2 0 1 3
A N N U A L
R E P O R T
COMPANY PROFILE
C U L P, I N C . is one of the world's largest marketers of mattress fabrics for bedding and upholstery fabrics
for furniture. The company markets a variety of innovative fabrics to its global customer base of leading
bedding and furniture companies, including fabrics produced at Culp’s manufacturing facilities and fabrics
sourced from other suppliers. Culp has operations located in the United States, Canada, China and Poland.
Shares in Culp, Inc. are traded on the New York Stock Exchange under the symbol CFI.
FINANCIAL HIGHLIGHTS
(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 repurchased (3)
Dividends paid
Balance Sheet
Cash and cash equivalents and short term investments
Capital employed at fiscal year-end (1)
Return on capital (1)
Total assets
Total debt (including current maturities and line of credit)
Shareholder’s equity
Debt as a percent of shareholder’s equity
Mattress Fabrics Segment Highlights (2)
Net sales
Operating income
Operating income margin
Capital employed (1)
Return on capital (1)
Upholstery Fabrics Segment Highlights (2)
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) See segment information beginning on page 28 of fiscal 2013 10-K
(3) Purchases represent percent of shares outstanding when the program began in June 2011
2013
$ 268,814
20,289
18,317
2012
$ 254,443
14,198
13,296
2011
$ 216,806
15,062
16,164
1.50
1.47
1.05
1.03
1.25
1.22
17,408
11,571
12,637
1.42
1.40
0.91
0.90
0.98
0.96
12,235
12,450
12,711
12,866
12,959
13,218
$
5,022
503
3.8%
7,593
$
$
5,384
624
4.7%
–
–
–
–
–
$ 28,816
72,699
$ 30,964
67,887
$ 30,880
62,521
29.4%
21.9%
24.9%
144,706
7,161
95,583
144,716
10,012
89,000
130,051
11,547
80,341
7.5%
11.2%
14.4%
$ 154,014
19,900
$ 145,519
15,764
$122,431
15,373
12.9%
57,950
35.6%
10.8%
53,910
29.4%
12.6%
52,632
29.5%
$ 114,800
6.953
$ 108,924
3,531
6.1%
17,313
40.4%
3.2%
14,518
25.7%
$94,375
4,359
4.6%
10.317
36.3%
FELLOW SHAREHOLDERS
We are very pleased to report one of the best years in Culp’s history.
Our financial and operating results in fiscal 2013 demonstrate our
consistent ability to execute our strategy in a dynamic global
marketplace. Our sales for the year were up six percent and our
pre-tax profits increased 43 percent to $20.3 million, the highest
level since 1998.
Both of our businesses delivered a solid performance by remaining
focused on what is important to our customers – creative designs,
a wide range of innovative products and outstanding service. We
have continued to leverage our efficient global manufacturing
platform to enhance our service capabilities and to meet the
changing style demands of our customers. This strategy has
enabled us to improve our return on capital from 22 percent
to 29 percent, the highest level since the company went public
in 1983.
In addition, our strong cash flow and balance sheet
provide us with the financial flexibility to continue to pursue
organic growth initiatives and make strategic investments in both
of our businesses.
We are especially excited about the outstanding progress we have
demonstrated in product innovation and design creativity. These
efforts have made a significant contribution to our sales and profit
performance for the year, with an increasing percentage of our
sales coming from new product introductions. Our ability to
sustain excellence in creating innovative fabrics season after
season, and meet the demands of our customers, is a key driver to
our long-term success.
CASH RETURNED TO SHAREHOLDERS
We were also very pleased to return $12.6 million to our
shareholders in fiscal 2013 through $7.6 million in dividends and
$5.0 million in share repurchases. Importantly, over the last two
fiscal years, the company has repurchased a total of 1.1 million
shares, or 8.5 percent of our outstanding shares, for $10.4 million
at an average price of $9.23 per share. At the end of fiscal 2013,
we also announced a 33 percent increase in our quarterly
cash dividend from $0.03 to $0.04 per share, commencing the
first quarter of fiscal 2014. We believe these actions further
demonstrate both our confidence in Culp’s future and our
commitment to building shareholder value.
MATTRESS FABRICS SEGMENT
For the year, mattress fabric sales were $154.0 million, the highest
annual sales level for this division in company history. Overall, we
demonstrated a very consistent performance throughout the year
with both improved sales and higher profitability over fiscal 2012.
These results reflect our focus on product innovation and the
ability to maximize the efficiencies and flexibility of our
manufacturing platform. We have continued to make strategic
investments in our business and enhance our reactive capacity to
offer a full complement of the latest technologies, design expertise,
production capabilities and exceptional service.
Our success over the past year reflects our ability to respond to
customers’ needs and changing demand trends. More than ever,
1
the bedding industry is demanding innovation, and Culp is
uniquely positioned with a flexible and diverse manufacturing
platform that offers a wide range of product offerings and rapid
speed-to-market. We are a true full-service fabric supplier to the
bedding industry, with strong focus and placement in all major
product lines, from the promotional to the premium segments of
the market. The higher-end mattress segment has continued to
demonstrate the strongest growth, as consumer trends indicate a
greater number of purchases of better bedding with more of a
tailored and upholstery-type look. In addition to Culp’s wide array
of mattress fabrics, we can support this demand with our excellent
design capabilities and expertise from our upholstery fabrics
business to achieve today’s fashionable look. Our innovative
designs have been well received in the marketplace with strong
product placements with key customers
We made meaningful progress in fiscal 2013 with our latest
business venture, Culp-Lava, established to produce and market
mattress covers. With this expanded capability, we have a
manufacturing platform that adds further value to the mattress
industry supply chain - from weaving, knitting and finishing to our
latest cut and sew operation for mattress sewn covers. We began
production of covers during the second quarter in our new
Stokesdale, North Carolina, manufacturing facility, developed
specifically for this operation. We are pleased with the favorable
operating synergies and sales contribution to date as we have
focused on the specialized training and development necessary to
establish this new venture. As we continue to gradually add
capacity, we believe Culp is well positioned to capitalize on
meeting demand for the growing specialty bedding sector of the
mattress industry. We are very excited about the potential growth
opportunities as we continue to enhance Culp’s leadership position
in the bedding industry.
UPHOLSTERY FABRICS SEGMENT
We are pleased with the performance of our upholstery fabrics
business in fiscal 2013. Sales for this segment totaled $114.8 million,
a 5.4 percent increase compared with $108.9 million in fiscal 2012,
marking four consecutive years of sales growth for this segment.
The higher annual sales and improved profitability primarily reflect
a positive response to our innovative designs and diverse product
offering. Our customers appreciate the value in our creativity,
innovation and relevance to current furniture style trends. We have
been especially pleased with the success of our newest product
introductions with favorable product placements.
China produced fabrics have continued to be the key driver of our
sales and accounted for approximately 90 percent of upholstery
fabric sales this year. With our 100 percent-owned and scalable
China platform, we are well positioned to provide our growing
global customer base with a wide variety of innovative products
along with outstanding quality and delivery performance. We have
significant manufacturing flexibility, creative design capabilities,
and a strong commitment to customer service - all important
advantages that allow us to more effectively meet the demands of
a global marketplace.
We are encouraged with the stable sales level and steady progress
with key customers we have made with respect to Culp Europe,
especially in the face of a weak European business climate. In spite
of ongoing challenges, we remain optimistic about the long-term
opportunities for Culp Europe.
BALANCE SHEET AND FREE CASH FLOW
Maintaining a strong financial position and generating free cash
flow were top priorities for Culp in fiscal 2013. Due to our focused
efforts, we achieved $13.1 million in free cash flow, after spending
$11.0 million in capital expenditures and working capital. As of
April 28, 2013, we reported $28.8 million in cash and cash
equivalents and short-term investments, or total cash, compared
with $31.0 million at the end of fiscal 2012. Notably, we were able
to maintain this strong cash position after the payment of $7.6
million in dividends, $5.0 million in share repurchases, and $2.8
million in debt payments. Total debt, which includes long-term
debt plus current maturities of long-term debt and our line of
credit, was $7.2 million at the end of fiscal 2013, down from $10.0
million at the end of fiscal 2012. We have since made a scheduled
$2.2 million principal payment in August 2013, with two remaining
annual $2.2 million payments due August 2014 and 2015.
CAPITAL ALLOCATION STRATEGY
We have continued to pursue a disciplined approach to capital
allocation. This discipline has involved using free cash flow to pay
down debt and invest in the mattress fabrics business, through
capital expenditures and two acquisitions, totaling about $50
million since fiscal 2007. During fiscal 2011, we also implemented
an Economic Value Added, or EVA, platform for incentive
compensation, which further promotes the importance of the
efficient use of capital. This approach has resulted in a return on
capital of 29 percent for fiscal 2013. At the same time, we also
returned a substantial amount of funds to shareholders in fiscal
2013 through share repurchase and dividends, both quarterly and
special payments.
Going forward, we will continue to prioritize our use of capital. The
first priority will always be to invest in our existing businesses with
working capital and capital expenditures to grow organically. We
believe this approach offers the highest returns with the least risk.
Secondly, we initiated a regular quarterly cash dividend a year ago,
and, as noted, have increased it by 33 percent beginning with our
July dividend payment. With the free cash flow we expect to
continue generating, our goal is to increase the regular dividend on
a moderate basis over the years ahead, based upon performance.
Third, we are open to strategic acquisitions in our mattress fabrics
business. We have invested $20 million in two great acquisitions in
this segment since fiscal 2007, both of which added significant
value. Fourth, our goal has been to build our net cash position,
which equals total cash minus total debt, to the levels achieved this
fiscal year. Our goal for fiscal 2014 is to build upon this net cash level.
This seems to be a prudent strategy at this time and provides us
plenty of flexibility to be opportunistic. Finally, after the above
priorities, and assuming an acquisition does not materialize, we
expect to generate free cash flow that will allow us to consider
continued actions that will return funds to shareholders. As we have
done over the last two fiscal years, our plan would be to use those
excess funds for share repurchases and special dividends, assuming
certain conditions are met. With respect to share repurchases, we
would be interested only if the market is valuing Culp at a price we
consider a substantial discount to a conservatively calculated
intrinsic value. And for special dividends, our board would consider
distributing such a dividend after fiscal year-end, depending on
circumstances such as our net cash level, economic and business
outlook, and potential opportunities for acquisitions.
The bottom line is that we are in the fortunate position to be
generating significant free cash flow above the requirements to
grow our business organically and to maintain a strong net cash
position. As such, we can provide shareholders with the added value
that comes from dividends and opportunistic share repurchases.
LOOKING AHEAD
Throughout fiscal 2013, we continued to enhance our competitive
position in both businesses and deliver excellent financial results.
Looking ahead, we intend to leverage our success and build
upon this momentum. Our creative designs and innovative
products are resonating with our customers and we have many
exciting opportunities to extend our market reach. Culp has a
unique operating structure with a flexible and scalable global
manufacturing platform, supported by design expertise, product
innovation and outstanding customer service. We believe this
business model is a distinct competitive advantage for Culp that
can provide for further profitable growth, especially as the housing
market recovers and consumers gain more confidence.
We are fortunate to have a talented and dedicated team of long-
term associates located throughout the world, supported by
an outstanding management team and board of directors. Both
our past success and confidence in our future reflect this strong
foundation. Above all, everyone at Culp is committed to
outstanding performance for our valued customers as a financially
stable and trusted source for innovative fabrics. We look forward to
the opportunities before us in fiscal 2014 and beyond.
Thank you for your continued support.
Sincerely,
Franklin N. Saxon
President and Chief Executive Officer
Robert G. Culp, III
Chairman of the Board
August 14, 2013
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 28, 2013
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 28, 2013, 12,224,894 shares of common stock were outstanding. As of October 28, 2012, the
aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $119,511,612
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 17, 2013 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 ........................................................................................................................... 4
Overview of Industry and Markets ................................................................................... 6
Overview of Bedding Industry .......................................................................................... 6
Overview of Residential Furniture Industry ..................................................................... 7
Products ............................................................................................................................ 8
Manufacturing and Sourcing............................................................................................. 9
Product Design and Styling ............................................................................................ 10
Distribution ..................................................................................................................... 10
Sources and Availability of Raw Materials .................................................................... 11
Seasonality ...................................................................................................................... 12
Competition .................................................................................................................... 12
Environmental and Other Regulations ............................................................................ 12
Employees ....................................................................................................................... 13
Customers and Sales ....................................................................................................... 14
Net Sales by Geographic Area ........................................................................................ 14
Backlog ........................................................................................................................... 14
Risk Factors ........................................................................................................................ 15
Unresolved Staff Comments ............................................................................................... 18
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 ............................................ 49
8.
9.
9A.
9B.
Consolidated Financial Statements and Supplementary Data............................................. 50
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ......................................................................................................................... 86
Controls and Procedures ..................................................................................................... 86
Other Information ............................................................................................................... 88
Item No.
Page
PART III
10.
Directors, Executive Officers, and Corporate Governance................................................. 88
11.
Executive Compensation .................................................................................................... 88
12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ............................................................................................. 88
13.
Certain Relationships, Related Transactions, and Director Independence ......................... 89
14.
Principal Accountant Fees and Services ............................................................................. 89
PART IV
15.
Exhibits and Financial Statement Schedules ...................................................................... 90
Documents Filed as Part of this Report .............................................................................. 90
Exhibits ............................................................................................................................... 90
Financial Statement Schedules ........................................................................................... 90
Signatures ........................................................................................................................... 94
Exhibit Index ...................................................................................................................... 95
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, 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, cash flow, 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 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, box springs,
and foundations and upholstery fabrics primarily for use in production of upholstered furniture. The
company competes in a fashion-driven business, and we continue to differentiate ourselves by focusing
on product innovation and new product introductions. In addition, Culp places great emphasis on
providing excellent and dependable service to our customers and protecting our financial strength,
allowing us to maintain our position as a creative, trusted and reliable supplier of fabrics to bedding and
furniture manufacturers.
We believe Culp is the largest producer of mattress fabrics in North America and one of the largest
marketers of upholstery fabrics for furniture in North America, measured by total sales. We have two
operating segments — mattress fabrics and upholstery fabrics. The mattress fabric business markets
mostly woven and knitted fabrics, and sewn covers made from those fabrics, which are used primarily in
the production of bedding products, including mattresses, box springs, and foundations. The upholstery
fabric business markets a variety of fabric products that are used in the production of upholstered
furniture, such as sofas, recliners, chairs, loveseats, sectionals, and sofa-beds. Culp primarily markets
upholstery 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 fourteen active
manufacturing plants and distribution facilities as of the end of fiscal 2013, which are located in
North and South Carolina; Quebec, Canada; Shanghai, China; and Poznan, Poland. We also source
fabrics from other manufacturers, located mostly in China and Turkey, with 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 we recently opened a new distribution
facility in Poznan, Poland. Over the past decade, 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 approximately 90%
of our sales now consist of fabrics produced in China.
Total net sales in fiscal 2013 were $268.8 million. The mattress fabrics segment had net sales of
$154.0 million (57.3% of total net sales), while the upholstery fabrics segment had net sales of
$114.8 million (42.7% of total net sales).
During fiscal 2013, both segments continued to build upon strategic initiatives and structural changes
made over the last several years. The flexible manufacturing and sourcing platform created through these
changes has allowed Culp to place increasing focus on product innovation and introduction of new
designs. Our ability to differentiate our products has helped drive our sales growth the past two years,
even as the home furnishings industry has continued to experience weak and uneven business conditions.
At the same time, management has focused on following a disciplined capital allocation strategy in this
environment.
The bedding and furniture industries were strongly affected by the economic downturn that occurred
beginning in fiscal 2008. In particular, a large decline in the housing industry had a significant negative
impact on demand for home furnishings. Industry strength and demand for our products has improved
somewhat during the past few years, although business conditions have not improved to the levels seen
2
before the economic downturn. During the same period, we have experienced positive responses from
customers to our innovative designs and new products introduced during these years, and our sales and
profits have responded accordingly. Net sales for fiscal 2013 represented the fourth consecutive year of
increased revenues, and our pre-tax income levels for 2013 reached their highest levels in more than 15
years. An increasing percentage of our sales is now based on new product introductions.
