGMENT
FOR THE TWELVE MONTHS ENDED MAY 1, 2011 AND MAY 2, 2010
(Amounts in thousands)
Net Sales by Segment
Mattress Fabrics
Upholstery Fabrics
Net Sales
Gross Profit by Segment
Mattress Fabrics
Upholstery Fabrics
Subtotal
Restructuring related charges
Gross Profit
Selling, General and Administrative expenses by Segment
Mattress Fabrics
Upholstery Fabrics
Unallocated Corporate expenses
Subtotal
Operating Income (loss) by Segment
Mattress Fabrics
Upholstery Fabrics
Unallocated corporate expenses
Subtotal
Restructuring and related (charges) credit
Operating income
Depreciation by Segment
Mattress Fabrics
Upholstery Fabrics
Subtotal
Notes:
$
$
$
$
$
$
$
$
$
$
TWELVE MONTHS ENDED (UNAUDITED)
Amounts
May 1,
2011
122,431
94,375
May 2,
2010
114,848
91,568
% Over
(Under)
6.6 %
3.1 %
Percent of Total Sales
May 1,
2011
May 2,
2010
56.5 %
43.5 %
55.6 %
44.4 %
216,806
206,416
5.0 %
100.0 %
100.0 %
Gross Profit Margin
23,248
13,592
36,840
-
23,652
15,183
38,835
(1.7) %
(10.5) %
(5.1) %
19.0 %
14.4 %
17.0 %
20.6 %
16.6 %
18.8 %
(58) (2)
(100.0) %
0.0 %
(0.0) %
36,840
38,777
(5.0) %
17.0 %
18.8 %
7,875
9,233
3,961
21,069
15,373
4,359
(3,961)
15,771
Percent of Sales
8,178
9,227
5,400
22,805
(3.7) %
0.1 %
(26.6) %
(7.6) %
6.4 %
9.8 %
1.8 %
9.7 %
7.1 %
10.1 %
2.6 %
11.0 %
Operating Income (Loss) Margin
15,474
5,956
(5,400)
16,030
(0.7) %
(26.8) %
(26.6) %
(1.6) %
12.6 %
4.6 %
(1.8) %
7.3 %
(28) (1)
312 (3)
N.M.
(4)
(0.0) %
15,743
16,342
(3.7) %
7.3 %
3,820
552
4,372
3,458
552
4,010
10.5 %
0.0 %
9.0 %
13.5 %
6.5 %
(2.6) %
7.8 %
0.2 %
7.9 %
(1) This $28 represents an impairment charge of $28 related to equipment associated with the upholstery fabrics segment
that is classified as held for sale, and a charge of $24 for lease termination and other exit costs, offset by a credit of $14
for employee termination benefits, and a credit of $10 for sales proceeds received on equipment with no carrying value.
(2) The $58 represents a restructuring related charge of $108 for other operating costs associated with closed plant
facilities, offset by a credit of $50 for the sale of inventory previously reserved for.
(3) The $312 restructuring credit of $186 for employee termination benefits, a credit of $170 for sales proceeds received on
equipment with no carrying value, a credit of $50 fo the sale of inventory previously reserved for, a credit of $14 for lease
termination and other exit costs, offset by a charge of $108 for other operating costs associated with closed plant facilities.
(4) N.M. - Not meaningful.
29
2012 compared with 2011
Segment Analysis
Mattress Fabrics Segment
Net Sales
Net sales were $145.5 million for fiscal 2012, an increase of 19% compared with $122.4 million for fiscal
2011. The $145.5 million in net sales represents the highest annual net sales in our history. Also, net sales
were $43.4 million in the fourth quarter of fiscal 2012, an increase of 23% compared with $35.2 million
in the fourth quarter of fiscal 2011. This increase in net sales was primarily due to improved industry
demand and our sales and marketing initiatives. We have been able to respond to this increased demand
as we are benefitting from our recent investments in production facilities that have expanded our internal
capacity. The bedding industry is evolving into a more decorative business with increased product
diversity and growing consumer demand for better bedding and a higher quality mattress fabric. Our
expanded manufacturing platform has allowed us to better serve our customers by providing them with a
diverse product line in all major product categories. This product diversity, along with our design
capabilities, has created additional sales opportunities with customers who are leading suppliers in the
bedding industry. As a result, we experienced sales gains across all major product categories in fiscal
2012 compared to fiscal 2011. The increase in net sales also reflects price increases we implemented
starting in the fourth quarter of fiscal 2011 to partially offset the increased raw material costs noted
below.
Sales and Marketing Initiatives
In order to expand our product offerings and keep pace with the changing customer demand trends within
the bedding industry, we entered into a joint product development, sales and marketing agreement with A.
Lava & Son Co. (Lava) on May 21, 2012. This agreement forms a new business named Culp-Lava
Applied Sewn Solutions (Company) and will provide us the opportunity to enter the business of
designing, producing, and marketing sewn mattress covers. As we enter the business of sewn mattress
covers, we will be able to leverage our design capabilities and expand our product offerings from mattress
fabrics to finished covers. In connection with this agreement, Lava will provide us with technical
assistance and know-how for the start-up of the business and will work with us on the design, sales and
marketing of sewn mattress covers.
As part of the agreement, the new business will be fully funded and 100% owned by us. We plan to
establish a manufacturing facility located in the southeastern U.S. that will be selected by us. As a result,
we will have two mirrored manufacturing facilities to better serve our customer base and meet current and
expected demand trends in the bedding industry. We will have responsibility for all operating control of
the new business, including capital expenditures and production and operating costs. We are projecting
capital expenditures to start the business to be approximately $500,000 for fiscal 2013, as sewn products
are a different business than our current normal operations and do not require large investments in plant
and equipment. Lava is not required to invest capital into the Company.
We are expecting production to start in the second quarter of fiscal 2013 with approximately 35
employees. Our plan is to let the market dictate our growth strategy and we feel it is important to enter
this business gradually to protect our investment as we learn what types of products and volume meet
demand trends.
30
Gross Profit and Operating Income
Gross profit was $24.8 million in fiscal 2012, or 17% of net sales, compared with $23.2 million, or 19%
of net sales, in fiscal 2011. SG&A expenses for fiscal 2012 were $9.1 million compared with $7.9 million
for fiscal 2011. Operating income was $15.8 million in fiscal 2012, an increase of 2.5% compared with
$15.4 million in fiscal 2011. Operating margins were 10.8% and 12.6% of net sales for fiscal 2012 and
2011, respectively.
Our gross profit and operating margins for fiscal 2012 were affected by higher raw material costs and
customer pricing pressure that started in fiscal 2011 and continued through most of fiscal 2012. As a
result, we implemented customer price increases starting in the fourth quarter of fiscal 2011. In addition,
operating margins were affected by increased SG&A expenses due to increased incentive compensation
expense, which reflects stronger financial results in relation to pre-established performance targets. While
the increased raw material costs affected our gross profit and operating margins for the full fiscal year for
2012, raw material prices stabilized in the fourth quarter of fiscal 2012.
Segment Assets
Segment assets consist of accounts receivable, inventory, assets held for sale, non-compete agreements
associated with certain acquisitions, goodwill, and property, plant and equipment. As of April 29, 2012,
accounts receivable and inventory totaled $29.9 million, compared to $25.5 million at May 1, 2011. This
change reflects the net sales increase in the fourth quarter of fiscal 2012 noted above.
At April 29, 2012, and May 1, 2011, property, plant and equipment totaled $29.2 million and
$28.6 million, respectively. The $29.2 million represents property, plant, and equipment located in the
U.S. of $21.2 million and located in Canada of $8.0 million. The $28.6 million represents property, plant,
and equipment located in the U.S. of $20.0 million and located in Canada of $8.6 million. The increase in
this segment’s property, plant, and equipment balance at April 29, 2012 compared with May 1, 2011, is
primarily due to fiscal 2012 capital spending of $4.9 million offset by depreciation expense of $4.3
million.
At April 29, 2012, and May 1, 2011, the carrying value of the segment’s goodwill was $11.5 million. At
April 29, 2012, and May 1, 2011, the carrying values of our non-compete agreements were $333,000 and
$480,000, respectively. The decrease in the carrying values of the non-compete agreements during fiscal
2012 primarily represents amortization expense. At April 29, 2012 and May 1, 2011, assets held for sale
totaled $15,000.
Upholstery Fabrics Segment
Net Sales
Upholstery fabric net sales (which include both fabric and cut and sewn kits) were $108.9 million in fiscal
2012, compared with $94.4 million in fiscal 2011, an increase of 15%. Also, upholstery fabric net sales
were $32.3 million in the fourth quarter of fiscal 2012, an increase of 28% compared with $25.2 million
in the fourth quarter of fiscal 2011. The $32.3 million reported in the fourth quarter of fiscal 2012 was the
highest quarterly net sales total in five fiscal years. This increase in net sales reflects improved industry
demand and customer response to our designs and new product introductions. In addition, this increase in
net sales is also reflects price increases we implemented starting in the fourth quarter of fiscal 2011 which
continued in fiscal 2012 to partially offset increased raw material costs.
Net sales of upholstery fabric produced outside our U.S. manufacturing operations were 88% of total
upholstery fabric net sales in fiscal 2012, of which 85% and 3% were generated by our operations located
in China and Poland, respectively. Net sales of upholstery fabric produced outside our U.S. manufacturing
31
operations were 86% of total upholstery fabric net sales in fiscal 2011, of which primarily all of these
were generated from our operations located in China. Net sales of upholstery fabrics produced outside our
U.S. manufacturing operations were $95.5 million in fiscal 2012, of which $92.5 million and $3.0 million
were generated from our operations located in China and Poland, respectively. Net sales of upholstery
fabrics produced outside our U.S. manufacturing operations were $81.2 million in fiscal 2011, of which
primarily all of these net sales were generated from our operations located in China.
Net sales of U.S.-produced upholstery fabrics were $13.4 million or 12% of total upholstery fabric net
sales in fiscal 2012 compared with $13.2 million or 14% of total upholstery fabric net sales in fiscal 2011.
Our increase in net sales was primarily driven by growth of our China produced fabrics, as this platform
has played a significant role in our global development in fiscal 2012, with increased net sales to key
customers located in the U.S., the local China market, and other international customers.
In the third quarter of fiscal 2011, we established a wholly-owned subsidiary called Culp Europe in
Poland, and we continued to make progress in the development of this operation in fiscal 2012. We have
been encouraged by the initial response from several of the largest furniture manufacturers and retailers in
Europe. During fiscal 2012, Culp Europe accounted for 3% of our total upholstery fabric net sales, and we
expect this percentage to increase further over the next fiscal year. While we experienced a small
operating loss for this operation during fiscal 2012 due to start-up costs, we expect this subsidiary to be
more profitable in fiscal 2013.
Also, we are pleased with the sales and profit improvement during the fourth quarter of fiscal 2012, from
our U.S. operation with increased demand for both velvet and woven texture fabrics. We have struggled
for several years with declining sales and low profitability with this operation. However, we felt it was
strategically important to keep one U.S. upholstery fabric operation. Our actions in the second quarter of
fiscal 2012 to align our U.S. capacity with expected demand and increase prices had a favorable impact
on profitability. We reported net sales of $4.1 million in the fourth quarter of fiscal 2012 from our U.S.
operation, an increase of 44% from $2.9 million in the second quarter of fiscal 2012. We are also
encouraged by new placements with our U.S. produced fabrics and are expecting future sales growth and
profitability in the first quarter of fiscal 2013. We are cautiously optimistic about our long-term prospects
with this operation.
Gross Profit and Operating Income
Gross profit was $15.0 million in fiscal 2012, or 13.8% of net sales, compared with $13.6 million, or
14.4% of net sales, in fiscal 2011. SG&A expenses were $11.5 million, or 10.5% of net sales in fiscal
2012 compared with $9.2 million, or 9.8% in fiscal 2011. Operating income was $3.5 million in fiscal
2012, a decrease of 19% compared with $4.4 million in fiscal 2011. Operating margins were 3.2% and
4.6% of net sales for fiscal 2012 and 2011, respectively.
Our gross profit and operating margins were affected by higher raw material costs. As a result, we
implemented customer price increases starting in the fourth quarter of fiscal 2011 which continued in
fiscal 2012. In addition, our gross profit and operating margins were affected by lower profitability in our
U.S. velvet product line in the first half of fiscal 2012. In response, we aligned our U.S. capacity with
expected demand and increased prices. As a result of these actions, our U.S. upholstery operation returned
to profitability during the third quarter and continued to be profitable through the fourth quarter of fiscal
2012.
In addition, operating margins were affected by increased SG&A expenses due to start-up expenses
associated with our Culp Europe operation and an increase in incentive compensation accruals reflecting
stronger financial results in relation to pre-established performance targets.
32
While our gross profit and operating margins for the full fiscal year for fiscal 2012 declined, our gross
profit margins increased to 16% in the fourth quarter of fiscal 2012 from 13% for the third quarter of
fiscal 2012. In addition, operating margins increased to 5.5% in the fourth quarter of fiscal 2012 from
2.9% in the third quarter of fiscal 2012. These increases in gross profit and operating margins in the
fourth quarter of fiscal 2012 are primarily due to the increase in net sales and actions taken with our U.S.
upholstery fabric operation noted above, as well as the stabilization of raw material price increases in the
fourth quarter of fiscal 2012.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant and equipment, and assets held
for sale.
As of April 29, 2012, and May 1, 2011, accounts receivable and inventory totaled $31.5 million and $23.5
million, respectively. There were no assets classified as held for sale at April 29, 2012. At May 1, 2011,
assets held for sale totaled $60,000.
At April 29, 2012, property, plant, and equipment totaled $1.1 million compared with $967,000 at May 1,
2011. The $1.1 million at April 29, 2012, represents property, plant, and equipment located in the U.S. of
$837,000, located in China of $183,000, and located in Poland of $104,000. The $967,000 at May 1,
2011, represents property, plant, and equipment located in the U.S. of $727,000, located in China of
$184,000, and located in Poland of $56,000.
Other Income Statement Categories
Selling, General and Administrative Expenses – SG&A expenses for the company as a whole were
$25.0 million for fiscal 2012 compared with $21.1 million for fiscal 2011, an increase of 19%. This
increase primarily pertains to start-up expenses associated with our Culp Europe operations that did not
significantly occur until fiscal 2012 and increased incentive compensation expense, which reflects
stronger financial results in relation to pre-established performance targets. SG&A as a percent of net
sales was 9.8% and 9.7% in fiscal 2012 and 2011, respectively.
Interest Expense (Income) -- Interest expense was $780,000 for fiscal 2012 compared with $881,000 for
fiscal 2011. This trend reflects lower outstanding balances on our long-term debt.
Interest income was $508,000 in fiscal 2012 compared with $240,000 for fiscal 2011. Our increase in
interest income is primarily due to a higher rate of return on increased short-term investment balances
throughout fiscal 2012 compared to fiscal 2011
Other Expense – Other expense was $236,000 for fiscal 2012 compared with $40,000 for fiscal 2011.
This increase reflects fluctuations in the foreign exchange rate for our subsidiaries domiciled in Canada,
China, and Poland. We have been able to reduce these expenses through maintenance of a natural hedge
by keeping a balance of our assets and liabilities denominated in Canadian dollars during fiscal 2012.
Although, we will continue to try to maintain this natural hedge, there is no assurance that we will be able
to continue to do so in future reporting periods.
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 ASC
Topic 740, “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
33
statements or income tax returns. Using the enacted tax rates in effect for the fiscal 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 $902,000, or 6.4% of income before income tax expense, in fiscal
2012 compared with an income tax benefit of $1.1 million, or 7.3% of income before income tax expense,
in fiscal 2011. The income tax expense for fiscal 2012 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 26% or an income tax benefit of $3.7 million was recorded
for the reduction in the valuation allowance recorded against our net deferred tax assets
associated with our U.S. operations. This income tax benefit of $3.7 million represents a $4.2
million income tax benefit pertaining to a change in judgment about the future realization of our
U.S. net deferred tax assets, offset by an income tax charge of $477,000 associated with the
realization of our U.S. loss carryforwards from fiscal 2012 pre-tax income.
• The income tax rate was reduced by 9% for taxable income subject to lower statutory income
rates in foreign jurisdictions compared with the statutory income tax rate of 34% for the United
States.
• The income tax rate increased 6% for an increase in unrecognized tax benefits.
• The income tax rate increased 1.4% for non-deductible stock-based compensation expense and
other miscellaneous items.
The income tax benefit for fiscal 2011 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 42% or an income tax benefit of $6.4 million was recorded
for the reduction in the valuation allowance recorded against our net deferred tax assets
associated with our U.S. and China operations. This income tax benefit of $6.4 million represents
a $2.8 million realization of U.S. loss carryforwards associated with fiscal 2011 pre-tax income
from our U.S. operations, a $2.3 million adjustment pertaining to a change in judgment about the
future realization of our U.S. net deferred tax assets, and a $1.3 million adjustment pertaining to a
change in judgment about the future realization of our China net deferred tax assets.
• The income tax rate was reduced by 7% for taxable income subject to lower statutory income
rates in foreign jurisdictions compared with the statutory income tax rate of 34% for the United
States.
• The income tax rate was reduced by 2% for adjustments made to our Canadian deferred tax
liabilities associated with our election to file our Canadian income tax returns in U.S. dollars
commencing with our fiscal 2011 tax year. Our Canadian income tax returns were filed in
Canadian dollars for fiscal years prior to fiscal 2011. This adjustment totaled $315,000 and
represented a discrete event in which the full tax effects were recorded in the first quarter and the
full year of fiscal 2011.
• The income tax rate increased 9% for an increase in unrecognized tax benefits.
• The income tax rate increased 0.7% for non-deductible stock-based compensation expense and
other miscellaneous items.
34
Deferred Income Taxes – Valuation Allowance
Summary
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation
allowance is required. ASC Topic 740 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. Since
the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a
jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on this
assessment, we recorded a partial valuation allowance of $12.8 million and $16.4 million against our
net deferred tax assets associated with our U.S. operations at April 29, 2012 and May 1, 2011,
respectively. At April 29, 2012 and May 1, 2011, no valuation allowance was recorded against our
net deferred tax assets associated with our operations located in China and Poland.
United States
Our net deferred tax asset regarding our U.S. operations primarily pertain to incurring significant U.S.
pre-tax losses during previous years, with U.S. loss carryforwards totaling $59.9 million and $60.0
million at April 29, 2012 and May 1, 2011, respectively.
