2 0 1 6 A N N U A L R E P O R T
We deliver fashion-forward, stylish
fabrics with broad appeal to the largest home furnishing
retailers and manufacturers.
Culp, Inc. 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 and China.
Shares in Culp, Inc. are traded on the New York Stock Exchange
under the symbol CFI.
37%
Upholstery
Fabrics–
China-Produced
2016
SALES MIX
Upholstery
Fabrics–
U.S.-Produced
3%
Mattress
Fabrics
60%
9.1%
Debt
Repayment
33.5%
Dividends
2016 CAPITAL
ALLOCATION
Shares
Repurchased
9.9%
Cap Ex
47.5%
Cover photo courtesy of Williams-Sonoma, Inc. west elm
Financial Highlights
(Amounts in thousands, except per share data)
Net Sales
Income before income taxes
Net income
Net income per share:
Basic
Diluted
2016
$ 312,860
27,898
16,935
2015
$ 310,166
22,956
15,071
2014
$ 287,162
19,043
17,447
1.38
1.36
1.23
1.21
1.43
1.41
Adjusted net income (1)
22,709
19,352
15,691
Adjusted net income per share:
Basic
Diluted
Average shares outstanding:
Basic
Diluted
1.85
1.82
1.58
1.56
1.29
1.26
12,302
12,475
12,217
12,422
12,177
12,414
Cash Returned to Shareholders
Cost of shares repurchased
Number of shares repurchased
Dividends paid
Cumulative funds returned to shareholders (2)
$ 2,397
101
8,140
42,509
$
745
43
7,579
–
–
2,204
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 long-term debt, current
maturities of long-term debt and line of credit)
Shareholders’ equity
Debt as a percent of shareholders’ equity
175,142
–
128,812
–
$ 42,146
90,357
$ 39,729
83,225
$ 35,597
80,038
32.0%
28.0%
25.5%
171,300
160,935
2,200
119,427
4,986
111,744
1.8%
4.5%
Mattress Fabrics Segment Highlights (3)
Net sales (3)
Operating income (3)
Operating income margin
Capital employed (1)
Return on capital (1)
$ 186,419
26,496
$ 179,739
21,671
$ 160,705
17,515
14.2%
12.1%
10.9%
74,637
70,472
62,457
36.7%
33.5%
29.3%
Upholstery Fabrics Segment Highlights (3)
Net sales (3)
Operating income (3)
Operating income margin
Capital employed (1)
Return on capital (1)
$ 126,441
11,298
$ 130,427
8,128
$ 126,457
8,036
8.9%
6.2%
6.4%
17,025
14,026
17,419
65.2%
48.7%
40.7%
(1) See reconciliation tables at the end of the report and previous SEC Form 8-K filings
(2) Includes dividends paid and shares repurchased since June 2011 through July 15, 2016
(3) See Note 16 of the Notes to Consolidated Financial Statements beginning on page 79 of the fiscal 2016 Form 10-K
1
NET SALES
FISCAL YEARS 2012-16 (IN MILLIONS)
.
2
0
1
3
$
.
9
2
1
3
$
.
2
7
8
2
$
.
8
8
6
2
$
.
4
4
5
2
$
$350
$300
$250
$200
$150
‘12
‘13
‘14
‘15
‘16
PRE-TAX INCOME AND
PRE-TAX MARGIN
FISCAL YEARS 2012-16 (IN MILLIONS)
8.9%
10%
.
.
0
9
7
2
$
$30
$28
$24
$20
$16
$12
7.5%
7.4%
6.6%
.
0
3
2
$
.
3
0
2
$
.
0
9
1
$
5.6%
.
2
4
1
$
‘12
‘13
‘14
‘15
‘16
CAPITAL EMPLOYED AND
RETURN ON CAPITAL
FISCAL YEARS 2012-16 (IN MILLIONS)
32.0%
29.4%
28.0%
25.5%
21.9%
.
4
0
9
$
.
2
3
8
$
.
0
0
8
$
.
6
9
6
$
.
7
4
7
$
‘12
‘13
‘14
‘15
‘16
$100
$80
$60
$40
FREE CASH FLOW AND DIVIDENDS
AND SHARES REPURCHASED
FISCAL YEARS 2012-16 (IN MILLIONS)
$18
$16
$14
$12
$10
$8
$6
$4
$2
.
1
5
1
$
.
2
5
1
$
.
8
3
1
$
.
1
3
1
$
.
1
3
1
$
$10.5
$8.3
$12.6
.
6
6
$
$5.4
$2.2
‘12
‘13
‘14
‘15
‘16
9%
8%
7%
6%
5%
4%
3%
2%
1%
32%
28%
24%
20%
16%
12%
8%
4%
$12
$10
$8
$6
$4
$2
Fellow Shareholders
We are proud to share another solid performance for Culp in
fiscal 2016.
With total sales of $312.9 million, we achieved our seventh
consecutive year of overall annual sales growth. Both of our
businesses achieved a strong operating performance with
significantly improved profitability over fiscal 2015. Notably, our
pre-tax income for the year was $27.9 million, the highest in
the company’s history. Further, we achieved excellent free cash
flow of $15.2 million, slightly above last year’s $15.1 million,
after spending $11.5 million on capital expenditures. Return
on capital was 32 percent, the highest return in Culp’s history,
compared with 28 percent in fiscal 2015.
Our performance for the year demonstrates consistent
execution of our strategy with a focus on design creativity
and product innovation, supported by exceptional customer
service. Our success in the marketplace reflects our ability to
deliver a wide range of innovative fabrics that keep pace with
customer demand and style trends. We also made important
strategic investments in our operations to expand our
production and design capabilities and further enhance our
competitive position. Importantly, we have maintained the
financial strength to support a growth strategy that rewards
both our customers and shareholders.
Cash Returned to Shareholders
Our commitment to delivering value to our shareholders
is reflected in our disciplined capital allocation strategy. In
fiscal 2016, we returned over $10.5 million to shareholders
through dividends and share repurchases. In addition to our
regular quarterly cash dividend of $0.07 per share, our solid
financial performance and excellent free cash flow provided
an opportunity to pay a special dividend of $0.21 per share,
which was paid in July 2016. Notably, this was our fourth
special dividend payment in five years. For fiscal 2016, the
company purchased 100,776 shares of Culp common stock
for $2.4 million, pursuant to the $5.0 million share repurchase
program authorized by the Board of Directors in February
2014, leaving $1.9 million available under the previous
program. The Board has since approved an increase in the
authorization for the company to acquire its common stock
back to a total of $5.0 million.
Since June 2011, we have returned a total of
approximately $43.0 million to our shareholders in the
form of regular quarterly and special dividends and share
repurchases. We are pleased to be in a position to share our
financial success with our shareholders, and we will continue
to make this a top priority.
Mattress Fabric Segment
For fiscal 2016, mattress fabric sales were $186.4 million, up
3.7 percent, compared with $179.7 million in fiscal 2015. These
results mark another record performance for the year, topping
the previous year’s record with the highest annual mattress
fabric sales and profits in Culp’s history. We are especially
pleased with our steady sales growth throughout the year,
which has outperformed overall industry trends. In addition,
we continued to make strategic investments for the future and
expanded our operations in line with expected demand.
Operating income was $26.5 million, a 22 percent increase
over the prior year and a record performance. Return on
capital in fiscal 2016 was 37 percent, another record for this
segment, and an impressive accomplishment given a capital
intensive business. Our strong operating performance in fiscal
2016 underscores the success of the capital investments we
made in both our North Carolina and Canadian operations,
with increased capacity, enhanced finishing capabilities and
overall improved efficiency and throughput. We also realized
lower input costs in fiscal 2016 and a more favorable currency
exchange rate in Canada compared with the prior year.
2
“ O U R A B I L I T Y T O K E E P P A C E W I T H C U R R E N T S T Y L E T R E N D S
I S A C R I T I C A L A D V A N T A G E F O R O U R C U S T O M E R S . ”
3
Our focus on design and innovation clearly distinguishes
Culp’s products in the mattress fabric marketplace, and
our mirrored manufacturing platform, technical expertise
and reactive capacity support our ability to deliver these
products with outstanding customer service. We have
continued to execute a diversification strategy and further
enhance our strong value proposition with a product mix of
mattress fabrics and sewn covers across most price points
and style trends. We are also pleased with the increased
contribution this year from CLASS, our mattress cover
business. Importantly, CLASS has allowed us to design
from fabric to finished cover and reach new customers and
additional market segments, especially the Internet bedding
space, with solid growth prospects.