The mattress fabrics segment has made strategic investments in capital projects and expansion initiatives
in recent years, and maintained a flexible approach to its sources of fabrics, while dealing with
challenging industry conditions. These expenditures provided increased manufacturing capacity and
more efficient equipment for this segment, as well as two successful acquisitions. During fiscal 2013, this
segment announced a new joint marketing agreement to market sewn mattress covers, with the
establishment of a new production facility, and late in the year we announced further initiatives to
enhance this part of its business.
Our upholstery fabrics segment has undergone major changes over the past decade, transforming from a
U.S.-based manufacturing operation with large amounts of fixed assets to a more flexible variable cost
model, with most fabrics sourced in China. At the same time we have maintained control over the key
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 fabric revenues has
reversed, and sales in this segment have now increased for each of the past four 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.
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. References in this document to “Culp,” the
“company,” “we,” “our,” and “us” refer to Culp, Inc. and its consolidated subsidiaries.
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.
3
Segments
Our two operating segments are mattress fabrics and upholstery fabrics. The following table sets forth
certain information for each of our segments.
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 2013
$154.0
$102.1
$ 12.7
$114.8
$268.8
(57%)
(38%)
(5%)
(43%)
(100%)
Fiscal 2012
$145.5
$ 95.5
$ 13.4
$108.9
$254.4
(57%)
(38%)
(5%)
(43%)
(100%)
Fiscal 2011
$122.4
$ 81.2
$ 13.2
$ 94.4
$216.8
(56%)
(37%)
(6%)
(44%)
(100%)
Additional financial information about our operating segments can be found in Note 16 to the
Consolidated Financial Statements included in Item 8 of this report.
Mattress Fabrics. The mattress fabrics segment, also known as Culp Home Fashions, manufactures and
markets mattress fabric to bedding manufacturers. These fabrics encompass woven jacquard fabrics,
knitted fabrics, and some converted fabrics. Culp Home Fashions has manufacturing facilities located in
Stokesdale and High Point, North Carolina, and St. Jerome, Quebec, Canada. One Stokesdale plant and
the St. Jerome plant both manufacture and finish jacquard (damask) fabric. The main Stokesdale plant
also finishes knitted fabric, and houses the division offices and finished goods distribution capabilities,
while the High Point facility houses most of our knitted mattress fabrics manufacturing operations.
During fiscal 2013, the mattress fabrics division established a second plant in Stokesdale to produce cut
and sewn mattress covers, a growing product category that is used mostly by producers of specialty (non-
innerspring, hybrid) bedding. We have also maintained flexibility in our supply of the major categories of
mattress fabrics. All woven jacquard and knitted fabrics can be produced in multiple facilities, (internal
or external to the company) providing us with mirrored, reactive capacity involving state of the art
capabilities across facilities.
Culp Home Fashions had capital expenditures during the period fiscal 2005 through 2013 totaling
approximately $42 million, which primarily provided for increased knit machine capacity, faster and
more efficient weaving machines, and the initial capital required for our sewn cover business. These
capital expenditures also provided high technology finishing equipment for woven and knitted fabric. In
order to maintain our leading edge technology and support modernization and expansion projects, we
expect steady year-to-year capital investments in the mattress fabrics segment.
The Bodet & Horst USA, LP acquisition in fiscal 2009 allowed us 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 also allowed for improved supply logistics, greater control of
product development, and accelerated responsiveness to our customers. Since the acquisition, we have
made further investments in knitting machines and finishing equipment, increasing our internal
production capacity substantially.
4
Our new sewn mattress cover facility, established during fiscal 2013, participates in a joint marketing
agreement for the production and marketing of sewn mattress covers and represents a further step in our
efforts to respond to industry demands. The new marketing venture is known as Culp-Lava Applied
Sewn Solutions (CLASS), and is a joint marketing effort with A. Lava & Son Co. of Chicago, a leading
provider of mattress covers. This new manufacturing operation, located near our other plants in North
Carolina, involves leased space and a limited capital investment in equipment. Teaming with A. Lava &
Son allows us to have two mirrored manufacturing facilities and greater flexibility in meeting demand for
mattress covers from bedding producers.
Upholstery Fabrics. The upholstery fabrics segment markets fabrics for residential furniture, including
synthetic leathers, velvets, woven jacquards, woven dobbies, and suedes. This 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 the past fiscal year, sales of non-U.S. produced fabric accounted for almost 90% of
our total 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 our 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. Another recent trend that has benefitted the upholstery segment is the
increasing use of upholstery-type fabrics in bedding, which allows us to cross-market our upholstery
products and design capabilities with our mattress fabrics division.
We established a new subsidiary called Culp Europe during fiscal 2011, 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, which produces a significant portion of
the world’s furniture. Although our efforts to grow this part of our business have been challenged by
continuing weak economic conditions in Europe, we continue to view this market as a significant
opportunity for long-term 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 each of fiscal 2012 and 2013.
Over the past decade, we have moved our upholstery business from one that relied on a large fixed capital
base to a more flexible and scalable marketer of upholstery fabrics that meets changing style trends and
different levels of customer demand. 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 challenging during fiscal 2013, our
upholstery fabrics sales increased for the fourth 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 have been achieved primarily
through implementation of a business strategy that included: 1) innovation in a low-cost environment,
5
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 fabric segment
to execute a strategy that we believe is clearly differentiated from our 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.
Overview of Industry and Markets
Culp markets products primarily to manufacturers that operate in two 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. The residential
furniture market includes upholstered furniture sold to consumers for household use, including sofas,
sofa-beds, chairs, recliners and sectionals. 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 2012, the bedding industry experienced gains in both dollar and unit sales for the third
consecutive year. According to the International Sleep Products Association (ISPA), a trade association,
the U.S. wholesale bedding industry increased dollar sales by 8.7% to $6.8 billion in 2012. Unit volume
sales increased 3.6% in 2012 compared to 2011, having experienced a small 0.2% increase in the previous
year. Specialty bedding manufacturers, which produce mattresses that do not use inner spring
construction, now account for about 32% of bedding dollar sales, but only 16% of the unit volume in the
industry. This category of bedding, which generally has higher average selling prices, 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 5.0% in 2012, the second consecutive year of
increasing prices following 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 2012, while the top fifteen accounted for
approximately 87%. Until recently, the industry had 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.
Having now experienced three consecutive years of sales growth, the traditional slow and steady growth
pattern may be returning. 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 imported beds 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’s 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.
6
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.
• While mattress fabrics serve the functional purpose of providing a soft and durable cover, there is
a strong 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 three years and
equaled $15.4 billion in 2012. This level represents a 1.6% increase from 2011, 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 with
the prior year, and in 2009 retail furniture shipments dropped 18.1% compared with 2008. Although
industry sales appeared to have stabilized over the past three years, overall weak demand for residential
furniture has continued to affect the industry, creating significant challenges for suppliers to the
residential furniture industry. It appears that sales of upholstered furniture have grown more rapidly in
recent years than the market for all residential furniture (which includes wood furniture). Industry
sources report that U.S. sales of upholstered furniture increased by 7.2% from 2011 to 2012.
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 58% of total U.S. furniture
imports.
•
Imports of upholstery fabric, both in roll and in “kit” form, have had a significant impact on the
market for upholstery fabrics 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 upholstered furniture has been losing market share recently, particularly at lower and
medium price points, due to supply shortages and higher prices. This trend has created increased
opportunities for suppliers of “leather look” and suede fabrics, and for suppliers of upholstery
generally.
• The residential furniture industry has been consolidating for several years. The result of this
trend is fewer, but larger, customers for marketers of upholstery fabrics.
7
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 $2.25 to $5.50 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 $3.15 to $8.10 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
Converted
Knitted fabric
Upholstery Fabrics
Synthetic leathers
Velvets
Woven jacquards
Woven dobbies
Suedes
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
conform well with layered foam packages.
Composite products which are face finished with polyurethane, either by
printing or coating, creating a product that has the look and feel of synthetic
leather.
Soft fabrics with a plush feel. Produced with synthetic yarns, by weaving or
knitting. Basic designs in both traditional and contemporary styles.
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.
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.
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. These are sometimes referred to as microdenier suedes.
8
Manufacturing and Sourcing
Mattress Fabrics Segment
Our mattress fabrics segment operates four manufacturing plants, with two located in Stokesdale, North
Carolina; and one each in High Point, North Carolina and St. Jerome, Quebec, Canada. Over the past
eight fiscal years, we made capital expenditures of approximately $42 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, as well as expanded
product offerings.
Jacquard mattress fabric is woven at the St. Jerome plant and our main Stokesdale plant, and knitted
fabrics are produced at the High Point facility. Most finishing and inspection processes for mattress
fabrics are conducted at the main Stokesdale plant. We recently announced a new joint marketing
arrangement with a producer of sewn mattress covers for bedding. This effort has resulted in the
establishment of an additional manufacturing facility in Stokesdale to produce and market sewn mattress
covers.
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.
Upholstery Fabrics Segment
We currently operate one upholstery manufacturing facility in the U.S. and four 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 facilities, 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 synthetic leather) 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 while working with our product development team to meet the demands of our customers. We
also source a substantial portion of our yarns, both for U.S. and China upholstery operations, through our
China facilities. The remainder of our yarn is obtained from other suppliers around the world.
9
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 innovation 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. Fiber
differentiation also plays 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 a primary focus on value in designing 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 supply network located mostly in China.
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 facilities in Stokesdale, N.C. Through
arrangements with major customers and in accordance with industry practice, we maintain a significant
inventory of mattress fabrics at our distribution facility in Stokesdale (“make to stock”), so that products
may be shipped to customers with short lead times and on a “just in time” basis.
Upholstery Fabrics Segment
A majority of our upholstery fabrics are marketed on a “make to order” basis and are shipped directly
from our distribution facilities in Burlington, N.C. and Shanghai, China. We also distribute upholstery
fabrics from our new facility in Poznan, Poland. In addition to “make to order” distribution, an inventory
comprised of a limited number of fabric patterns are 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.”
10
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.
Upholstery Fabrics Segment
Raw materials account for approximately 60%-70% 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.
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. While increases in raw material prices negatively affected profits for both of our segments in
the fiscal years from 2009 to 2011, the impact was less severe in fiscal 2012, and raw material prices were
relatively stable during the most recent fiscal year.
11
Seasonality
Mattress Fabrics Segment
The mattress fabrics business and the bedding industry in general are slightly seasonal, with sales being
the highest in early spring and late summer, with another peak in mid-winter.
Upholstery Fabrics Segment
The upholstery fabrics business is somewhat seasonal, with higher sales typically during our first and
fourth fiscal quarters. In the past, seasonality resulted from one-week closings of our manufacturing
facilities and the facilities of most of our customers in the United States during our first and third fiscal
quarters for the holiday weeks of July 4th and Christmas. This effect has become less pronounced as a
larger portion of our fabrics are produced or sold in locations outside of the U.S. The Chinese National
Holiday in October and the Chinese New Year (which occurs in January or February each year) now have
a more significant impact on upholstery sales than the effects of U.S. holiday periods.
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 our 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.
12
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 greenhouse gas emissions, including carbon dioxide. In addition, the U.S. Environmental
Protection Agency has made a determination that greenhouse gas emissions may be a threat to human
health and the environment. International agreements may also result in new regulations on greenhouse
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 28, 2013, we had 1,205 employees, compared to 1,114 at the end of fiscal 2012. 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 13% 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.
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.
Mattress Fabrics Segment
Upholstery Fabrics Segment
United States
Poland
China
Total Upholstery Fabrics Segment
Unallocated corporate
Total
Number of Employees
Fiscal
2012
492
113
8
497
618
4
1,114
Fiscal
2011
466
130
6
543
679
4
1,149
Fiscal
2010
439
125
-
537
662
4
1,105
Fiscal
2009
420
119
-
504
623
4
1,047
Fiscal
2013
604
128
5
464
597
4
1,205
13
Customers and Sales
Mattress Fabrics Segment
Major customers for our mattress fabrics include the leading bedding manufacturers: Sealy, Serta
(National Bedding), Corsicana 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 the Ontario
Teachers Pension Plan), accounting for approximately 15% of the company’s overall sales in fiscal 2013,
and (2) Sealy, Inc. accounting for approximately 12% of our overall sales in fiscal 2013. 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 retailers and 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. 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 2013.
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 2013
Fiscal 2012
Fiscal 2011
$207,201
11,900
77.1% $200,394
78.8% $168,212
77.5%
4.4
10,417
4.1
10,505
4.8
43,907
5,806
16.3
2.2
38,279
5,353
15.0
2.1
36,587
1,502
17.0
0.7
61,613
22.9
54,049
21.2
48,594
22.5
$268,814
100%
$254,443
100.00%
$216,806
100.0%
For additional segment information, see Note 16 in the consolidated financial statements included in
Item 8 of this report.
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.
14
Upholstery Fabrics Segment
Although it is difficult to predict the amount of backlog that is “firm,” we have reported the portion of the
upholstery fabrics backlog from customers with confirmed shipping dates within five weeks of the end of
the fiscal year. On April 28, 2013 the portion of the upholstery fabrics backlog with confirmed shipping
dates prior to June 2, 2013 was $9.0 million, all of which are expected to be filled early during fiscal
2014, as compared to $12.2 million as of the end of fiscal 2012 (for confirmed shipping dates prior to
June 3, 2012).
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 and uncertainty 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
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 four 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.
15
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. Although no write-downs were
experienced in the past several 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 our raw material costs were more
stable during fiscal 2013, higher raw material prices could 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.
16
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 15% of consolidated net sales, and Sealy, Inc. accounting for approximately
12% of net sales, in fiscal 2013. In the upholstery fabrics segment, La-Z-Boy Incorporated accounted for
approximately 13% of consolidated net sales during fiscal 2013, 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
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. 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.
17
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
18
ITEM 2. PROPERTIES
Our headquarters are located in High Point, North Carolina. As of the end of fiscal 2013, we owned or
leased fourteen 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 (1)
• Mattress Fabrics:
Stokesdale, North Carolina
Stokesdale, North Carolina
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
Shanghai, China
Shanghai, China
Poznan, Poland (2)
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 offices
Manufacturing and warehousing
Manufacturing and warehousing
Warehouse and office
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
29,812
2025
230,000
Owned
56,950
63,522
65,886
202,500
99,000
132,000
69,000
89,861
89,861
101,632
12,917
16,146
26,160
2017
-
2014
Owned
Owned
2016
2015
2016
2017
2013
2013
2014
-
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. 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 the 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 plain 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 have exceeded
$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 asserted 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 defended
ourselves vigorously with regards to the matters described in this litigation. 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.
In the first quarter of fiscal 2014, the parties to this lawsuit reached a tentative settlement of all matters,
which would involve the company contributing cash to a global settlement fund in an amount that is not
material to our operating results or financial condition. As of the date of this report, the settlement
remains subject to final agreement by the parties, as well as governmental review procedures and
approval by the court.
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 28, 2013, Culp, Inc. had approximately 2,530 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 – James Fronda
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)
-
$2,000,000
Period
January 28, 2013 to
March 3, 2013
March 4, 2013
March 31, 2013
to
-
$ -
-
$2,000,000
April 1, 2013 to April
28, 2013
-
$ -
-
$2,000,000
Total
-
$ -
-
$2,000,000
(1) 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, and this authorization was reached through common stock
repurchases through September 2, 2012. On August, 29, 2012, we announced that our board of directors
approved a new authorization for us to acquire up to $2.0 million of our common stock.
21
Dividends
On June 13, 2012, we announced that our board of directors approved the payment of a cash dividend of
$0.03 per share in the first quarter of fiscal 2013, representing the first cash dividend on our common
stock since January of 2001. These dividend payments of $0.03 per share continued each quarter for the
remainder of fiscal 2013. On November 27, 2012, we announced that our board of directors approved the
payment of a special cash dividend of $0.50 per share, which was paid on December 28, 2012.
During fiscal 2013, dividend payments totaled $7.6 million, of which $6.1 million represented the special
cash dividend payment of $0.50 per share, and $1.5 million represented the quarterly dividend payments
of $0.03 per share, respectively.
One June 12, 2013, we announced that our board of directors approved a 33% increase in payment of a
quarterly cash dividend from $0.03 to $0.04 per share, commencing the first quarter of fiscal 2014. The
dividend will be paid on July 15, 2013, to shareholders of record as of the close of business on July 1,
2013. Future dividend payments are subject to Board approval and may be adjusted at the Board’s
discretion as business needs or market conditions change.