Fiscal 2011
Due to the favorable results of our multi-year restructuring process in our upholstery fabric operations
and key acquisitions and capital investments made for our mattress fabric segment, on a cumulative
three-year basis ending May 1, 2011, our U.S. operations earned a pre-tax income of $4.2 million. In
addition, our U.S. operations reported a pre-tax income over fiscal years 2011 and 2010 totaling $8.2
million. We believe that fiscal years 2011 and 2010 are a more indicative measure of future pre-tax
income as these fiscal years reflect operating performance after the cost savings of the profit-
improvement and restructuring plans were realized and the full operational effects of the acquisitions
associated with the company’s mattress fabric operations located in the U.S.
Although the financial results of our U.S. operations improved, the significant uncertainty in the
overall economic climate made it very difficult to forecast medium and long-term financial results
associated with our U.S. operations. Based on these economic conditions, we believed it was too
uncertain to project pre-tax income associated with our U.S. operations after fiscal 2012.
Based on this significant positive and negative evidence, we recorded a partial valuation allowance of
$16.4 million against our net deferred tax assets associated with our U.S. operations that was
expected to reverse beyond fiscal 2012 and we recognized an income tax benefit of $2.3 million in
the fourth quarter of fiscal 2011 for the reduction in this valuation allowance for projected U.S.
taxable income in fiscal 2012 that was expected to reduce our U.S. loss carryforwards.
Fiscal 2012
This improvement in the U.S. operations' financial results continued through fiscal 2012. Our U.S.
operations earned a cumulative pretax income through the second quarter of fiscal 2012 and fiscal
years 2011 and 2010 totaling $10.0 million. This continued earnings improvement from our U.S.
operations was driven by our mattress fabrics operations (which primarily resides in the U.S.). During
the second quarter of fiscal 2012, our mattress fabrics operations had net sales totaling $35.2 million
compared with $28.3 million in the second quarter of fiscal 2011. In addition, our mattress fabrics
operations had operating income totaling $3.8 million in the second quarter of fiscal 2012 compared
with $3.3 million in the second quarter of fiscal 2011. These improved results in the second quarter of
35
fiscal 2012, which were better than expected, can be attributed to increased sales from our sales and
marketing initiatives and new programs with customers who are leading suppliers in the bedding
industry. Collectively these developments increased our confidence in forecasting U.S. taxable
income through fiscal 2014 in the second quarter of fiscal 2012.
Although our U.S. operations' financial results continued to improve through the second quarter of
fiscal 2012, the significant uncertainty in the overall economic climate also continued. As a result, to
forecast medium and long-term financial results associated with our U.S. operations remained
difficult. Since it will take a significant period of time for our U.S. operations to realize its U.S. net
deferred income tax assets based on earned and forecasted U.S. pre-tax income levels, we believe it
was too uncertain to project U.S. pre-tax income levels associated with our U.S. operations after
fiscal 2014 that support a "more likely than not" assertion at the end of our second quarter of fiscal
2012.
These trends continued through the fourth quarter of fiscal 2012 and, as a result, we maintain our
position that we can forecast U.S. taxable income through fiscal 2014. Our mattress fabric operations
had net sales totaling $145.5 million in fiscal 2012 compared with $122.4 million in fiscal 2011. In
addition our mattress fabric operations reported operating income of $15.8 million in fiscal 2012
compared with $15.4 million in fiscal 2011.
Based on this positive and negative evidence noted above, we recorded a partial valuation allowance
of $12.8 million at April 29, 2012, against the net deferred tax assets associated with our U.S.
operations that are expected to reverse beyond fiscal 2014. Accordingly, we recognized an income
tax benefit of $4.4 million in the second quarter of fiscal 2012 for the reduction in this valuation
allowance for estimated U.S. taxable income in fiscal years 2013 and 2014 that is expected reduce
our U.S. loss carryfowards. In the fourth quarter of fiscal 2012, we booked an income tax charge of
$211,000 due to a change in our estimate of U.S. taxable income in fiscal years 2013 and 2014 that
was made in the second quarter of fiscal 2012.
China
Our net deferred tax asset regarding our China operations primarily pertains to the book versus tax
basis difference associated with our China operation’s fixed assets. This book versus tax basis
difference resulted from our impairment losses and fixed asset write-downs associated with our
September 2008 upholstery fabrics restructuring plan. In order for this net deferred tax asset to have
been realized, our China operations must have had sufficient pre-tax income levels to utilize its tax
over book depreciation expense. During fiscal 2011, management assessed both positive and negative
evidence and concluded that there was sufficient positive evidence that our net deferred tax assets
regarding our China operations will more likely than not be realized. Due to the favorable results
from our restructuring activities and profit improvement plan initiated in the second quarter of fiscal
2009, our China operations became profitable, reporting pre-tax income of $7.9 million in fiscal 2011
and fiscal 2010. In addition, our China operations earned pre-tax income of $10.2 million over a
cumulative three-year period ending May 1, 2011. As a result of the improvement of our China
operations’ pre-tax income levels that have been demonstrated over a cumulative period of three
years, there was sufficient positive evidence that our China operations can provide sufficient pre-tax
income levels to utilize its tax over book depreciation expense. Based on this significant positive
evidence, we do not have a valuation allowance against our China net deferred tax assets at April 29,
2012 and May 1, 2011, respectively. During fiscal 2011 we recognized an income tax benefit of $1.3
million to reduce the valuation allowance of $1.3 million recorded at May 2, 2010 (the beginning of
fiscal 2011).
36
Income Taxes Paid
Although we reported income tax expense of $902,000 in fiscal 2012 an income tax benefit of $1.1
million in fiscal 2011, we pay income taxes associated with our subsidiaries in China and Canada.
We had income tax payments of $2.4 million and $1.2 million in fiscal 2012 and 2011, respectively.
2011 compared with 2010
Segment Analysis
Mattress Fabrics Segment
Net Sales
Net sales were $122.4 million for fiscal 2011, an increase of 6.6% compared with $114.8 million for
fiscal 2010. Also, we reported net sales of $35.2 million in the fourth quarter of fiscal 2011, an increase of
5.3% compared with $33.4 million in the fourth quarter of fiscal 2010. These results reflected favorable
growth trends during fiscal 2011 as a result of a stronger competitive position and small price increases
we implemented in the fourth quarter of fiscal 2011 to partially offset increased raw material costs and
customer pricing pressure.
Gross Profit and Operating Income
Gross profit was $23.2 million in fiscal 2011, or 19% of net sales, compared with $23.7 million, or 20.6%
of net sales, in fiscal 2010. SG&A expenses for fiscal 2011were $7.9 million compared with $8.2 million
for fiscal 2010. Operating income was $15.3 million in fiscal 2011, a decrease of 0.7% compared with
$15.5 million in fiscal 2010. Operating margins were 12.6% and 13.5% of net sales for fiscal 2011 and
2010, respectively.
Although net sales increased 6.6% in fiscal 2011 compared with fiscal 2010, gross profit and operating
income decreased by 1.7% and 0.7%, respectively. This trend in profitability was primarily due to
increased competitive pricing pressure and higher raw material costs that started in the second quarter of
fiscal 2011.
Segment Assets
Segment assets consist of accounts receivable, inventory, assets held for sale, non-compete agreements
associated with certain acquisitions, goodwill, and property, plant and equipment. As of May 1, 2011,
accounts receivable and inventory totaled $25.5 million, compared to $22.3 million at May 2, 2010. This
was a product of the net sales increase in the fourth quarter of fiscal 2011 noted above.
At May 1, 2011, and May 2, 2010, property, plant and equipment totaled $28.6 million and $26.7 million,
respectively. The $28.6 million represented property, plant, and equipment located in the U.S. of $20.0
million and located in Canada of $8.6 million. The $26.7 million represents property, plant, and
equipment located in the U.S. of $18.8 million and located in Canada of $7.9 million. The increase in this
segment’s property, plant, and equipment balance at May 1, 2011 compared with May 2, 2010, was
primarily due to fiscal 2011 capital spending of $5.7 million offset by depreciation expense of $3.8
million.
At May 1, 2011, and May 2, 2010, the carrying value of the segment’s goodwill was $11.5 million. At
May 1, 2011, and May 2, 2010, the carrying value of our non-compete agreements were $480,000 and
$843,000, respectively. The decrease in the carrying values of the non-compete agreements during fiscal
37
2011 primarily represented amortization expense. At May 1, 2011, and May 2, 2010, assets held for sale
totaled $15,000 and $34,000, respectively.
Upholstery Fabrics Segment
Net Sales
Upholstery fabric net sales (which include both fabric and cut and sewn kits) were $94.4 million in fiscal
2011, compared with $91.6 million in fiscal 2010, an increase of 3.1%. Also, we reported net sales of
$25.2 million in the fourth quarter of fiscal 2011, an increase of 5.7% compared with $23.8 million in the
fourth quarter of fiscal 2010. This increase in net sales reflected favorable growth trends during fiscal
2011 as a result of a stronger competitive position and price increases we implemented in the fourth
quarter of fiscal 2011 that were used to partially offset increased raw material costs, and a significant
increase in the provision for returns, allowances, and discounts in fiscal 2010 that did not recur in fiscal
2011.
Our upholstery fabric net sales continued to be driven by our operations located in China, accounting for
86% and 84% of total upholstery fabric net sales in fiscal 2011 and 2010, respectively. Net sales of
upholstery fabrics produced outside our U.S. manufacturing operations were $81.2 million in fiscal 2011,
an increase of 5% from $77.3 million in fiscal 2010. Net sales of U.S.-produced upholstery fabrics were
$13.2 million in fiscal 2011, a decrease of 8% from $14.3 million in fiscal 2010. These trends reflected
our continued shift toward production outside our U.S. manufacturing operations and are the result of our
long-term strategy to build a wholly-owned and low-cost business located in China that is scalable, and
not capital intensive.
Gross Profit and Operating Income
Gross profit was $13.6 million in fiscal 2011, or 14.4% of net sales, compared with $15.2 million, or
16.6% of net sales, in fiscal 2010. SG&A expenses were $9.2 million for both fiscal 2011 and 2010.
Operating income was $4.4 million in fiscal 2011, a decrease of 27% compared with $6.0 million in fiscal
2010. Operating margins were 4.6% and 6.5% of net sales for fiscal 2011 and 2010, respectively.
Although net sales increased 3.1% in fiscal 2011 compared with fiscal 2010, gross profit and operating
income decreased by 11% and 27%, respectively. This trend in profitability is primarily due to higher raw
material costs which started to increase in the second quarter of fiscal 2011 and weaker operating
performance of our one remaining U.S. facility as compared to the prior year. Our one remaining U.S.
facility experienced weaker performance in fiscal 2011 due to the higher raw material costs as mentioned
above and a decrease in net sales of 8%.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant and equipment, and assets held
for sale.
As of May 1, 2011, and May 2, 2010, accounts receivable and inventory totaled $23.5 million. At May 1,
2011, assets held for sale totaled $60,000 compared with $89,000 at May 2, 2010.
38
At May 1, 2011, property, plant, and equipment totaled $967,000 compared with $989,000 at May 2,
2010. The $967,000 at May 1, 2011, represented property, plant, and equipment located in the U.S. of
$727,000, located in China of $184,000, and located in Poland of $56,000. The $989,000 at May 2, 2010,
represented property, plant, and equipment of $887,000 and $102,000 located in the U.S. and China,
respectively.
Other Income Statement Categories
Selling, General and Administrative Expenses – SG&A expenses for the company as a whole were
$21.1 million for fiscal 2011 compared with $22.8 million for fiscal 2010, a decrease of 8%. This
decrease primarily reflected (i) a decrease in stock-based compensation expense reflecting a decrease in
stock-based awards and the company’s stock price, (ii) a decrease in incentive bonus accruals reflecting
weaker financial results in relation to pre-established performance targets, and (iii) a decrease in bad debt
expense reflecting management’s assessment of estimated credit exposures within its accounts receivable
portfolio.
Interest Expense (Income) -- Interest expense was $881,000 for fiscal 2011 compared with $1.3 million
for fiscal 2010. This trend reflected lower outstanding balances on our long-term debt.
Interest income was $240,000 in fiscal 2011 compared with $116,000 for fiscal 2010. Our increase in
interest income was primarily due to higher cash and cash equivalent and short-term investment balances
during fiscal 2011 compared with fiscal 2010, and a higher rate of return in fiscal 2011 on short-term
investment purchases that did not commence until the third quarter of fiscal 2010.
Other Expense – Other expense was $40,000 for fiscal 2011 compared with $828,000 for fiscal 2010.
This decrease reflected fluctuations in the foreign exchange rate for our subsidiaries domiciled in Canada
and China and our ability to maintain a natural hedge by keeping a balance of our assets and liabilities
denominated in Canadian dollars during fiscal 2011.
Income Taxes
We recorded an income tax benefit of $1.1 million, or 7.3% of income before income tax expense in
fiscal 2011, compared with income tax expense of $1.1 million, or 7.9% of income before income tax
expense, in fiscal 2010. The income tax benefit for fiscal 2011 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 42% or an income tax benefit of $6.4 million was recorded
for the reduction in the valuation allowance recorded against our net deferred tax assets
associated with our U.S. and China operations. This income tax benefit of $6.4 million represents
a $2.8 million realization of U.S. loss carryforwards associated with fiscal 2011 pre-tax income
from our U.S. operations, a $2.3 million adjustment pertaining to a change in judgment about the
future realization of our U.S. net deferred tax assets, and a $1.3 million adjustment pertaining to a
change in judgment about the future realization of our China net deferred tax assets.
• The income tax rate was reduced by 7% for taxable income subject to lower statutory income
rates in foreign jurisdictions compared with the statutory income tax rate of 34% for the United
States.
39
• The income tax rate was reduced by 2% for adjustments made to our Canadian deferred tax
liabilities associated with our election to file our Canadian income tax returns in U.S. dollars
commencing with our fiscal 2011 tax year. Our Canadian income tax returns were filed in
Canadian dollars for fiscal years prior to fiscal 2011. This adjustment totaled $315,000 and
represented a discrete event in which the full tax effects were recorded in the first quarter and the
full year of fiscal 2011.
• The income tax rate increased 9% for an increase in unrecognized tax benefits.
• The income tax rate increased 0.7% for non-deductible stock-based compensation expense and
other miscellaneous items.
Income tax expense for fiscal 2010 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 33% for the reduction in the valuation allowance recorded
against substantially all of our net deferred tax assets associated with our U.S. and China
operations. This reduction in our valuation allowance was primarily due to U.S. taxable income
generated by the repatriation of undistributed earnings from our subsidiaries located in China and
the resulting usage of U.S. net operating loss carryforwards. Also, this reduction pertains to the
realization on and projected realization of deferred tax assets created from tax versus book
depreciation associated with the company’s China operations.
• The income tax rate was reduced by 12% 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 2010
the Canadian foreign exchange rate in relation to the U.S. dollar was very volatile due to changes
in oil prices and global economic conditions. In order to mitigate our exposure to the Canadian
foreign exchange rate in relation to the U.S. dollar and its impact on our income tax provision, we
elected to file our Canadian tax returns in U.S. dollars commencing with our fiscal 2011 tax year.
• The income tax rate was reduced by 6% for taxable income subject to lower statutory income
rates in foreign jurisdictions compared with the statutory income tax rate of 34% for the United
States.
• The income tax rate increased 12% for the recording of a deferred tax liability for estimated U.S.
income taxes that were paid upon repatriation of undistributed earnings from the company’s
subsidiaries located in China.
• The income tax rate increased 10% for an increase in unrecognized tax benefits.
• The income tax rate increased 2.9% for non-deductible stock-based compensation expense and
other miscellaneous items.
Handling Costs
The company records warehousing costs in selling, general and administrative expenses. These costs
were $2.6 million, $2.4 million, and $2.2 million in fiscal 2012, 2011, and 2010, respectively.
Warehousing costs include the operating expenses of our 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 $37.1 million or 14.6%, in fiscal 2012,
$34.4 million, or 15.9%, in fiscal 2011, and $36.6 million, or 17.7%, in fiscal 2010.
40
Liquidity and Capital Resources
Liquidity
Our sources of liquidity include cash and cash equivalents, short-term investments, cash flow from
operations, and amounts available under our unsecured revolving credit lines. These sources have been
adequate for day-to-day operations and capital expenditures. We believe our present cash and cash
equivalents and short-term investment balance of $31.0 million at April 29, 2012, cash flow from
operations, and current availability under our unsecured revolving credit lines will be sufficient to fund
our business needs and fiscal 2013 contractual obligations (see commitments table below).
We have maintained a strong financial position during fiscal 2012. Our cash and cash equivalents and
short-term investments totaled $31.0 million at April 29, 2012, compared with $30.9 million at May 1,
2011.We were able to maintain a comparable cash and cash equivalents and short-term investment
balance at the end of fiscal 2012 compared with the end of fiscal 2011, despite common stock repurchases
of $5.4 million, capital expenditures of $5.9 million, long-term debt payments of $2.4 million, and
working capital spending of $6.9 million to meet increasing business needs.
Our cash and cash equivalents and short-term investment balance of $31.0 million exceeded our total debt
(current maturities of long-term debt, long-term debt, and line of credit) of $10.0 million at the end of
fiscal 2012 and represents 35% of shareholders’ equity. Our next major scheduled long-term debt
principal payment of $2.2 million is due August 2012. As of April 29, 2012, our lines of credit
approximating $16.0 million had an outstanding balance of $889,000. All of our long-term debt and line
of credit agreements are unsecured.
We are currently planning for capital expenditures of $5.5 million in fiscal 2013, which primarily pertain
to our mattress fabrics segment.
During fiscal 2012, our board of directors authorized the expenditure of up to $7.0 million for the
repurchase of shares of our common stock. Under the common stock repurchase program, shares may be
purchased from time to time in open market transactions, block trades, and through plans established
under the Securities Exchange Act Rule 10b5-1. The amount of shares purchased and the timing of such
purchases is based on working capital requirements, market and general business conditions and other
factors including alternative investment opportunities. Since the initial authorization of this program on
June 16, 2011, we repurchased approximately 624,000 shares of our common stock at a cost of $5.4
million through April 29, 2012.
On June 13, 2012, we announced that our board of directors approved a new authorization to repurchase
up to $5.0 million of our common stock. This action replaces the authorization to acquire up to $7.0
million of our common stock noted above.
On June 13, 2012, we announced that our board of directors approved the payment of a quarterly cash
dividend of $0.03 per share to be paid on or about July 16, 2012, to shareholders of record as of the close
of business on July 2, 2012. Our last dividend payment was over eleven years ago. We anticipate paying a
cash dividend each quarter, with expected payment dates in October, January, April, and July. Future
dividend payments are subject to board approval and may be adjusted at the board’s discretion as business
needs or market conditions change.