With our outstanding performance in fiscal 2016,
we have established a strong competitive position in
our mattress fabric business. We are excited about the
opportunities to build upon our success as we move
forward with our multi-year expansion plans. We are
underway with additional projects in our North Carolina
facilities to add more production capacity, expand our
design facilities and significantly improve our distribution
capabilities. We recently commenced the second phase
of our Canadian expansion project, including additional
equipment, finishing capabilities and a new distribution
platform that will allow us to improve deliveries and better
serve our customers in Canada. Together, these projects
will further strengthen our infrastructure and support our
growth strategy, and we look forward to the opportunities
ahead for Culp during fiscal 2017.
Upholstery Fabric Segment
For fiscal 2016, upholstery fabric sales were $126.4
million, down 3.1 percent compared with $130.4 million in
fiscal 2015. In spite of slightly lower sales, we delivered a
strong operating performance and solidified our reputation
as an industry leader with exceptional products and service
for our customers. Operating income for the year was
$11.3 million, up 39 percent over fiscal 2015, and return on
capital was 65 percent, a new record for this segment.
Our strategic focus on three critical areas – driving
design and innovation, providing a diverse range of
products, and expanding our customer base, both to new
end-user markets as well as to a broader global marketplace
– was the key driver of our performance for the year.
Our China platform provides us with significant
manufacturing flexibility, and we have continued to
leverage this capability to support our product-driven
strategy. Sales of China produced fabrics accounted for 91
percent of upholstery fabric sales in fiscal 2016, and our
improved operating performance reflects a more favorable
product mix of fabric styles and price points. We also
benefited from a more stable cost environment in China,
with lower input costs for raw materials and a favorable
currency exchange rate.
Looking ahead, in spite of uncertain retail market
conditions, we remain confident about the long-term
opportunities for our upholstery fabric business. We had
impressive showings at all the major furniture markets this
past year with solid placements. Customer response to
our latest product offerings was favorable, especially with
the introduction of our new “performance” line of highly
durable, stain-resistant upholstery fabrics. We will continue
our relentless drive to meet the changing demands of our
customers and keep up with current style trends. As such,
we believe Culp is well positioned for growth in upholstery
fabric, especially as a stronger economy and a more stable
U.S. housing market support higher consumer spending for
home furnishings.
Balance Sheet
Our disciplined approach to financial management
has remained an important priority for Culp. As a result,
we ended fiscal 2016 with a strong financial position of
$42.1 million in cash and cash equivalents and short-term
investments, up from the previous year’s ending balance
of $39.7 million, with no debt. Notably, this year over
year increase in cash was achieved even after spending
$11.5 million on capital expenditures, $8.1 million on
dividends, and $4.6 million on debt repayments and share
repurchases, for a total of $24.2 million spent during fiscal
2016. Free cash flow for the year was $15.2 million, slightly
up from last year’s $15.1 million.
“ C U L P H A S A P R O V E N R E P U T A T I O N A S A N I N D U S T R Y
L E A D E R K N O W N F O R I N N O V A T I V E P R O D U C T S A N D
C R E A T I V E F A B R I C D E S I G N S . ”
4
All style, no stain.
Top left, photo courtesy of Angelo Home
5
“ F U N C T I O N + S T Y L E L I V E T O G E T H E R A T C U L P ”
As we look to fiscal 2017, we expect another year of
strong free cash flow, with capital expenditures projected to
approximate the $11.5 million spent during fiscal 2016 and
modest growth in working capital.
Capital Allocation Strategy
Our performance for fiscal 2016 also reflects the consistent
execution of our capital allocation strategy, as we again met our
stated objectives for the year.
Our first priority is to fund organic growth in both of our
businesses. In fiscal 2016, we spent $11.5 million in capital
expenditures, most of which related to our mattress fabric
business. In line with our commitment to use additional cash
for dividends and share repurchases, we increased our regular
quarterly dividend by 17 percent to $0.07 per share, or an annual
rate of $0.28 per share, commencing in the third quarter. We
also repurchased 100,776 shares of Culp common stock for
$2.4 million at an average price of $23.79 per share.
Our net cash position of $42.1 million at the end of fiscal
2016 was well above our $31.0 million target level, or ten
percent of annual sales. These excess funds are intended for
payment of special dividends and share repurchases, subject
to cash availability in the United States, prevailing market
conditions and the overall business outlook, and assuming
there are no acquisition opportunities. Commensurate with this
strategy, we paid another special dividend of $0.21 per share
following the end of fiscal 2016. Together, these actions reflect
our commitment to generating value for our shareholders and
also demonstrate our confidence in Culp’s future.
Looking Ahead
Our ability to drive creativity and innovation continues to
set Culp apart in today’s global marketplace, and we intend to
pursue this same strategic direction in the year ahead. We are
well positioned to offer products that reflect current style trends
and meet changing customer demand with our flexible and
scalable global manufacturing platform, backed by exceptional
service. We will continue to make the right investments to
further enhance our design and production capabilities and
strengthen our competitive advantage. Importantly, we have the
financial strength to support these initiatives and, at the same
time, deliver greater value for our shareholders. Above all, we are
committed to outstanding performance for our customers as a
financially stable and trusted source for innovative fabrics.
We are fortunate to be surrounded by an extraordinary group
of seasoned Culp associates around the globe who consistently
outperform our expectations. We are inspired every day by
their dedication, talent and unwavering commitment in serving
our customers. We also wish to acknowledge the outstanding
leadership of our management team and board of directors.
Together, we look forward to the opportunities before us in fiscal
2017 and beyond.
Thank you for your support of Culp.
Sincerely,
Franklin N. Saxon
President and Chief Executive Officer
Robert C. Culp, III
Chairman of the Board
6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 1, 2016
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 May 1, 2016, 12,265,489 shares of common stock were outstanding. As of November 1, 2015, the
aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $323,277,203
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 21, 2016 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 and Commercial Furniture Industry .......................................... 7
Products ............................................................................................................................ 7
Manufacturing and Sourcing............................................................................................. 9
Product Design and Styling ............................................................................................ 10
Distribution ..................................................................................................................... 11
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 ........................................................................................ 15
Backlog ........................................................................................................................... 15
Risk Factors ........................................................................................................................ 16
Unresolved Staff Comments ............................................................................................... 20
Properties ............................................................................................................................ 20
Legal Proceedings ............................................................................................................... 21
Mine Safety Disclosure ....................................................................................................... 21
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 ......................................................................................................................... 85
Controls and Procedures ..................................................................................................... 85
Other Information ............................................................................................................... 87
Item No.
10.
11.
12.
13.
14.
Page
PART III
Directors, Executive Officers, and Corporate Governance................................................. 87
Executive Compensation .................................................................................................... 87
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .......................................................................................................... 87
Certain Relationships, Related Transactions, and Director Independence ......................... 88
Principal Accountant Fees and Services ............................................................................. 88
PART IV
15.
Exhibits and Financial Statement Schedules ...................................................................... 89
Documents Filed as Part of this Report .............................................................................. 89
Exhibits ............................................................................................................................... 91
Financial Statement Schedules ........................................................................................... 91
Signatures ........................................................................................................................... 92
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 or alter such statements
whether as a result of new information, future events or otherwise. 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,” “project,” “anticipate,” “depend” 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, capital expenditures, income taxes,
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. Finally, increases in market prices for petrochemical products can significantly
affect the prices we pay for raw materials, driving up our operating costs and putting downward pressure
on our profits. 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. A forward-looking statement is neither a prediction nor a
guarantee of future events or circumstances, and those future events or circumstances may not occur.
PART 1
ITEM 1. BUSINESS
Overview
Culp, Inc. manufacturers, sources, and markets mattress fabrics and sewn covers for mattresses,
foundations and other bedding products; and upholstery fabrics, including cut and sewn kits,
primarily used in the production of upholstered furniture. The company competes in a fashion-
driven business, and we strive to differentiate ourselves by placing sustained focus on product
innovation and creativity along with excellent and dependable service to our customers. Our
focused efforts to protect our financial strength have allowed us to maintain our position as a
financially stable and trusted supplier of innovative 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
fabrics business markets primarily knitted and woven fabrics, and sewn covers made from those
fabrics, which are used in the production of bedding products, including mattresses, foundations,
and mattress sets. The upholstery fabrics business markets a variety of fabric products that are
used principally in the production of residential and commercial upholstered furniture, including
sofas, recliners, chairs, loveseats, sectionals, sofa-beds and office seating.