We did not pay any cash dividends during fiscal 2012 and 2011.
Sales of Unregistered Securties
There were no sales of unregistered securities during fiscal 2013, 2012, or 2011.
22
Performance Comparison
The following graph shows changes over the five fiscal years ending April 28, 2013 in the value of $100
invested in (1) the common stock of the company, (2) the Hemscott Textile Manufacturing Group Index
reported by Standard and Poor’s, consisting of nine 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 2008 and the reinvestment of all
dividends during the periods identified.
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, except per share, ratios & other, stock data)
INCOME (LOSS) STATEMENT DATA
net sales
cost of sales
gross profit
selling, general, and administrative expenses
restructuring expense (credit)
income (loss) from operations
interest expense
interest income
other expense
income (loss) before income taxes
income taxes
net income (loss)
depreciation (5)
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
2013
fiscal
2012
fiscal
2011
fiscal
2010
fiscal
2009
percent
change
2013/2012
%
5.6
2.1
24.7
13.7
-
43.4
(19.0)
(17.5)
147.0
42.9
118.6
37.8
5.1
(3.7)
(3.2)
43.1
42.4
11.7
28.2
%
(2.2)
(0.0)
(24.7)
(28.5)
7.4
7.1
$
$
$
$
$
$
$
268,814
219,284
49,530
28,445
-
254,443
214,711
39,732
25,026
-
21,085
14,706
632
(419)
583
20,289
1,972
18,317
5,115
12,235
12,450
1.50
1.47
7.82
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
39,228
30,594
30,596
31,279
23,921
30,296
22,979
28,403
144,706
144,716
130,051
112,598
4,457
7,161
95,583
72,699
5,919
10,012
89,000
67,887
18.4%
7.8%
6.8%
9.7%
9.9%
7.4
31
5.9
18.15
9.00
16.25
12
6
40.9
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
(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) Includes accelerated depreciation of $2.1 in fiscal 2009 from the company's restructuring activities.
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 2013, 2012
and 2011 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 furniture manufacturers.
We evaluate the operating performance of our segments based upon income from operations before
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 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 a non-compete
agreement associated with an acquisition. The upholstery fabrics segment also includes assets held for
sale in segment assets.
Executive Summary
Results of Operations
Net sales were $268.8 million in fiscal 2013, an increase of 5.6%, compared with $254.4 million for fiscal
2012. The higher sales in fiscal 2013 primarily reflect improved demand and favorable customer response
to our innovative designs and our diverse product line. Our global manufacturing platform has enhanced
our ability to develop new products and meet the changing style demands of our customers. Net sales
were $70.4 million in the fourth quarter of fiscal 2013, a decrease of 7%, compared with $75.7 million in
the fourth quarter of fiscal 2012. This decrease is due to an exceptionally strong fourth quarter in fiscal
2012, as the $75.7 million reported in the fourth quarter of fiscal 2012 was the highest quarterly net sales
level in nine years.
Income before income taxes was $20.3 million in fiscal 2013, an increase of 43% compared with
$14.2 million in fiscal 2012. Our increase in income before income taxes primarily reflects the increase in
net sales noted above, as well as improved product mix reflecting a shift toward higher margin products,
and stabilizing raw material costs in both business segments.
We reported net income of $18.3 million, or $1.47 per diluted share, in fiscal 2013 compared with net
income of $13.3 million, or $1.03 per diluted share, in fiscal 2012. Net income for fiscal 2013 and 2012
included income tax expense of $2.0 million and $902,000, respectively. The income tax expense of $2.0
million included a $12.1 income tax benefit that was mostly recorded in the second quarter of fiscal 2013
to reverse substantially all of the valuation allowance against our U.S. net deferred tax assets, partially
offset by an income tax charge of $7.0 million that was primarily recorded in the second quarter of fiscal
2013 to record the U.S. income tax effects of the undistributed earnings from our foreign subsidiaries
located in Canada and China. The income tax expense of $902,000 in fiscal 2012 includes an income tax
benefit of $3.7 million for the reduction of our valuation allowance against our U.S. net deferred tax
assets.
25
Liqudity
We have maintained a strong financial position during fiscal 2013. Our cash and cash equivalents and
short-term investments totaled $28.8 million at April 28, 2013, compared with $31.0 million at
April 29, 2012. We have maintained this position despite spending of $7.6 million for dividend payments,
$5.0 million for common stock repurchases, $4.4 million for capital expenditures, and $2.5 million for
long-term debt principal payments. This spending was significantly offset by net cash provided by
operating activities of $17.1 million
At April 28, 2013, our cash and cash equivalents and short-term investments of $28.8 million exceeded
our total debt (current maturities of long-term debt, long-term debt, and line of credit) of $7.2 million.
Our next scheduled principal payment of $2.2 million on long-term debt is due August 2013.
Dividend Program
On June 13, 2012, we announced that our board of directors approved the payment of a cash dividend of
$0.03 per share in the first quarter of fiscal 2013, representing the first cash dividend on our common
stock since January 2001. These dividend payments of $0.03 per share continued each quarter for the
remainder of fiscal 2013. On November 27, 2012, we announced that our board of directors approved the
payment of a special cash dividend of $0.50 per share, which was paid on December 28, 2012.
During fiscal 2013, dividend payments totaled $7.6 million, of which $6.1 million represented the special
cash dividend payment of $0.50 per share, and $1.5 million represented the quarterly dividend payments
of $0.03 per share, respectively.
One June 12, 2013, we announced that our board of directors approved a 33% increase in payment of
a quarterly cash dividend from $0.03 to $0.04 per share, commencing the first quarter of fiscal
2014. The dividend will be paid on July 15, 2013, to shareholders of record as of the close of business
on July 1, 2013.
Future dividend payments are subject to Board approval and may be adjusted at the Board’s discretion as
business needs or market conditions change.
Common Stock Repurchases
On June 13, 2012, we announced that our board of directors approved a new authorization to acquire up
to $5.0 million of our common stock. This action replaced prior authorizations to acquire up to
$7.0 million of our common stock in fiscal 2012, of which $5.4 million had been used during fiscal 2012.
On August 29, 2012, we announced that our board of directors approved a new authorization to acquire
up to $2.0 million of our common stock.
During fiscal 2013, we purchased 502,595 shares of common stock at a cost of $5.0 million, and as a
result, we reached the $5.0 million limit that was authorized on June 13, 2012. As of April 28, 2013,
there had been no repurchases of common stock on the $2.0 million limit that was authorized on
August 29, 2012.
Since the common stock repurchase program was implemented in fiscal 2012, we have repurchased
1.1 million shares of common stock at a cost of $10.4 million.
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
Income from operations
Interest expense, net
Other expense
Income before income taxes
Income taxes *
Net income
Fiscal Fiscal
2012
100.0%
84.4
15.6
9.8
0.0
5.8
0.1
0.1
5.6
6.4
5.2%
2013
100.0%
81.6
18.4
10.6
0.0
7.8
0.0
0.2
7.5
9.7
6.8%
Fiscal
2011
100.0%
83.0
17.0
9.7
0.0
7.3
0.3
0.0
6.9
(7.3)
7.5%
* 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 28, 2013, April 29, 2012, and May 1, 2011.
27
CULP, INC.
STATEMENTS OF OPERATIONS BY SEGMENT
FOR THE TWELVE MONTHS ENDED APRIL 28, 2013 AND APRIL 29, 2012
(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
Selling, General and Administrative Expenses
Operating Income (loss) by Segment
Mattress Fabrics
Upholstery Fabrics
Unallocated corporate expenses
Subtotal
Other non-recurring charges
Operating Income
Depreciation expense by Segment
Mattress Fabrics
Upholstery Fabrics
Depreciation expense
Notes:
$
$
$
$
$
$
$
TWELVE MONTHS ENDED
Amounts
April 28,
2013
154,014
114,800
268,814
April 29,
2012
145,519
108,924
254,443
Percent of Total Sales
% Over
(Under)
April 28,
2013
April 29,
2012
5.8 %
5.4 %
5.6 %
57.3 %
42.7 %
57.2 %
42.8 %
100.0 %
100.0 %
Gross Profit Margin
29,546
19,984
49,530
-
49,530
9,646
13,031
5,768
28,445
19,900
6,953
(5,768)
21,085
-
21,085
4,487
628
5,115
24,825
14,984
39,809
19.0 %
33.4 %
24.4 %
(77)
(1)
(100.0) %
39,732
24.7 %
19.2 %
17.4 %
18.4 %
0.0 %
18.4 %
Percent of Sales
17.1 %
13.8 %
15.6 %
(0.0) %
15.6 %
6.2 %
10.5 %
1.8 %
9.8 %
6.3 %
11.4 %
2.1 %
10.6 %
Operating Income (Loss) Margin
12.9 %
6.1 %
(2.1) %
7.8 %
0.0 %
7.8 %
10.8 %
3.2 %
(1.8) %
5.8 %
(0.0) %
5.8 %
9,061
11,453
4,512
25,026
15,764
3,531
(4,512)
14,783
6.5 %
13.8 %
27.8 %
13.7 %
26.2 %
96.9 %
27.8 %
42.6 %
(77)
(1)
(100.0) %
14,706
43.4 %
4,275
590
4,865
5.0 %
6.4 %
5.1 %
(1) The $77 represents employee termination benefits associated with our Anderson, SC plant facility.
28
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:
$
$
$
$
$
$
$
Amounts
April 29,
2012
145,519
108,924
254,443
TWELVE MONTHS ENDED
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 %
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 %
(77) (1)
-
100.0 %
39,732
36,840
7.9 %
17.1 %
13.8 %
15.6 %
(0.0) %
15.6 %
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 %
19.0 %
14.4 %
17.0 %
0.0 %
17.0 %
6.4 %
9.8 %
1.8 %
9.7 %
9,061
11,453
4,512
25,026
15,764
3,531
(4,512)
14,783
15,373
4,359
(3,961)
15,771
2.5 %
(19.0) %
13.9 %
(6.3) %
(77) (1)
(28) (2)
175.0 %
14,706
15,743
(6.6) %
4,275
590
4,865
3,820
552
4,372
11.9 %
6.9 %
11.3 %
Operating Income (Loss) Margin
10.8 %
3.2 %
(1.8) %
5.8 %
(0.0) %
5.8 %
12.6 %
4.6 %
(1.8) %
7.3 %
(0.0) %
7.3 %
(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 segmen
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
29
2013 compared with 2012
Segment Analysis
Mattress Fabrics Segment
Net Sales
Net sales were $154.0 million for fiscal 2013, an increase of 6% compared with $145.5 million for fiscal
2012. The $154.0 million in net sales represents the highest annual net sales in this segment’s history.
These results reflect our focus on product innovation and our ability to respond to the needs of our
customers and changing demands. 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. We are well positioned to meet this growing consumer demand with a manufacturing
platform and flexible capacity that can produce a diverse line of products. This product diversity, along
with our design capabilities, has created additional sales opportunities with customers who are leading
suppliers in the bedding industry. In addition, we have the ability to leverage our design capabilities and
expertise in the upholstery fabric business to enhance our product offering, as more upholstery type
fabrics are being used in bedding products.
Net sales were $40.8 million in the fourth quarter of fiscal 2013, a decrease of 6% compared with $43.4
million in the fourth quarter of fiscal 2012. As expected, our net sales for the fourth quarter were lower
than the same period last year. However, our net sales were in line with industry demand, which was
exceptionally strong a year ago.
Sales and Marketing Initiatives
Joint Product, Sales and Marketing Agreement
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 formed a new business named Culp-Lava
Applied Sewn Solutions (CLASS) and has provided us an opportunity to enter the business of designing,
producing, and marketing sewn mattress covers. As a result, we are able to leverage our design
capabilities and expand our product offerings from mattress fabrics to finished covers. In connection with
this agreement, Lava is providing us with technical assistance and know-how for the start-up of the
business and is working with us on the design, sales and marketing of sewn mattress covers.
Pursuant to the agreement, the new business will be fully funded and 100% owned by us. We have
established a manufacturing facility located in Stokesdale, North Carolina, that is adjacent to our mattress
fabric headquarters, providing favorable operating synergies with management and production in the
same location. As a result, we will have two mirrored manufacturing facilities to serve our customer base
and meet current and expected demand trends in the bedding industry. We have responsibility for all
operating control of the new business, including capital expenditures and production and operating costs.
Our capital investment in this facility was $751,000 in fiscal 2013 and is projected to be approximately
$300,000 for fiscal 2014. Lava is not required to invest capital into CLASS.
During the second quarter of fiscal 2013, we completed the initial equipment installation and conducted
training for the start-up associates in this location. We commenced production in November 2012, and we
currently expect to incrementally add more capacity for this product category to meet anticipated demand.
30
Bodet & Horst
On May 8, 2013, we entered into an asset purchase and consulting agreement with Bodet & Horst GMBH
& Co. KG and certain of its affiliates (“Bodet & Horst”) that provides for, among other things, the
purchase of equipment and certain other assets from Bodet & Horst and the restructuring of existing
consulting and non-compete agreements pursuant to the asset purchase and consulting agreement dated
August 11, 2008. We have agreed with Bodet & Horst to replace the existing non-compete agreement
that prevented us from selling certain mattress fabrics and products to a leading manufacturer, which will
now allow us to make such sales. In addition, the current consulting and non-compete agreement, under
which Bodet & Horst agreed not to sell most mattress fabrics in North America, is replaced, expanded,
and extended pursuant to the new asset purchase and consulting agreement.
Gross Profit and Operating Income
Gross profit was $29.5 million in fiscal 2013, an increase of 19% compared with $24.8 million in fiscal
2012. Gross profit margins were 19% and 17% of net sales for fiscal 2013 and 2012, respectively. SG&A
expenses for fiscal 2013 were $9.6 million compared with $9.1 million for fiscal 2012. Operating income
was $19.9 million in fiscal 2013, an increase of 26% compared with $15.8 million in fiscal 2012.
Operating margins were 13% and 11% of net sales for fiscal 2013 and 2012, respectively.
Our increase in profitability represents higher sales volume, a more favorable product mix, operating
efficiencies from our manufacturing platform, and the recent stabilization of raw material costs. In order
to sustain our operating efficiencies from our manufacturing platform, we have worked diligently to take
advantage of the newest technologies available and have continued to modernize our equipment. We have
also continued to merchandise new products with alternate sources of yarns and raw materials without
compromising quality and value for our customers. Our improved profit margins were achieved despite
increased selling, general, and administrative expenses (SG&A) due to higher incentive compensation
expense, reflecting stronger financial results in relation to pre-established performance targets.
Gross profit was $7.8 million in the fourth quarter of fiscal 2013, or 19% of net sales, compared with
$8.6 million, or 20% of net sales, in the fourth quarter of fiscal 2012. Operating income was $5.4 million
in the fourth quarter of fiscal 2013, compared with $5.7 million in the fourth quarter fiscal 2012.
Operating margins were 13% of net sales for the fourth quarter fiscal 2013 and 2012, respectively. As
expected, our profitability for the fourth quarter was lower than the same period last year. However, our
profitability was in line with industry demand, which was exceptionally strong a year ago.
SG&A was $2.4 million in the fourth quarter of fiscal 2013, or 6% of net sales, compared with
$3.0 million or 7% in the fourth quarter of fiscal 2012. As expected, our SG&A for the fourth quarter was
lower than the same period last year, as a larger portion of the incentive compensation expense was
incurred during the first nine months of fiscal 2013 than in fiscal 2012, in which most of the incentive
compensation was incurred during the last six months of the fiscal year.
31
Segment Assets
Segment assets consist of accounts receivable, inventory, assets held for sale, a non-compete agreement
associated with an acquisition, goodwill, and property, plant and equipment. As of April 28, 2013,
accounts receivable and inventory totaled $33.3 million, compared to $29.9 million at April 29, 2012.
This increase primarily represents an increase in this business segment's inventory of $2.8 million during
the year. The increase in inventory on hand reflects anticipated customer demand trends in the first
quarter of fiscal 2014 and the start-up for our CLASS operation associated with our mattress fabrics
segment.