Our cash and cash equivalents and short-term investment balance may be adversely affected by factors
beyond our control, such as weakening industry demand and delays in receipt of payment on accounts
receivable.
41
Working Capital
Accounts receivable at April 29, 2012, were $25.1 million, an increase of 24% compared with $20.2
million, at May 1, 2011. This increase primarily reflects increased business volume in both our business
segments for fiscal 2012 compared with fiscal 2011. Days’ sales in receivables were 29 days and 30 days
during the fourth quarters of fiscal 2012 and 2011, respectively.
Inventories at April 29, 2012 were $36.4 million, an increase of 27%, compared with $28.7 million at
May 1, 2011. This increase primarily reflects increased business volume in both our business segments
for fiscal 2012 compared with fiscal 2011. Inventory turns were 6.6 for fiscal 2012 and 2011,
respectively.
Accounts payable-trade as of April 29, 2012, were $30.7 million, an increase of 23%, compared with
$24.9 million at May 1, 2011. This increase primarily reflects increased business volume and inventory
purchases in both our business segments for fiscal 2012 compared with fiscal 2011.
Operating working capital (comprised of accounts receivable and inventories, less accounts payable –
trade and capital expenditures) was $30.6 million at April 29, 2012, compared with $23.9 million at May
1, 2011. Operating working capital turnover was 8.9 in fiscal 2012 compared to 8.8 in fiscal 2011.
Financing Arrangements
Unsecured Term Notes
In connection with the Bodet & Horst acquisition during fiscal 2009, we entered into a note agreement
dated August 11, 2008. This agreement provided 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 August 11, 2011. The principal payments are payable over an average
term of 3.3 years through August 11, 2015. Any principal prepayments will be assessed a penalty as
defined in the agreement. The agreement contains customary financial and other covenants as defined in
the agreement.
We made our first principal payment of $2.2 million associated with this note agreement on August 11,
2011.
Government of Quebec Loan
We have an agreement with the Government of Quebec for a term loan that is non-interest bearing and is
payable in 48 equal monthly installments (denominated in Canadian dollars) that commenced on
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
At May 1, 2011, we had an unsecured Amended and Restated Credit Agreement that provided for a
revolving loan commitment of $6.5 million, including letters of credit up to $3.0 million. This agreement
was set to expire August 15, 2012. On August 25, 2011, we entered into a seventeenth amendment to the
Amended and Restated Credit Agreement, amending the agreement effective May 1, 2011 (end of our
fiscal 2011). This amendment extends the expiration date of the line of credit through August 25, 2013,
increasing the revolving loan commitment from $6.5 million to $10.0 million, and decreases the capital
42
expenditure limit for fiscal years 2012 and 2013 from $10.0 million to $6.0 million. On January 17, 2012,
and in connection with the Culp Europe Credit Agreement discussed below, we entered into an eighteenth
amendment to decrease our revolving loan commitment from $10.0 million to $7.6 million.
The amended agreement provides for a pricing matrix to determine the interest rate payable on loans
made under the agreement (applicable interest rate of 2.24% at April 29, 2012). As of April 29, 2012,
there were no outstanding letters of credit under this agreement. As of April 29, 2012 and May 1, 2011,
there were no borrowings outstanding under the agreement.
Revolving Credit Agreement - China
We have an unsecured credit agreement for our Chinese operations that provides for a line of credit up to
40 million RMB (approximately $6.4 million USD at April 29, 2012). This agreement expires on
September 2, 2012 and has an interest rate determined by the Chinese government. There were no
borrowings under this agreement as of April 29, 2012 and May 1, 2011.
Revolving Credit Agreement - Europe
On January 17, 2012, we entered into an unsecured credit agreement associated with our operations in
Poland that provides for a line of credit up to 6.8 million Polish Zloty (approximately $2.2 million in
USD at April 29, 2012). This agreement expires on January 15, 2013 and bears interest at WIBOR
(Warsaw Interbank Offered Rate) plus 2% (applicable interest rate of 6.85% interest rate at April 29,
2012). At April 29, 2012, $889,000 (2.8 million Polish Zloty) was outstanding under this agreement.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. At April 29, 2012, the company was in compliance with these financial covenants.
The principal payment requirements for long-term debt during the next four fiscal years are: 2013 – $2.4
million; 2014 – $2.3 million; 2015 - $2.2 million; and 2016 – $2.2 million.
Commitments
The following table summarizes our contractual payment obligations and commitments for each of the
next five fiscal years (in thousands):
2013
2014
2015
2016
2017
Thereafter
Total
Capital expenditures
Accounts payable –
capital expenditures
Operating leases
Interest expense (1)
Line of credit
Long-term debt –
principal
Total (2)
$ 1,191
-
169
1,727
621
889
2,404
$ 7,001
-
1,027
402
-
2,319
3,748
-
-
764
226
-
-
-
449
49
-
2,200
3,190
2,200
2,698
-
-
24
-
-
-
24
-
-
-
-
-
-
-
1,191
169
3,991
1,298
889
9,123
16,661
Note: Payment Obligations by End of Each Fiscal Year
(1) Interest expense includes interest incurred on long-term debt and line of credit.
43
(2) At April 29, 2012, the company had $12.5 million of total gross unrecognized tax benefits, of which
$8.3 million and $4.2 million were classified as net non-current deferred income taxes and income
taxes payable – long-term, respectively. The final outcome of these tax uncertainties is dependent
upon various matters
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 $12.5 million in total gross unrecognized
tax benefits, $8.3 million would not be subject to cash payments due to the company’s U.S. federal
and state net operating loss carryforwards.
tax examinations,
including
Capital Expenditures
Capital expenditures on a cash basis were $5.9 million and $6.4 million for fiscal 2012 and 2011,
respectively. These capital expenditures for fiscal 2012 and 2011 primarily pertain to our mattress fabrics
segment. Depreciation expense was $4.9 million and $4.4 million for fiscal 2012 and 2011, respectively.
Depreciation expense for fiscal 2012 and 2011 primarily pertained to our mattress fabrics segment.
We are currently planning for capital expenditures of $5.5 million in fiscal 2013, which primarily pertain
to our mattress fabrics segment.
For fiscal 2013, we are estimating capital expenditures and depreciation expense for the company as a
whole to be $5.5 million and $5.2 million, respectively. The estimated capital expenditures and
depreciation expense primarily relates to the mattress fabrics segment. These are management’s current
expectations only, and changes in our business needs could cause changes in plans for capital
expenditures and expectations for related depreciation expense.
Accounts Payable – Capital Expenditures
At April 29, 2012, we had total amounts due regarding capital expenditures totaling $169,000, which
pertain to outstanding vendor invoices, none of which are financed. This amount due of $169,000 is
required to be paid in full during fiscal 2013.
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 our
ability to pass significant operating increases on to customers. As discussed elsewhere in this report (see
“Segment Analysis”), significant increases in raw material costs led to lower profit margins for both of
our business segments during fiscal years 2012 and 2011.
Critical Accounting Policies
U.S. generally accepted accounting principles require us to make estimates and assumptions that affect
our 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
44
manufacturers is increasingly concentrated and certain bedding manufacturers have a high degree of
leverage. As of April 29, 2012, accounts receivable from furniture manufacturers totaled approximately
$12.8 million, and accounts receivable from bedding manufacturers totaled approximately $12.3 million.
Additionally, as of April 29, 2012, the aggregate accounts receivable balance of the company’s ten largest
customers was $12.9 million, or 52% of trade accounts receivable. One customer within the upholstery
fabrics segment represented 12% of consolidated accounts receivable at April 29, 2012. No customers
within the mattress fabrics segment represented more than 10% of consolidated accounts receivable at
April 29, 2012.
We continuously perform credit evaluations of our 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 $567,000 and $776,000 at April 29, 2012 and May 1,
2011, 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 and the planned discontinuance of certain patterns. 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. We also provide
inventory valuation write-downs based on the planned discontinuance of certain products based on the
current market values at that time as compared to their current carrying values. 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 $2.0 million and $1.8 million at April 29, 2012 and May 1,
2011, respectively.
Goodwill. Management assesses goodwill for impairment at the end of each fiscal year or 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. During the fourth quarter of fiscal 2012, we early
adopted ASU No. 2011-08, Intangibles – Goodwill and Other (ASC Topic 350) – Testing Goodwill for
Impairment when we performed our annual impairment test. ASU No. 2011-08 provides companies with
a new option to determine whether or not it is necessary to apply the traditional two-step quantitative
goodwill impairment test in ASC Topic 350. Under ASU No. 2011-08, companies are no longer required
to calculate the fair value of the reporting unit (mattress fabrics segment) unless it determines, on the
basis of qualitative information, that it is more likely than not (i.e. greater than 50%) that the fair value of
a reporting unit is less than its carrying amount. Based on our qualitative assessment, we determined that
our goodwill is not impaired using a more likely than not standard.
The company’s goodwill at April 29, 2012, of $11.5 million relates to the mattress fabrics segment.
45
Although we believe we have based the impairment testing on reasonable estimates and assumptions, the
use of different estimates and assumptions could result in materially different results.
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.
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation
allowance is required. ASC Topic 740 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. Since the
company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-
by-jurisdiction basis, taking into account the effects of local tax law. Based on this assessment, we
recorded a partial valuation allowance of $12.8 million and $16.4 million against our net deferred tax
assets associated with our U.S. operations at April 29, 2012 and May 1, 2011, respectively. At April 29,
2012 and May 1, 2011, no valuation allowance was recorded against our net deferred tax assets associated
with our operations located in China and Poland.
Refer to Note 10 located in the notes to the consolidated statements for disclosures regarding our assessment
of our recorded valuation allowance as of April 29, 2012 and May 1, 2011, respectively.
In accordance with ASC Topic 740, 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 April 29, 2012, we had $12.5 million of total gross unrecognized tax benefits, of which $8.3 million
and $4.2 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
Refer to Note 1 located in the notes to the consolidated statements for recently adopted accounting
pronouncements for fiscal 2012.
Recently Issued Accounting Standards
Refer to Note 1 located in the notes to the consolidated statements for recently issued accounting
pronouncements for fiscal 2013.
46
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our revolving credit lines. At April 29,
2012, our U.S. revolving credit agreement provides for a pricing matrix to determine the interest rate
payable on loans made under this agreement. Our revolving credit line associated with our China
subsidiaries bears interest at a rate determined by the Chinese government. At April 29, 2012, there were
no borrowings outstanding under our U.S. and China revolving credit lines. On January 17, 2012, we
entered into an unsecured credit agreement associated with our operations located in Poland that bears
interest at WIBOR (Warsaw Interbank Offered Rate) plus 2%. At April 29, 2012, $889,000 was
outstanding under this agreement and this amount is required to be paid in full by January 15, 2013, when
this agreement expires.
We are not exposed to market risk from changes in interest rates on our long-term debt. Our unsecured
term notes have a fixed interest rate of 8.01% and the loan associated with the Government of Quebec is
non-interest bearing.
We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries
domiciled in China, Canada, and Poland. We try to maintain a natural hedge by keeping a balance of our
assets and liabilities denominated in the local currencies of our subsidiaries domiciled in Canada and
Europe, although there is no assurance that we will be able to continually maintain this natural hedge. Our
foreign subsidiaries use the U.S. dollars as their functional currency. A substantial portion of the
company’s imports purchased outside the U.S. are denominated in U.S. dollars. A 10% change in the
above exchange rates at April 29, 2012, would not have had a significant impact on our results of
operations or financial position.
47
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders of
Culp, Inc.:
We have audited the accompanying consolidated balance sheets of Culp, Inc. (a North Carolina
corporation) and Subsidiaries (the “Company”) as of April 29, 2012, and May 1, 2011, and the
related consolidated statements of operations, shareholders’ equity and cash flows for each of the
three years in the period ended April 29, 2012. 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 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 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 April 29, 2012 and
May 1, 2011, and the results of their operations and their cash flows for each of the three years in
the period ended April 29, 2012, in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
April 29, 2012, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated July 12, 2012 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Charlotte, North Carolina
July 12, 2012
48
CONSOLIDATED BALANCE SHEETS
April 29, 2012 and May 1, 2011 (dollars in thousands)
ASSETS
2012
2011
current assets:
cash and cash equivalents
short-term investments
accounts receivable, net
inventories
deferred income taxes
assets held for sale
income taxes receivable
other current assets
total current assets
property, plant and equipment, net
goodwill
deferred income taxes
other assets
total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt
line of credit
accounts payable - trade
accounts payable - capital expenditures
accrued expenses
accrued restructuring costs
deferred income taxes
income taxes payable
total current liabilities
income taxes payable - long-term
deferred income taxes
long-term debt, less current maturities
total liabilities
commitments and contingencies (notes 11 and 12)
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 12,702,806 at
April 29, 2012 and 13,264,458 at May 1, 2011
capital contributed in excess of par value
accumulated earnings
accumulated other comprehensive income
total shareholders' equity
total liabilities and shareholders' equity
$
$
$
25,023
5,941
25,055
36,373
2,467
15
-
1,989
96,863
31,279
11,462
3,205
1,907
144,716
2,404
889
30,663
169
9,321
40
-
642
44,128
4,164
705
6,719
55,716
$
$
$
23,181
7,699
20,209
28,723
293
75
79
2,376
82,635
30,296
11,462
3,606
2,052
130,051
2,412
-
24,871
140
7,617
44
82
646
35,812
4,167
596
9,135
49,710
-
-
635
46,056
42,293
16
89,000
144,716
$
663
50,681
28,997
-
80,341
130,051
$
The accompanying notes are an integral part of these consolidated financial statements.
49
CONSOLIDATED STATEMENTS OF NET INCOME
For the years ended Aprl 29, 2012, May 1, 2011 and May 2, 2010
(dollars in thousands, except per share data)
2012
2011
2010
net sales
cost of sales
gross profit
selling, general and administrative expenses
restructuring expense (credit) (note 2)
income from operations
interest expense
interest income
other expense, net
income before income taxes
income tax expense (benefit) (note 10)
net income
net income per share-basic
net income per share-diluted
$
$
$
$
254,443
214,711
39,732
25,026
-
14,706
780
(508)
236
14,198
902
13,296
$1.05
$1.03
$
$
216,806
179,966
36,840
21,069
28
15,743
881
(240)
40
15,062
(1,102)
16,164
$1.25
$1.22
206,416
167,639
38,777
22,805
(370)
16,342
1,314
(116)
828
14,316
1,128
13,188
$1.04
$1.01
The accompanying notes are an integral part of these consolidated financial statements.
50
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands, except common stock shares)
For the years ended April 29, 2012
May 1, 2011 and May 2, 2010
balance, May 3, 2009
net income
stock-based compensation
gain on cash flow hedge, net of taxes
restricted stock granted
common stock issued in connection
with performance based units
common stock surrendered for withholding
taxes payable and cost of option exercises
excess tax benefit related to stock options
exercised
common stock issued in connection
with stock option plans
balance, May 2, 2010
net income
stock-based compensation
loss on cash flow hedge, net of taxes
common stock issued in connection
with performance based units
common stock surrendered for withholding
taxes payable and cost of option exercises
excess tax benefit related to stock options
exercised
fully vested common stock award
common stock issued in connection
with stock option plans
balance, May 1, 2011
net income
stock-based compensation
unrealized gain on short-term investments
excess tax benefit related to stock options
exercised
common stock repurchased
fully vested common stock award
common stock issued in connection
with stock option plans
balance, April 29, 2012
common
stock
shares
common
stock
amount
$
12,767,527
-
-
-
80,000
80,000
(20,658)
-
144,916
13,051,785
-
-
-
40,000
(60,415)
-
3,114
229,974
13,264,458
-
-
-
-
(624,127)
3,075
638
-
-
-
4
4
(1)
-
7
652
-
-
-
2
(3)
-
-
12
663
-
-
-
(31)
-
capital
contributed
in excess of
par value
$
47,728
-
834
-
(4)
$
(4)
(190)
429
666
49,459
-
360
-
(2)
(560)
339
-
1,085
50,681
-
349
64
(5,353)
-
Accumulated
(deficit) earnings
accumulated
other
comprehensive
income
total
shareholders'
equity
$
(355)
13,188
-
-
-
-
-
-
-
12,833
16,164
-
-
-
-
-
-
-
28,997
13,296
-
-
-
-
$
20
-
-
83
-
-
-
-
-
103
-
-
(103)
-
-
-
-
-
-
-
-
16
-
-
-
48,031
13,188
834
83
-
-
(191)
429
673
63,047
16,164
360
(103)
-
(563)
339
-
1,097
80,341
13,296
349
16
64
(5,384)
-
318
89,000
59,400
12,702,806
$
3
635
$
315
46,056
$
-
42,293
$
-
16
$
The accompanying notes are an integral part of these consolidated financial statements.
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 29, 2012, May 1, 2011 and May 2, 2010
(dollars in thousands)
2012
2011
2010
$
13,296
16,164
13,188
cash flows from operating activities:
net income
adjustments to reconcile net income to net cash
provided by operating activities:
depreciation
amortization of other assets
stock-based compensation
excess tax benefit related to stock options exercised
deferred income taxes
gain on sale of equipment
restructuring expenses, net of gain on sale of related assets
foreign currency exchange (gains) losses
changes in assets and liabilities, net of effects of acquisition of assets:
accounts receivable
inventories
other current assets
other assets
accounts payable-trade
accrued expenses
accrued restructuring
income taxes
net cash provided by operating activities
cash flows from investing activities:
capital expenditures
purchase of short-term investments
proceeds from the sale of short-term investments
proceeds from the sale of buildings and equipment
net cash used in investing activities
cash flows from financing activities:
proceeds from lines of credit
payments on lines of credit
payments on vendor-financed capital expenditures
payments on a capital lease obligation
payments on long-term debt
debt issuance costs
repurchases of common stock
proceeds from common stock issued
excess tax benefit related to stock options exercised
net cash (used in) provided by financing activities
effect of exchange rate changes on cash and cash equivalents
increase in cash and cash equivalents
cash and cash equivalents at beginning of year
4,865
243
349
(64)
(1,682)
(168)
-
(215)
(4,792)
(7,497)
395
(61)
5,426
1,710
(4)
202
12,003
(5,890)
(4,797)
6,707
299
(3,681)
6,323
(5,500)
-
-
(2,404)
(37)
(5,384)
318
64
(6,620)
140
1,842
23,181
4,372
442
360
(339)
(3,390)
(22)
28
(115)
(199)
(2,579)
(621)
(3)
2,110
(2,286)
(280)
1,179
14,821
(6,352)
(6,713)
2,037
79
(10,949)
-
-
(377)
-
(179)
(27)
-
769
339
525
489
4,886
18,295
23,181
4,010
548
834
(429)
(148)
(65)
(170)
688
(1,684)
(2,020)
(418)
(67)
5,157
2,853
(529)
(171)
21,577
(7,431)
(3,023)
-
583
(9,871)
-
-
(985)
(626)
(4,789)
(15)
-
673
429
(5,313)
105
6,498
11,797
18,295
cash and cash equivalents at end of year
$
25,023
The accompanying notes are an integral part of these consolidated financial statements.