Culp markets a variety of fabrics in different categories to a global customer base, including
fabrics produced at our manufacturing facilities and fabrics produced by other suppliers. We had
thirteen active manufacturing plants and distribution facilities as of the end of fiscal 2016,
located in North and South Carolina; Quebec, Canada; and Shanghai, China. We also source
fabrics from other manufacturers, located primarily in China and Turkey, with almost all of those
fabrics 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. 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 91% of our sales now consist of
fabrics produced in Asia.
Total net sales in fiscal 2016 were $312.9 million. The mattress fabrics segment had net sales of
$186.4 million (60% of total net sales), while the upholstery fabrics segment had net sales of
$126.4 million (40% of total net sales).
During fiscal 2016, both segments continued to build upon strategic initiatives and structural
changes that were implemented over the last several years. The flexible manufacturing and
sourcing platform created through these changes has allowed Culp to place a greater emphasis on
product innovation and the introduction of new designs to keep current with industry trends and
differentiate our products. This approach has helped us drive continued sales growth, with fiscal
2016 representing our seventh consecutive year of higher net sales.
2
Industry strength and demand for our products has improved during the past several years, with a
stronger recovery in the bedding industry than in the upholstered furniture business. During the
same period, we have experienced positive responses from customers to our innovative designs
and new product introductions during these years with improved profitability. Sales and
operating income in mattress fabrics increased 4% and 22%, respectively, during fiscal 2016.
Net sales for upholstery fabrics were slightly lower in fiscal 2016, but our operating income
showed significant improvement due to a more profitable product mix. Both business segments
experienced lower raw material costs and lower operating expenses due to more favorable
foreign currency exchange rates. An increasing percentage of our sales are now based on new
product introductions. For the company as a whole, pre-tax income for fiscal 2016 was $27.9
million, the highest level in company history, exceeding the record level of the previous year.
The mattress fabrics segment has made strategic investments in capital projects and expansion
initiatives in recent years. Investments have been targeted at expanding capacity, continuing
improvements in service capabilities, maintaining a flexible approach to fabric sourcing, and
dealing with challenging industry conditions. The mattress fabrics segment has also expanded its
design capabilities with additional personnel and product software to enhance innovation.
During fiscal 2013, this segment announced a joint marketing agreement to market sewn
mattress covers, which involved the establishment of a new production facility. In fiscal 2014,
we completed an asset purchase and related consulting agreement that provided for, among other
things, the purchase of equipment and certain other assets and the restructuring of prior
consulting and non-compete agreements. These initiatives have allowed for further expansion of
our mattress fabrics business.
Our upholstery fabrics segment underwent major changes over the past decade, transforming
from a primarily U.S.-based manufacturing operation with large amounts of fixed assets, to a
more flexible variable cost model, with most fabrics sourced in Asia. 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. This
multi-year trend of declining upholstery revenues and profits has reversed, with sales and income
for this segment well above the levels reached during the Great Recession, and pre-tax income
establishing a new record in fiscal 2016. Since the end of our multi-year restructuring, we have
focused on product innovation and marketing, including the exploration of new markets.
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.
3
Culp maintains an Internet website at www.culp.com. We will make this annual report and our
other annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to these reports available free of charge on our Internet site as soon as
reasonably practicable after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission. Information included on our website is not incorporated
by reference into this annual report.
Segments
Our two operating segments are mattress fabrics and upholstery fabrics. The following table sets
forth certain information for each of our segments.
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 2016
$186.4
$115.2
11.2
$126.4
$312.9
(60%)
(37%)
(3%)
(40%)
(100%)
Fiscal 2015
$179.7
$119.1
$11.3
$130.4
$310.2
(58%)
(38%)
(4%)
(42%)
(100%)
Fiscal 2014
$160.7
$116.0
$10.5
$126.5
$287.2
(56%)
(40%)
(4%)
(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 and mattress covers to bedding manufacturers. These
products include 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 and St. Jerome facilities house 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
primarily by producers of specialty (non-innerspring) bedding. We have also maintained
flexibility in our supply of the major categories of mattress fabrics and some sewn covers, with
sourcing capacity located in Turkey and China. Most of our woven jacquard and knitted fabrics
can be produced in multiple facilities (internal or external to the company), providing us with
mirrored, reactive capacity involving state of the art capabilities across plant facilities.
Culp Home Fashions had capital expenditures during the past ten years totaling approximately
$56 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 and an improved platform for warehousing and distribution. In order to maintain our
leading edge technology and support modernization and expansion projects, we significantly
increased our capital investments in the mattress fabrics segment during fiscal 2015 and 2016.
4
Asset acquisition transactions in fiscal 2009 and fiscal 2014 allowed us to enhance and secure
our competitive position and to increase our mattress fabrics business. Taken together, the two
transactions allowed us to secure our supply for knitted mattress fabrics, an important and
growing product category, while also gaining control of product development and enhancing
customer service. The transactions also involved consulting and non-compete agreements that
enhanced our mattress fabrics product development and helped to secure our end markets. In
addition to these transactions, we have continued to make further investments in knitting
machines and finishing equipment, increasing our internal production capacity substantially.
Our sewn mattress cover business, 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 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 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 great flexibility in meeting demand for mattress covers from
bedding producers.
Upholstery Fabrics. The upholstery fabrics segment markets fabrics for residential and
commercial furniture, including jacquard woven fabrics, velvets, microdenier suedes, woven
dobbies, knitted fabrics, piece-dyed woven products, and polyurethane “leather look” fabrics.
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 upholstery accounted for approximately 91% of our upholstery fabric
sales. Our China facilities near Shanghai include fabric sourcing, finishing, warehousing, 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. Important 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
have expanded our marketing efforts to sell our China products in countries other than the U.S.,
including the Chinese local market. The U.S. facility in South Carolina produces a variety of
woven upholstery fabrics, including velvets and certain decorative fabrics.
During fiscal 2015 we closed our distribution warehouse in Poland that had been established to
support sales in Europe. We are currently reviewing the company’s best long-term strategy for
marketing upholstery fabrics in Europe.
Our upholstery fabrics business has moved from one that relied on a large fixed capital base that
was difficult to adjust to a more flexible and scalable marketer of upholstery fabrics that meets
changing levels of customer demand and style preferences. 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 control the costs of our products, while continuing to
leverage our design and finishing expertise, industry knowledge, and important relationships.
5
Our upholstery fabrics sales decreased slightly in fiscal 2016 after six consecutive years of
growth, while operating income for this segment increased strongly during the year. We believe
the positive trends in sales and profits for the upholstery fabrics segment are due primarily to
implementation of a business strategy that has included: 1) innovation in a low-cost
environment, 2) speed-to-market execution, 3) consistent quality, 4) reliable service and lead
times, and 5) increased recognition of and reliance on the Culp brand. Success in upholstery
fabrics has been achieved through development of a unique business model that has enabled the
upholstery segment to execute a strategy that we believe is clearly differentiated from 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 three principal markets. The
mattress fabrics segment supplies the bedding industry, which produces mattress sets
(mattresses, box springs, foundations and top of bed components). The upholstery fabrics
segment supplies the residential furniture industry and, to a lesser extent, the commercial
furniture industry. The residential furniture market includes upholstered furniture sold to
consumers for household use, including sofas, sofa-beds, chairs, recliners, and sectionals. The
commercial furniture and fabrics market includes upholstered office seating and modular office
systems sold primarily for use in offices and other institutional settings, fabrics used in the
hospitality industry, and commercial textile wall coverings. 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 that
market.
Overview of Bedding Industry
The bedding industry has contracted and expanded in recent years in accordance with the general
economy, although traditionally the industry has been relatively mature and stable. This is due
in part to the fact that a majority of bedding industry sales are replacement purchases, which are
less volatile than sales based on economic growth and new household formations. Unlike the
residential furniture industry, which continues to face 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 inventory 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.
A key trend driving the bedding industry is increased awareness among consumers about the
health benefits of better sleep, which has caused an increased focus on the quality of bedding
products and an apparent willingness on the part of consumers to upgrade their bedding.
Another important trend is the strong and growing emphasis on the design knitted or woven into
mattress 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
6
fashion. Another trend has been the growth in non-traditional sources for retail mattress sales
such as internet sales and wholesale warehouse clubs. These sales channels have the potential to
increase overall consumption of goods due to convenience and high traffic volume, which in turn
results in higher turnover of product. Among fabric types, knitted fabrics have continued to
increase in popularity. Knitted fabric was initially used primarily on premium mattresses, but
these products are now being placed increasingly on mattresses at mid-range to lower retail price
points.