At April 28, 2013, and April 29, 2012, property, plant and equipment totaled $28.6 million and
$29.2 million, respectively. The $28.6 million represents property, plant, and equipment located in the
U.S. of $20.4 million and located in Canada of $8.2 million. 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 decrease in
this segment’s property, plant, and equipment balance, is primarily due to fiscal 2013 capital spending of
$3.8 million offset by depreciation expense of $4.4 million. At April 28, 2013, and April 29, 2012, the
carrying value of the segment’s goodwill was $11.5 million. At April 28, 2013, and April 29, 2012, the
carrying values of our non-compete agreement were $185,000 and $333,000, respectively. The decrease
in the carrying values of the non-compete agreements during fiscal 2013 primarily represents
amortization expense. At April 28, 2013, there were no assets classified as held for sale. At April 29,
2012, 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 $114.8 million in fiscal
2013, an increase of 5% compared with $108.9 million in fiscal 2012. The increase in net sales reflects
improved demand, a positive customer response to our innovative designs, and new product introductions
for key customers. Our design capabilities and capacity to offer innovative products at key price points
has been an important advantage for us in expanding our sales in the global marketplace.
Our 100% owned China operations continued to drive the growth of our non-U.S. produced sales, which
accounted for 89% and 88% of our total upholstery fabric sales for fiscal 2013 and 2012, respectively.
With our China platform, we are well positioned to provide our growing global customer base with a wide
variety of innovative products at key price points.
Net sales of U.S.-produced upholstery fabrics were $12.7 million or 11% of total upholstery fabric net
sales in fiscal 2013, compared with $13.4 million or 12% of total upholstery fabric net sales in fiscal
2012.
Upholstery fabric net sales were $29.5 million in the fourth quarter of fiscal 2013, a decrease of 9%
compared with $32.3 million in the fourth quarter of fiscal 2012. The decrease in the fourth quarter of
fiscal 2013 compared to the same period last year is primarily due to the timing of the Chinese New Year
holiday, which occurred entirely in the fourth quarter of fiscal 2013 compared with occurring mostly in
the third quarter of fiscal 2012, as well as somewhat lower overall industry demand.
Gross Profit and Operating Income
Gross profit was $20.0 million in fiscal 2013, an increase of 33% compared with $15.0 million in fiscal
2012. Gross profit margins were 17.4% and 13.8% of net sales for fiscal 2013 and 2012, respectively.
SG&A expenses were $13.0 million, or 11.4% of net sales in fiscal 2013 compared with $11.5 million, or
10.5% in fiscal 2012. Operating income was $7.0 million in fiscal 2013, an increase of 97% compared
with $3.5 million in fiscal 2012. Operating margins were 6.1% and 3.2% of net sales for fiscal 2013 and
2012, respectively.
32
Our increase in profitability represents higher sales volume, improved operating efficiencies from both
our China and domestic manufacturing operation, improved operating margins on new products, and the
recent stabilization of raw material costs. The higher profitability in fiscal 2013 compared with fiscal
2012 was achieved despite increased SG&A expenses due to an increase in incentive compensation
expense, reflecting stronger financial results in relation to pre-established financial targets.
As noted above, we experienced a slight decline in net sales of our U.S.-produced upholstery fabrics with
net sales totaling $12.7 million in fiscal 2013 compared with $13.4 million in fiscal 2012. However, we
experienced significant profit improvement for this operation, with gross profit totaling $1.7 million in
fiscal 2013 compared with $129,000 in fiscal 2012. As a result of our efforts to improve productivity, we
have a much more efficient operation with higher capacity utilization than a year ago. In addition, raw
material costs have stabilized compared to last year. However, looking ahead we continue to face a
challenging market in upholstery fabrics and a number of factors could adversely affect our ability to
sustain this performance in the U.S. operations in fiscal 2014.
In the third quarter of fiscal 2011, we established a wholly-owned subsidiary located in Poland, which is
called Culp Europe. During the last two fiscal years, we have continued our efforts to develop this
operation. However, the ongoing uncertainties related to the European economy have adversely affected
this business. While this is creating challenges for the near term, we remain optimistic about the future
opportunities for Culp Europe to enhance our global sales as business conditions improve.
Gross profit for the upholstery fabric segment was $5.0 million in the fourth quarter of fiscal 2013, or
17% of net sales, compared with $5.0 million, or 15.6% of net sales, in the fourth quarter of fiscal 2012.
Operating income was $1.8 million in the fourth quarter of fiscal 2013 and 2012, respectively. Operating
margins were 6.2% and 5.5% of net sales for the fourth quarter fiscal 2013 and 2012, respectively. We are
pleased with the profitability reported in the fourth quarter of fiscal 2013 compared to the same period
last year, despite the decline in net sales for the fourth quarter of fiscal 2013 compared to fiscal 2012.
This trend reflects improved operating efficiencies from our China and domestic manufacturing
operations, improved operating margins on new products, and the recent stabilization of raw material
costs.
Segment Assets
Segment assets consist of accounts receivable, inventory, and property, plant and equipment. As of April
28, 2013, and April 29, 2012, accounts receivable and inventory totaled $28.5 million and $31.5 million,
respectively. This change reflects the net sales decrease in the fourth quarter of fiscal 2013 compared with
the fourth quarter of 2012 noted above.
At April 28, 2013, property, plant, and equipment totaled $1.2 million compared with $1.1 million at
April 29, 2012. The $1.2 million represents property, plant, and equipment located in the U.S. of
$908,000, located in China of $265,000, and located in Poland of $57,000.
The $1.1 million 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.
Other Income Statement Categories
Selling, General and Administrative Expenses – SG&A expenses for the company as a whole were
$28.4 million for fiscal 2013 compared with $25.0 million for fiscal 2012, an increase of 14%. SG&A as
a percent of net sales was 10.6% and 9.8% in fiscal 2013 and 2012, respectively. This increase in SG&A
primarily represents an increase in incentive compensation expense reflecting stronger financial results in
relation to pre-established performance targets in fiscal 2013 compared with fiscal 2012.
33
Interest Expense (Income) -- Interest expense was $632,000 for fiscal 2013 compared with $780,000 for
fiscal 2012. This trend reflects lower outstanding balances on our long-term debt.
Interest income was $419,000 in fiscal 2013 compared with $508,000 for fiscal 2012. This decrease
reflects lower cash and cash equivalents and short-term investment balances held by our foreign
subsidiaries during fiscal 2013 compared with fiscal 2012. Our cash and cash equivalents and short-term
investment balances held by our foreign subsidiaries have higher interest rates as compared to our cash
and cash equivalents and short-term investment balances held in the United States.
Other Expense – Other expense was $583,000 for fiscal 2013 compared with $236,000 for fiscal 2012.
This increase primarily reflects fluctuations in the foreign exchange rate for our subsidiaries domiciled in
China. We have been able to mitigate the effects of foreign exchange rate fluctuations associated with our
subsidiaries domiciled in Canada and Poland through maintenance of a natural hedge by keeping in
balance of assets and liabilities denominated in foreign currencies other than the U.S dollar. 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
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 $2.0 million, or 9.7% of income before income tax expense, in fiscal
2013 compared with income tax expense of $902,000, or 6.4% of income before income tax expense, in
fiscal 2012. The income tax expense for fiscal 2013 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 60% or $12.1 million for a reduction in the valuation
allowance associated with our U.S. net deferred income tax assets. This 60% reduction in our
effective income tax rate is due to a change in judgment about the realization of our U.S. net
deferred income tax assets in future years.
• The income tax rate increased 35% or $7.0 million for the recording of a deferred tax liability for
U.S. income taxes that will be paid upon repatriation of undistributed earnings from our foreign
subsidiaries located in Canada and China. This 35% increase in our effective income tax rate is
due to a change in judgment in which our prior years' accumulated earnings and profits associated
with our subsidiaries located in Canada and China are no longer indefinitely reinvested.
• 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 increased 4% for an increase in unrecognized tax benefits.
• The income tax rate increased 3.7% for non-deductible stock-based compensation expense and
other miscellaneous items.
34
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.
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 our
assessment at April 28, 2013, we recorded a partial valuation allowance of $963,000, of which
$722,000 pertained to certain U.S. state net operating loss carryforwards and credits and $241,000
pertained to loss carryforwards associated with our Culp Europe operation located in Poland. Based
on our assessment at April 29, 2012, we recorded a partial valuation allowance of $12.8 million
against our net deferred tax assets associated with our U.S. operations.
No valuation allowance was recorded against our net deferred tax assets associated with our
operations located in China and Canada at April 28, 2013 and April 29, 2012, respectively.
United States
Our net deferred tax asset regarding our U.S. operations primarily pertains to incurring significant
U.S. pre-tax losses over the last several years, with U.S. loss carryforwards totaling $50.7 million,
$59.9 million, and $60.0 million at April 28, 2013, 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 reflected 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.
35
Although the financial results of our U.S. operations had 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
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 increase in cumulative pre-tax income 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 was difficult.
Since it would have taken a significant period of time for our U.S. operations to realize their U.S. net
deferred income tax assets based on earned and forecasted U.S. pre-tax income levels, we believed 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 as of end of our second quarter of fiscal
2012.
These trends continued through the fourth quarter of fiscal 2012 and, as a result, we maintained our
position that we could only forecast U.S. taxable income through fiscal 2014. Our mattress fabric
operations had net sales that totaled $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 the 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 were 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.
36
Fiscal 2013
The improvement in our U.S. operations’ financial results continued through the second quarter of
fiscal 2013. Our U.S. operations earned a pre-tax income on a cumulative three-year basis as of April
29, 2012 (the end of our fiscal 2012) of $11.9 million and an additional $3.4 million through the
second quarter of fiscal 2013.
This continued earnings improvement from our U.S. operations was primarily due to the operating
performance of our mattress fabric operations. Through the second quarter of fiscal 2013, our
mattress fabric operations had net sales that totaled $77.7 million, an increase of 15% compared with
$67.4 million through the second quarter of fiscal 2012. In addition, our mattress fabric operations
reported operating income of $10.3 million through the second quarter of fiscal 2013, an increase of
49% compared with $7.0 million through the second quarter of fiscal 2012. These improved results
through the second quarter of fiscal 2013, which were better than expected, can be attributed to the
recent evolution of the bedding industry into a more decorative business with growing consumer
demand for better bedding and a higher quality mattress fabric, and the recent stabilization of raw
material prices.
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign
subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC
Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from
foreign subsidiaries that will not be reinvested indefinitely. Prior to the second quarter of fiscal 2013,
it was management’s intention to indefinitely reinvest all of our undistributed foreign earnings.
Accordingly, no deferred tax liability had been recorded in connection with the future repatriation of
these earnings.
During the second quarter of fiscal 2013, we assessed the financial requirements of our U.S. parent
company and foreign subsidiaries and determined that our undistributed earnings from our foreign
subsidiaries totaling $55.6 million will not be reinvested indefinitely and will be eventually
distributed to our U.S. parent company. The financial requirements of the U.S. parent company have
recently changed due to a decision to return cash to its shareholders through dividend payments and
common stock repurchases. Also, in order to keep up with the recent growth in consumer demand for
better bedding and a higher quality mattress fabric, it is our intention to continue our investment in
our domestic mattress fabric operations. As a result of this assessment, we recorded a deferred tax
liability and corresponding income tax charge of $6.6 million during the second quarter of fiscal 2013
and an additional $400,000 in the last half of fiscal 2013.
At April 28, 2013, we had accumulated earnings and profits from our foreign subsidiaries totaling
$56.7 million. At the same date, the deferred tax liability associated with our undistributed earnings
from our foreign subsidiaries included U.S. income and foreign withholding taxes totaling
$22.0 million, offset by U.S. foreign income tax credits of $15.0 million.
Based on the positive evidence at the end of our second quarter of fiscal 2013, as supported by our
cumulative earnings history, current and expected earnings improvement driven by our U.S. mattress
fabric operations, and the significant source of U.S. taxable income from the undistributed earnings of
our foreign subsidiaries, we recorded an income tax benefit of $12.2 million to reverse substantially
all of the valuation allowance against our U.S. net deferred tax assets. In the third quarter of
fiscal 2013, we recorded an income tax charge of $103,000, due to a change in our second quarter
estimate of the recoverability of our U.S. state net loss operating carryforwards.
37
After this valuation allowance reversal of $12.1 million, we have a remaining valuation allowance
against our U.S. net deferred tax assets totaling $722,000 as of April 28, 2013. This valuation
allowance pertains to certain U.S. state net operating loss carryforwards and credits in which it is
“more likely than not” that these U.S. state net operating loss carryforwards and credits will not be
realized prior to their respective expiration dates.
Poland
During the third quarter of fiscal 2011, we established Culp Europe, a wholly-owned subsidiary
located in Poland. Due to the initial start up costs of setting up this operation and the current state of
the European economy, this operation had recorded cumulative pre-tax losses through the second
quarter of fiscal 2013.
Based on the negative evidence, as supported by our cumulative loss history and the short
carryforward period of 5 years imposed by the Polish government, we recorded a full valuation
allowance against Culp Europe’s net deferred tax assets as of the end of the second quarter of fiscal
2013. As of April 28, 2013, we recorded an income tax charge and a full valuation allowance against
Culp Europe’s net deferred tax assets totaling $241,000.
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 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 2013, we recorded an income tax benefit of $11.8 million for the reduction of our valuation
allowance. This $11.8 million decrease represents a $12.1 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 $241,000 for the establishment of a full valuation allowance against our net
deferred tax assets associated with our Culp Europe operations located in Poland.
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.
38
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.
Income Taxes Paid
Although we reported income tax expense of $2.0 million and $902,000 in fiscal 2013 and 2012,
respectively, we pay income taxes associated with our subsidiaries in China and Canada. We had
income tax payments of $2.8 million and $2.4 million in fiscal 2013 and fiscal 2012, respectively.
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. 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 benefited from investments in production facilities that expanded our internal
capacity. During fiscal 2012, the bedding industry started to evolve 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 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, 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 also reflected price increases we
implemented starting in the fourth quarter of fiscal 2011 to partially offset the increased raw material
costs noted below.
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 11% and 13% 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 reflected 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.
39
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 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. This increase in net sales reflected improved industry demand and
customer response to our designs and new product introductions. In addition, the increase reflected price
increases we implemented starting in the fourth quarter of fiscal 2011 to partially offset increased raw
material costs.
Our increase in net sales was primarily driven by growth of our China operations, as this platform 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. Net sales of upholstery
fabric produced outside our U.S. manufacturing operations were 88% of total upholstery fabric net sales
in fiscal 2012 compared with 86% in fiscal 2011. Net sales of upholstery fabrics produced outside our
U.S. manufacturing operations were $95.5 million in fiscal 2012 compared with $81.2 million in fiscal
2011.
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.
Although net sales remained relatively flat in fiscal 2012 compared with fiscal 2011, we were 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. 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.
40
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 that
reflected stronger financial results in relation to pre-established performance targets.
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. This change reflects the net sales increase in the fourth quarter of fiscal 2012
noted above. 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 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 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 pertained to start-up expenses associated with our Culp Europe operations that did not
significantly occur until fiscal 2012 and increased incentive compensation expense, which reflected
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.
41
Interest Expense (Income) -- Interest expense was $780,000 for fiscal 2012 compared with $881,000 for
fiscal 2011. This trend reflected 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 was 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 reflected fluctuations in the foreign exchange rate for our subsidiaries domiciled in Canada,
China, and Poland.
Income Taxes
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.
42
Handling Costs
The company records warehousing costs in SG&A expenses. These costs were $3.2 million, $2.6
million, and $2.4 million in fiscal 2013, 2012, and 2011, 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 $46.3 million or 17.2% of net sales, in fiscal 2013, $37.1 million,
or 14.6% of net sales, in fiscal 2012, and $34.4 million, or 15.9% of net sales, in fiscal 2011.
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, capital expenditures, debt payments, common stock repurchases, and
dividend payments. We believe our present cash and cash equivalents and short-term investment balance
of $28.8 million at April 28, 2013, cash flow from operations, and current availability under our
unsecured revolving credit lines will be sufficient to fund our business needs and our contractual
obligations (see commitments table below).