52
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 operations located in Shanghai, China,
Poznan, Poland, Burlington, NC and Anderson, SC.
During the third quarter of fiscal 2011, we formed a new wholly-owned subsidiary in Poland, called
Culp Europe. This operation sells and distributes upholstery fabrics and makes and sells cut and
sewn kits in Europe, using fabrics sourced primarily from our operations located in China. Our sales
and marketing efforts in Europe also include a program for shipping containers of fabric and cut and
sewn kits directly from our operations located in China to customers in Europe. Sales activities in
Culp Europe commenced during the fourth quarter of fiscal 2011.
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 our subsidiaries located in
Shanghai, China and Poznan, Poland are consolidated as of April 30, a calendar month end, which
year end is required by the Chinese and Polish governments, respectively. No events occurred
related to the difference between our fiscal year end on the Sunday closest to April 30 and our China
and Polish subsidiaries year end of April 30 that materially affected the company’s financial
position, results of operations, or cash flows for fiscal years 2012, 2011, and 2010.
Fiscal Year – Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30.
Fiscal 2012, 2011 and 2010 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. We consider all highly liquid instruments with original maturities of three months
or less to be cash equivalents. Our Chinese subsidiaries had cash and cash equivalents of $15.6
million and $12.9 million at April 29, 2012 and May 1, 2011, respectively. Our Canadian subsidiary
had cash and cash equivalents of $5.6 million and $7.6 million at April 29, 2012 and May 1, 2011,
respectively. Our Polish subsidiary had cash and cash equivalents of $158,000 and $111,000 at
April 29, 2012 and May 1, 2011, 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.
53
Short-Term Investments – Short-term investments include short-term bond funds and a savings
account that has a maturity of less than one year. Our short-term bond funds are classified as
available-for-sale. Our short term bonds funds had unrealized gains totaling $16,000 in fiscal 2012
and were immaterial for fiscal 2011. Our short-term bond funds were recorded at its fair value of
$5.1 million and $1.0 million at April 29, 2012 and May 1, 2011, respectively. The fair value of this
investment approximates its cost basis.
Our Chinese subsidiaries had short-term investments of $796,000 and $3.5 million at April 29, 2012
and May 1, 2011, respectively. Our Canadian subsidiary had short-term investments of $4.1 million
and $2.1 million at April 29, 2012 and May 1, 2011, respectively. Our U.S. operations held short-
term investments of $1.0 million and $2.1 million at April 29, 2012 and May 1, 2011, respectively.
Accounts Receivable – Substantially all of our accounts receivable are due from manufacturers in
the bedding and furniture industries. We grant credit to customers, a substantial number of which
are located in North America and generally do not require collateral. We record an allowance for
doubtful accounts that reflects estimates of probable credit losses. Management continuously
performs credit evaluations of our customers, considering numerous inputs including financial
position, past payment history, cash flows, management ability, historical loss experience and
economic conditions and prospects. We do not have any off-balance sheet credit exposure related to
our customers.
Inventories – We account 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 indicators of
the need for inventory markdowns are the age of the inventory and the planned discontinuance of
certain patterns. As a result, we provide inventory valuation write-downs based upon established
percentages based on the age of the inventory that are continually evaluated as events and market
conditions require. Our inventory aging categories are six, nine, twelve, and fifteen months. We also
provide inventory valuation write-downs based on the planned discontinuance of certain products
based on the current market values at that time as compared to their current carrying values.
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 or equipment 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) from operations.
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 is the 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 $17,000 and $34,000 for the construction of qualifying fixed assets were capitalized
and are being amortized over the related assets’ estimated useful lives for the fiscal years ended 2011
and 2010, respectively. No interest costs were capitalized for the construction of qualifying fixed
assets for fiscal 2012.
54
Foreign Operations – Our future operations and earnings will be significantly impacted by the
results of our operations in China, Poland, and Canada. There can be no assurance that we will be
able to successfully conduct such operations, and a failure to do so could have a material adverse
effect on our financial position, results of operations, and cash flows. Also, the success of our
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, our 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, Chinese, and Polish subsidiaries. All foreign currency asset and liability
accounts are remeasured into U.S. dollars at year-end exchange rates, except for property, plant, and
equipment, and other long-term assets and liabilities 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.
Our Canadian subsidiary reported a foreign currency exchange loss of $19,000, $24,000, and
$542,000 for fiscal 2012, 2011, and 2010, respectively. Our Chinese subsidiaries reported a foreign
exchange gain of $320,000 and $222,000 for fiscal 2012 and 2011, respectively. Our Chinese
subsidiaries reported a foreign currency exchange loss of $23,000 for fiscal 2010. Our Polish
subsidiary reported a foreign exchange loss of $145,000 in fiscal 2012 and a foreign exchange gain
of $26,000 in fiscal 2011. Our Polish subsidiary did not report a foreign exchange gain or loss in
fiscal 2010 as operations commenced in the third quarter of fiscal 2011.
Goodwill – Management assesses goodwill for impairment at the end of each fiscal year or 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. During the fourth quarter of fiscal 2012,
we early adopted ASU No. 2011-08, Intangibles – Goodwill and Other (ASC Topic 350) – Testing
Goodwill for Impairment when we performed our annual impairment test. ASU No. 2011-08
provides companies with a new option to determine whether or not it is necessary to apply the
traditional two-step quantitative goodwill impairment test in ASC Topic 350. Under ASU No. 2011-
08, companies are no longer required to calculate the fair value of the reporting unit (mattress fabrics
segment) unless it determines, on the basis of qualitative information, that it is more likely than not
(i.e. greater than 50%) that the fair value of a reporting unit is less than its carrying amount. Based
on our qualitative assessment, we determined that our goodwill is not impaired using a more likely
than not standard.
Our goodwill at April 29, 2012, of $11.5 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 our 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.
We have not recorded deferred income taxes applicable to undistributed earnings of our subsidiary
located in Canada and China. 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
55
present intention of management to reinvest the undistributed earnings of our subsidiary located in
Canada indefinitely. At April 29, 2012, our subsidiary located in Canada had undistributed earnings
totaling $42.6 million. If these undistributed earnings were not indefinitely reinvested, an additional
deferred tax liability of approximately $15.7 million would have been required at April 29, 2012,
prior to consideration of the related valuation allowance. At April 29, 2012, our subsidiaries located
in China had undistributed earnings totaling $12.3 million. It is the present intention of management
to reinvest these undistributed earnings and, therefore a deferred tax liability has not been recorded.
If these undistributed earnings were not indefinitely reinvested, an additional deferred tax liability of
approximately $4.5 million would have been required at April 29, 2012, prior to consideration of the
related valuation allowance.
Revenue Recognition – Revenue is recognized upon shipment, when title and risk of loss pass to the
customer. Provision is currently made 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 $2.6 million, $2.4 million and
$2.2 million in fiscal 2012, 2011, and 2010, respectively, and are included in selling, general and
administrative expenses.
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 – Our equity incentive plans are described more fully in Note 13. ASC
718, “Compensation – Stock Compensation” (formerly known as SFAS No. 123(R)), requires that
all stock-based compensation be recognized as compensation expense in the financial statements and
that such cost be measured at the grant date for awards issued to employees and the company’s board
of directors. Equity awards issued to non-employees are measured at the earlier date of when the
performance criteria are met or the end of each reporting period. Compensation expense for unvested
stock options and time vested restricted stock awards are amortized on a straight-line basis over the
remaining vesting periods. Compensation expense for performance based restricted stock units were
recorded based on an assessment each reporting period of the probability if certain performance
goals were to be met during the contingent vesting period. If performance goals were not probable of
occurrence, no compensation expense was recognized and any previously recognized compensation
cost was reversed. Excess tax benefits related to our equity incentive plans are reflected as financing
cash inflows on the Statement of Cash Flows. We have elected to record the additional excess tax
benefits associated with our equity incentive awards as a reduction in current income tax payable
prior to utilizing any net operating loss carryforwards.
Fair Value of Financial Instruments – The accompanying consolidated financial statements
include certain financial instruments, and the fair market value of such instruments may differ from
amounts reflected on a historical basis. These financial instruments include our long-term debt and
short-term bond funds. The fair value measurement of these financial instruments are described more
fully in Note 14.
The carrying amount of cash and cash equivalents, short-term investments, accounts receivable,
other current assets, accounts payable and accrued expenses approximates fair value because of the
short maturity of these financial instruments.
56
Recently Adopted Accounting Pronouncements
ASC Topic 605
In October 2009, the FASB issued ASU No. 2009-13, which amends ASC Topic 605, “Revenue
Recognition”, to revise accounting guidance related to revenue arrangements with multiple
deliverables. The guidance relates to the determination of when the individual deliverables included
in a multiple-element arrangement may be treated as separate units of accounting and modifies the
manner in which the transaction consideration is allocated across the individual deliverables. This
guidance was effective as of May 2, 2011 (the beginning of our fiscal 2012) and did not have an
impact on our consolidated results of operations.
ASC Topic 350
In September 2011, ASU No. 2011-08, Intangibles – Goodwill and Other (ASC Topic 350) – Testing
Goodwill for Impairment was issued. ASU No. 2011-08 provides companies with a new option to
determine whether or not it is necessary to apply the traditional two-step quantitative goodwill
impairment test in ASC Topic 350. Under ASU No. 2011-08 companies are no longer required to
calculate the fair value of the reporting unit unless it determines, on the basis of qualitative
information, that it is more likely than not (i.e. greater than 50%) that the fair value of a reporting unit
is less than its carrying amount. ASU No. 2011-08 is effective for periods ending after December 15,
2011; however, early adoption is permitted for periods ending after September 15, 2011. We early
adopted ASU No. 2011-08 in our fourth quarter of fiscal 2012 when we performed our annual
impairment test. The adoption of ASU No. 2011-08 did not have an impact on our Consolidated
Financial Statements.
Recently Issued Accounting Pronouncements
ASC Topic 220
In June of 2011, the FASB issued ASU No. 2011-05, which amends ASC Topic 220,
“Comprehensive Income”, to revise accounting guidance related to the presentation of comprehensive
income in an entity’s financial statements. The guidance allows an entity the option to present the
total comprehensive income, the components of net income, and the components of other
comprehensive income either in a single continuous statement of comprehensive income or two
separate but consecutive statements. In both choices, an entity is required to present each component
of net income along with a total net income, each component of other comprehensive income along
with a total for other comprehensive income, and a total amount of comprehensive income. ASU
2011-05 eliminates the option to present the components of other comprehensive income as part of
the statement of changes in stockholders’ equity or notes to the financial statements. This revised
guidance does not change the items that must be reported in other comprehensive income or when an
item of other comprehensive income must be reclassified to net income. This guidance is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2011. As a result,
this guidance is effective for our first quarter of fiscal 2013. The FASB amended this guidance in
December 2011 to postpone a requirement to present items that are reclassified from other
comprehensive income to net income on the face of the financial statement where the components of
net income and other comprehensive income are presented and reinstate previous guidance related to
such reclassifications. This guidance will change how we present comprehensive income in our
consolidated financial statements as we currently present the components of other comprehensive
income and total comprehensive income as part of our notes to the consolidated financial statements
(see Note 20).
57
2. RESTRUCTURING AND ASSET IMPAIRMENTS
Accrued restructuring costs were $40,000 and $44,000 at April 29, 2012 and May 1, 2011,
respectively. Our accrued restructuring costs related to our upholstery fabrics segment.
The following summarizes the activity in the restructuring accrual (dollars in thousands):
balance, May 3, 2009
adjustments in fiscal 2010
paid in fiscal 2010
balance, May 2, 2010
adjustments in fiscal 2011
paid in fiscal 2011
balance, May 1, 2011
adjustments in fiscal 2012
paid in fiscal 2012
balance, April 29, 2012
Fiscal 2012
Employee
Termination Benefits
Lease Termination
and Other Exit Costs
$
$
$
$
389
(186)
(190)
13
(14)
1
-
-
-
-
464
(14)
(139)
311
24
(291)
44
-
(4)
40
Total
853
(200)
(329)
324
10
(290)
44
-
(4)
40
No restructuring and related charges or credits were recorded in fiscal 2012.
Fiscal 2011
During fiscal 2011, we recorded a $28,000 restructuring charge, of which $28,000 related to an
impairment charge on equipment classified as held for sale (see Note 3), a charge of $24,000 for
lease termination and other exit costs, offset by a credit of $14,000 for employee termination
benefits, and a credit of $10,000 for sales proceeds received on equipment with no carrying value.
This $28,000 restructuring charge was recorded in restructuring expense in the 2011 Consolidated
Statement of Net Income and relates to the upholstery fabrics segment.
Fiscal 2010
During fiscal 2010, we recorded a restructuring and related credit of $312,000, of which a credit of
$186,000 was for employee termination benefits, a credit of $170,000 for sales proceeds received on
equipment with no carrying value, a credit of $50,000 was inventory markdowns, a credit of $14,000
for lease termination and other exit costs, offset by a charge of $108,000 for other operating costs
associated with closed plant facilities. Of this total credit, a charge of $58,000 was recorded to cost
of sales and a credit of $370,000 was recorded to restructuring credit in the 2010 Consolidated
Statement of Net Income and relates to the upholstery fabrics segment.
3. ASSETS HELD FOR SALE AND RELATED IMPAIRMENTS
A summary of assets held for sale follows:
(dollars in thousands)
U.S. upholstery fabrics
Mattress fabrics
April 29, 2012
$
$
-
15
15
$
May 1, 2011
60
15
75
$
The carrying value of these assets held for sale are presented separately in the April 29, 2012 and May
1, 2011 consolidated balance sheets and are no longer being depreciated.
58
U.S. Upholstery Fabrics
During fiscal 2012, we received proceeds of $63,000 associated with the sale of equipment classified
as held for sale and recorded a gain on the sale of equipment of $3,000 which was recorded in cost of
sales in the 2012 Consolidated Statement of Net Income.
During the fourth quarter of fiscal 2011, we determined that the carrying value of equipment classified
as held for sale exceeded its fair value (based on quoted market prices form a used equipment dealer).
Consequently, we recorded an impairment loss of $28,000 in restructuring expense in the 2011
Consolidated Statement of Operations.
Mattress Fabrics
During fiscal 2011, we determined that the carrying value of equipment classified as held for sale
exceeded its fair value (based on quoted market prices). Consequently, we recorded an impairment loss
of $10,000 in cost of sales in the 2011 Consolidated Statement of Net Income. During fiscal 2011, we
received proceeds of $10,000 associated with sale of equipment classified as held for sale.
4. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
April 29, May 1,
2011
(dollars in thousands)
21,562
customers
(776)
allowance for doubtful accounts
(577)
reserve for returns and allowances and discounts
20,209
2012
26,100
(567)
(478)
25,055
$
$
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2012
(776)
beginning balance
(67)
provision for bad debts
276
write-offs, net of recoveries
(567)
ending balance
$
$
2011
(1,322)
273
273
(776)
2010
(1,535)
(292)
505
(1,322)
A summary of the activity in the allowance for returns and allowances and discounts
follows:
(dollars in thousands) 2012
beginning balance
(577)
provision for returns and allowances
(2,694)
and discounts
credits issued
ending balance
2,793
(478)
$
$
2011
(534)
(2,236)
2,193
(577)
2010
(442)
(2,987)
2,895
(534)
5.
INVENTORIES
A summary of inventories follows:
April 29, May 1,
2011
(dollars in thousands)
6,130
raw materials
2,421
work-in-process
20,172
finished goods
28,723
2012
5,534
3,631
27,208
36,373
$
$
59
6. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
(dollars in thousands)
land and improvements
buildings and improvements
leasehold improvements
machinery and equipment
office furniture and equipment
capital projects in progress
depreciable lives
(in years)
0-10
7-40
**
3-12
3-10
accumulated depreciation and amortization
$
April 29,
2012
741
12,566
801
51,267
5,869
1,062
72,306
(41,027)
31,279
$
May 1,
2011
741
11,966
451
48,031
5,393
786
67,368
(37,072)
30,296
** Shorter of life of lease or useful life.
At April 29, 2012, we had total amounts due regarding capital expenditures totaling $169,000, which
pertain to outstanding vendor invoices, none of which are financed. The total outstanding amount of
$169,000 is required to be paid in full in fiscal 2013.
At May 1, 2011, we had total amounts due regarding capital expenditures totaling $140,000, which
pertain to outstanding vendor invoices, none of which are financed.
We did not finance any of our capital expenditures in fiscal 2012, 2011, and 2010.
We financed a $2.4 million equipment purchase with a capital lease obligation totaling $1.4 million
in fiscal 2009. This capital lease was paid in full in fiscal 2010. The $1.4 million in equipment under
capital leases is reflected in property, plant, and equipment in the accompanying consolidated
balance sheets as of April 29, 2012 and May 1, 2011, respectively. Depreciation expense on the
carrying value of $2.4 million associated with this capital lease obligation was $208,000 in each of
fiscal 2012, 2011 and 2010, respectively.
7. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands)
beginning balance
Bodet & Horst acquisition
ending balance
2012
$ 11,462
-
$ 11,462
2011
11,462
-
11,462
2010
11,593
(131)
11,462
The goodwill balance relates to the mattress fabrics segment.
During the first quarter of fiscal 2010, we finalized our valuation of the fair values for the assets
acquired and liabilities assumed regarding the purchase of the Bodet & Horst USA, LP and Bodet &
Horst GMBH & Co. KG's (collectively "Bodet & Horst") knitted mattress fabric operation located in
High Point, NC. As a result of this final valuation, we recorded an adjustment to increase the fair
value of the non-compete agreement and reduce the fair value of the goodwill by $131,000.
60
8. OTHER ASSETS
A summary of other assets follows:
(dollars in thousands)
cash surrender value – life insurance
non-compete agreements, net
other
April 29,
2012
1,327
333
247
1,907
$
$
May 1,
2011
1,323
480
249
2,052
We recorded non-compete agreements in connection with the company’s asset purchase agreements
with International Textile Group, Inc. (ITG) and Bodet & Horst at their fair values based on
valuation techniques. These non-compete agreements pertain to our mattress fabrics segment. The
non-compete agreement associated with ITG was amortized on a straight line basis over the four
year life of the agreement that expired at the end of the third quarter of fiscal 2011. 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. As of
April 29, 2012, the total remaining non-compete payments were $112,500.