Overview of Residential and Commercial Furniture Industry
Sales of residential and commercial furniture were both severely affected by the global economic
downturn in 2008-2009, and have now been in recovery for several years along with the overall
economy. The pace of recovery since 2010 has been relatively steady, but modest, as has the
growth rate for the economy as a whole. Sales of residential furniture are influenced
significantly by the housing industry and by trends in home sales and household formations,
while demand for commercial furniture generally reflects economic trends affecting businesses.
The sourcing of components and fully assembled furniture from overseas continues to play a
major role in the furniture industry. By far, the largest source for these imports continues to be
China. Imports of upholstery fabric, both in roll and in “kit” form, have also 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 have resulted in increased price competition in the upholstery
fabric and upholstered furniture markets. Prices for leather have created increased opportunities
for suppliers of “leather look” and suede fabrics, and for suppliers of upholstery generally.
In general, 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. Intense price
competition continues to be an important consideration for both residential and commercial
furniture.
Products
As described above, our products include mattress fabrics and upholstery fabrics, which are our
identified operating segments. These fabrics are sold in roll form and as sewn mattress covers by
the mattress fabrics segment, and in roll form and as cut and sewn kits by the upholstery fabrics
segment.
Mattress Fabrics Segment
Mattress fabrics segment sales constituted 56% to 60% of our total net sales in each of the past
three fiscal years. The company has emphasized fabrics that have broad appeal at prices
generally ranging from $1.50 to more than $10.00 per yard.
Upholstery Fabrics Segment
Upholstery fabrics segment sales totaled 40% to 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 $3.00 to $10.00 per yard.
7
Culp Product 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
Various patterns and intricate designs. Woven on complex looms
using a variety of synthetic and natural yarns.
Suedes, pile and embroidered fabrics, and other specialty type
products are sourced to offer diversity for higher end mattresses.
Various patterns and intricate designs produced on special-width
circular knit machines utilizing a variety of synthetic and natural yarns.
Knitted mattress fabrics have inherent stretching properties and spongy
softness, which conforms well with layered foam packages.
Sewn mattress covers
Covers for bedding (primarily non-inner spring), sewn from knitted,
jacquard and other mattress fabrics produced by our facilities or
sourced from others.
Upholstery Fabrics
Woven jacquards
Woven dobbies
Velvets
Suedes
Faux leathers
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.
Soft fabrics with a plush feel. Woven or knitted in basic designs,
using synthetic yarns which are yarn dyed or piece dyed.
Fabrics woven or knitted using microdenier polyester yarns, which
are piece dyed and finished, usually by sanding. The fabrics are
typically plain or small jacquard designs, with some being printed.
These are sometimes referred to as microdenier suedes.
Sueded or knitted base cloths which are overprinted with
polyurethane, and composite products consisting of a base fabric
which is coated with a top layer of polyurethane, which simulate the
look and feel of leather.
Cut and sewn kits
Covers made from various types of upholstery fabrics and cut and
sewn to specifications of furniture manufacturing customers for use
on specific furniture frames.
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 ten fiscal years, we made capital expenditures of approximately $56 million to
consolidate all of our production of woven jacquards, or damask fabric, to these plants and to
modernize both knit and weaving equipment, enhance and provide knit and woven 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 fabrics and knitted fabrics are produced at the St. Jerome plant, with further
jacquard capacity at our main Stokesdale facility and knitting capacity at our High Point facility.
Most finishing and inspection processes for mattress fabrics are conducted at the main
Stokesdale plant. We have a joint marketing arrangement with a producer of sewn mattress
covers for bedding. This arrangement includes 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
and a production schedule created by Culp. We are also sourcing some Culp-designed knitted
fabrics using our Culp China platform, and we are also 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 three in China. The
U.S. plant is located in Anderson, South Carolina, and mainly produces velvet upholstery fabrics
with some production of certain decorative fabrics.
Our upholstery manufacturing facilities in China are all located within the same industrial area
near Shanghai. At these 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. Our facilities in China provide a base from
which to access a variety of products, including certain fabrics (such as microdenier suedes and
polyurethane fabrics) that are not produced anywhere within the U.S. We have found
opportunities to develop significant relationships with key overseas suppliers in China that allow
us to source products on a cost-effective basis, while limiting our investment of capital in
manufacturing assets. We source unfinished and finished fabrics, as well as a portion of our cut
and sewn kits, from a limited number of strategic suppliers in China who are willing to commit
significant capacity to meet our needs while working with our product development team to meet
9
the demands of our customers. We also source a portion of our yarns for our U.S. operation
through our China facilities. The remainder of our yarn is obtained from other suppliers around
the world.
Product Design and Styling
Consumer tastes and preferences related to bedding and upholstered furniture change over time.
The use of new fabrics and creative 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 a very 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 routinely introduced on a scheduled season. Designs are typically
introduced upon the request of the 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 Las Vegas, Nevada, and High Point, North Carolina.
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 focus on value in designing body cloths, while
promoting style leadership with pillow fabrics and color. Our design staff travels regularly to
international trade and design shows to maintain familiarity with current design and fashion
trends. 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 that 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.
10
Distribution
Mattress Fabrics Segment
The vast majority of our shipments of mattress fabrics originate from our facilities in Stokesdale,
North Carolina. Through arrangements with major customers and in accordance with industry
practice, we maintain a significant inventory of mattress fabrics at our distribution facility in
Stokesdale (“make to stock”), so that products may be shipped to customers with short lead times
and on a “just in time” basis.
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, North Carolina, and Shanghai, China. In
addition to “make to order” distribution, an inventory of a limited number of fabric patterns is
held at our distribution facilities in Burlington and Shanghai from which our customers can
obtain quick delivery of sourced fabrics through a program known as “Culp Express.”
Beginning in fiscal 2010 and continuing through fiscal 2016, market share opportunities have
been expanded through strategic selling partnerships.
Sources and Availability of Raw Materials
Mattress Fabrics Segment
Raw materials account for approximately 60%-70% of mattress fabric production costs. The
mattress fabrics segment purchases synthetic yarns (polyester, polypropylene, 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 (polyester, acrylic,
rayon, and polypropylene), 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. During fiscal 2015 and 2016, our profitability was aided by lower raw
material prices due to lower oil prices.
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 sales often higher 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 timing of 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 BekaertDeslee Textiles, Global Textile Alliance, and
several smaller companies producing knitted and other fabric.
Upholstery Fabrics Segment
In the upholstery fabrics market, we compete against a large number of companies, ranging from
a few large manufacturers comparable in size to the company to small producers, and a growing
number of “converters” of fabrics (companies who buy and re-sell, but do not manufacture
fabrics). We believe our principal upholstery fabric competitors are Dorell Fabrics Co.,
Merrimack Fabrics, Morgan Fabrics, Richloom 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.
12
Our operations involve a variety of materials and processes that are subject to environmental
regulation. Under current law, environmental liability can arise from previously owned
properties, leased properties and properties owned by third parties, as well as from properties
currently owned and leased by the company. Environmental liabilities can also be asserted by
adjacent landowners or other third parties in toxic tort litigation.
In addition, under the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended (“CERCLA”), and analogous state statutes, liability can be imposed for
the disposal of waste at sites targeted for cleanup by federal and state regulatory authorities.
Liability under CERCLA is strict as well as joint and several.
The U.S. Congress is 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 affect 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.
Employees
As of May 1, 2016, we had 1,217 employees, compared with 1,188 at the end of fiscal 2015.
Overall, our total number of employees has remained fairly steady over the past five years, with
increases in the mattress fabrics segment and decreases in the upholstery segment during that
period.
The hourly employees at our manufacturing facility in Canada (approximately 14% of the
company’s workforce) are represented by a local, unaffiliated union. The collective bargaining
agreement for these employees expires on February 1, 2017. 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.
13
Fiscal
2016
682
134
-
397
531
4
1,217
Mattress Fabrics Segment
Upholstery Fabrics Segment
United States
Poland
China
Total Upholstery Fabrics Segment
Unallocated corporate
Total
Customers and Sales
Mattress Fabrics Segment
Number of Employees
Fiscal
2014
592
Fiscal
2015
631
Fiscal
2013
577
129
-
424
553
4
1,188
129
4
438
571
4
1,167
121
5
464
590
4
1,171
Fiscal
2012
492
113
8
497
618
4
1,114
Major customers for our mattress fabrics include the leading bedding manufacturers: Serta-
Simmons Bedding (SSB), Tempur + Sealy International (TSI), and Corsicana Bedding. Our two
largest customers in the mattress fabrics segment are (1) Serta Simmons Holdings, LLC,
accounting for approximately 23% of the company’s overall sales in fiscal 2016, and (2) Tempur
+ Sealy International, Inc., accounting for approximately 11% of our overall sales in fiscal 2016.