We have maintained a strong financial position during fiscal 2013. Our cash and cash equivalents
and short-term investments totaled $28.8 million at April 28, 2013, compared with $31.0 million at
April 29, 2012. We have maintained this position despite spending of $7.6 million for dividend payments,
$5.0 million for common stock repurchases, $4.4 million for capital expenditures, and $2.5 million for
long-term debt principal payments. This spending was significantly offset by net cash provided by
operating activities of $17.1 million, as compared to $12.0 million in fiscal 2012.
At April 28, 2013, our cash and cash equivalents and short-term investments of $28.8 million exceeded
our total debt (current maturities of long-term debt, long-term debt, and line of credit) of $7.2 million.
Our next scheduled principal payment of $2.2 million on long-term debt is due August 2013. We are
currently planning for capital expenditures of $7.2 million in fiscal 2014, which primarily pertain to our
mattress fabrics segment.
Our cash and cash equivalents and short-term investments may be adversely affected by factors beyond
our control, such as weakening industry demand and delays in receipt of payments on accounts
receivable.
Dividend Program
On June 13, 2012, we announced that our board of directors approved the payment of a cash dividend of
$0.03 per share in the first quarter of fiscal 2013, representing the first cash dividend on our common
stock since January of 2001. These dividend payments of $0.03 per share continued each quarter for the
remainder of fiscal 2013. On November 27, 2012, we announced that our board of directors approved the
payment of a special cash dividend of $0.50 per share, which was paid on December 28, 2012.
During fiscal 2013, dividend payments totaled $7.6 million, of which $6.1 million represented the special
cash dividend payment of $0.50 per share, and $1.5 million represented the quarterly dividend payments
of $0.03 per share, respectively.
43
One June 12, 2013, we announced that our board of directors approved a 33% increase in payment of a
quarterly cash dividend from $0.03 to $0.04 per share, commencing the first quarter of fiscal 2014. The
dividend will be paid on July 15, 2013, to shareholders of record as of the close of business on July 1,
2013. Future dividend payments are subject to Board approval and may be adjusted at the Board’s
discretion as business needs or market conditions change.
Common Stock Repurchases
On June 13, 2012, we announced that our board of directors approved a new authorization to acquire up
to $5.0 million of our common stock. This action replaced prior authorizations to acquire up to
$7.0 million of our common stock in fiscal 2012, of which $5.4 million had been used during fiscal 2012.
On August 29, 2012, we announced that our board of directors approved a new authorization to acquire
up to $2.0 million of our common stock. Under the common stock repurchase program, shares may be
purchased from time to time in open market transactions, block trades, through plans established under
the Securities Exchange Act Rule 10b5-1, or otherwise. 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.
During fiscal 2013, we purchased 502,595 shares of common stock at a cost of $5.0 million, and as a
result, we reached the $5.0 million limit that was authorized on June 13, 2012. As of April 28, 2013,
there had been no repurchases of common stock on the $2.0 million limit that was authorized on
August 29, 2012.
Since the common stock repurchase program was implemented in fiscal 2012, we have repurchased
1.1 million shares of common stock at a cost of $10.4 million.
Working Capital
Accounts receivable at April 28, 2013, were $23.4 million, a decrease of 7% compared with $25.1 million
at April 29, 2012. This decrease primarily reflects a decrease in business volume in both our business
segments for the fourth quarter of fiscal 2013 compared with the fourth quarter of fiscal 2012. Net sales in
the fourth quarter of fiscal 2013 and 2012 were $70.4 million and $75.7 million, respectively. Days’ sales
in receivables were 30 days and 29 days during the fourth quarters of fiscal 2013 and 2012, respectively.
Inventories at April 28, 2013 were $38.4 million, an increase of 6% compared with $36.4 million at April
29, 2012. The inventory on hand reflects anticipated customer demand trends in the first quarter of fiscal
2014 and the start-up for our CLASS operation associated with our mattress fabrics segment. Inventory
turns were 5.9 and 6.6 for fiscal 2013 and 2012, respectively.
Accounts payable-trade as of April 28, 2013, were $22.4 million, a decrease of 27% compared with
$30.7 million at April 29, 2012. This decrease primarily reflects timing of vendor payments associated
with our inventory and fixed assets purchases in fiscal 2013 compared with fiscal 2012.
Operating working capital (comprised of accounts receivable and inventories, less accounts payable –
trade and capital expenditures) was $39.2 million at April 28, 2013, compared with $30.6 million at
April 29, 2012. Operating working capital turnover was 7.4 in fiscal 2013 compared to 8.9 in fiscal 2012.
44
Financing Arrangements
Unsecured Term Notes
We entered into a note agreement dated August 11, 2008 that 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 remaining principal
payments are payable over an average term of 2.3 years through August 11, 2015. Any principal
prepayments would be assessed a penalty as defined in the agreement. The agreement contains customary
financial and other covenants as defined in the agreement.
Government of Quebec Loan
We had an agreement with the Government of Quebec for a term loan that was non-interest bearing with
the last monthly payment due on December 1, 2013. This loan was paid in full in the fourth quarter of
fiscal 2013. The proceeds from this loan were used to partially finance capital expenditures at our
Rayonese facility located in Quebec, Canada.
Revolving Credit Agreement –United States
We have an unsecured Amended and Restated Credit Agreement that provides for a revolving loan
commitment of $7.6 million and is set to expire on August 25, 2013. This agreement provides for a
pricing matrix to determine the interest rate payable on loans made under the agreement (applicable
interest rate of 1.8% at April 28, 2013). At April 28, 2013 there was a $195,000 outstanding letter of
credit (all of which related to workers compensation). As of April 29, 2012, there were no outstanding
letters of credit. At April 28, 2013 and April 29, 2012, there were no borrowings outstanding under the
agreement.
We are currently negotiating a renewal of this line of credit and we expect to reach a final agreement
before the expiration date of the current agreement.
Revolving Credit Agreement - China
We have an unsecured credit agreement with our operations in China that provides for a line of credit up
to 40 million RMB (approximately $6.4 million USD at April 28, 2013), expiring on September 2, 2013.
This agreement has an interest rate determined by the Chinese government. There were no borrowings
under this agreement as of April 28, 2013 and April 29, 2012.
On June 8, 2013, we renewed our secured credit agreement associated with our operations in China. The
renewal extended the agreement to June 8, 2014, and provides for a line of credit up to 40 million RMB
(approximately $6.4 million USD).
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 $2.1 million in
USD at April 28, 2013). This agreement bears interest at WIBOR (Warsaw Interbank Offered Rate) plus
2% (applicable interest rate of 5.25% at April 28, 2013). On January 8, 2013, this agreement was
amended to extend the expiration date from January 15, 2013 to August 25, 2013.
At April 28, 2013, $561,000 (1.8 million Polish Zloty) in borrowings were outstanding under this
agreement. At April 29, 2012, $889,000 (2.8 million Polish Zloty) in borrowings were outstanding under
this agreement.
45
We are currently negotiating a renewal of this line of credit and we expect to reach a final agreement
before the expiration date of the current agreement.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. At April 28, 2013, the company was in compliance with these financial covenants.
The principal payment requirements for long-term debt during the next three fiscal years are: 2014 –
$2.2 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):
2014
2015
2016
2017
2018
Thereafter
Total
Capital expenditures
Accounts payable –
capital expenditures
Operating leases
Interest expense (1)
Line of credit
Long-term debt –
principal
Total (2)
$ 170
-
-
225
2,099
441
561
2,200
$ 5,696
-
1,843
264
-
2,200
4,307
-
1,484
88
-
2,200
3,772
-
-
577
-
-
-
577
-
-
52
-
-
-
52
-
-
-
-
-
-
-
170
225
6,055
793
561
6,600
14,404
Note: Payment Obligations by End of Each Fiscal Year
(1) Interest expense includes interest incurred on long-term debt
(2) At April 28, 2013, the company had $13.1 million of total gross unrecognized tax benefits, of which
$8.9 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 $13.1 million in total gross unrecognized
tax benefits, $8.9 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 $4.4 million and $5.9 million for fiscal 2013 and 2012,
respectively. These capital expenditures primarily pertain to our mattress fabrics segment. Depreciation
expense was $5.1 million and $4.9 million for fiscal 2013 and 2012, respectively, and primarily pertained
to our mattress fabrics segment.
46
For fiscal 2014, we are estimating capital expenditures and depreciation expense for the company as a
whole to be $7.2 million and $5.6 million, respectively. The estimated capital expenditures and
depreciation expense primarily relate 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 28, 2013, we had total amounts due regarding capital expenditures totaling $225,000, which
pertain to outstanding vendor invoices, none of which are financed. This amount due of $225,000 is
required to be paid in full during fiscal 2014.
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 furniture and bedding manufacturers. Ownership of these manufacturers is
increasingly concentrated and certain bedding manufacturers have a high degree of leverage. As of April
28, 2013, accounts receivable from furniture manufacturers totaled approximately $10.6 million, and
accounts receivable from bedding manufacturers totaled approximately $12.8 million. Additionally, as of
April 28, 2013, the aggregate accounts receivable balance of the company’s ten largest customers was
$12.7 million, or 54% of trade accounts receivable. No customers within the upholstery fabrics segment
accounted for 10% or more of consolidated accounts receivable as of April 28, 2013. One
customer within the mattress fabrics segment represented 10% of consolidated accounts receivable at
April 28, 2013.
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 $780,000 and $567,000 at April 28, 2013 and April 29,
2012, respectively.
47
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 at April 28, 2013 and April 29, 2012, 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 of $11.5 million at April 28, 2013, relates to the mattress fabrics segment.
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 $963,000 and $12.8 million against our net deferred tax assets at
April 28, 2013 and April 29, 2012, respectively. Our valuation allowance of $963,000 at April 28, 2013,
represents a $722,000 valuation allowance against certain U.S. state net operating loss carryforwards and
credits and a valuation allowance of $241,000 against our loss carryforwards associated with our Culp
Europe operation located in Poland. Our valuation of $12.8 million at April 29, 2012, was against our net
deferred tax assets associated with our U.S. operations.
48
Refer to Note 8 located in the notes to the consolidated statements for disclosures regarding our assessment of
our recorded valuation allowance as of April 28, 2013 and April 29, 2012, 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 28, 2013, we had $13.1 million of total gross unrecognized tax benefits, of which $8.9 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 2013.
Recently Issued Accounting Standards
Refer to Note 1 located in the notes to the consolidated statements for recently issued accounting
pronouncements for fiscal 2014.
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 28,
2013, 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 28, 2013, there were
no borrowings outstanding under our U.S. and China revolving credit lines. At April 28, 2013, our
revolving credit line associated with our operation in Europe bears interest rate of WIBOR plus 2% and
had borrowings outstanding of $561,000.
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%.
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 currency of our subsidiaries domiciled in Canada and
Poland, although there is no assurance that we will be able to continually maintain this natural hedge. Our
foreign subsidiaries use the U.S. dollar 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 28, 2013, would not have had a significant impact on our results of
operations or financial position.
49
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Culp, Inc. (a North Carolina
corporation) and Subsidiaries (the “Company”) as of April 28, 2013 and April 29, 2012, and the
related consolidated statements of net income, comprehensive income, shareholders’ equity, and
cash flows for each of the three years in the period ended April 28, 2013. 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 28, 2013 and
April 29, 2012, and the results of their operations and their cash flows for each of the three years
in the period ended April 28, 2013, 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 28, 2013, 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, 2013 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
July 12, 2013
50
CONSOLIDATED BALANCE SHEETS
April 28, 2013 and April 29, 2012 (dollars in thousands, except per share data and common stock shares)
ASSETS
2013
2012
$
$
$
23,530
5,286
23,392
38,418
7,709
-
318
2,093
100,746
30,594
11,462
753
1,151
144,706
2,200
561
22,357
225
11,829
-
285
37,457
4,191
3,075
4,400
49,123
$
$
$
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
-
-
611
41,901
53,017
54
95,583
144,706
$
635
46,056
42,293
16
89,000
144,716
$
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
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 9 and 10)
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 12,224,894 at
April 28, 2013 and 12,702,806 at April 29, 2012
capital contributed in excess of par value
accumulated earnings
accumulated other comprehensive income
total shareholders' equity
total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
51
CONSOLIDATED STATEMENTS OF NET INCOME
For the years ended April 28, 2013, April 29, 2012 and May 1, 2011
(dollars in thousands, except per share data)
2013
2012
2011
net sales
cost of sales
gross profit
selling, general and administrative expenses
restructuring expense
income from operations
interest expense
interest income
other expense, net
income before income taxes
income tax expense (benefit) (note 8)
net income
net income per share-basic
net income per share-diluted
$
$
$
$
268,814
219,284
49,530
28,445
-
21,085
632
(419)
583
20,289
1,972
18,317
$1.50
$1.47
$
$
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
The accompanying notes are an integral part of these consolidated financial statements.
52
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended April 28, 2013, April 29, 2012 and May 1, 2011
Net income
$
18,317
$
13,296
$
16,164
2013
2012
2011
Other comprehensive income (loss)
Loss on cash flow hedges, net of taxes
Unrealized gain on short-term investments, net of taxes
Total other comprehensive income (loss)
-
38
38
-
16
16
(103)
-
(103)
Comprehensive income
$
18,355
$
13,312
$
16,061
The accompanying notes are an integral part of the consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands, except common stock shares)
For the years ended April 28, 2013
April 29, 2012 and May 1, 2011
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
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
dividends paid
balance, April 28, 2013
common
stock
shares
common
stock
amount
capital
contributed
in excess of
par value
Accumulated
earnings
accumulated
other
comprehensive
income
total
shareholders'
equity
$
13,051,785
-
-
-
$
652
-
-
-
$
49,459
-
360
-
$
12,833
16,164
-
-
$
103
-
-
(103)
40,000
(60,415)
-
3,114
229,974
13,264,458
-
-
-
-
(624,127)
3,075
59,400
12,702,806
-
-
-
-
(502,595)
1,658
23,025
-
12,224,894
$
2
(3)
-
-
12
663
-
-
-
-
(31)
-
3
635
-
-
-
(25)
-
1
-
611
(2)
(560)
339
-
1,085
50,681
-
349
-
64
(5,353)
-
315
46,056
-
562
76
(4,997)
-
-
-
-
-
28,997
13,296
-
-
-
-
-
42,293
18,317
-
-
-
-
-
-
-
-
-
-
-
16
-
-
-
16
-
-
38
-
-
-
204
-
41,901
$
$
(7,593)
53,017
$
-
54
$
63,047
16,164
360
(103)
-
(563)
339
-
1,097
80,341
13,296
349
16
64
(5,384)
-
318
89,000
18,317
562
38
76
(5,022)
-
205
(7,593)
95,583
The accompanying notes are an integral part of these consolidated financial statements.
54
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 28, 2013, April 29, 2012 and May 1, 2011
(dollars in thousands)
2013
2012
2011
$
18,317
$
13,296
$
16,164
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 losses (gains)
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 life insurance policies
payments on life insurance policies
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 long-term debt
debt issuance costs
repurchases of common stock
dividends paid
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
(decrease) increase in cash and cash equivalents
5,115
235
562
(76)
(344)
-
-
222
1,667
(1,979)
(49)
(176)
(8,384)
2,531
(40)
(526)
17,075
(4,400)
(105)
795
716
(19)
-
(3,013)
1,000
(1,325)
-
(2,515)
-
(5,022)
(7,593)
205
76
(15,174)
(381)
(1,493)
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
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
cash and cash equivalents at beginning of year
25,023
23,181
cash and cash equivalents at end of year
$
23,530
$
25,023
$
23,181
The accompanying notes are an integral part of these consolidated financial statements.
55
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, 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 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 2013, 2012, and 2011.
Fiscal Year – Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30.
Fiscal 2013, 2012 and 2011 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 $10.2
million and $15.6 million at April 28, 2013 and April 29, 2012, respectively. Our Canadian
subsidiary had cash and cash equivalents of $5.0 million and $5.6 million at April 28, 2013 and
April 29, 2012, respectively. Our Polish subsidiary had cash and cash equivalents of $100,000 and
$158,000 at April 28, 2013 and April 29, 2012, 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.
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 $54,000 and $16,000 at
April 28, 2013 and April 29, 2012, respectively. Our short-term bond funds were recorded at its fair
value of $5.3 million and $5.1 million at April 28, 2013 and April 29, 2012, respectively. The fair
value of this investment approximates its cost basis.