At April 29, 2012 and May 1, 2011, the gross carrying amount of the non-compete agreements were
$1.1 million and $1.0 million, respectively. At April 29, 2012 and May 1, 2011, accumulated
amortization for these non-compete agreements was $741,000 and $544,000, respectively.
Amortization expense for these non-compete agreements was $197,000, $413,000 and $501,000 in
fiscal 2012, 2011 and 2010, respectively. The remaining amortization expense (which includes the
total remaining Bodet & Horst non-compete payments of $112,500) for the next three fiscal years
follows: FY 2013 – $198,000; FY 2014 – $198,000; and FY 2015 - $49,000. The weighted average
amortization period for these non-compete agreements is 2.2 years as of April 29, 2012.
At April 29, 2012, and May 1, 2011, we had four life insurance contracts with death benefits to the
respective insured totaling $12.9 million. Our cash surrender value – life insurance balances of
$1.3 million at April 29, 2012, and May 1, 2011, respectively, are collectible upon death of the
respective insured.
9. ACCRUED EXPENSES
A summary of accrued expenses follows:
(dollars in thousands)
compensation, commissions and related benefits
interest
other
April 29,
2012
7,293
147
1,881
9,321
$
$
10. INCOME TAXES
Income Tax Expense and Effective Income Tax Rate
Total income tax expense (benefit) was allocated as follows:
(dollars in thousands)
income from operations
shareholders’ equity, related to
the tax benefit arising from the
exercise of stock options
2012
902
$
(64)
$
838
61
2011
(1,102)
(339)
(1,441)
May 1,
2011
6,032
184
1,401
7,617
2010
1,128
(429)
699
Income tax expense (benefit) attributable to income from operations consists of:
(dollars in thousands)
current
federal
state
foreign
deferred
federal
state
U.S. operating loss carryforwards
foreign
USD election for Canadian returns
valuation allowance
2012
2011
2010
$
79
-
2,505
2,584
727
55
1,102
143
-
(3,709)
(1,682)
$ 902
(79)
-
2,367
2,288
1,805
142
1,241
89
(315)
(6,352)
(3,390)
(1,102)
(83)
-
1,359
1,276
1,625
129
2,722
138
-
(4,762)
(148)
1,128
Income before income taxes related to the company’s foreign operations for the years ended April
29, 2012, May 1, 2011, and May 2, 2010 was $10.5 million, $9.9 million, and $11.3 million,
respectively. Income before income taxes related to the company’s domestic operations for the years
ended April 29, 2012, May 1, 2011, and May 2, 2010 was $3.7 million, $5.2 million, and $3.0
million, 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:
federal income tax rate
foreign tax rate differential
increase in tax reserves
tax effects of Canadian fx gain (loss)
undistributed earnings from foreign subsidiaries
non-deductible stock option expense
USD election for Canadian returns
change in valuation allowance
other
2012
34.0%
(8.8)
6.1
-
-
-
-
(26.1)
1.2
6.4%
2011
34.0%
(6.5)
8.8
-
-
1.0
(2.1)
(42.2)
(0.3)
(7.3)%
2010
34.0%
(6.4)
9.7
(11.6)
12.3
0.9
-
(33.3)
2.3
7.9%
62
Deferred Income Taxes
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)
deferred tax assets:
accounts receivable
inventories
compensation
liabilities and other
alternative minimum tax credit
property, plant and equipment (1)
loss carryforwards – U.S.
loss carryforwards – foreign
unrecognized tax benefits – U.S.
valuation allowances
total deferred tax assets
deferred tax liabilities:
property, plant and equipment (2)
other
total deferred tax liabilities
Net deferred tax asset
2012
2011
$
$
301
1,738
2,107
523
1,320
1,001
23,472
115
(8,298)
(12,797)
9,482
(3,715)
(800)
(4,515)
4,967
425
1,753
1,594
509
1,241
1,262
23,303
28
(7,572)
(16,438)
6,105
(2,225)
(659)
(2,884)
3,221
(1) Pertains to the company’s operations located in China.
(2) Pertains to the company’s operations located in the U.S. and Canada.
Federal and state net operating loss carryforwards were $59.9 million with related future tax benefits
of $23.5 million at April 29, 2012. These carryforwards principally expire in 14-17 years, fiscal 2025
through fiscal 2028. The company also has an alternative minimum tax credit carryforward of
approximately $1.3 million for federal income tax purposes that does not expire.
At April 29, 2012, the current deferred tax asset of $2.5 million represents $2.1 million and
$405,000 from our operations located in the U.S. and China, respectively. At April 29, 2012, the
non-current deferred tax asset of $3.2 million represents $2.1 million, $1.0 million, and $115,000
from our operations located in the U.S., China, and Poland, respectively. At April 29, 2012, the non-
current deferred tax liability of $705,000 pertains to our operations located in Canada.
At May 1, 2011, the current deferred tax asset of $293,000 pertains to our operations located in
China. At May 1, 2011, the current deferred tax liability of $82,000 pertains to our operations
located in Canada. At May 1, 2011, the non-current deferred tax asset of $3.6 million represents
$2.3 million and $1.3 million from our operations located in the U.S. and China, respectively. At
May 1, 2011, the non-current deferred tax liability of $596,000 pertains to our operations located in
Canada.
Deferred Income Taxes – Valuation Allowance
Summary
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation
allowance is required. ASC Topic 740 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. Since
the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a
63
jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on this
assessment, we recorded a partial valuation allowance of $12.8 million and $16.4 million against our
net deferred tax assets associated with our U.S. operations at April 29, 2012 and May 1, 2011,
respectively. At April 29, 2012 and May 1, 2011, no valuation allowance was recorded against our
net deferred tax assets associated with our operations located in China and Poland.
United States
Our net deferred tax asset regarding our U.S. operations primarily pertain to incurring significant U.S.
pre-tax losses over the last several years, with U.S. loss carryforwards totaling $59.9 million and
$60.0 million at April 29, 2012 and May 1, 2011, respectively.
Fiscal 2011
Due to the favorable results of our multi-year restructuring process in our upholstery fabric operations
and key acquisitions and capital investments made for our mattress fabric segment, on a cumulative
three-year basis ending May 1, 2011, our U.S. operations earned a pre-tax income of $4.2 million. In
addition, our U.S. operations reported a pre-tax income over fiscal years 2011 and 2010 totaling $8.2
million. We believed that fiscal years 2011 and 2010 were a more indicative measure of future pre-
tax income as these fiscal years reflect operating performance after the cost savings of the profit-
improvement and restructuring plans were realized and the full operational effects of the acquisitions
associated with the company’s mattress fabric operations located in the U.S.
Although the financial results of our U.S. operations improved, the significant uncertainty in the
overall economic climate made it very difficult to forecast medium and long-term financial results
associated with our U.S. operations. Based on these economic conditions, we believed it was too
uncertain to project pre-tax income associated with our U.S. operations after fiscal 2012.
Based on this significant positive and negative evidence, we recorded a partial valuation allowance of
$16.4 million against our net deferred tax assets associated with our U.S. operations that was
expected to reverse beyond fiscal 2012 and we recognized an income tax benefit of $2.3 million in
the fourth quarter of fiscal 2011 for the reduction in this valuation allowance for projected U.S.
taxable income in fiscal 2012 that was expected to reduce our U.S. loss carryforwards.
Fiscal 2012
This improvement in the U.S. operations' financial results continued through fiscal 2012. Our U.S.
operations earned a cumulative pretax income through the second quarter of fiscal 2012 and fiscal
years 2011 and 2010 totaling $10.0 million. This continued earnings improvement from our U.S.
operations was driven by our mattress fabrics operations (which primarily resides in the U.S.). During
the second quarter of fiscal 2012, our mattress fabrics operations had net sales totaling $35.2 million
compared with $28.3 million in the second quarter of fiscal 2011. In addition, our mattress fabrics
operations had operating income totaling $3.8 million in the second quarter of fiscal 2012 compared
with $3.3 million in the second quarter of fiscal 2011. These improved results in the second quarter of
fiscal 2012, which were better than expected, can be attributed to increased sales from our sales and
marketing initiatives and new programs with customers who are leading suppliers in the bedding
industry. Collectively these developments increased our confidence in forecasting U.S. taxable
income through fiscal 2014 in the second quarter of fiscal 2012.
Although our U.S. operations' financial results continued to improve through the second quarter of
fiscal 2012, the significant uncertainty in the overall economic climate also continued. As a result, to
forecast medium and long-term financial results associated with our U.S. operations remained
difficult. Since it will take a significant period of time for our U.S. operations to realize its U.S. net
deferred income tax assets based on earned and forecasted U.S. pre-tax income levels, we believe it
64
was too uncertain to project U.S. pre-tax income levels associated with our U.S. operations after
fiscal 2014 that support a "more likely than not" assertion at the end of our second quarter of fiscal
2012.
These trends continued through the fourth quarter of fiscal 2012 and, as a result, we maintain our
position that we can forecast U.S. taxable income through fiscal 2014. Our mattress fabric operations
had net sales totaling $145.5 million in fiscal 2012 compared with $122.4 million in fiscal 2011. In
addition our mattress fabric operations reported operating income of $15.8 million in fiscal 2012
compared with $15.4 million in fiscal 2011.
Based on this positive and negative evidence noted above, we recorded a partial valuation allowance
of $12.8 million at April 29, 2012, against the net deferred tax assets associated with our U.S.
operations that are expected to reverse beyond fiscal 2014. Accordingly, we recognized an income
tax benefit of $4.4 million in the second quarter of fiscal 2012 for the reduction in this valuation
allowance for estimated U.S. taxable income in fiscal years 2013 and 2014 that is expected reduce
our U.S. loss carryfowards. In the fourth quarter of fiscal 2012, we booked an income tax charge of
$211,000 due to a change in our estimate of U.S. taxable income in fiscal years 2013 and 2014 that
was made in the second quarter of fiscal 2012.
China
Our net deferred tax asset regarding our China operations primarily pertains to the book versus tax
basis difference associated with our China operation’s fixed assets. This book versus tax basis
difference resulted from our impairment losses and fixed asset write-downs associated with our
September 2008 upholstery fabrics restructuring plan. In order for this net deferred tax asset to have
been realized, our China operations must have had sufficient pre-tax income levels to utilize its tax
over book depreciation expense. During fiscal 2011, management assessed both positive and negative
evidence and concluded that there was sufficient positive evidence that our net deferred tax assets
regarding our China operations will more likely than not be realized. Due to the favorable results
from our restructuring activities and profit improvement plan initiated in the second quarter of fiscal
2009, our China operations became profitable, reporting pre-tax income of $7.9 million in fiscal 2011
and fiscal 2010. In addition, our China operations earned pre-tax income of $10.2 million over a
cumulative three-year period ending May 1, 2011. As a result of the improvement of our China
operations’ pre-tax income levels that have been demonstrated over a cumulative period of three
years, there was sufficient positive evidence that our China operations can provide sufficient pre-tax
income levels to utilize its tax over book depreciation expense. Based on this significant positive
evidence, we do not have a valuation allowance against our China net deferred tax assets at April 29,
2012 and May 1, 2011, respectively. During fiscal 2011 we recognized an income tax benefit of $1.3
million to reduce the valuation allowance of $1.3 million recorded at May 2, 2010 (the beginning of
fiscal 2011).
Change in Valuation Allowance
In fiscal 2010, we recorded an income tax benefit of $4.8 million for the reduction of our valuation
allowance. This $4.8 million decrease results from the realization of U.S. loss carryforwards
associated with fiscal 2010 pre-tax income from our U.S. operations and the realization and projected
realization of tax versus book depreciation associated with our China operations, as discussed above.
In fiscal 2011, we recorded an income tax benefit of $6.4 million for the reduction of our valuation
allowance. This $6.4 million decrease represents a $2.8 million realization of U.S. loss carryforwards
associated with fiscal 2011 pre-tax income, a $2.3 million adjustment pertaining to a change in
judgment about the future realization of our U.S. net deferred tax assets, and a $1.3 million
adjustment pertaining to a change in judgment about the future realization of our China net deferred
tax assets.
65
In fiscal 2012, we recorded an income tax benefit of $3.7 million for the reduction of our valuation
allowance. This $3.7 million decrease represents a $4.2 million income tax benefit pertaining to a
change in judgment about the future realization of our U.S. net deferred tax assets, offset by an
income tax charge of $447,000 associated with the realization of our U.S. loss carryforwards from
fiscal 2012 pre-tax income.
Overall
The recorded valuation allowance of $12.8 million has no effect on our operations, compensation,
loan covenant compliance, or the possible realization of the U.S. income tax loss carryforwards in the
future. If it is determined that it is more-likely-than-not that we will realize any of these U.S. income
tax loss carryforwards, an income tax benefit would be recognized at that time.
Uncertainty in Income Taxes
The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands) 2012
beginning balance
increases from prior period tax positions 852
(129)
decreases from prior period tax positions
increases from current period tax positions
-
ending balance
$11,739
$ 12,462
2011
10,135
1,799
2010
8,254
1,940
(195) (59)
-
10,135
-
11,739
At April 29, 2012, we had $12.5 million of total gross unrecognized tax benefits, of which $4.2
million would favorably affect the income tax rate in future periods. At May 1, 2011, we had $11.7
million of total gross unrecognized tax benefits, of which $4.2 million would favorably affect the
income tax rate in future periods.
As of April 29, 2012, we had $12.5 million of total gross unrecognized tax benefits, of which $8.3
million and $4.2 million were classified as net non-current deferred income taxes and income taxes
payable-long-term, respectively, in the accompanying consolidated balance sheets. As of May 1,
2011, we had $11.7 million of total gross unrecognized tax benefits, of which $7.5 million and $4.2
million were classified as net non-current deferred income taxes and income taxes payable- long-
term, respectively, in the accompanying consolidated balance sheets.
We elected to classify interest and penalties as part of income tax expense. At April 29, 2012 and
May 1, 2011, the gross amount of interest and penalties due to unrecognized tax benefits was
$485,000 and $498,000, respectively.
The liability for uncertain tax positions at April 29, 2012, includes $12.5 million related to tax
positions for which significant change is reasonably possible in fiscal 2013. 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 2005 and subsequent. Canadian provincial (Quebec) returns remain subject to examination for
tax years 2009 and subsequent. Income tax returns for the company’s China subsidiaries are subject
to examination for tax years 2007 and subsequent.
Income Taxes Paid
Income tax payments, net of income tax refunds, were $2.4 million in fiscal 2012, $1.2 million in
2011, and $1.3 million in 2010.
66
11. LONG-TERM DEBT AND LINES OF CREDIT
A summary of long-term debt follows:
April 29, May 1,
(dollars in thousands)
unsecured senior term notes
canadian government loan
$
2012
8,800
323
9,123
(2,404)
6,719
2011
11,000
547
11,547
(2,412)
9,135
current maturities of long-term debt
long-term debt, less current maturities
$
Unsecured Term Notes
In connection with the Bodet & Horst acquisition, we entered into a note agreement dated August
11, 2008. This agreement provided 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 August 11, 2011. The principal payments are payable over an average
term of 3.3 years through August 11, 2015. Any principal prepayments will be assessed a penalty as
defined in the agreement. The agreement contains customary financial and other covenants as
defined in the agreement.
We made our first principal payment of $2.2 million associated with this note agreement on August
11, 2011.
Government of Quebec Loan
We have an agreement with the Government of Quebec for a term loan that is non-interest bearing
and is payable in 48 equal monthly installments (denominated in Canadian dollars) that commenced
on 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
At May 1, 2011, we had an unsecured Amended and Restated Credit Agreement that provided for a
revolving loan commitment of $6.5 million, including letters of credit up to $3.0 million. This
agreement was set to expire August 15, 2012. On August 25, 2011, we entered into a seventeenth
amendment to the Amended and Restated Credit Agreement, amending the agreement effective May
1, 2011 (end of our fiscal 2011). This amendment extends the expiration date of the line of credit
through August 25, 2013, increasing the revolving loan commitment from $6.5 million to $10.0
million, and decreases the capital expenditure limit for fiscal years 2012 and 2013 from $10.0
million to $6.0 million. On January 17, 2012, and in connection with the Culp Europe Credit
Agreement discussed below, we entered into an eighteenth amendment to decrease our revolving
loan commitment from $10.0 million to $7.6 million.
The amended agreement provides for a pricing matrix to determine the interest rate payable on loans
made under the agreement (applicable interest rate of 2.24% at April 29, 2012). As of April 29,
2012, there were no outstanding letters of credit. As of April 29, 2012 and May 1, 2011, there were
no borrowings outstanding under the agreement.
67
Revolving Credit Agreement - China
We have an unsecured credit agreement for our Chinese operations that provides for a line of credit
up to 40 million RMB (approximately $6.4 million USD at April 29, 2012). This agreement expires
on September 2, 2012 and has an interest rate determined by the Chinese government. There were no
borrowings under this agreement as of April 29, 2012 and May 1, 2011.
Revolving Credit Agreement - Europe
On January 17, 2012, we entered into an unsecured credit agreement associated with our operations
in Poland that provides for a line of credit up to 6.8 million Polish Zloty (approximately $2.2 million
in USD at April 29, 2012). This agreement expires on January 15, 2013 and bears interest at WIBOR
(Warsaw Interbank Offered Rate) plus 2% (applicable interest rate of 6.85% interest rate at April 29,
2012). At April 29, 2012, $889,000 (2.8 million Polish Zloty) was outstanding under this agreement.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. At April 29, 2012, the company was in compliance with these financial covenants.
The principal payment requirements for long-term debt during the next four fiscal years are: 2013 –
$2.4 million; 2014 – $2.3 million; 2015 - $2.2 million; and 2016 – $2.2 million.
Interest paid during 2012, 2011, and 2010 totaled $817,000, $901,000, and $1.3 million,
respectively.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
We lease certain office, manufacturing and warehouse facilities and equipment under noncancellable
operating leases. Lease terms related to real estate range from one to four years with renewal options
for additional periods ranging up to nine years. The leases generally require the company to pay real
estate taxes, maintenance, insurance and other expenses. Rental expense for operating leases was $2.2
million in fiscal 2012, $2.1 million in fiscal 2011, and $2.2 million in fiscal 2010. Future minimum
rental commitments for noncancellable operating leases are $1.7 million in fiscal 2013; $1.0 million in
fiscal 2014; $764,000 in fiscal 2015, $449,000 in fiscal 2016, and $24,000 in fiscal 2017. Management
expects that in the normal course of business, these leases will be renewed or replaced by other
operating leases.