Our mattress fabrics customers also
include many small and medium-size bedding
manufacturers.
Upholstery Fabrics Segment
Our major customers for upholstery fabrics are leading manufacturers of upholstered furniture,
including Ashley, Bassett, Best Home Furnishings, Flexsteel, Heritage Home Group (Broyhill
and Lane), Jackson Furniture, Jonathan Louis, La-Z-Boy (La-Z-Boy Residential and England),
and Southern Motion. Major customers for the company’s fabrics for commercial furniture
include HON Industries. Our largest customer in the upholstery fabrics segment is La-Z-Boy
Incorporated, which accounted for 13% of the company’s consolidated sales in fiscal 2016.
14
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)
Fiscal 2016
Fiscal 2015
Fiscal 2014
United States
North America
(Excluding USA)(1)
Far East and Asia(2)
All other areas
Subtotal
(International)
Total
$ 244,930
$ 31,667
78.3% $ 242,833
78.3% $ 232,078
80.8%
10.1% $ 30,758
10.0% $ 15,556
5.4%
31,927
4,336
10.2%
1.4%
31,855
4,720
10.3%
1.4%
33,487
6,041
11.7%
2.1%
$ 67,930
21.7% $ 67,333
21.7% $ 55,084
19.2%
$ 312,860
100.0% $ 310,166
100.0% $ 287,162
100.0%
(1) Of this amount, $24.2 million are attributable to shipments to Mexico in fiscal 2016, with
corresponding amounts of $24.1 million in fiscal 2015 and $9.3 million in fiscal 2014.
(2) Of this amount, $23.1 million are attributable to shipments to China in fiscal 2016, with
corresponding amounts of $26.5 million in fiscal 2015 and $32.2 million in fiscal 2014.
Sales are attributed to individual countries based upon the location that the company ships its
products for delivery to customers.
For additional segment information, including the geographic location of long-lived assets, see
Note 16 in the consolidated financial statements.
Backlog
Mattress Fabrics Segment
The backlog for mattress fabric is not a reliable predictor of future shipments because the
majority of sales are on a just-in-time basis.
Upholstery Fabrics Segment
Although it is difficult to predict the amount of backlog that is “firm,” we have reported the
portion of the upholstery fabric backlog from customers with confirmed shipping dates within
five weeks of the end of the fiscal year. On May 1, 2016, the portion of the upholstery fabric
backlog with confirmed shipping dates prior to June 6, 2016, was $8.4 million, all of which are
expected to be filled early during fiscal 2017, as compared to $9.4 million as of the end of fiscal
2015 (for confirmed shipping dates prior to June 7, 2015).
15
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. The risks described below are not the only risks we face.
Additional risks and uncertainties not presently known to us or not presently deemed material by
us also may materially adversely affect our business, financial condition or results of operations
in future periods.
Continued economic 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. Economic uncertainty has 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 challenging to maintain and increase sales levels in the upholstery fabrics segment.
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.
Greater 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 rely significantly on operations in distant locations, particularly China, and in addition we
have been purchasing a significant share of our products and raw materials from offshore
sources, particularly Asia and Turkey. At the same time, our domestic manufacturing capacity
for the upholstery fabrics segment has been greatly reduced. These changes have caused us to
rely 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.
16
We may have difficulty managing the outsourcing arrangements 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.
Write-offs or write-downs of assets would result in a decrease in our earnings and
shareholders’ equity.
The company has long-lived assets, primarily consist of property, plant and equipment, goodwill,
and to a lesser extent other intangible assets. 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 and
other intangible assets 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
material 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 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. Although our raw material costs were lower during our most recent fiscal years, 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
17
have varied significantly during recent fiscal years, and remain a volatile element of our costs.
Increases in energy costs could have a negative effect on our earnings.
Business difficulties or failures of large customers could result in a decrease in our sales
and earnings.
We currently have several customers that account for a substantial portion of our sales. In the
mattress fabrics segment, several large bedding manufacturers have large market shares and
comprise a significant portion of our mattress fabric sales, with Serta Simmons Holdings, LLC
accounting for approximately 23% of consolidated net sales, and Tempur Sealy International,
Inc. accounting for approximately 11% of consolidated net sales, in fiscal 2016. In the
upholstery fabrics segment, La-Z-Boy Incorporated accounted for approximately 13% of
consolidated net sales during fiscal 2016, 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, or the loss of one or more of these 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 decreases in earnings.
18
Increasing dependence on information technology systems comes with specific risks,
including cybersecurity breaches and data leaks, which could have an adverse effect on our
business.
We increasingly rely on technology systems and infrastructure. Greater dependence on such
systems heightens the risk of potential vulnerabilities from system failure and malfunction,
breakdowns due to natural disasters, human error, unauthorized access, power loss, and other
unforeseen events. Data privacy breaches by employees and others with or without authorized
access to our systems poses risks that sensitive data may be permanently lost or leaked to the
public or other unauthorized persons. With the growing use and rapid evolution of technology,
not limited to cloud-based computing and mobile devices, there are additional risks of
unintentional data leaks. There is also the risk of our exposure to theft of confidential
information, intentional vandalism, industrial espionage, and a variety of cyber-attacks that could
compromise our internal technology system and infrastructure, or result in data leakage in-house
or at our third-party providers and business partners. Failures of technology or related systems,
or an improper release of confidential information, could damage our business or subject us to
unexpected liabilities.
We are subject to litigation and environmental regulations that could adversely impact our
sales and earnings.
We have been, and in the future may be, a party to legal proceedings and claims, including
environmental matters, product liability, and employment disputes, some of which claim
significant damages. We face the continual business risk of exposure to claims that our business
operations have caused personal injury or property damage. We maintain insurance against
product liability claims and in some cases have indemnification agreements with regard to
environmental claims, but there can be no assurance that these arrangements will continue to be
available on acceptable terms or that such arrangements will be adequate for liabilities actually
incurred. Given the inherent uncertainty of litigation, there can be no assurance that claims
against the company will not have a material adverse impact on our earnings or financial
condition. We are also subject to various laws and regulations in our business, including those
relating to environmental protection and the discharge of materials into the environment. We
could incur substantial costs as a result of noncompliance with or liability for cleanup or other
costs or damages under environmental laws or other regulations.
We must comply with a number of governmental regulations applicable to our business,
and changes in those regulations could adversely affect our business.
Our products and raw materials are and will continue to be subject to regulation in the United
States by various federal, state, and local regulatory authorities. In addition, other governments
and agencies in other jurisdictions regulate the manufacture, sale, and distribution of our
products and raw materials. 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.
19
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in High Point, North Carolina. As of the end of fiscal 2016, we leased our
corporate headquarters and owned or leased thirteen manufacturing and distribution facilities. 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 (1)
High Point, North Carolina
Summerfield, North Carolina
St. Jerome, Quebec, Canada
• Upholstery Fabrics:
Anderson, South Carolina
Burlington, North Carolina (2)
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Upholstery fabric division
offices and corporate
headquarters
Manufacturing, distribution,
and division offices
Warehouse
Manufacturing
Warehouse and offices
Manufacturing
Manufacturing
Manufacturing
Finished goods distribution
Manufacturing and offices
Manufacturing and offices
Manufacturing and warehousing
Warehouse and offices
Warehouse
____________________________________________________
(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
293,958
Owned
56,950
63,522
65,886
39,320
202,500
99,000
132,000
68,677
89,857
89,861
64,583
48,610
2017
2023
2017
2017
Owned
Owned
-
2018
2018
2017
2017
2018
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.
20
ITEM 3. LEGAL PROCEEDINGS
Our legal proceedings are described more fully in Note 11 in the notes to the consolidated financial
statements.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Registrar and Transfer Agent
Computershare Trust Company, N.A.
c/o Computershare Investor Services
Post Office Box 30170
College Station, TX 77842
(800) 254-5196
(781) 575-2879 (Foreign shareholders)
www.computershare.com/investor
Stock Listing
Culp, Inc. common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol CFI.
As of May 1, 2016, Culp, Inc. had approximately 3,120 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
Stifel Financial Corp - John A. Baugh, CFA
Stonegate Capital Partners, Inc. – Marco Rodriguez, CFA
21
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)
-
$1,859,274
Period
February 1, 2016 to
March 6, 2016
March 7, 2016
April 3, 2016
to
-
$ -
-
$1,859,274
April 4, 2016 to May
1, 2016
-
$ -
-
$1,859,274
Total
-
$ -
-
$1,859,274
(1) On February 25, 2014, we announced that our board of directors approved an authorization for us
to acquire up to $5.0 million of our common stock. During fiscal 2016, we purchased 100,776
shares of common stock at a cost of $2.4 million, all of which were purchased during the third
quarter. At May 1, 2016, we had $1.9 million available for additional repurchases of common
stock pursuant to the authorization by our board of directors dated February 25, 2014. On June
15, 2016, we announced that our board of directors increased the authorization for us to acquire
up to $5.0 million of our common stock.