56
Our Chinese subsidiaries did not hold any short-term investments at April 28, 2013. Our Chinese
subsidiaries had short-term investments of $796,000 at April 29, 2012. Our Canadian subsidiary had
short-term investments of $4.2 million and $4.1 million at April 28, 2013 and April 29, 2012,
respectively. Our U.S. operations held short-term investments of $1.0 million at April 28, 2013 and
April 29, 2012, 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 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.
No interest costs were capitalized for the construction of qualifying fixed assets for fiscal 2013 and
2012.
Interest costs of $17,000 for the construction of qualifying fixed assets were capitalized and are
being amortized over the related assets’ estimated useful lives for the fiscal year ended 2011.
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
57
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 monetary foreign currency asset and
liability accounts are remeasured into U.S. dollars at year-end exchange rates. Non-monetary asset
and liabilities such as property, plant, and equipment 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 $10,000, $19,000, and
$24,000 for fiscal 2013, 2012, and 2011, respectively. Our Chinese subsidiaries reported a foreign
currency exchange loss of $158,000 for fiscal 2013. Our Chinese subsidiaries reported a foreign
exchange gain of $320,000 and $222,000 for fiscal 2012 and 2011, respectively. Our Polish
subsidiary reported a foreign exchange loss of $40,000 and $145,000 in fiscal 2013 and 2012,
respectively. Our Polish subsidiary reported a foreign exchange gain of $26,000 in 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 as of April 28, 2013, we determined that our goodwill is not impaired
using a more likely than not standard.
Our goodwill of $11.5 million at April 28, 2013 and April 29, 2012, respectively, relates to our
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.
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.
58
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 $3.2 million, $2.6 million and
$2.4 million in fiscal 2013, 2012, and 2011, 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 11. 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 12.
The carrying amount of cash and cash equivalents, short-term investments, accounts receivable,
other current assets, line of credit, accounts payable and accrued expenses approximates fair value
because of the short maturity of these financial instruments.
Recently Adopted Accounting Pronouncements
ASC Topic 220
In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income – Presentation of
Comprehensive Income.” ASU No. 2011-05 requires comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous statement
of comprehensive income or in two separate but consecutive statements. In both choices, an entity is
required to present each component of net income along with total net income, each component of
other comprehensive income along with a total for other comprehensive income, and a total amount
for comprehensive income. This update eliminates the option to present the components of other
comprehensive income as part of the statement of changes in stockholders’ equity. The amendments
in this update do 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. The amendments in this
update should be applied retrospectively and is effective for interim and annual reporting periods
beginning after December 15, 2011. We adopted this guidance in the first quarter of fiscal 2013. The
adoption of ASU 2011-05 is for presentation purposes only and had no impact on our consolidated
financial statements.
59
In February 2013, the FASB issued accounting guidance related to reporting amounts reclassified
out of accumulated other comprehensive income. The guidance amends the comprehensive income
reporting standards to require items that are reclassified in their entirety to net income from
accumulated other comprehensive income in the same reporting period to be reported separately
from other amounts in other comprehensive income. These amounts may be disclosed on the face of
the financial statements where net income is presented or in the notes to the consolidated financial
statements. The guidance does not amend any existing disclosures around net income or other
comprehensive income it is only intended to improve the transparency of items in other
comprehensive income. We adopted this guidance in the fourth quarter of fiscal 2013 and the
required disclosure was made in Note 13 of the notes to the consolidated financial statements.
Recently Issued Accounting Pronouncements
None
2. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
April 28, April 29,
(dollars in thousands)
customers
allowance for doubtful accounts
reserve for returns and allowances and discounts
$
2013
24,715
(780)
(543)
23,392
$
2012
26,100
(567)
(478)
25,055
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2013
(567)
beginning balance
(283)
provision for bad debts
70
write-offs, net of recoveries
(780)
ending balance
$
$
2012
(776)
(67)
276
(567)
2011
(1,322)
273
273
(776)
A summary of the activity in the allowance for returns and allowances and discounts
follows:
(dollars in thousands) 2013
(478)
beginning balance
provision for returns and allowances
(2,454)
and discounts
credits issued
ending balance
2,389
(543)
$
$
2012
(577)
(2,694)
2,793
(478)
2011
(534)
(2,236)
2,193
(577)
3.
INVENTORIES
A summary of inventories follows:
April 28, April 29,
(dollars in thousands)
raw materials
work-in-process
finished goods
$
2013
5,311
2,539
30,568
38,418
2012
5,534
3,631
27,208
36,373
$
60
4. 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 28,
2013
741
12,812
801
53,608
6,587
1,733
76,282
(45,688)
30,594
$
April 29,
2012
741
12,566
801
51,267
5,869
1,062
72,306
(41,027)
31,279
** Shorter of life of lease or useful life.
At April 28, 2013, we had total amounts due regarding capital expenditures totaling $225,000, which
pertain to outstanding vendor invoices, none of which are financed. The total outstanding amount of
$225,000 is required to be paid in full in fiscal 2014.
At April 29, 2012, we had total amounts due regarding capital expenditures totaling $169,000, which
pertained to outstanding vendor invoices, none of which are financed.
We did not finance any of our capital expenditures in fiscal 2013, 2012, and 2011.
5. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands)
beginning balance
loss on impairment
acquisitions
ending balance
2013
$ 11,462
-
-
$ 11,462
2012
11,462
-
-
11,462
2011
11,462
-
-
11,462
The goodwill balance relates to the mattress fabrics segment.
6. OTHER ASSETS
A summary of other assets follows:
(dollars in thousands)
cash surrender value – life insurance
non-compete agreements, net
other
April 28,
2013
625
185
341
1,151
$
$
April 29,
2012
1,327
333
247
1,907
61
Non-Compete Agreements
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.
In connection with the asset purchase and consulting agreement with Bodet & Horst on May 8, 2013
(see note 21), we restructured our existing non-compete agreement pursuant to our asset purchase and
consulting agreement dated August 11, 2008. We have agreed with Bodet & Horst to replace the
existing non-compete agreement that prevented us from selling certain mattress fabrics and products
to a leading a manufacturer, that will now allow us to make such sales. In addition, the existing
consulting and non-compete agreement, under which Bodet & Horst agreed not to sell most mattress
fabrics in North America, is replaced, expanded, and extended pursuant to the new asset purchase and
consulting agreement.
During fiscal 2013, 2012, and 2011, the existing non-compete agreement associated with Bodet &
Horst was amortized on a straight-line basis over the six year life of the previous agreement.
At April 28, 2013 and April 29, 2012, the gross carrying amount of the non-compete agreements
were $1.1 million. At April 28, 2013 and April 29, 2012, accumulated amortization for these non-
compete agreements was $940,000 and $741,000, respectively. Amortization expense for these non-
compete agreements was $198,000, $197,000 and $413,000 in fiscal 2013, 2012 and 2011,
respectively.
Cash Surrender Value - Life Insurance
On December 27, 2012, we entered into an agreement with our Chairman of the Board and his
irrevocable trust (the "Trust") dated December 11, 2012. As a result of this agreement, a previous
split dollar life insurance agreement in which we purchased a policy on the life of our Chairman of
the Board and his spouse, in which we retained ownership of the policy, paid premiums to support
the policy, had the right to receive the cash surrender value of the policy upon the second to die of
our Chairman of the Board and his spouse, with the Trust receiving the remainder of the policy's
death benefit ($8.0 million), was terminated. In connection with the termination of the previous split
dollar life insurance agreement, we transferred the life insurance policy to the Trust and received
cash proceeds in the amount of the cash surrender value of the policy totaling $626,000.
Also, this agreement required us to pay our Chairman of the Board during the period of his
continued employment but in an event no longer than twelve years, additional compensation totaling
$60,000 annually.
On March 18th, 2013, we entered into another agreement with our Chairman of the Board and the
trustees of the irrevocable trust (the "Trustees"). As a result of this agreement, a previous split dollar
life insurance agreement in which we purchased a policy on the life of the Chairman of the Board, in
which we retained ownership of the policy, paid premiums to support the policy, had the right to
receive the cash surrender value of the policy upon death of the Chairman of the Board, with the
Trustees receiving the policy's death benefit ($500,000) was terminated. In connection with the
termination of the previous split dollar life insurance agreement, we transferred the life insurance
policy to the Trustees and received cash proceeds in the amount of the cash surrender value of the
policy totaling $90,000.
62
At April 28, 2013, we had two life insurance contracts with death benefits to the respective insured
totaling $4.4 million. At April 29, 2012, we had four life insurance contracts with death benefits to
the respective insured totaling $12.9 million. Our cash surrender value - life insurance balance of
$625,000 and $1.3 million at April 28, 2013 and April 29, 2012, respectively, are collectible upon
death of the respective insured.
7. ACCRUED EXPENSES
A summary of accrued expenses follows:
(dollars in thousands)
compensation, commissions and related benefits
interest
other
April 28,
2013
9,831
111
1,887
11,829
$
$
April 29,
2012
7,293
147
1,881
9,321
8.
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
2013
$ 1,972
(76)
$ 1,896
2012
902
(64)
838
2011
(1,102)
(339)
(1,441)
Income tax expense (benefit) attributable to income from operations consists of:
(dollars in thousands)
current
federal
state
foreign
deferred
$
2013
-
19
2,297
2,316
federal
state
undistributed earnings – foreign subsidiaries
U.S. operating loss carryforwards
foreign
USD election for Canadian returns
valuation allowance
192
14
7,011
3,665
608
-
(11,834)
(344)
$ 1,972
2012
79
-
2,505
2,584
727
55
-
1,102
143
-
(3,709)
(1,682)
902
2011
(79)
-
2,367
2,288
1,805
142
-
1,241
89
(315)
(6,352)
(3,390)
(1,102)
Income before income taxes related to the company’s foreign operations for the years ended April
28, 2013, April 29, 2012, and May 1, 2011 was $12.0 million, $10.5 million, and $9.9 million,
respectively. Income before income taxes related to the company’s domestic operations for the years
ended April 28, 2013, April 29, 2012, and May 1, 2011 was $8.2 million, $3.7 million, and $5.2
million, respectively.
63
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:
2013
34.0%
federal income tax rate
(6.7)
foreign tax rate differential
increase in tax reserves
4.0
undistributed earnings from foreign subsidiaries 34.6
non-deductible stock option expense
USD election for Canadian returns
change in valuation allowance
other
-
-
(58.3)
2.1
9.7%
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)%
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:
undistributed earnings on foreign subsidiaries
property, plant and equipment (2)
other
total deferred tax liabilities
Net deferred tax asset
2013
2012
$
$
376
1,689
3,049
700
1,320
758
19,842
241
(8,976)
(963)
18,036
(7,011)
(4,653)
(985)
(12,649)
5,387
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
(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 $50.7 million with related future tax benefits
of $19.8 million at April 28, 2013. These carryforwards principally expire in 13-16 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 28, 2013, the current deferred tax asset of $7.7 million represents $7.4 million and
$325,000 from our operations located in the U.S. and China, respectively. At April 28, 2013, the
non-current deferred tax asset of $753,000 pertains to our operations located in China. At April 28,
2013, the non-current deferred tax liability of $3.1 million represents $2.0 million and $1.1 million
from our operations located in the U.S. and Canada, respectively.
64
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.
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 our
assessment at April 28, 2013, we recorded a partial valuation allowance of $963,000, of which
$722,000 pertained to certain U.S. state net operating loss carryforwards and credits and $241,000
pertained to loss carryforwards associated with our Culp Europe operation located in Poland. Based
on our assessment at April 29, 2012, we recorded a partial valuation allowance of $12.8 million
against our net deferred tax assets associated with our U.S. operations.
No valuation allowance was recorded against our net deferred tax assets associated with our
operations located in China and Canada at April 28, 2013 and April 29, 2012, respectively.
United States
Our net deferred tax asset regarding our U.S. operations primarily pertains to incurring significant
U.S. pre-tax losses over the last several years, with U.S. loss carryforwards totaling $50.7 million,
$59.9 million, and $60.0 million at April 28, 2013, 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 reflected 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 had 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.
65
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 increase in cumulative pre-tax income 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 was difficult.
Since it would have taken a significant period of time for our U.S. operations to realize their U.S. net
deferred income tax assets based on earned and forecasted U.S. pre-tax income levels, we believed 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 as of end of our second quarter of fiscal
2012.
These trends continued through the fourth quarter of fiscal 2012 and, as a result, we maintained our
position that we could only forecast U.S. taxable income through fiscal 2014. Our mattress fabric
operations had net sales that totaled $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 the 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 were 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.
Fiscal 2013
The improvement in our U.S. operations’ financial results continued through the second quarter of
fiscal 2013. Our U.S. operations earned a pre-tax income on a cumulative three-year basis as of April
29, 2012 (the end of our fiscal 2012) of $11.9 million and an additional $3.4 million through the
second quarter of fiscal 2013.
This continued earnings improvement from our U.S. operations was primarily due to the operating
performance of our mattress fabric operations. Through the second quarter of fiscal 2013, our
mattress fabric operations had net sales that totaled $77.7 million, an increase of 15% compared with
$67.4 million through the second quarter of fiscal 2012. In addition, our mattress fabric operations
reported operating income of $10.3 million through the second quarter of fiscal 2013, an increase of
49% compared with $7.0 million through the second quarter of fiscal 2012. These improved results
through the second quarter of fiscal 2013, which were better than expected, can be attributed to the
recent evolution of the bedding industry into a more decorative business with growing consumer
demand for better bedding and a higher quality mattress fabric, and the recent stabilization of raw
material prices.
66
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign
subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC
Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from
foreign subsidiaries that will not be reinvested indefinitely. Prior to the second quarter of fiscal 2013,
it was management’s intention to indefinitely reinvest all of our undistributed foreign earnings.
Accordingly, no deferred tax liability had been recorded in connection with the future repatriation of
these earnings.
During the second quarter of fiscal 2013, we assessed the financial requirements of our U.S. parent
company and foreign subsidiaries and determined that our undistributed earnings from our foreign
subsidiaries totaling $55.6 million will not be reinvested indefinitely and will be eventually
distributed to our U.S. parent company. The financial requirements of the U.S. parent company have
recently changed due to a decision to return cash to its shareholders through dividend payments and
common stock repurchases. Also, in order to keep up with the recent growth in consumer demand for
better bedding and a higher quality mattress fabric, it is our intention to continue our investment in
our domestic mattress fabric operations. As a result of this assessment, we recorded a deferred tax
liability and corresponding income tax charge of $6.6 million during the second quarter of fiscal 2013
and an additional $400,000 in the last half of fiscal 2013.
At April 28, 2013, we had accumulated earnings and profits from our foreign subsidiaries totaling
$56.7 million. At the same date, the deferred tax liability associated with our undistributed earnings
from our foreign subsidiaries included U.S. income and foreign withholding taxes totaling
$22.0 million, offset by U.S. foreign income tax credits of $15.0 million.
Based on the positive evidence at the end of our second quarter of fiscal 2013, as supported by our
cumulative earnings history, current and expected earnings improvement driven by our U.S. mattress
fabric operations, and the significant source of U.S. taxable income from the undistributed earnings of
our foreign subsidiaries, we recorded an income tax benefit of $12.2 million to reverse substantially
all of the valuation allowance against our U.S. net deferred tax assets. In the third quarter of fiscal
2013, we recorded an income tax charge of $103,000, due to a change in our second quarter estimate
of the recoverability of our U.S. state net loss operating carryforwards.
After this valuation allowance reversal of $12.1 million, we have a remaining valuation allowance
against our U.S. net deferred tax assets totaling $722,000 as of April 28, 2013. This valuation
allowance pertains to certain U.S. state net operating loss carryforwards and credits in which it is
“more likely than not” that these U.S. state net operating loss carryforwards and credits will not be
realized prior to their respective expiration dates.
Poland
During the third quarter of fiscal 2011, we established Culp Europe, a wholly-owned subsidiary
located in Poland. Due to the initial start up costs of setting up this operation and the current state of
the European economy, this operation had recorded cumulative pre-tax losses totaling $1.1 million
through the second quarter of fiscal 2013.