On June 1, 2011, we amended our lease associated with our corporate headquarters building located in
High Point, North Carolina. This amendment requires monthly payments of $29,706 from April 1,
2012 through March 31, 2016, plus a percentage of the building’s normal occupancy costs as defined
in the agreement. This amendment contains renewal options as defined in the agreement for the periods
from April 1, 2016 through March 31, 2019, April 1, 2019 through March 31, 2022, and April 1, 2022
through March 31, 2025.
In connection with the Bodet & Horst acquisition, we assumed the lease of the building where the
operation was located. The lease is with a partnership owned by certain shareholders and officers of the
company and their immediate families. This lease agreement is currently being negotiated and is
payable at $12,704 per month until the agreement is finalized. Rents paid to entities owned by certain
shareholders and officers of the company and their immediate families totaled $152,000 in each of
fiscal 2012, 2011 and 2010.
68
Chattanooga, TN Lease Agreement
We 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.
We closed this facility approximately eight years ago and had not occupied the facility except to
provide supervision and security. A $1.4 million lawsuit was filed by the Landlord on April 10,
2008, in the Circuit Court for Hamilton County, Tennessee to collect certain amounts due under the
lease. During the third quarter of fiscal 2011, this lawsuit was concluded, which did not have a
material impact on our results of operations and financial condition.
Chromatex Environmental Claim
A lawsuit was filed against us 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., we leased and operated the Site as part of our 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, plus unspecified future environmental costs. We understand that the
USEPA’s costs now exceed $13 million, but are not expected to increase significantly in the future.
Neither USEPA nor any other governmental authority has asserted any claim against us on account of
these matters. The plaintiffs seek contribution from us 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 plaintiffs also assert that we tortiously interfered with
contracts between them and other defendants in the case and diverted assets to prevent the plaintiffs
from being paid monies owed to them. We do not believe we have any liability for the matters
described in this litigation and intend to defend ourselves vigorously. In addition, we have an
indemnification agreement with certain other defendants in the litigation pursuant to which the other
defendants agreed to indemnify us for any damages we incur as a result of the environmental matters
that are the subject of this litigation, although it is unclear whether the indemnitors have significant
assets at this time. Since the loss is not probable and cannot be estimated, no reserve has been recorded.
Other Litigation
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.
Purchase Commitments
At April 29, 2012, and May 1, 2011, we had open purchase commitments to acquire equipment for our
mattress fabrics segment totaling $1.2 million and $980,000, respectively.
69
13. STOCK-BASED COMPENSATION
Equity Incentive Plan Description
On September 20, 2007, our shareholders approved an equity incentive plan entitled the Culp, Inc.
2007 Equity Incentive Plan (the “2007 Plan”). The types of equity based awards available for grant
under the 2007 Plan include stock options, stock appreciation rights, restricted stock and restricted
stock units, performance units, and other discretionary awards as determined by our 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, our 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 April 29, 2012 there were 795,811 shares available for future
equity based grants under the company’s 2007 Plan.
Stock Options
Under our 2007 Plan, employees, directors, and others associated with the company may be granted
options to purchase shares of common stock at the fair market value on the date of grant. No options
were granted to employees in fiscal 2012, 2011 or 2010, respectively.
No options were granted to outside directors during fiscal 2012 or 2011. During fiscal 2010, outside
directors were granted 6,000 option shares. Options granted to outside directors 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 $134,000, $145,000, and $338,000 within selling,
general, and administrative expense for incentive stock options in fiscal 2012, 2011, and 2010,
respectively.
The fair value of stock options granted to outside directors at each grant date during fiscal 2010 was
$4.44, using the following assumptions:
2011
-
Risk-free interest rate -
Dividend yield - -
Expected volatility - -
-
Expected term (in years) -
2012
2010
3.21%
0.00%
69.06%
10
The fair value of the above option award was estimated on the date of grant using a Black-Scholes
option-pricing model. The assumptions utilized in the model are evaluated and revised, as necessary,
to reflect market conditions, actual historical experience, and groups of participants 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 is calculated based on the company’s annual dividend as of
the option grant date. The expected volatility is 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
participant exercise and post-vesting employment termination trends.
70
The following table summarizes stock option activity for fiscal 2012, 2011, and 2010:
2012
2011
2010
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
outstanding at beginning
of year
268,875 $
6.81
granted
exercised
canceled/expired
outstanding at end of year
-
(59,400)
-
209,475
-
5.50
-
7.22
498,849 $ 5.87
-
4.77
-
6.81
-
(229,974)
-
268,875
735,765 $ 5.85
5.79
4.64
7.56
5.87
6,000
(144,916)
(98,000)
498,849
Options Outstanding
Number Weighted-Avg.
Range of
Exercise Prices
$ 1.88 - $ 1.88
$ 4.59 - $ 5.41
$ 7.08 - $ 7.27
$ 8.75 - $ 10.11
Outstanding
Remaining Weighted-Avg.
at 4/29/12 Contractual Life Exercise Price
7.0 years
3.8
5.4
4.6
5.1
40,000
6,000
27,125
136,350
209,475
$1.88
$4.86
$7.12
$8.91
$7.22
Options Exercisable
Number
Exercisable Weighted-Avg.
at 4/29/12 Exercise Price
24,000
6,000
17,125
111,150
158,275
$1.88
$4.86
$7.14
$8.94
$7.52
At April 29, 2012, outstanding options to purchase 158,275 shares were exercisable, had a weighted
average exercise price of $7.52 per share, an aggregate intrinsic value of $558,000, and a weighted
average contractual term of 4.8 years. At April 29, 2012, the aggregate intrinsic value for options
outstanding was $802,000 with a weighted average contractual term of 5.1 years.
The aggregate intrinsic value for options exercised was $220,000, $1.1 million, and $982,000 in
fiscal 2012, 2011, and 2010, respectively.
The remaining unrecognized compensation costs related to unvested awards at April 29, 2012 was
$62,000 which is expected to be recognized over a weighted average period of 1 year.
Time Vested Restricted Stock Awards
On July 1, 2009 (fiscal 2010), two executive officers were granted 80,000 shares of time vested
restricted common stock. This time vested restricted stock award vests in equal one-third
installments on July 1, 2012, 2013, and 2014. The fair value (the closing price of the company’s
common stock) of this restricted stock award is measured at the date of grant (July 1, 2009) and was
$5.08 per share.
On January 7, 2009 (fiscal 2009), certain key management employees and a non-employee were
granted 115,000 shares of time vested restricted common stock. Of these 115,000 shares, 105,000
and 10,000 were granted to employees and a non-employee, respectively. This time vested restricted
stock award vests in equal one-third installments on May 1, 2012, 2013, and 2014. The fair value of
this restricted stock award 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 and was $11.05 per share at April 29, 2012.
71
The following table summarizes the time vested restricted stock activity for fiscal 2012, 2011, and
2010:
2012 2011 2010
Shares
Shares
Shares
outstanding at beginning
of year
granted
vested
outstanding at end of year
195,000
-
(10,000)
185,000
195,000
-
-
195,000
115,000
80,000
-
195,000
During fiscal 2012, 10,000 shares of time vested restricted stock were vested due to disability and
had a weighted average fair value of $18,800 or $1.88 per share.
At April 29, 2012, there were 185,000 shares of time vested restricted stock and unvested. Of the
185,000 shares outstanding and unvested, 105,000 shares were granted on January 7, 2009 and
80,000 shares were granted on July 1, 2009. At April 29, 2012, the weighted average fair value of
these outstanding and unvested shares was $3.76 per share. At May 1, 2011, there were 195,000
shares of time vested restricted stock outstanding and unvested. Of the 195,000 shares outstanding
and unvested, 115,000 shares were granted on January 7, 2009 and 80,000 shares were granted on
July 1, 2009. At May 1, 2011, the weighted average fair value of these outstanding and unvested
shares was $3.61 per share.
At April 29, 2012, the remaining unrecognized compensation cost related to the unvested restricted
stock awards was $164,000, which is expected to be recognized over a weighted average vesting
period of 1.6 years.
We recorded compensation expense of $189,000, $172,000 and $174,000 within selling, general,
and administrative expense for time vested restricted stock awards in fiscal 2012, 2011 and fiscal
2010, respectively.
Performance Based Restricted Stock Units
We did not grant any performance based restricted stock units during fiscal 2012, 2011, and 2010
respectively.
On January 7, 2009 (fiscal 2009), certain key management employees and a non-employee were
granted 120,000 shares of performance based restricted stock units. This award contingently vested
in one third increments, if in any discrete period of two consecutive quarters from February 2, 2009
through April 30, 2012, certain performance goals were met, as defined in the agreement. As of
August 1, 2010 (our fiscal 2011), the performance goals as defined in the agreement were met and as
a result, all of the performance based restricted stock units were vested.
The fair value (the closing price of the company’s common stock) of the performance based
restricted stock units granted to key management employees was measured at the date of grant
(January 7, 2009) and was $1.88 per share. The fair value (the closing price of the company’s
common stock) of the performance based restricted stock units granted to a non-employee was
measured at the earlier date of when the performance criteria was met or the end of the respective
reporting period. The performance based restricted stock units granted to the non-employee vested in
one-third increments on August 2, 2009, January 31, 2010, and August 1, 2010, and were measured
at $6.59, $13.01, and $10.42 per share, respectively, which represented the closing price of the
company’s common stock at the date on which the performance criteria was met.
72
We recorded compensation expense of $12,000 and $322,000 within selling, general, and
administrative expense for performance based restricted stock units in fiscal 2011 and fiscal 2010
respectively. No compensation expense was recorded for performance based restricted stock units in
fiscal 2012 as the performance based restricted stock units granted in fiscal 2009 were fully vested in
fiscal 2011 and no performance based restricted stock units were granted in fiscal years 2010
through 2012.
Of the 120,000 vested shares, 105,000 and 15,000 shares pertained to key management employees
and a non-employee, respectively. Of the 120,000 vested shares, 40,000 and 80,000 shares were
vested in fiscal 2011 and 2010, respectively. The total fair value of the 40,000 performance based
restricted stock units that vested during fiscal 2011 was $117,900 and had a weighted average grant
date fair value of $2.95 per share. The total fair value of the 80,000 performance based restricted
stock units that vested during fiscal 2010 was $230,000 and had a weighted average grant date fair
value of $2.97 per share.
Common Stock Awards
On October 1, 2011, we granted a total of 3,075 shares of common stock to our board of directors.
These shares of common stock vested immediately and were measured at $8.45 per share, which
represents the closing price of the company’s common stock at the date of grant.
On October 1, 2010, we granted a total of 3,114 shares of common stock to our board of directors.
These shares of common stock vested immediately and were measured at a fair value of $10.02 per
share, which represents the closing price of our common stock at the date of grant.
We recorded $26,000 and $31,000 of compensation expense within selling, general, and
administrative expense for these common stock awards for fiscal 2012 and 2011, respectively. There
were not any common stock awards for fiscal 2010 and, therefore, no compensation was recorded for
fully vested common stock awards for this fiscal year.
Other Share-Based Arrangements
The company had a stock-based compensation agreement with a non-employee that required us to
settle in cash and was indexed by shares of our common stock as defined in the agreement. The cash
settlement was based on a 30-day average closing price of our common stock at the time of payment.
During fiscal 2011, this agreement was terminated and settled for a cash payment of $644,000 that
was indexed on 68,260 shares of our common stock at $9.44 per share. The $9.44 per share
represents the closing price of our common stock on the date this agreement was settled.
Effective May 2, 2011, we entered into an agreement in which we granted a non-employee a stock
appreciation right that is indexed on 70,000 shares of our common stock. This agreement requires us
to settle in cash an amount equal to $35,000, plus the excess, if any, over a stock appreciation right
value of $700,000 at May 2, 2011. This stock appreciation right value of $700,000 represents the
70,000 indexed shares of common stock noted above measured at the closing price per share of
$10.00 at May 2, 2011. The cash settlement in connection with the stock appreciation right value
would represent the difference between a stock appreciation right value that is indexed on the 70,000
shares of common stock noted above and based on the highest closing price per share of our
common stock for the period May 2, 2011 through June 30, 2012 (limited to $12.00 per share) and
the $700,000 stock appreciate right value at May 2, 2011. This award will vest over the period May
2, 2011 through June 30, 2012 as this represents the non-employee’s required service period.
The fair value of this agreement was included in accrued expenses and was $134,000 at April 29,
2012. We recorded $134,000 of compensation expense within selling, general, and administrative
expense for this agreement during fiscal 2012.
73
14. Fair Value of Financial Instruments
ASC Topic 820 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 value 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 April 29, 2012 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:
Limited Term Bond Fund
Low Duration Bond Fund
Intermediate Term Bond Fund
$ 2,049
2,037
1,058
N/A
N/A
N/A
N/A
N/A
N/A
$2,049
2,037
1,058
Fair value measurements at May 1, 2011 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:
Low Duration Bond Fund
$1,003
N/A
N/A
$ 1,003
The determination of where an asset or liability falls in the hierarchy requires significant judgment.
We evaluate our 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.
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
April 29, 2012, the carrying value of the company’s long-term debt was $9.1 million and the fair
value was $8.1 million. At May 1, 2011, the carrying value of the company’s long-term debt was
$11.5 million and the fair value was $10.2 million.
74
15. DERIVATIVES
In accordance with the provisions of ASC Topic 815, Derivatives and Hedging, our Canadian dollar
foreign exchange contract was designated as a cash flow hedge, with the fair value of these financial
instruments recorded in other assets and changes in fair value recorded in accumulated other
comprehensive income. ASC Topic 815 requires disclosure of gains and losses on derivative
instruments in the following tabular format.
(Amounts in Thousands)
Fair Values of Derivative Instruments As of,
April 29, 2012
May 1, 2011
Derivatives designated as hedging instruments
under ASC Topic 815
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
None
Other Assets
$-
Other Assets
$-
Derivatives in
ASC Topic 815
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 (loss) (net of tax)
Recognized in Income on
Derivative (Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
2012
2011
2010
2012
2011
2010
2012
2011
2010
$-
$(103) $83
Other Exp
$-
$5
$15
Other Exp
$-
$79
$-
Canadian Dollar
Foreign Exchange
Contract
Canadian Dollar Foreign Exchange Rate
On January 21, 2009, we entered into a Canadian dollar foreign exchange contract to mitigate the risk
of foreign exchange rate fluctuations associated with our loan from the Government of Quebec. The
agreement effectively converted the Canadian dollar principal payments at a fixed Canadian dollar
foreign exchange rate compared with the United States dollar of 1.218 and was due to expire on
November 1, 2013. During the first quarter of fiscal 2011, we elected to terminate this contract due to
the favorable Canadian dollar foreign exchange rates in comparison to the fixed contractual rate noted
above.
75
16. NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of shares outstanding
during the period. Diluted net 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 income per share are as follows:
(in thousands)
weighted-average common
shares outstanding, basic
dilutive effect of stock-based compensation
weighted-average common
shares outstanding, diluted
2012
2011
2010
12,711
155
12,959
259
12,709
348
12,866
13,218
13,057
Options to purchase 24,750 shares of common stock were not included in the computation of diluted
net loss per share for fiscal 2012 as the exercise price of the options were greater than the average
market price of the common shares.
All options to purchase shares of common stock were included in the computation of diluted net
income for fiscal 2011 and 2010, as the exercise price of the options was less than the average
market price of common shares.
17. BENEFIT PLANS
The company has defined contribution plans which cover substantially all employees and provides
for participant contributions on a pre-tax basis and matching contributions by the company for its
U.S. and Canadian operations. Our contributions to the plan were $606,000, $543,000, and $515,000
in fiscal 2012, 2011, and 2010, respectively.
In addition to the defined contribution plan, we have 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. Our contributions to the plan were
$132,000 for fiscal 2012, $120,000 for fiscal 2011, and $68,000 for fiscal 2010, respectively. Our
nonqualified deferred compensation plan liability of $1.7 million and $1.4 million at April 29, 2012,
and May 1, 2011, respectively, and is included in accrued expenses in the Consolidated Balance
Sheets.
76
18. 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.
Net sales denominated in U.S. dollars accounted for 86%, 83% and 84% of total consolidated net
sales in 2012, 2011, and 2010, respectively. International sales accounted for 21%, 22% and 22% of
net sales in 2012, 2011, and 2010, respectively, and are summarized by geographic area as follows:
(dollars in thousands)
north america (excluding USA)
far east and asia
all other areas
2012
$ 10,417
38,279
5,353
$ 54,049
2011
2010
10,505
36,587
1,502
48,594
11,654
31,856
2,546
46,056
The company evaluates the operating performance of its segments based upon income from
operations before restructuring and related charges (credits), 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 non-compete agreements
associated with certain acquisitions. The upholstery fabrics segment also includes assets held for sale
in segment assets.
77
Statements of operations for the company’s operating segments are as follows:
(dollars in thousands)
net sales:
upholstery fabrics
mattress fabrics
gross profit:
upholstery fabrics
mattress fabrics
total segment gross profit
other non-recurring charges
2012
2011
2010
$ 108,924
145,519
$ 254,443
$
14,984
24,825
39,809
(77) (1)
$
39,732
94,375
122,431
216,806
13,592
23,248
36,840
-
36,840
91,568
114,848
206,416
15,183
23,652
38,835
(58) (3)
38,777
(dollars in thousands)
selling, general, and administrative expenses:
upholstery fabrics
mattress fabrics
unallocated corporate
total selling, general, and administrative
expenses
2012
2011
2010
$
11,453
9,061
4,512
9,233
7,875
3,961
9,227
8,178
5,400
$
25,026
21,069
22,805
$
3,531
15,764
19,295
(4,512)
Income from operations:
upholstery fabrics
mattress fabrics
total segment income from operations
unallocated corporate expenses
other non-recurring charges
total income from operations
16,342
interest expense
(1,314)
interest income
116
other expense
(828)
14,316
income before income taxes
(1) The $77 represents employee termination benefits associated with our Anderson, SC plant
facility. This charge was recorded in cost of sales in the 2012 Consolidated Statement of Net
Income and relates to the upholstery fabrics segment.
15,743
(881)
240
(40)
15,062
14,706
(780)
508
(236)
14,198
4,359
15,373
19,732
(3,961)
5,956
15,474
21,430
(5,400)
(77) (1)
(28) (2)
$
312 (4)
(2) The $28 represents an impairment charge related to equipment that is classified as held for sale,
a charge of $24 for lease termination and other exit costs, offset by a credit of $14 for employee
termination benefits, and a credit of $10 for sales proceeds received on equipment with no
carrying value. This charge was recorded in restructuring expense in the 2011 Consolidated
Statement of Net Income and relates to the upholstery fabrics segment.