Dividends
On June 15, 2016, we announced that our board of directors approved the payment of a special cash
dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.07 per share. These
dividend payments are payable on July 15, 2016, to shareholders of record as of July 1, 2016.
During fiscal 2016, dividend payments totaled $8.1 million, of which $5.0 million represented a special
cash dividend payment in the first quarter of $0.40 per share, and $3.1 million represented our regular
quarterly cash dividend payments ranging from $0.06 to $0.07 per share.
During fiscal 2015, dividend payments totaled $7.6 million, of which $4.9 million represented a special
cash dividend payment in the first quarter of $0.40 per share, and $2.7 million represented our regular
quarterly cash dividend payments ranging from $0.05 to $0.06 per share.
During fiscal 2014, we paid regular quarterly cash dividends totaling $2.2 million that ranged from $0.04
to $0.05 per share.
Future dividend payments are subject to Board approval and may be adjusted at the Board’s discretion as
business needs or market conditions change.
Sales of Unregistered Securities
There were no sales of unregistered securities during fiscal 2016, 2015, or 2014.
22
Performance Comparison
The following graph shows changes over the five fiscal years ending May 1, 2016 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 eight 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 2011 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 STATEMENT DATA
net sales
cost of sales
gross profit
selling, general, and administrative expenses
income from operations
interest expense
interest income
other expense
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
dividends per share
book value
BALANCE SHEET DATA
operating working capital (4)
property, plant and equipment, net
total assets
capital expenditures
dividends paid
long-term debt, current maturities of long-term debt and line of credit
shareholders' equity
capital employed (3)
RATIOS & OTHER DATA
gross profit margin
operating income margin
net income margin
effective income tax rate
debt to total capital employed ratio (1) (3)
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)
percent
change
2016/2015
0.9%
-2.7%
17.2%
12.2%
24.3%
-100.0%
-71.7%
57.5%
21.5%
39.0%
12.4%
15.6%
0.7%
0.4%
11.6%
11.9%
6.5%
7.5%
9.5%
10.8%
2.2%
-4.2%
7.4%
-100.0%
7.9%
8.6%
$
$
$
$
$
$
$
$
fiscal
2016
fiscal
2015
fiscal
2014
fiscal
2013
fiscal
2012
312,860
247,749
65,111
36,773
28,338
-
(176)
616
27,898
10,963
16,935
6,671
12,302
12,475
1.38
1.36
0.66
10.50
45,794
39,973
175,142
10,708
8,140
-
128,812
90,357
20.8%
9.1%
5.4%
39.3%
0.0%
7.0
27
5.6
35.23
22.72
26.24
26
17
67.3
310,166
254,599
55,567
32,778
22,789
64
(622)
391
22,956
7,885
15,071
5,773
12,217
12,422
1.23
1.21
0.62
9.77
41,829
36,078
171,300
11,174
7,579
2,200
119,427
83,225
17.9%
7.3%
4.9%
34.3%
2.6%
7.7
34
6.1
29.19
16.60
26.02
24
14
38.6
287,162
238,256
48,906
28,657
20,249
427
(482)
1,261
19,043
1,596
17,447
5,312
12,177
12,414
1.43
1.41
0.18
9.12
268,814
219,284
49,530
28,445
21,085
632
(419)
583
20,289
1,972
18,317
5,115
12,235
12,450
1.50
1.47
0.62
7.82
41,120
31,376
39,228
30,594
160,935
142,779
5,310
2,204
4,986
111,744
80,038
4,457
7,593
7,161
95,583
74,747
17.0%
18.4%
7.1%
6.1%
8.4%
6.2%
7.0
35
6.0
21.10
14.93
18.61
15
11
27.5
7.8%
6.8%
9.7%
9.6%
7.4
32
5.9
18.15
9.00
16.25
12
6
40.9
254,443
214,711
39,732
25,026
14,706
780
(508)
236
14,198
902
13,296
4,865
12,711
12,866
1.05
1.03
-
7.00
30,596
31,279
144,721
5,919
-
10,012
89,000
69,630
15.6%
5.8%
5.2%
6.4%
14.4%
8.9
36
6.6
11.81
7.05
11.05
11
7
30.6
(1) Debt includes long-term and current maturities of long-term debt and line of credit.
(2)
(3)
P/E ratios based on trailing 12-month diluted net income per share.
Capital employed does not include cash and cash equivalents, short-term investments, long-term investments,
current maturities of long-term debt, long-term debt, line of credit, noncurrent deferred tax assets and liabilities,
income taxes receivable and payable, and deferred compensation.
(4) Operating working capital for this calculation is accounts receivable and inventories, offset by accounts payable-trade and
account payable - capital expenditures.
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 and other exhibits included elsewhere in this report.
General
Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30. Fiscal 2016 and
2014 each included 52 weeks. Fiscal 2015 included 53 weeks. Our operations are classified into two
business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures,
sources and sells fabrics and mattress covers 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
good purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate
expenses primarily represent compensation and benefits for certain executive officers, all costs related to
being a public company, and other miscellaneous expenses.
Executive Summary
Results of Operations
(dollars in thousands)
May 1, 2016
May 3, 2015
Twelve Months Ended
Net sales
Gross profit
$
Gross profit margin
SG&A expenses
Income from operations
Operating margin
Income before income taxes
Income taxes
Net income
Net Sales
312,860
65,111
20.8%
36,773
28,338
9.1%
27,898
10,963
16,935
$
310,166
55,567
17.9%
32,778
22,789
7.3%
22,956
7,885
15,071
Change
0.9%
17.2%
290bp
12.2%
24.3%
180bp
21.5%
39.0%
12.4%
Overall, our net sales were slightly higher in fiscal 2016 compared to a year ago. We have remained
focused on our top strategic priorities of product innovation and creativity to provide a product mix that
meets the demands of our customers. Our scalable and flexible manufacturing platform supports this
strategy and we have made significant capital investments to improve our operating efficiencies and
overall capacity.
Our overall net sales for fiscal 2016 were also affected by the fact that fiscal 2016 contained one less
week of operations compared to a year ago.
25
Income Before Income Taxes
The increase in income before income taxes primarily reflects the significant improvement in our
operating results for both business segments. We continued to realize the benefits of our recent capital
investments in our mattress fabrics business, with increased capacity via newer and more efficient
equipment, enhanced finishing capabilities, and better overall throughput. We also incurred lower raw
material costs and operating expenses (primarily due to more favorable foreign currency exchange rates)
in both our business segments during fiscal 2016 compared with fiscal 2015. Partially offsetting the
improvement in income before income taxes was the increase in SG&A expenses due primarily to higher
incentive compensation expense reflecting stronger financial results in relation to pre-established
performance targets.
Income Taxes
We recorded income tax expense of $11.0 million, or 39.3% of income before income tax expense, in
fiscal 2016 compared with income tax expense of $7.9 million, or 34.3% of income before income tax
expense, in fiscal 2015. This increase was primarily due to the increase in taxable foreign currency
exchange gains associated with our operations located in China in fiscal 2016 compared with fiscal 2015.
See the Segment Analysis section located in the Results of Operations for further details.
Liquidity
At May 1, 2016, our cash and cash equivalents and short-term investments totaled $42.1 million
compared with $39.7 million at May 3, 2015. This year over year increase was achieved despite spending
$11.5 million on capital expenditures mostly associated with our mattress fabrics segment, $8.1 million
on dividend payments, $2.4 million on common stock repurchases, $2.2 million on a long-term debt
payment, and $1.6 million on long-term investment purchases associated with our Rabbi Trust. This
spending was more than offset by net cash provided by operating activities of $26.8 million.
Our net cash provided by operating activities of $26.8 million was slightly higher than the same period a
year ago.
On August 11, 2015, we paid our last annual payment of $2.2 million on our unsecured term notes, and
we currently do not have any long-term debt or balances due on our revolving credit lines.
On March 10, 2016, we amended our Credit Agreement with Wells Fargo Bank, N.A. (Wells Fargo) to
increase our borrowing capacity from $10 million to $30 million. The purpose of the increase in our
revolving credit line with Wells Fargo is to support potential short-term cash needs in different
jurisdictions within our global operations, mitigate our risk associated with foreign currency exchange
rate fluctuations, and support repatriation of earnings and profits from our foreign subsidiaries to the U.S.
for strategic purposes.