Based on the negative evidence, as supported by our cumulative loss history and the short
carryforward period of 5 years imposed by the Polish government, we recorded a full valuation
allowance against Culp Europe’s net deferred tax assets as of the end of the second quarter of fiscal
2013. As of April 28, 2013, we recorded an income tax charge and a full valuation allowance against
Culp Europe’s net deferred tax assets totaling $241,000.
67
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 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 2013, we recorded an income tax benefit of $11.8 million for the reduction of our valuation
allowance. This $11.8 million decrease represents a $12.1 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 $241,000 for the establishment of a full valuation allowance against our net
deferred tax assets associated with our Culp Europe operations located in Poland.
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.
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.
Uncertainty in Income Taxes
The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands) 2013
$12,462
beginning balance
increases from prior period tax positions 812
(108)
decreases from prior period tax positions
increases from current period tax positions
-
$ 13,166
ending balance
68
2012
11,739
852
2011
10,135
1,799
(129) (195)
-
11,739
-
12,462
At April 28, 2013, we had $13.1 million of total gross unrecognized tax benefits, of which
$4.2 million would favorably affect the income tax rate in future periods. 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.
As of April 28, 2013, we had $13.1 million of total gross unrecognized tax benefits, of which
$8.9 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 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.
We elected to classify interest and penalties as part of income tax expense. At April 28, 2013 and
April 29, 2012, the gross amount of interest and penalties due to unrecognized tax benefits was
$640,000 and $485,000, respectively.
The liability for uncertain tax positions at April 28, 2013, includes $13.1 million related to tax
positions for which significant change is reasonably possible in fiscal 2014. 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 2006 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 2008 and subsequent.
Income Taxes Paid
Income tax payments, net of income tax refunds, were $2.8 million in fiscal 2013, $2.4 million in
2012, and $1.2 million in 2011.
9. LONG-TERM DEBT AND LINES OF CREDIT
A summary of long-term debt follows:
April 28, April 29,
(dollars in thousands)
unsecured senior term notes
canadian government loan
$
2013
6,600
-
6,600
(2,200)
4,400
2012
8,800
323
9,123
(2,404)
6,719
current maturities of long-term debt
long-term debt, less current maturities
$
Unsecured Term Notes
We entered into a note agreement dated August 11, 2008 that 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
remaining principal payments are payable over an average term of 2.3 years through August 11,
2015. Any principal prepayments would be assessed a penalty as defined in the agreement. The
agreement contains customary financial and other covenants as defined in the agreement.
69
Government of Quebec Loan
We had an agreement with the Government of Quebec for a term loan that was non-interest bearing
with the last monthly payment due on December 1, 2013. This loan was paid in full in the fourth
quarter of fiscal 2013. The proceeds from this loan were used to partially finance capital
expenditures at our Rayonese facility located in Quebec, Canada.
Revolving Credit Agreement –United States
We have an unsecured Amended and Restated Credit Agreement that provides for a revolving loan
commitment of $7.6 million and is set to expire on August 25, 2013. This agreement provides for a
pricing matrix to determine the interest rate payable on loans made under the agreement (applicable
interest rate of 1.8% at April 28, 2013). At April 28, 2013 there was a $195,000 outstanding letter of
credit (all of which related to workers compensation). As of April 29, 2012, there were no
outstanding letters of credit. At April 28, 2013 and April 29, 2012, there were no borrowings
outstanding under the agreement.
We are currently negotiating a renewal of this line of credit and we expect to reach a final agreement
before the expiration date of the current agreement.
Revolving Credit Agreement - China
We have an unsecured credit agreement with our operations in China that provides for a line of
credit up to 40 million RMB (approximately $6.4 million USD at April 28, 2013), expiring on
September 2, 2013. This agreement has an interest rate determined by the Chinese government.
There were no borrowings under this agreement as of April 28, 2013 and April 29, 2012.
On June 8, 2013, we renewed our secured credit agreement associated with our operations in China.
The renewal extended the agreement to June 8, 2014, and provides for a line of credit up to 40
million RMB (approximately $6.4 million USD).
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 $2.1 million
in USD at April 28, 2013). This agreement bears interest at WIBOR (Warsaw Interbank Offered
Rate) plus 2% (applicable interest rate of 5.25% at April 28, 2013). On January 8, 2013, this
agreement was amended to extend the expiration date from January 15, 2013 to August 25, 2013.
At April 28, 2013, $561,000 (1.8 million Polish Zloty) in borrowings were outstanding under this
agreement. At April 29, 2012, $889,000 (2.8 million Polish Zloty) in borrowings were outstanding
under this agreement.
We are currently negotiating a renewal of this line of credit and we expect to reach a final agreement
before the expiration date of the current agreement.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. At April 28, 2013, the company was in compliance with these financial covenants.
The principal payment requirements for long-term debt during the next three fiscal years are: 2014 –
$2.2 million; 2015 - $2.2 million; and 2016 – $2.2 million.
Interest paid during 2013, 2012, and 2011 totaled $666,000, $817,000, and $901,000, respectively.
70
10. 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 three to five 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 $2.4
million in fiscal 2013, $2.2 million in fiscal 2012, and $2.1 million in fiscal 2011. Future minimum
rental commitments for noncancellable operating leases are $2.1 million in fiscal 2014; $1.8 million in
fiscal 2015; $1.5 million in fiscal 2016, $577,000 in fiscal 2017, and $52,000 in fiscal 2018.
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.
We lease a plant facility associated with our mattress fabrics segment from a partnership owned by
certain shareholders and officers of the company and their immediate families. This facility is being
leased on a month to month basis at an amount of $12,704 per month. Rents paid to entities owned by
certain shareholders and officers of the company and their immediate families totaled $152,000 in
each of fiscal 2013, 2012 and 2011.
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 nine 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 the 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 plain 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 have exceeded $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
71
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
asserted 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 defended
ourselves vigorously with regards to the matters described in this litigation. 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.
In the first quarter of fiscal 2014, the parties to this lawsuit reached a tentative settlement of all
matters, which would involve the company contributing cash to a global settlement fund in an
amount that is not material to our operating results or financial condition. As of the date of this
report, the settlement remains subject to final agreement by the parties, as well as governmental
review procedures and approval by the court.
Joint Product, Sales and Marketing Agreement
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 formed a new business
named Culp-Lava Applied Sewn Solutions (CLASS) and has provided us an opportunity to enter the
business of designing, producing, and marketing sewn mattress covers. As a result, we are able to
leverage our design capabilities and expand our product offerings from mattress fabrics to finished
covers. In connection with this agreement, Lava is providing us with technical assistance and know-
how for the start-up of the business and is working with us on the design, sales and marketing of
sewn mattress covers.
Pursuant to the agreement, the new business will be fully funded and 100% owned by us. We have
established a manufacturing facility located in Stokesdale, North Carolina that is adjacent to our
mattress fabric headquarters, providing favorable operating synergies with management and
production in the same location. As a result, we will have two mirrored manufacturing facilities to
serve our customer base and meet current and expected demand trends in the bedding industry. We
have responsibility for all operating control of the new business, including capital expenditures and
production and operating costs. Our capital investment in this facility was $751,000 in fiscal 2013
and is projected to be approximately $300,000 for fiscal 2014. Lava is not required to invest capital
into CLASS.
During the second quarter of fiscal 2013, we completed the initial equipment installation and
conducted training for the start-up associates in this location. We commenced production in
November 2012, and we currently expect to incrementally add more capacity for this product
category to meet anticipated demand.
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 28, 2013, and April 29, 2012, we had open purchase commitments to acquire equipment for
our mattress fabrics segment totaling $170,000 and $1.2 million, respectively.
72
11. 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 28, 2013 there were 672,153 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 2013, 2012 or 2011, respectively.
During fiscal 2013, an outside director was granted 2,000 option shares to purchase shares of
common stock at the fair market value on the date of grant. 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.
No options were granted to outside directors during fiscal 2012 or 2011.
The fair value of stock options granted to an outside director at each grant date during fiscal 2013
was $5.03, using the following assumptions:
Risk-free interest rate 0.67%
Dividend yield 3.00%
Expected volatility 61.70%
Expected term (in years) 5
2013
2012
-
-
-
-
2011
-
-
-
-
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 based on historical experience and future dividend yields
in effect at the time of grant. The expected volatility was derived using a term structure based on
historical volatility and the volatility implied by exchange-traded options on the company’s common
stock. The expected term of the options is based on the contractual term of the stock option award,
and expected participant exercise trends.
The company recorded compensation expense of $62,000 $134,000, and $145,000 within selling,
general, and administrative expense for incentive stock options in fiscal 2013, 2012, and 2011,
respectively.
73
The following table summarizes stock option activity for fiscal 2013, 2012, and 2011:
2013
2012
2011
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
209,475 $
2,000
(23,025)
(5,625)
182,825
7.22
12.13
8.92
9.37
6.99
268,875 $ 6.81
-
5.50
-
7.22
-
(59,400)
-
209,475
498,849 $ 5.87
-
4.77
-
6.81
-
(229,974)
-
268,875
outstanding at beginning
of year
granted
exercised
canceled/expired
outstanding at end of year
Range of
Exercise Prices
$ 1.88 - $ 1.88
$ 4.59 - $ 5.41
$ 7.08 - $ 7.27
$ 8.75 - $ 9.57
$10.11 - $ 12.13
Options Outstanding
Number Weighted-Avg.
Outstanding
Remaining Weighted-Avg.
at 4/28/13 Contractual Life Exercise Price
5.7 years
2.8
4.4
3.9
5.7
4.4
40,000
6,000
27,125
101,700
8,000
182,825
$1.88
$4.86
$7.12
$8.81
$10.62
$6.99
Options Exercisable
Number
Exercisable Weighted-Avg.
at 4/28/13 Exercise Price
32,000
6,000
22,125
101,700
8,000
169,825
$1.88
$4.86
$7.13
$8.81
$10.62
$7.23
At April 28, 2013, the aggregate intrinsic value for options exercisable was $1.5 million and had a
weighted average contractual term of 4.3 years. At April 28, 2013, the aggregate intrinsic value for
options outstanding was $1.7 million.
The aggregate intrinsic value for options exercised was $90,000, $220,000, and $1.1 million in fiscal
2013, 2012, and 2011, respectively.
The remaining unrecognized compensation costs related to unvested awards at April 28, 2013 was
$10,000 which is expected to be recognized over a weighted average period of 0.5 years.
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 earlier date when the service period is met or the end of each reporting period.
The fair value of the one-third installment that vested on May 1, 2012 was $11.05. The fair value of
the one-third installment that vested on May 1, 2013 and 2014 was $16.25.
74
The following table summarizes the time vested restricted stock activity for fiscal 2013, 2012, and
2011:
2013 2012 2011
Shares
Shares
Shares
outstanding at beginning
of year
granted
vested
outstanding at end of year
185,000
-
(61,665)
123,335
195,000
-
(10,000)
185,000
195,000
-
-
195,000
During fiscal 2013, 61,665 shares of time vested restricted stock vested and had a weighted average
fair value of $232,000 or $3.76 per share. 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 28, 2013, there were 123,335 shares of time vested restricted stock outstanding and
unvested. Of the 123,335 shares outstanding and unvested, 70,000 shares were granted on
January 7, 2009 and 53,335 shares were granted on July 1, 2009. At April 28, 2013, the weighted
average fair value of these outstanding and unvested shares was $4.04 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 April 28, 2013, the remaining unrecognized compensation cost related to the unvested restricted
stock awards was $59,000, which is expected to be recognized over a weighted average vesting
period of 1 year.
We recorded compensation expense of $140,000, $189,000 and $172,000 within selling, general,
and administrative expense for time vested restricted stock awards in fiscal 2013, 2012 and fiscal
2011, respectively.
Performance Based Restricted Stock Units
Fiscal 2013
On July 11, 2012, certain key members of management were granted performance based restricted
common stock units which could earn up to 120,000 shares of common stock if certain performance
targets are met as defined in the agreement. These awards were valued based on the fair market
value on the date of grant. The fair value of these awards was $10.21, which represents the closing
price of our common stock on the date of grant. The vesting of these awards is over the requisite
service period of three years. Compensation cost is recorded based on an assessment each reporting
period of the probability if certain performance goals will be met during the vesting period. If
performance goals are not probable of occurrence, no compensation cost will be recognized and any
recognized compensation cost would be reversed.
At April 28, 2013, the remaining unrecognized compensation cost related to the performance based
restricted stock units was $885,000, which is expected to be recognized over a weighted average
vesting period of 2.2 years.
75
Fiscal 2012
We did not grant any performance based restricted stock units during fiscal 2012. No performance
based restricted units vested during fiscal 2012.
Fiscal 2011
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. During the
first quarter of fiscal 2011, the last one-third increment of 40,000 shares of performance based
restricted stock units were vested. 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.
We did not grant any performance based restricted stock units during fiscal 2011.
Overall
We recorded compensation expense of $340,000 and $12,000 within selling, general, and
administrative expense for performance based restricted stock units in fiscal 2013 and fiscal 2011
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.
Common Stock Awards
On October 8, 2012, we granted a total of 1,658 shares of common stock to certain outside directors.
These shares of common stock vested immediately and were measured at $12.13 per share, which
represents the closing price of the company’s common stock at the date of grant.
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 $20,000, $26,000, and $31,000 of compensation expense within selling, general, and
administrative expense for these common stock awards for fiscal 2013, 2012, and 2011, respectively.
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.
76
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 required 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 represented 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 represented 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 vested over the period May 2,
2011 through June 30, 2012 and represented the non-employee’s required service period.
During the first quarter of fiscal 2013, this award fully vested and was paid out at a fair value
totaling $174,000.
We recorded $40,000 and $134,000 of compensation expense within selling, general, and
administrative expense for this agreement during fiscal 2013 and 2012, respectively.
At April 29, 2012, the fair value of this agreement was $134,000 and was included in accrued
expenses in the 2012 Consolidated Balance Sheet.
12. 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 28, 2013 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
$ 2,092
2,076
1,118
N/A
N/A
N/A
$2,092
2,076
1,118
N/A
N/A
N/A
77
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 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
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 28, 2013, the carrying value of the company’s long-term debt was $6.6 million and the fair
value was $7.0 million. 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.
13. 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)
Derivatives designated as hedging instruments
under ASC Topic 815
Fair Values of Derivative Instruments
April 28, 2013
April 29, 2012
Balance
Sheet
Location
Fair
Value
Balance
Sheet
Location
Fair
Value
None
Other Assets
$-
Other Assets
$-
78
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)
2013
2012
2011
2013
2012
2011
2013
2012
2011
$-
$- $(103)
Other Exp
$-
$-
$5
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.
14. 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
2013
2012
2011
12,235
215
12,711
155
12,959
259
12,450
12,866
13,218
All options to purchase shares of common stock were included in the computation of diluted net
income for fiscal 2013 and 2011, as the exercise price of the options was less than the average
market price of common shares.
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.
The computation of basic net income did not include 123,335, 185,000, and 195,000 shares of time
vested restricted common stock as these shares were unvested for fiscal 2013, 2012, and 2011,
respectively.
79
15. 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 $635,000, $606,000, and $543,000
in fiscal 2013, 2012, and 2011, 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
$145,000 for fiscal 2013, $132,000 for fiscal 2012, and $120,000 for fiscal 2011, respectively. Our
nonqualified deferred compensation plan liability of $2.0 million and $1.7 million at April 28, 2013,
and April 29, 2012, respectively, and is included in accrued expenses in the Consolidated Balance
Sheets.
16. SEGMENT INFORMATION
The company’s 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 manufactures, sources, and sells fabrics primarily to
residential furniture manufacturers.
Net sales denominated in U.S. dollars accounted for 85%, 86% and 83% of total consolidated net
sales in 2013, 2012, and 2011, respectively. International sales accounted for 23%, 21% and 22% of
net sales in 2013, 2012, and 2011, respectively, and are summarized by geographic area as follows:
(dollars in thousands)
north america (excluding USA)
far east and asia
all other areas
2013
$ 11,900
43,907
5,806
$ 61,613
2012
2011
10,417
38,279
5,353
54,049
10,505
36,587
1,502
48,594
The company evaluates the operating performance of its segments based upon income from
operations before 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 a non-compete agreement associated with an acquisition. The upholstery
fabrics segment also includes assets held for sale in segment assets.