(3) The $58 represents a restructuring related charge of $108 for other operating costs associated
with closed plant facilities, offset by a credit of $50 for the sale of inventory previously reserved
for. This charge was recorded in cost of sales in the 2010 Consolidated Statement of Net Income
and relates to the upholstery fabrics segment.
(4) The $312 represents a restructuring credit of $186 for employee termination benefits, a credit of
$170 for sales proceeds received on equipment with no carrying value, a credit of $50 for the
sale of inventory previously reserved for, a credit of $14 for lease termination and other exit
costs, offset by a charge of $108 for other operating costs associated with closed plant facilities.
Of this total credit, a charge of $58 was recorded to cost of sales and a credit of $370 was
recorded in restructuring credit in the 2010 Consolidated Statement of Net Income. This credit
relates to the upholstery fabrics segment.
78
One customer within the upholstery fabrics segment represented 13%, 12%, and 12% of
consolidated net sales in each of fiscal 2012, 2011, and 2010, respectively. Two customers within
the mattress fabrics segment represented 22%, 23%, and 22% of consolidated net sales in fiscal
2012, 2011 and 2010, respectively. One customer within the upholstery fabrics segment represented
12% and 13% of net accounts receivable at April 29, 2012 and May 1, 2011, respectively. No
customers within the mattress fabrics accounted for 10% or more of net accounts receivable as of
April 29, 2012 or May 1, 2011.
Balance sheet information for the company’s operating segments follow:
2012
2011
2010
total segment assets
103,599
90,497
(dollars in thousands)
segment assets
mattress fabrics
current assets (5)
assets held for sale
non-compete agreements, net
goodwill
property, plant, and equipment
total mattress fabrics assets
upholstery fabrics
current assets (5)
assets held for sale
property, plant, and equipment
total upholstery fabrics assets
non-segment assets
cash and cash equivalents
short-term investments
income taxes receivable
deferred income taxes
other current assets
property, plant, and equipment
other assets
total assets
capital expenditures (13):
mattress fabrics
upholstery fabrics
unallocated corporate
depreciation expense
mattress fabrics
upholstery fabrics
total segment depreciation expense
$
$
$
$
29,909
15
333
11,462
29,237 (6)
70,956
25,455
15
480
11,462
28,581 (7)
65,993
31,519
-
23,477
60
1,124 (9) 967 (10)
32,643
24,504
22,307
34
843
11,462
26,720 (8)
61,366
23,517
89
989 (11)
24,595
85,961
18,295
3,023
728
474
1,698
25,023
5,941
-
5,672
1,989
23,181
7,699
79
3,899
2,376
918 (12)
1,574
$ 144,716
748 (12)
694 (12)
1,572
130,051
1,725
112,598
$
$
$
$
4,875
512
532
5,919
4,275
590
4,865
5,714
311
277
6,302
3,820
552
4,372
6,600
481
316
7,397
3,458
552
4,010
(5) Current assets represent accounts receivable and inventory.
(6) The $29.2 million at April 29, 2012 represents property, plant, and equipment located in the U.S.
of $21.2 million and located in Canada of $8.0 million. The increase in this segment’s property,
plant, and equipment balance at April 29, 2012, compared with May 1, 2011 is primarily due to
fiscal 2011 capital spending of $4.9 million, offset by depreciation expense of $4.3 million.
79
(7) The $28.6 million at May 1, 2011, represents property, plant, and equipment located in the U.S.
of $20.0 million and located in Canada of $8.6 million. The increase in this segment’s property,
plant, and equipment balance at May 1, 2011 compared with May 2, 2010 is primarily due to
fiscal 2011 capital spending of $5.7 million, offset by depreciation expense of $3.8 million.
(8) The $26.7 million at May 2, 2010, represents property, plant, and equipment located in the U.S.
of $18.8 million and located in Canada of $7.9 million.
(9) The $1.1 million at April 29, 2012, represents property, plant, and equipment located in the U.S.
of $837, located in China of $183, and located in Poland of $104.
(10) The $967 at May 1, 2011, represents property, plant, and equipment located in the U.S. of $727,
located in China of $184, and located in Poland of $56.
(11) The $989 at May 2, 2010 represents property, plant, and equipment located in the U.S. of $887
and China of $102.
(12) The $918, $748 and $694 balance at April 29, 2012, May 1, 2011 and May 2, 2010, represent
property, plant, and equipment associated with unallocated corporate departments and corporate
departments shared by both the mattress and upholstery fabric segments.
(13) Capital expenditure amounts are stated on an accrual basis. See Consolidated Statement of Cash
Flows for capital expenditure amounts on a cash basis.
19. 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
April 29, 2012, the company’s statutory surplus reserve was $3.2 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.
The company’s subsidiaries located in China can transfer funds to the parent company with the
exception of the statutory surplus reserve of $3.2 million to assist with debt repayment, capital
expenditures, and other expenses of the company’s business.
20. COMPREHENSIVE INCOME
Comprehensive income is the total of net income and other changes in equity, except those resulting
from investments by shareholders and distributions to shareholders not reflected in net income.
A summary of comprehensive income follows:
(dollars in thousands)
net income
unrealized gain on short-term investments
(loss) gain on cash flow hedges, net of taxes
80
2012
$ 13,296
16
-
$ 13,312
2011
16,164
-
(103)
16,061
2010
13,188
-
83
13,271
21. CASH FLOW INFORMATION
During fiscal 2012, we did not have any non-cash investing and financing activities.
During fiscal 2011, 60,415 shares of common stock were surrendered to satisfy withholding tax
liabilities and the cost of stock options exercised totaling $563,000. The shares surrendered to satisfy
withholding tax liabilities were in connection with 110,500 and 40,000 shares of common stock
issued related to the vesting of performance based units and stock option exercises, respectively.
During fiscal 2010, 20,658 shares of common stock were surrendered to satisfy withholding tax
liabilities totaling $191,000 in connection with 80,000 shares of common stock issued and related to
the vesting of performance based restricted stock units.
22. COMMON STOCK REPURCHASE PROGRAM
Fiscal 2012
On June 16, 2011, our board of directors authorized the expenditure of up to $5.0 million for the
repurchase of shares of our common stock. Under the common stock repurchase program, shares
may be purchased from time to time in open market transactions, block trades, and through plans
established under the Securities Exchange Act Rule 10b5-1. The amount of shares purchased and the
timing of such purchases will be based on working capital requirements, market and general business
conditions and other factors including alternative investment opportunities. On August 29, 2011, our
board of directors authorized the expenditure of an additional $2.0 million for a total authorization of
$7.0 million, for the repurchase of shares of our common stock.
During fiscal 2012, we purchased 624,127 shares of our common stock at a cost of $5.4 million.
Fiscal 2013
On June 13, 2012, we announced that our board of directors approved a new authorization for us to
acquire up to $5.0 million of our common stock. This action replaces the authorization to acquire up
to $7.0 million of our common stock noted above.
23. QUARTERLY DIVIDEND PROGRAM
On June 13, 2012, we announced that our board of directors approved the payment of a quarterly cash
dividend of $0.03 per share, to be paid on or about July 16, 2012, to shareholders of record as of the
close of business on July 2, 2012. We anticipate paying a cash dividend each quarter, with expected
payment dates in October, January, April, and July. Future dividend payments are subject to Board
approval and may be adjusted at the Board’s discretion as business needs or market conditions
change.
81
24. SUBSEQUENT EVENT
In order to expand our product offerings and keep pace with the changing customer demand trends within
the bedding industry, we entered into a joint product development, sales and marketing agreement with A.
Lava & Son Co. (Lava) on May 21, 2012. This agreement forms a new business named Culp-Lava
Applied Sewn Solutions and will provide us the opportunity to enter the business of designing, producing,
and marketing sewn mattress covers. As we enter the business of sewn mattress covers, we will be able to
leverage our design capabilities and expand our product offerings from mattress fabrics to finished
covers. In connection with this agreement, Lava will provide us with technical assistance and know-how
for the start-up of the business and will work with us on the design, sales and marketing of sewn mattress
covers.
As part of the agreement, the new business will be fully funded and 100% owned by us. We plan to
establish a manufacturing facility located in the southeastern U.S. that will be selected by us. As a result,
we will have two mirrored manufacturing facilities to better serve our customer base and meet current and
expected demand trends in the bedding industry. We will have responsibility for all operating control of
the new business, including capital expenditures and production and operating costs. We are projecting
capital expenditures to start the business to be approximately $500,000 for fiscal 2013, as sewn products
are a different business than our current normal operations and do not require large investments in plant
and equipment. Lava is not required to invest capital into the Company.
We are expecting production to start in the second quarter of fiscal 2013 with approximately 35
employees. Our plan is to let the market dictate our growth strategy and we feel it is important to enter
this business gradually to protect our investment as we learn what types of products and volume meet
demand trends.
82
SELECTED QUARTERLY DATA (UNAUDITED)
(amounts in thousands)
INCOME STATEMENT DATA
net sales
cost of sales
gross profit
selling, general and administrative expenses
restructuring expense (credit)
income from operations
interest expense
interest income
other expense (income)
income before income taxes
income taxes
net income
depreciation
weighted average shares outstanding
weighted average shares outstanding,
assuming dilution
PER SHARE DATA
net income per share - basic
net income per share - diluted
book value
BALANCE SHEET DATA
operating working capital (3)
property, plant and equipment, net
total assets
capital expenditures
long-term debt, current maturities of long-term debt, and line of credit (1)
shareholders' equity
capital employed (2)
RATIOS & OTHER DATA
gross profit margin
operating income margin
net income margin
effective income tax rate
Debt-to-total capital employed ratio (1)
operating working capital turnover (3)
days sales in receivables
inventory turnover
STOCK DATA
stock price
high
low
close
daily average trading volume (shares)
fiscal
2012
4th quarter
fiscal
2012
3rd quarter
fiscal
2012
2nd quarter
fiscal
2012
1st quarter
fiscal
2011
4th quarter
fiscal
2011
3rd quarter
fiscal
2011
2nd quarter
fiscal
2011
1st quarter
75,711
62,013
13,698
8,031
-
5,667
190
(121)
104
5,494
2,071
3,423
1,264
12,513
60,450
51,939
8,511
5,518
-
2,993
181
(148)
83
2,877
1,075
1,802
1,214
12,536
58,013
49,367
8,646
5,720
-
2,926
188
(110)
(15)
2,863
(3,389)
6,252
1,200
12,733
60,270
51,392
8,878
5,757
-
3,121
220
(129)
65
2,965
1,145
1,820
1,187
13,061
60,363
49,080
11,283
6,525
28
4,730
222
(96)
(71)
4,675
(1,315)
5,990
1,167
13,030
51,652
43,413
8,239
5,129
7
3,103
224
(57)
28
2,908
483
2,425
1,108
13,005
48,879
41,270
7,609
4,202
-
3,407
225
(49)
30
3,201
(801)
4,002
1,083
12,932
55,912
46,203
9,709
5,212
(6)
4,503
210
(38)
53
4,278
531
3,747
1,014
12,870
12,695
12,677
12,871
13,205
13,217
13,228
13,167
13,199
0.27
0.27
7.00
30,596
31,279
144,716
2,326
10,012
89,000
67,887
18.1%
7.5
4.5
37.7
14.7
8.9
29
7.5
11.81
8.90
11.05
12.1
0.14
0.14
6.73
31,418
30,285
131,457
1,068
9,166
85,371
70,042
14.1%
5.0
3.0
37.4
13.1
8.7
31
6.2
9.18
7.67
9.10
10.2
0.49
0.49
6.59
28,216
30,431
127,124
1,019
9,219
84,097
66,889
14.9%
5.0
10.8
(118.4)
13.8
8.7
25
6.0
9.75
7.05
8.65
26.7
0.14
0.14
6.17
28,399
30,615
129,307
1,506
11,488
81,351
69,520
14.7%
5.2
3.0
38.6
16.5
8.6
26
6.0
10.78
7.30
8.92
72.6
0.46
0.45
6.06
23,921
30,296
130,051
899
11,547
80,341
62,521
18.7%
7.8
9.9
(28.1)
18.5
8.8
30
7.3
10.22
8.43
10.08
27.5
0.19
0.18
5.61
25,992
30,571
113,877
453
11,566
74,100
65,709
16.0%
6.0
4.7
16.6
17.6
8.5
28
6.2
11.43
9.54
9.79
29.0
0.31
0.30
5.42
26,000
31,225
111,908
1,868
11,605
71,504
66,370
15.6%
7.0
8.2
(25.0)
17.5
8.9
28
5.5
11.59
8.86
10.14
64.1
0.29
0.28
5.13
24,710
30,471
113,097
3,082
11,647
67,126
64,493
17.4%
8.1
6.7
12.4
18.1
9.4
28
6.4
14.10
6.56
10.42
111.0
$
$
$
$
$
$
(1)Debt includes long-term debt, current maturities of long-term debt, and line of credit.
(2) Capital employed represents long-term and current maturities of long-term debt, lines of credit, current and noncurrent
deferred income tax liabilities, current and long-term income taxes payable, stockholders' equity, offset by cash and cash equivalents,
short-term investments, current and noncurrent deferred income tax assets, and income taxes receivable.
(3) Operating working capital for this calculation is accounts receivable and inventories, offset by accounts payable-trade and capital expenditures
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 29, 2012, there were no disagreements on any matters of accounting
principles or practices or financial statement disclosures.
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of
April 29, 2012. 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 April 29, 2012.
Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated
financial statements as of and for the years ended April 29, 2012, May 1, 2011 and May 2, 2010 and has
audited the company’s effectiveness of internal controls over financial reporting as of April 29, 2012, as
stated in their report, which is included in Item 8 hereof. During the quarter ended April 29, 2012, 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.
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Culp, Inc.
We have audited Culp, Inc.’s (a North Carolina corporation) internal control over financial reporting as of April
29, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Culp, Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying management’s annual report on internal control over
financial reporting. Our responsibility is to express an opinion on Culp, Inc.’s internal control over financial
reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
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.
In our opinion, Culp, Inc. maintained, in all material respects, effective internal control over financial reporting as of
April 29, 2012, based on criteria established in Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Culp, Inc. and Subsidiaries as of April 29, 2012, and May 1, 2011, and
the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in
the period ended April 29, 2012 and our report dated July 12, 2012 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Charlotte, North Carolina
July 12, 2012
85
ITEM 9B. OTHER INFORMATION
Pursuant to the Culp, Inc. 2007 Equity Incentive Plan (the “Plan”), on July 11, 2012, the Compensation
Committee of our Board of Directors approved equity-based awards consisting of an aggregate of 60,000
restricted stock units, with each unit consisting of the right to receive one share of the common stock of
the company based on attainment of certain performance targets, which could become two shares of stock
if certain maximum performance targets are attained. These units will vest in an amount that depends
upon the aggregate operating income excluding certain one-time or unusual items, of the company, or the
division that employs the award recipient, during our next three fiscal years, and may vest in any amount
from zero to twice the number of units awarded, depending on the amount of operating income earned in
the three year period. The units will also vest in the target amounts for each award recipient upon a
change in control or the termination of the recipient’s employment without cause or by reason of his death
or disability. The number of units (and number of shares of common stock that would vest upon
attainment of target operating income levels) include a grant of 21,840 units (maximum level of 43,680
shares) to Franklin N. Saxon, President and Chief Executive Officer, a grant of 17,160 units (maximum
level of 34,320 shares) to Robert G. Culp, III, Chairman, and a grant of 11,200 units (maximum level of
22,400 shares) to Robert G. Culp, IV, President, Culp Home Fashions Division. The effective date of the
grants is July 11, 2012. These awards are subject to a clawback feature providing that amounts earned
pursuant to the awards be repaid to the company if reported financial results are subject to a material
negative restatement such that the amount earned or vested would have been lower using the restated
financial results. The grants are being made subject to the terms of the Plan and to the terms of Restricted
Stock Agreements between Culp and each of the recipients.
PART III
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
86
captions “Executive Compensation Plan Information” and “Voting Securities,” which information is
herein incorporated by reference.
The following table sets forth information as of the end of fiscal 2012 regarding shares of the Company’s
common stock that may be issued upon the exercise of equity awards previously granted and currently
outstanding equity awards under the company’s equity incentive and stock option plans, as well as the
number of shares available for the grant of equity awards that had not been granted as of that date.
Plan Category
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding
options, warrants and
rights
Equity compensation
plans approved by security
holders
Equity compensation
plans not approved by
security holders
Total
(a)
209,475
-
209,475
(b)
$7.22
-
$7.22
Number of securities
remaining available for
future issuance under
equity compensation plan
(excluding securities
reflected in column (a))
(c)
795,811
-
795,811
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.
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.
87
PART IV
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.
Item
Page of Annual
Report on
Form 10-K
Reports of Independent Registered Public Accounting Firms ............................................................... 48
Consolidated Balance Sheets – April 29, 2012 and
May 1, 2011 ........................................................................................................................................ 49
Consolidated Statements of Net Income -
for the years ended April 29, 2012,
May 1, 2011 and May 2, 2010 ............................................................................................................ 50
Consolidated Statements of Shareholders’ Equity -
for the years ended April 29, 2012,
May 1, 2011 and May 2, 2010 ............................................................................................................ 51
Consolidated Statements of Cash Flows -
for the years ended April 29, 2012,
May 1, 2011 and May 2, 2010 ............................................................................................................ 52
Notes to Consolidated Financial Statements.......................................................................................... 53
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)
3(ii)
10.1
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 (Commission File No.
001-12597), and are incorporated herein by reference.
Restated and Amended Bylaws of the company, as amended November 12, 2007 (Commission
File No. 001-12597), were filed as Exhibit 3.1 to the company’s Form 8-K dated November 12,
2007, and are incorporated herein by reference.
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 (Commission File No. 001-12597), and is
incorporated herein by reference. (*)
88
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
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 (Commission
File No. 001-12597), and is incorporated herein by reference.
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 28, 2003
(Commission File No. 001-12597), and is incorporated here by reference.
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 28, 2003
(Commission File No. 001-12597), and is incorporated here by reference.
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 (Commission File No. 001-
12597), and is incorporated herein by reference.
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 (Commission
File No. 001-12597), filed on December 9, 2004, and is incorporated here by reference.
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 (Commission File No. 001-
12597), and is incorporated herein by reference.
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 (Commission File No. 001-
12597), and is incorporated herein by reference.
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 (Commission File No. 001-12597), and is incorporated herein by reference.
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 (Commission File No. 001-12597), and is incorporated herein by reference.
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.
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.
10.13 Written description of compensation arrangement for non-employee directors.
10.14
Form of stock option agreement for options granted to executive officers 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. (*)
89
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
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. (*)
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. (*)
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. (*)
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.
Form of stock option agreement for options granted to executive officers 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. (*)
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.