Dividend Program
On June 15, 2016, we announced that our board of directors approved the payment of a special cash
dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.07 per share. These
dividend payments are payable on July 15, 2016, to shareholders of record as of July 1, 2016.
During fiscal 2016, dividend payments totaled $8.1 million, of which $5.0 million represented a special
cash dividend payment in the first quarter of $0.40 per share, and $3.1 million represented our regular
quarterly cash dividend payments ranging from $0.06 to $0.07 per share.
26
During fiscal 2015, dividend payments totaled $7.6 million, of which $4.9 million represented a special
cash dividend payment in the first quarter of $0.40 per share, and $2.7 million represented our regular
quarterly cash dividend payments ranging from $0.05 to $0.06 per share.
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 February 25, 2014, we announced that our board of directors approved an authorization for us to
acquire up to $5.0 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 2016, we purchased 100,776 shares of our common stock at a cost of $2.4 million, all of
which were purchased during the third quarter. During fiscal 2015, we purchased 43,014 shares of our
common stock at a cost of $745,000, all of which were purchased in the first and second quarters.
At May 1, 2016, we had $1.9 million available for additional repurchases of our common stock pursuant
to the authorization by our board of directors dated February 25, 2014. On June 15, 2016, we announced
that our board of directors increased the authorization for us to acquire up to $5.0 million of our common
stock.
Results of Operations
The following table sets forth certain items in our consolidated statements of net income as a percentage
of net sales.
Fiscal Fiscal
2015
100.0%
82.1
17.9
10.6
7.3
0.2
(0.1)
7.4
34.3
4.9%
2016
100.0%
79.2
20.8
11.7
9.1
0.0
(0.2)
8.9
39.3
5.4%
Fiscal
2014
100.0%
83.0
17.0
9.9
7.1
0.0
(0.5)
6.6
8.4
6.1%
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Interest income, net
Other expense, net
Income before income taxes
Income taxes *
Net income
* Calculated as a percentage of income before income taxes.
27
2016 compared with 2015
Segment Analysis
Mattress Fabrics Segment
(dollars in thousands)
May 1, 2016
May 3, 2015
Change
Twelve Months Ended
Net sales
Gross profit
Gross profit margin
SG&A expenses
Income from operations
Operating margin
Net Sales
$
$
186,419
38,718
20.8%
12,223
26,496
14.2%
179,739
32,877
18.3%
11,206
21,671
12.1%
3.7%
17.8%
250bp
9.1%
22.3%
210bp
Our steady sales growth this fiscal year, outperformed overall industry trends. Our focus on design and
innovation has allowed us to create a diversified product mix of mattress fabrics and sewn covers across
most price points. We also achieved significant progress this year in our mattress cover business. This has
allowed us to reach new customers and additional market segments, especially the internet bedding space.
Our scalable manufacturing platform and reactive capacity supports our ability to deliver a diverse
product mix in line with customer demand.
Our mattress fabric net sales also were affected somewhat by increased customer pricing pressures and
the fact that fiscal 2016 contained one less week of operations compared with fiscal 2015.
Gross Profit and Operating Income
Our increase in gross profit and operating income reflect the benefits of our capital investments that were
placed into service in the last half of fiscal 2015, which include increased production capacity via newer
and more efficient equipment, enhanced finishing capabilities, and improved overall efficiency and
throughput. During the last half of fiscal 2016, we completed the first phase of our expansion project at
our facility located in Canada, which primarily included the installation of additional new equipment and
other technological improvements to our manufacturing platform. In early fiscal 2017, we will commence
the second phase of our expansion project, which includes additional equipment, finishing capabilities,
and a new distribution platform that we expect will improve our service to customers located in Canada.
Also, we have already commenced work on additional expansion projects associated with our facilities
located in North Carolina, which will add more capacity, expand our design facilities, and enhance our
distribution capabilities.
The increases in our gross profit and operating income for this segment were also due to lower raw
material costs and lower operating expenses due to more favorable exchange rates in Canada.
28
Partially offsetting the improvement in operating income was an increase in SG&A expenses, due
primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-
established performance targets. Also, the improvement in operating income was somewhat affected by
increased customer pricing pressures as noted above.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant and equipment, goodwill, a non-
compete agreement and customer relationships associated with an acquisition.
(dollars in thousands)
May 1, 2016
May 3, 2015
% Change
Accounts receivable
and inventory
Property, plant & equipment
Goodwill
Non-compete agreement
Customer Relationships
$
43,472
$
41,328
37,480
11,462
903
715
33,773
11,462
979
766
5.2%
11.0%
0.0%
(7.8)%
(6.7)%
Accounts Receivable & Inventory
The increase in accounts receivable and inventory are due to an increase in inventory of $4.6 million, as a
result of customers requiring us to hold higher inventory levels of key products. This was partially offset
by a decrease in accounts receivable of $2.5 million due to improved cash collections in the fourth quarter
of fiscal 2016 compared with the fourth quarter fiscal 2015.
Property, Plant & Equipment
The $37.5 million at May 1, 2016, represents property, plant and equipment of $24.8 million and $12.7
million located in the U.S. and Canada, respectively. The $33.8 million at May 3, 2015, represents
property, plant, and equipment of $23.8 million and $10.0 million located in the U.S. and Canada,
respectively.
The increase in property, plant, and equipment for this segment is due to the capital expansion projects
noted above, offset by depreciation expense.
Non-Compete Agreement and Customer Relationships
The decreases in carrying values of our non-compete agreement and customer relationships at May 1,
2016, are primarily due to amortization expense in fiscal 2016.
29
Upholstery Fabrics Segment
Net Sales
(dollars in thousands)
May 1, 2016
May 3, 2015
% Change
Twelve Months Ended
Non U.S. Produced
U.S Produced
Total
$
$
115,167
91%
$
119,177
11,274
9%
11,250
92%
8%
(3.4)%
0.2%
126,441
100%
$
130,427
100%
(3.1)%
Our decrease in net sales reflects softer retail demand for home furnishings and our strategy to enhance
both our customer and product mix to improve our profitability. Our upholstery fabric net sales were also
affected by the fact that fiscal 2016 contained one less week of operations compared with the same period
a year ago and by the closure of our finished goods warehouse and distribution facility located in Poland
during the third quarter of fiscal 2015.
Design and product innovation remain our top strategic priorities. This strategy has allowed us to offer a
diverse range of products that meet changing market trends and style preferences. As a result, we have
extended our market reach to a more diverse customer base, enhanced our product mix with profitable
results, and increased our net sales with the hospitality and lifestyle retail markets. Our 100% owned
China platform supports our marketing efforts with the manufacturing flexibility to adapt to changing
furniture market trends and consumer style preferences. This platform has allowed us to more effectively
reach new customers, with the ability to offer a diverse product mix of fabric styles and price points.
Gross Profit and Operating Income
(dollars in thousands)
May 1, 2016
May 3, 2015
Change
Twelve Months Ended
Gross profit
$
Gross profit margin
SG&A expenses
Income from operations
Operating margin
26,393
20.9%
15,094
11,298
8.9%
$
22,690
17.4%
14,562
8,128
6.2%
16.3%
350bp
3.7%
39.0%
270bp
30
The increases in this segment's gross profit and operating income reflect the benefits of our strategic focus
on product innovation and sales diversification. The benefits include an enhanced product mix that has
resulted in greater operating efficiency and capacity utilization. We also experienced lower raw material
costs and operating expenses due to more favorable foreign exchange rates in China.
Partially offsetting the improvement in income from operations was an increase in SG&A expenses due
primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-
established performance targets, and some pricing pressures from key customers.
Also, our profitability was affected by non-recurring charges of approximately $200,000 during the
second quarter of fiscal 2015 related to the closure of our Culp Europe operation. No corresponding
charge was recorded in fiscal 2016.
Culp Europe
At the end of the third quarter of fiscal 2015, we closed our finished goods warehouse and distribution
facility located in Poznan, Poland, primarily as a result of ongoing economic weakness in Europe.
Currently, we remain very interested in developing business in Europe, and we are assessing the best
strategy for selling upholstery fabric into this market as business conditions improve.
Segment Assets
Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.
(dollars in thousands)
May 1, 2016
May 3, 2015
Accounts receivable
and inventory
$
26,540
$
29,905
% Change
(11.3)%
Property, plant & equipment
1,564
1,467
6.6%
Accounts Receivable & Inventory
The decrease in accounts receivable and inventory are primarily due to a decrease in this segment's
accounts receivable as a result of lower net sales and improved cash collections in the fourth quarter of
fiscal 2016 compared with the fourth quarter of fiscal 2015.