80
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
(dollars in thousands)
selling, general, and administrative expenses:
upholstery fabrics
mattress fabrics
unallocated corporate
total selling, general, and administrative
expenses
94,375
122,431
216,806
13,592
23,248
36,840
-
36,840
2013
2012
2011
$ 114,800
154,014
$ 268,814
108,924
145,519
254,443
$
$
$
19,984
29,546
49,530
-
49,530
14,984
24,825
39,809
(77) (1)
39,732
2013
2012
2011
13,031
9,646
5,768
11,453
9,061
4,512
9,233
7,875
3,961
$
28,445
25,026
21,069
$
Income from operations:
upholstery fabrics
mattress fabrics
total segment income from operations
unallocated corporate expenses
other non-recurring charges
total income from operations
15,743
interest expense
(881)
interest income
240
other expense
(40)
15,062
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.
6,953
19,900
26,853
(5,768)
-
21,085
(632)
419
(583)
20,289
14,706
(780)
508
(236)
14,198
3,531
15,764
19,295
(4,512)
4,359
15,373
19,732
(3,961)
(77) (1)
$
(28) (2)
(2) The $28 represents an impairment charge related to equipment that was 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.
One customer within the upholstery fabrics segment represented 13%, 13%, and 12% of
consolidated net sales in each of fiscal 2013, 2012, and 2011, respectively. Two customers within
the mattress fabrics segment represented 22%, 22%, and 23% of consolidated net sales in fiscal
2013, 2012 and 2011, respectively. No customers within the upholstery fabrics segment accounted
for 10% or more of net accounts receivable as of April 28, 2013. One customer within the upholstery
fabrics segment represented 12% of net accounts receivable at April 29, 2012. One customer within
the mattress fabrics segment accounted for 10% of net accounts receivable balance at April 28, 2013.
No customers within the mattress fabrics segment accounted for 10% or more of net accounts
receivable as of April 29, 2012.
81
Balance sheet information for the company’s operating segments follow:
(dollars in thousands)
segment assets
mattress fabrics
current assets (3)
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
2013
2012
2011
$
$
$
$
33,323
-
185
11,462
28,578 (4)
73,548
29,909
15
333
11,462
29,237 (5)
70,956
25,455
15
480
11,462
28,581 (6)
65,993
28,487
-
31,519
-
1,230 (7) 1,124 (8)
29,717
32,643
23,477
60
967 (9)
24,504
total segment assets
103,265
103,599
90,497
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 (11):
mattress fabrics
upholstery fabrics
unallocated corporate
depreciation expense
mattress fabrics
upholstery fabrics
total segment depreciation expense
23,530
5,286
318
8,462
2,093
25,023
5,941
-
5,672
1,989
23,181
7,699
79
3,899
2,376
786 (10)
966
$ 144,706
918 (10)
748 (10)
1,574
144,716
1,572
130,051
$
$
$
$
3,805
425
227
4,457
4,487
628
5,115
4,875
512
532
5,919
4,275
590
4,865
5,714
311
277
6,302
3,820
552
4,372
(3) Current assets represent accounts receivable and inventory.
(4) The $28.6 million at April 28, 2013 represents property, plant, and equipment located in the U.S.
of $20.4 million and located in Canada of $8.2 million.
(5) 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.
(6) 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.
(7) The $1.2 million at April 28, 2013, represents property, plant, and equipment located in the U.S.
of $908, located in China of $265, and located in Poland of $57.
(8) 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.
82
(9) The $967 at May 1, 2011 represents property, plant, and equipment located in the U.S. of $727,
China of $184, and located in Poland of $56.
(10) The $786, $918 and $748 balance at April 28, 2013, April 29, 2012 and May 1, 2011, represent
property, plant, and equipment associated with unallocated corporate departments and corporate
departments shared by both the mattress and upholstery fabric segments.
(11) Capital expenditure amounts are stated on an accrual basis. See Consolidated Statement of Cash
Flows for capital expenditure amounts on a cash basis.
17. 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 28, 2013, the company’s statutory surplus reserve was $3.9 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 $3.9 million to assist with debt repayment, capital
expenditures, and other expenses of the company’s business.
18. CASH FLOW INFORMATION
During fiscal 2013 and 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.
19. 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. 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 replaced prior authorizations to acquire
up to $7.0 million of our common stock in fiscal 2012, of which $5.4 million had been used during
fiscal 2012.
83
On August 29, 2012, we announced that our board of directors approved a new authorization for us
to acquire up to $2.0 million of our common stock. Under the common stock repurchase program,
shares may be purchased from time to time in open market transactions, block trades, through plans
established under the Securities Exchange Act Rule 10b5-1, or otherwise. 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.
During fiscal 2013, we purchased 502,595 shares of common stock at a cost of $5.0 million, and
as a result, we have reached the $5.0 million limit that was authorized on June 13, 2012. As of
April 28, 2013, there have been no repurchases of common stock on the $2.0 million limit that was
authorized on August 29, 2012.
Since the common stock repurchase program was implemented in fiscal 2012, we have repurchased
1.1 million shares of common stock at a cost of $10.4 million.
20. DIVIDEND PROGRAM
On June 13, 2012, we announced that our board of directors approved the payment of a cash dividend
of $0.03 per share in the first quarter of fiscal 2013. These dividend payments of $0.03 per share
continued each quarter for the remainder of fiscal 2013. On November 27, 2012, we announced that
our board of directors approved the payment of a special cash dividend of $0.50 per share, which was
paid on December 28, 2012.
During fiscal 2013, dividend payments totaled $7.6 million, of which $6.1 million represented the
special cash dividend payment of $0.50 per share, and $1.5 million represented the quarterly dividend
payments of $0.03 per share, respectively.
One June 12, 2013, we announced that our board of directors approved a 33% increase in payment of
a quarterly cash dividend from $0.03 to $0.04 per share, commencing the first quarter of fiscal 2014.
The dividend will be paid on July 15, 2013, to shareholders of record as of the close of business on
July 1, 2013.
Future dividend payments are subject to Board approval and may be adjusted at the Board’s
discretion as business needs or market conditions change.
21. SUBSEQUENT EVENT
On May 8, 2013, we entered into an asset purchase and consulting agreement with Bodet & Horst
GMBH & Co. KG and certain of its affiliates (“Bodet & Horst”) that provides for, among other
things, the purchase of equipment and certain other assets from Bodet & Horst and the restructuring
of existing consulting and non-compete agreements pursuant to the asset purchase and consulting
agreement dated August 11, 2008. We have agreed with Bodet & Horst to replace the existing non-
compete agreement that prevented us from selling certain mattress fabrics and products to a leading a
manufacturer, which will now allow us to make such sales. In addition, the current consulting and
non-compete agreement, under which Bodet & Horst agreed not to sell most mattress fabrics in North
America, is replaced, expanded, and extended pursuant to the new asset purchase and consulting
agreement.
The purchase price for the equipment and other certain assets was $2.7 million in cash. We are
currently performing our preliminary valuation of the allocation of the purchase price among the
equipment and the other assets that were purchased.
84
SELECTED QUARTERLY DATA (UNAUDITED)
(amounts in thousands except per share, ratios & other, stock data)
INCOME STATEMENT DATA
net sales
cost of sales
gross profit
selling, general and administrative expenses
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
2013
4th quarter
fiscal
2013
3rd quarter
fiscal
2013
2nd quarter
fiscal
2013
1st quarter
fiscal
2012
4th quarter
fiscal
2012
3rd quarter
fiscal
2012
2nd quarter
fiscal
2012
1st quarter
$
$
$
$
$
$
70,375
57,527
12,848
6,772
6,076
140
(90)
163
5,863
2,161
3,702
1,297
12,102
63,695
52,010
11,685
6,822
4,863
145
(105)
300
4,523
1,700
2,823
1,279
12,095
65,560
53,683
11,877
7,209
4,668
156
(96)
76
4,532
(3,736)
8,268
1,285
12,191
69,184
56,064
13,120
7,641
5,479
190
(127)
44
5,372
1,848
3,524
1,254
12,551
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
12,323
12,290
12,348
12,711
12,695
12,677
12,871
13,205
0.31
0.30
7.82
39,228
30,594
144,706
1,863
7,161
95,583
72,699
18.3%
8.6
5.3
36.9
9.9
7.4
30
6.0
18.15
14.76
16.25
51.9
0.23
0.23
7.52
40,214
30,055
143,797
713
7,342
91,966
71,758
18.3%
7.6
4.4
37.6
10.2
7.9
32
5.3
16.82
12.00
16.70
43.4
0.68
0.67
7.81
35,616
30,621
142,443
890
7,692
95,388
70,596
18.1%
7.1
12.6
(82.4)
10.9
8.3
29
5.5
12.35
9.75
12.28
29.9
0.28
0.28
7.26
36,637
31,016
143,160
991
9,900
91,831
75,177
19.0%
7.9
5.1
34.4
13.2
8.5
24
5.2
11.99
9.00
10.15
38.6
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
(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.
85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 28, 2013, there were no disagreements on any matters of accounting
principles or practices or financial statement disclosures.
ITEM 9A. 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 28, 2013. 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 28, 2013.
Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated
financial statements as of and for the years ended April 28, 2013, April 29, 2012 and May 1, 2011 and has
audited the company’s effectiveness of internal controls over financial reporting as of April 28, 2013, as
stated in their report, which is included in Item 8 hereof. During the quarter ended April 28, 2013, 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.
86
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Culp, Inc.
We have audited the internal control over financial reporting of Culp, Inc. (a North Carolina corporation) and
Subsidiaries (the “Company”) as of April 28, 2013, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company’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 report on
internal control over financial reporting. Our responsibility is to express an opinion on the Company’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, the Company maintained, in all material respects, effective internal control over financial reporting
as of April 28, 2013, 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 financial statements of the Company as of and for the year ended April 28, 2013, and our
report dated July 12, 2013 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
July 12, 2013
87
ITEM 9B. OTHER INFORMATION
None
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
captions “Executive Compensation Plan Information” and “Voting Securities,” which information is
herein incorporated by reference.
88
The following table sets forth information as of the end of fiscal 2013 regarding shares of the our
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)
182,825
-
182,825
(b)
$6.99
-
$6.99
Number of securities
remaining available for
future issuance under
equity compensation plan
(excluding securities
reflected in column (a))
(c)
672,153
-
672,153
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.
89
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 Firm ................................................................ 50
Consolidated Balance Sheets – April 28, 2013 and
April 29, 2012 ..................................................................................................................................... 51
Consolidated Statements of Net Income -
for the years ended April 28, 2013,
April 29, 2012 and May 1, 2011 ......................................................................................................... 52
Consolidated Statements of Comprehensive Income -
for the years ended April 28, 2013,
April 29, 2012 and May 1, 2011……………………………………………………………………… 53
Consolidated Statements of Shareholders’ Equity -
for the years ended April 28, 2013,
April 29, 2012 and May 1, 2011 ......................................................................................................... 54
Consolidated Statements of Cash Flows -
for the years ended April 28, 2013,
April 29, 2012 and May 1, 2011 ......................................................................................................... 55
Notes to Consolidated Financial Statements.......................................................................................... 56
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)
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.
90
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
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. (*)
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 filed as Exhibit
10.13 to the company’s Form 10-K for the year-end dated April 29, 2012, dated July 12, 2012, and
is incorporated herein by reference.
91
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
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. (*)
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 is 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.
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.
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.
92
10.29 Written description of annual incentive plan was filed as Exhibit 10.29 to the company’s Form
10-K for the year end dated April 29, 2012, dated July 12, 2012, and is incorporated herein by
reference.
10.30
10.31
21
23
Form of restricted stock unit agreement for restricted stock units granted pursuant to the 2007
Equity Incentive Plan was filed as Exhibit 10.1 to the company’s Form 10-Q for the quarter end
dated July 29, 2012, dated September 7, 2012, and is incorporated herein by reference.
Agreement dated December 27, 2012 between Culp, Inc., Robert G. Culp, III, and Robert G. Culp,
III Irrevocable Trust dated December 11, 2012 was filed as Exhibit 10.1 to the Current Report on
Form 8-K dated December 28, 2012.
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, 2013
24(b)
Power of Attorney of Kenneth R. Larson, dated July 12, 2013
24(c)
Power of Attorney of Kenneth W. McAllister, dated July12, 2013
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 95 under the subheading “Exhibit Index.”
c)
Financial Statement Schedules:
None
93
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 2013.
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
2013.
/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.
94
EXHIBIT INDEX
Exhibit Number
Exhibit
21
23
24(a)
24(b)
24(c)
31(a)
31(b)
32(a)
32(b)
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, 2013
Power of Attorney of Kenneth R. Larson, dated July 12, 2013
Power of Attorney of Kenneth W. McAllister, dated July 12, 2013
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
95
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, 2013, 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 28, 2013. 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).
/s/ Grant Thornton LLP
Raleigh, North Carolina
July 12, 2013
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 28, 2013 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, 2013
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 28, 2013 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, 2013
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 28, 2013 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, 2013
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, 2013
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, 2013
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 28, 2013 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, 2013
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 28, 2013 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, 2013
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 28, 2013, 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
Undistributed Earnings from Foreign Subsidiaries
Non-Cash U.S. Income Tax Expense
Non-Cash Foreign Income Tax Expense
Consolidated Adjusted Effective Income Tax Rate (2)
April 28,
2013
9.7%
59.7%
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(34.6)%
(19.3)%
(1.3)%
14.2%
TWELVE MONTHS ENDED
April 29,
2012
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26.1%
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18.5%
May 1,
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8.4%
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(20.6)%
1.9%
16.1%
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 28,
2013
$ 20,289
$
1,972
$ 18,317
1.50
$
1.47
$
12,235
12,450
Adjustments
$
$
$
$
909
(909)
0.07
0.07
12,235
12,450
April 28, 2013
Proforma Net
of Adjustments
$ 20,289
$
2,881
$ 17,408
1.42
$
1.40
$
12,235
12,450
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
Proforma Net
of Adjustments
$ 14,198
$
2,627
$ 11,571
0.91
$
0.90
$
12,711
12,866
As reported
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 expense (benefit) 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.
Net cash provided by operating activities
Minus: Capital Expenditures
Add: Proceeds from the sale of equipment
Add: Proceeds from life insurance policies
Minus: Payments on life insurance policies
Add: Excess tax benefits related to stock-based compensation
Effects of exchange rate changes on cash and cash equivalents
FREE CASH FLOW RECONCILIATION
FY 2013
$ 17,075
(4,400)
–
716
(19)
76
(381)
$ 13,067
FY 2012
$ 12,003
(5,890)
299
–
–
64
140
6,616
$
IMPORTANT INFORMATION
This document contains 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, cash flow, 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 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 Item 1A “Risk Factors” section in the fiscal 2013 Form 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 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 free cash flow, a non-GAAP liquidity measure that we define as net cash provided by operating activities, less cash capital
expenditures and payments on life insurance policies, plus any proceeds from sales of fixed assets and life insurance policies, plus excess tax benefits related to
stock-based compensation, and plus or minus the effects of exchange rate changes on cash and cash equivalents. Details of these calculations and a reconciliation
to information from our GAAP financial statements is set forth in this report. Management believes the disclosure of free cash flow provides useful information to
investors because it measures our available cash flow for potential debt repayment, stock repurchases, dividends, and additions to cash and cash equivalents. We
note, however, that not all of the company’s free cash flow is available for discretionary spending, as we have mandatory debt payments and other cash
requirements that must be deducted from our cash available for future use. In operating our business, management uses free cash flow to make decisions about
what commitments of cash to make for operations, such as capital expenditures (and financing arrangements for these expenditures), purchases of inventory or
supplies, SG&A expenditure levels, compensation, and other commitments of cash, while still allowing for adequate cash to meet known future commitments for
cash, such as debt repayment, and also for making decisions about dividend payments and share repurchases.
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 estimated cash 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.
CORPORATE DIRECTORY
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
SHAREHOLDER INFORMATION
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
Stock Listing
Culp, Inc. common stock is traded
on the New York Stock Exchange under
the symbol CFI. As of July 17, 2013, Culp,
Inc. had approximately 2,530
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 17, 2013, at the company’s
corporate offices, 1823 Eastchester Drive,
High Point, North Carolina.
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 – James Fronda
1823 Eastchester Drive
Post Office Box 2686
High Point, NC 27265
(336) 889-5161
www.culp.com