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.
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. (*)
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. (*)
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. (*)
Culp, Inc. Deferred Compensation Plan Scheduled for Selected Key Employees , filed as Exhibit
10.36 to the company’s Form 10-K dated July 16, 2009, and incorporated herein by reference. (*)
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, filed as
Exhibit 10.37 to the company’s Form 10-K dated July 16, 2009, and incorporated herein by
reference.
10.27
Sixteenth Amendment to Amended and Restated Credit Agreement dated August 13, 2010 among
Culp, Inc. and Wells Fargo Bank, N.A., as Agent and Bank, was filed as Exhibit 10.1 to Current
Report on Form 8-K dated August 19, 2010, and is incorporated herein by reference.
90
10.28
Seventeenth Amendment and Restated Credit Agreement dated as August 25, 2011 among Culp,
Inc. and Wells Fargo Bank, N.A. was filed as Exhibit 10.1 to the company’s Form 10-Q for the
quarter ended July 31, 2011 dated September 9, 2011, and is incorporated herein by reference.
10.29 Written description of annual incentive plan.
21
23
List of subsidiaries of the company
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 12, 2012
24(b)
Power of Attorney of Kenneth R. Larson, dated July 12, 2012
24(c)
Power of Attorney of Kenneth W. McAllister, dated July12, 2012
31(a)
31(b)
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
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.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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 93 under the subheading “Exhibit Index.”
c)
Financial Statement Schedules:
None
91
SIGNATURES
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 12th day
of July 2012.
CULP, INC.
By /s/ Franklin N. Saxon
Franklin N. Saxon
Chief Executive Officer
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities indicated on the 12h day of July
2012.
/s/
/s/
/s/
/s/
Robert G. Culp, III
Robert G. Culp, III
(Chairman of the Board of Directors)
/s/ Kenneth R. Larson *
Kenneth R. Larson
(Director)
Franklin N. Saxon
Franklin N. Saxon
Chief Executive Officer
(principal executive officer)
(Director)
Patrick B. Flavin*
Patrick B. Flavin
(Director)
Kenneth W. McAllister*
Kenneth W. McAllister
(Director)
/s/ Kenneth R. Bowling
Kenneth R. Bowling
Chief Financial Officer
(principal financial officer)
/s/ Thomas B. Gallagher, Jr.
Thomas B. Gallagher, Jr.
Corporate Controller
(principal accounting officer)
* By Kenneth R. Bowling, Attorney-in-Fact, pursuant to Powers of Attorney filed with the Securities
and Exchange Commission.
92
EXHIBIT INDEX
Exhibit Number
Exhibit
10.13
10.29
21
23
24(a)
24(b)
24(c)
31(a)
31(b)
32(a)
32(b)
Written description of Non-Employee Director Compensation
Written description of annual incentive plan
List of subsidiaries of the company
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).
Power of Attorney of Patrick B. Flavin, dated July 12, 2012
Power of Attorney of Kenneth R. Larson, dated July 12, 2012
Power of Attorney of Kenneth W. McAllister, dated July 12, 2012
Certification of Principal Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-
Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
93
Written Description of Non-employee Director Compensation
Exhibit 10.13
Each non-employee Director is paid an annual retainer of $40,000 (except the Lead Director,
who receives a $45,000 retainer), plus an annual grant of options to purchase 2,000 shares of the
Company’s stock or, if the director elects, a direct stock grant of a number of shares equal to the
value of such options. The options or stock are granted under the Company’s 2007 Equity
Incentive Plan, which provides for options to be granted to directors with an exercise price equal
to the fair market value of the Company’s stock on the date of grant. The options are
immediately exercisable upon grant and remain outstanding for a period of 10 years from the
date of grant.
Written Description of Annual Incentive Plan
Exhibit 10.29
The annual incentive plan is structured to provide potential bonus payments to the participants
based upon an economic value added (EVA) performance measurement, which is derived from
return on capital employed. The plan provides for bonuses based upon the EVA of the entire
Company in the case of certain executives, and upon the EVA of one of the Company’s two
divisions for other executives.
EVA is calculated under the incentive plan by determining the capital employed in the portion of
the Company that employs the award recipient (the Company or one of the Company’s two
divisions, referred to herein as a “reporting unit’), and then multiplying the capital employed by
a cost of capital (stated as a percentage) to determine the “capital charge” for each reporting unit.
The sum of operating income earned by a reporting unit for each month during the fiscal year in
excess of the capital charge for the reporting unit for that month is deemed to be the economic
value added, or EVA, produced by the reporting unit for the year. To the extent that EVA is
produced by a reporting unit in a fiscal year, a sharing percentage is used to determine the bonus
pool for the award recipients from that reporting unit. The bonus pool is divided among the
recipients from the reporting unit in accordance with proportions established by the
Compensation Committee, stated as a target bonus opportunity. The Committee also establishes
a target amount of EVA for each reporting unit. The sharing percentage for award recipients
increases if the reporting unit achieves EVA above the target level. Bonus amounts are paid in
cash.
Exhibit 21
LIST OF SUBSIDIARIES OF CULP, INC.
Name of Subsidiary
Jurisdiction of Incorporation
Culp Fabrics (Shanghai) Co., Ltd.
Culp Fabrics (Shanghai) International Trading Co., Ltd.
Culp Cut and Sew Co., Ltd.
Culp International Holdings Ltd.
Rayonese Textile Inc.
Culp Europe
People’s Republic of China
People’s Republic of China
People’s Republic of China
Cayman Islands
Canada
Poland
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated July 12, 2012, with respect to the consolidated financial statements and
internal control over financial reporting included in the Annual Report of Culp, Inc. on Form 10-K for
the fiscal year ended April 29, 2012. We hereby consent to the incorporation by reference of said reports
in the Registration Statements of Culp, Inc. on Forms S-8 (File No. 333-59512 effective April 26, 2001,
File No. 333-59514 effective April 25, 2001, File No. 333-27519 effective May 21, 1997, File No. 333-
101805 effective December 12, 2002, File No. 33-13310 effective March 20, 1987, File No. 33-37027
effective September 18, 1990, File No. 33-80206 effective June 13, 1994, File No. 33-62843 effective
September 22, 1995, and File No. 333-147663 effective November 27, 2007), and on Form S-3 and Form
S-3/A (File No. 333-141346 effective March 16, 2007).
Charlotte, North Carolina
July 12, 2012
Exhibit 24(a)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a
North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and
lawful agent and attorney-in-fact to sign for the undersigned, as a director of the Corporation, the
Corporation's Annual Report on Form 10-K for the year ended April 29, 2012 to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of
1934, as amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as herein authorized.
/s/
Patrick B. Flavin
Patrick B. Flavin
Date: July 12, 2012
Exhibit 24(b)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a
North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and
lawful agent and attorney-in-fact to sign for the undersigned as a director of the Corporation the
Corporation's Annual Report on Form 10-K for the year ended April 29, 2012 to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of
1934, as amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as herein authorized.
/s/
Kenneth R. Larson
Kenneth R. Larson
Date: July 12, 2012
Exhibit 24(c)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a
North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and
lawful agent and attorney-in-fact to sign for the undersigned as a director of the Corporation the
Corporation's Annual Report on Form 10-K for the year ended April 29, 2012 to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of
1934, as amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as herein authorized.
/s/
Kenneth W. McAllister
Kenneth W. McAllister
Date: July 12, 2012
Exhibit 31(a)
CERTIFICATIONS
I, Franklin N. Saxon, certify that:
1.
I have reviewed this report on Form 10-K of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
/s/ Franklin N. Saxon
Franklin N. Saxon
Chief Executive Officer
(Principal Executive Officer)
Date: July 12, 2012
Exhibit 31(b)
CERTIFICATIONS
I, Kenneth R. Bowling, certify that:
1.
I have reviewed this report on Form 10-K of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
/s/ Kenneth R. Bowling
Kenneth R. Bowling
Chief Financial Officer
(Principal Financial Officer)
Date: July 12, 2012
Exhibit 32(a)
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Culp, Inc. (the “Company”) on Form 10-K for the fiscal
year ended April 29, 2012 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Franklin N. Saxon, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Franklin N. Saxon
Franklin N. Saxon
Chief Executive Officer
July 12, 2012
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the
electronic version of this written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 32(b)
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Culp, Inc. (the “Company”) on Form 10-K for the fiscal
year ended April 29, 2012 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Kenneth R. Bowling, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Kenneth R. Bowling
Kenneth R. Bowling
Chief Financial Officer
July 12, 2012
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the
electronic version of this written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
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CONSOLIDATED ADJUSTED EFFECTIVE INCOME TAX RATE, NET INCOME AND EARNINGS PER SHARE
FOR THE TWELVE MONTHS ENDED APRIL 29, 2012 AND MAY 1, 2011 (Amounts in Thousands)
Consolidated Effective GAAP Income Tax Rate (1)
Reduction of U.S. Valuation Allowance
Reduction of China Valuation Allowance
Non-Cash U.S. Income Tax Expense
Non-Cash Foreign Income Tax Expense
Consolidated Adjusted Effective Income Tax Rate (2)
TWELVE MONTHS ENDED
May 1,
April 29,
2011
2012
(7.3)%
33.7%
8.4%
(20.6)%
1.9%
16.1%
6.4%
26.1%
–
(13.8)%
(0.2)%
18.5%
Income before income taxes
Income taxes (3)
Net income
Net income per share-basic
Net income per share-diluted
Average shares outstanding-basic
Average shares outstanding-diluted
As reported
April 29,
2012
$ 14,198
902
$ 13,296
1.05
$
1.03
$
12,711
12,866
Adjustments
$ 1,725
$ (1,725)
0.14
$
0.13
$
12,711
12,866
April 29, 2012 As reported
Proforma Net
of Adjustments
$ 14,198
2,627
$ 11,571
0.91
$
0.90
$
12,711
12,866
May 1,
2011
$ 15,062
(1,102)
$ 16,164
1.25
$
1.22
$
12,959
13,218
Adjustments
$ 3,527
$ (3,527)
0.27
$
0.27
$
12,959
13,218
May 1, 2011
Proforma Net
of Adjustments
$ 15,062
2,425
$ 12,637
0.98
$
0.96
$
12,959
13,218
Notes:
(1) Calculated by dividing consolidated income tax (benefit) expense by consolidated income before income taxes.
(2) Represents estimated cash income tax expense for our subsidiaries located in Canada and China divided by consolidated income before income taxes.
(3) Proforma taxes calculated using the Consolidated Adjusted Effective Income Tax Rate as reflected above.
This report contains “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, and we disclaim any duty to
update such statements. 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 our future operations, production levels, sales,
gross profit margins, operating income, SG&A, or other expenses, earnings, and other performance measures, 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 our 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 us adversely. Changes in consumer tastes or preferences toward products not produced by us could erode
demand for our products. Changes in the value of the U.S. dollar versus other currencies could 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 could make our 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 our sales of
products produced in those places. Also, economic and political instability in international areas could affect our operations or sources of goods in those areas,
as well as demand for our products in international markets. Further information about these factors, as well as other factors that could affect our future
operations or financial results and the matters discussed in forward-looking statements, are included in the company’s periodic reports filed with the
Securities and Exchange Commission, including the “Risk Factors” section in the fiscal 2012 10-K.
This document contains disclosures about return on capital, both for the entire company and for individual business segments. We define return on capital
as operating income (on an annualized basis if at a point other than the end of the fiscal year) divided by average capital employed. Operating income
excludes certain non-recurring charges, and average capital employed is calculated over rolling two – five fiscal periods, depending on which quarter is being
presented. Details of these calculations and a reconciliation to information from our GAAP financial statements is set forth in this report.. We believe
return on capital is an accepted measure of earnings efficiency in relation to capital employed, but it is a non-GAAP performance measure that is not
defined or calculated in the same manner by all companies. This measure should not be considered in isolation or as an alternative to net income or other
performance measures, but we believe it provides useful information to investors by comparing the operating income we produce to the asset base used to
generate that income. Also, annualized operating income does not necessarily indicate results that would be expected for the full fiscal year. We note that,
particularly for return on capital measured at the segment level, not all assets and expenses are allocated to our operating segments, and there are assets and
expenses at the corporate (unallocated) level that may provide support to a segment’s operations and yet are not included in the assets and expenses used to
calculate that segment’s return on capital. Thus, the average return on capital for the company’s segments will generally be different from the company’s
overall return on capital. Management uses return on capital to evaluate the company’s earnings efficiency and the relative performance of its segments.
This document contains disclosures about our consolidated adjusted effective income tax rate, which is a non-GAAP liquidity measure that represents our
estimated cash expenditures for income taxes. The consolidated adjusted effective income tax rate is calculated by eliminating the non-cash items that affect
our GAAP income tax expense, including adjustments to valuation allowances for deferred tax assets, reductions in income taxes due to net operating loss
(NOL) carry forwards, and non-cash foreign income tax expenses. Currently we do not pay income taxes in the U.S. due to NOL carryforward amounts,
and thus the consolidated adjusted effective income tax rate represents income tax expense for our subsidiaries located in China and Canada. A
reconciliation of our consolidated adjusted effective income tax rate to our consolidated effective GAAP income tax rate is set forth in this report. We believe
this information is useful to investors because it demonstrates the amount of cash, as a percentage of income before income taxes, expected to be required to
fund our income tax liabilities incurred for the periods reported. Our consolidated income tax expense on a GAAP basis can vary widely over different
reporting periods due to the effects of non-cash items, and we believe the calculation of our consolidated adjusted effective tax rate is helpful in comparing
financial reporting periods and the amount of income tax liability that we are or will be required to pay to taxing authorities in cash. We also note that,
because the consolidated adjusted effective income tax rate used to calculate adjusted net income is based on annualized amounts and estimates, adjusted net
income for any quarter or year-to-date period does not necessarily indicate results that could be expected for the full fiscal year. In addition, non-cash
reductions in our U.S. NOL carryforwards are based on pre-tax losses in prior periods and will not be available to reduce taxes on current earnings once the
NOL carryforward amounts are utilized. Management uses the consolidated adjusted effective income rate to analyze the effect that income tax
expenditures are likely to have on cash balances and overall liquidity.
This document contains disclosures about our adjusted net income, which is a non-GAAP performance measure that incorporates the consolidated adjusted
effective income tax rate discussed in the preceding paragraph. Adjusted net income is calculated by multiplying the consolidated adjusted effective income
tax rate by the amount of income before income taxes shown on our income statement. Because the consolidated adjusted effective income tax rate eliminates
non-cash items that affect our GAAP income tax expense, adjusted net income is intended to demonstrate the amount of net income that would be generated
by our operations if only the cash portions of our income tax expense are deducted from income before income taxes. As noted above, our consolidated
income tax expense on a GAAP basis can vary widely over different reporting periods due to the effect of non-cash items, and we believe the calculation of
adjusted net income is useful to investors because it eliminates these items and aids in the analysis of comparable financial periods by reflecting the amount
of earnings available after the deduction of tax liabilities that are paid in cash. Adjusted net income should not be viewed in isolation by investors and
should not be used as a substitute for net income calculated in accordance with GAAP. We also note that, because the consolidated adjusted effective income
tax rate used to calculate adjusted net income is based on annualized amounts and estimates, adjusted net income for any quarter or year-to-date period
does not necessarily indicate results that could be expected for the full fiscal year. In addition, the limitations on the usefulness of consolidated adjusted
effective income tax rates described in the preceding paragraph also apply to the usefulness of adjusted net income, since consolidated adjusted effective income
tax rates are used to calculate adjusted net income. Management uses adjusted net income to help it analyze the company’s earnings and performance after
taking certain tax matters into account when comparing comparable quarterly and year-to-date periods.
C O R P O R A T E D I R E C T O R Y
Robert G. Culp, III
Chairman of the Board
Director (E)
Franklin N. Saxon
President and Chief Executive Officer
Director (E)
Patrick B. Flavin
Retired President and
Chief Investment Officer,
Flavin, Blake & Co., Inc.,
Kenneth W. McAllister
Member/Manager, The McAllister Firm
PLLC, a law firm
High Point, NC
an investment management company
Director (A,C,E,N,L)
Stamford, CT
Director (A,C,N)
Robert G. Culp, IV
President, Culp Home Fashions division
Kenneth R. Larson
Owner and Chief Executive Officer,
Slumberland Furniture,
a retailer of furniture and bedding
Little Canada, MN
Director (A,C,N)
Kenneth R. Bowling
Vice President, Chief Financial Officer,
Treasurer and Corporate Secretary
Thomas B. Gallagher, Jr.
Corporate Controller, Assistant Treasurer
and Assistant Corporate Secretary
Board Committees:
A-Audit
C-Compensation
E-Executive
N-Corporate Governance and
Nominating
L-Lead Director
S H A R E H O L D E R
I N F O R M A T I O N
Corporate Address
Post Office Box 2686
1823 Eastchester Drive
High Point, NC 27265
Telephone: (336) 889-5161
Fax: (336) 887-7089
www.culp.com
Registrar and Transfer Agent
Computershare Investor Services
Post Office Box 43078
Providence, RI 02940-3023
Telephone:
800-254-5196
781-575-2879 (Foreign Shareholders)
www.computershare.com/investor
Independent Registered Public
Accounting Firm
Grant Thornton LLP
Charlotte, NC 28244
Legal Counsel
Robinson, Bradshaw & Hinson, PA
Charlotte, NC 28246
Form 10-K and Quarterly
Reports/Investor Contact
The Form 10-K Annual Report of
Culp, Inc., as filed with the Securities
and Exchange Commission, is
available without charge to
shareholders upon written request.
Shareholders may also obtain copies
of the corporate news releases issued
in conjunction with the company's
quarterly results. These requests and
other investor contacts should be
directed to Kenneth R. Bowling,
Chief Financial Officer, at the
corporate address or at the investor
relations section at www.culp.com
Analyst Coverage
These analysts cover Culp, Inc.:
Raymond James & Associates –
Budd Bugatch, CFA
Value Line – Craig Sirois
Sidoti & Company, LLC – Steve Shaw
Stock Listing
Culp, Inc. common stock is traded on
the New York Stock Exchange under
the symbol CFI. As of July 17, 2012,
Culp, Inc. had approximately 1,775
shareholders based on the number
of holders of record and an estimate
of the number of individual
participants represented by security
position listings.
Annual Meeting
Shareholders are cordially invited
to attend the annual meeting to
be held at 9:00 a.m. on Tuesday,
September 18, 2012, at the company’s
corporate offices, 1823 Eastchester
Drive, High Point, North Carolina.
C U L P, I N C .
1823 Eastchester Drive
Post Office Box 2686
High Point, NC 27265
(336) 889-5161
www.culp.com