Property, Plant & Equipment
The $1.6 million at May 1, 2016, represents property, plant, and equipment located in the U.S. of
$893,000 and located in China of $671,000. The $1.5 million at May 3, 2015, represents property, plant,
and equipment located in the U.S. of $848,000 and located in China of $619,000.
31
Other Income Statement Categories
(dollars in thousands)
May 1, 2016
May 3, 2015
% Change
Twelve Months Ended
SG&A expenses
Interest expense
Interest income
Other expense
$
36,773
-
176
616
$
32,778
64
622
391
12.2%
(100.0)%
(71.7)%
57.5%
Selling, General and Administrative Expenses
The increase in SG&A expenses is primarily due to higher incentive compensation expense reflecting
stronger financial results in relation to pre-established performance targets in fiscal 2016 compared to
fiscal 2015.
Interest Expense
Interest expense decreased in fiscal 2016 compared with fiscal 2015. This trend primarily reflects lower
outstanding balances of long-term debt and interest costs that were capitalized in connection with our
capital investments associated with our mattress fabrics segment. Interest costs charged to operations and
incurred on our long-term debt and lines of credit were $58,000 and $235,000 for fiscal 2016 and 2015,
respectively. Interest costs charged to operations were reduced by $58,000 and $171,000 for capitalized
interest costs for fiscal 2016 and 2015, respectively. These capitalized interest costs will be amortized
over the related assets' useful lives.
Interest Income
Interest income decreased in fiscal 2016 compared with fiscal 2015. This trend reflects higher cash and
cash equivalents and short-term investment balances held in U.S. dollar denominated account balances
during fiscal 2016 compared with fiscal 2015. Cash and cash equivalents and short-term investment
balances held in U.S. dollar denominated account balances earn lower interest rates as compared to our
cash and cash equivalents and short-term investment balances denominated in the local currency of our
foreign subsidiaries.
During fiscal 2016, we implemented a strategy of substantially reducing the amount of cash we hold in
Chinese Yuan Renminbi. Although this action resulted in lower interest income as compared to last year,
the strategy has mitigated our foreign currency exchange rate exposure in China. See discussion in "Other
Expense" below.
Other Expense
The increase in other expense was primarily due to foreign exchange rate fluctuations associated with our
subsidiaries domiciled in Canada and China. Our operations located in Canada and China reported a
foreign exchange gain of $6,000 in fiscal 2016 compared to $131,000 in fiscal 2015.
Our foreign exchange gain of $6,000 in fiscal 2016 reflects our ability to mitigate the effects of foreign
currency exchange rate fluctuations through the maintenance of a natural hedge by keeping a balance of
assets and liabilities denominated in foreign currencies other than the U.S. dollar. As noted above, we
made a concerted effort in fiscal 2016 to transfer significant amounts of cash we hold in Chinese Yuan
Renminbi to accounts denominated in U.S. dollars.
32
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 $11.0 million, or 39.3% of income before income tax expense, in
fiscal 2016 compared with income tax expense of $7.9 million, or 34.3% of income before income tax
expense, in fiscal 2015. The following schedule summarizes the principal differences between income tax
expense at the federal income tax rate and the effective income tax rate reflected in the consolidated
financial statements:
federal income tax rate
tax effects of Chinese foreign exchange gains
change in valuation allowance
change in North Carolina income tax rates
other
Deferred Income Taxes – Valuation Allowance
Summary
2016
34.0%
4.4
(1.2)
0.7
1.4
39.3%
2015
34.0%
0.3
(0.2)
-
0.2
34.3%
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 May 1,
2016, we recorded a partial valuation allowance of $590,000, of which $518,000 pertained to certain U.S.
state net operating loss carryforwards and credits and $72,000 pertained to loss carryforwards associated
with our Culp Europe operation located in Poland. Based on our assessment at May 3, 2015, we recorded
a partial valuation allowance of $922,000, of which $561,000 pertained to certain U.S. state net operating
loss carryforwards and credits and $361,000 pertained to loss carryforwards associated with our Culp
Europe operation located in Poland.
No valuation allowance was recorded against our net deferred tax assets associated with our operations
located in China and Canada at May 1, 2016 and May 3, 2015, respectively.
33
United States
Our partial valuation allowance against our U.S. net deferred assets totaled $518,000 and $561,000 at
May 1, 2016 and May 3, 2015, respectively. These valuation allowances pertain to 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 would not be realized prior to their respective expiration dates.
We recorded income tax benefits of $43,000 and $105,000 that reduced our valuation allowance against
our U.S. net deferred tax assets in fiscal years 2016 and 2015, respectively. These income tax benefits
pertain to a change in estimate of the recoverability of our U.S. state net loss operating carryforwards at
the end of the respective prior fiscal year.
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 a history of cumulative pre-tax losses.
Based on the negative evidence, as supported by our cumulative pre-tax loss history and the short
carryforward period of five years imposed by the Polish government, we established a full valuation
allowance against Culp Europe’s net deferred tax assets during fiscal 2013.
Our partial valuation allowance against our loss carryforwards associated with our Culp Europe operation
located in Poland totaled $72,000 at May 1, 2016. Our full valuation allowance against our loss
carryforwards associated with our Culp Europe operation located in Poland totaled $361,000 at May 3,
2015. These valuation allowances pertain to net operating loss carryforwards in which it is “more likely
than not” that these net operating loss carryforwards would not be realized prior to their respective
expiration dates.
During fiscal 20 16, we recorded an income tax benefit of $289,000 for a change in estimate of the
recoverability of our net loss operating carryforwards at the end of the respective prior fiscal year. During
fiscal 2015, we recorded an income tax charge of $50,000 for an increase in the full valuation allowance
against our net deferred tax assets associated with our Culp Europe operations.
Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries
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. Also, we assess the recognition of U.S. foreign
income tax credits associated with foreign withholding and income tax payments and whether it is more-
likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign
income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will
not be realized, an adjustment to our provision for income taxes will be recognized at that time.
At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6
million. At the same date, the deferred tax liability associated with our undistributed earnings from our
foreign subsidiaries totaled $604,000, which included U.S. income and foreign withholding taxes totaling
$38.5 million, offset by U.S. foreign income tax credits of $37.9 million.
At May 3, 2015, we had accumulated earnings and profits from our foreign subsidiaries totaling $85.2
million. At the same date, the deferred tax liability associated with our undistributed earnings from our
foreign subsidiaries totaled $1.7 million, which included U.S. income and foreign withholding taxes
totaling $32.4 million, offset by U.S. foreign income tax credits of $30.7 million.
34
Income Taxes Paid
We reported income tax expense of $11.0 million and $7.9 million in fiscal 2016 and 2015, respectively.
Currently, we are not paying income taxes in the United States as we have an estimated $18.0 million in
operating loss carryforwards at May 1, 2016. However, we did have income tax payments of $6.7 million
in fiscal 2016 and $4.8 million in fiscal 2015. Our income tax payments are associated with our
subsidiaries located in China and Canada.
2015 compared with 2014
Segment Analysis
Mattress Fabrics Segment
(dollars in thousands)
May 3, 2015
April 27, 2014
Change
Twelve Months Ended
Net sales
Gross profit
Gross profit margin
SG&A expenses
Income from operations
Operating margin
Net Sales
$
179,739
$
32,877
18.3%
11,206
21,671
12.1%
160,705
27,477
17.1%
9,962
17,515
10.9%
11.8%
19.7%
120bp
12.5%
23.7%
120bp
The increase in mattress fabric net sales reflected our ability to capitalize on the growing consumer
demand for better designed bedding products. In response to this demand trend, design and innovation
were our top strategic priorities, which allowed us to keep pace with latest fashion trends and meet
customer style preferences.
Also contributing to this increase in net sales as compared to the prior year was the fact that fiscal 2015
included 53 weeks compared to 52 weeks in fiscal 2014.
Gross Profit and Operating Income
The increases in gross profit and operating income for the mattress fabric segment reflected the increase
in net sales noted above, as well as improvement in operating efficiencies as compared to the prior year.
The year over year operational improvement resulted largely from the benefits of our $9.5 million capital
expansion project that increased our production capacity, added finishing capabilities, and improved our
overall efficiency and throughput. We also benefited from lower input costs, primarily in the second half
of fiscal 2015.Another factor contributing to the increased operating profit in our mattress fabrics
segment, especially in the last half of fiscal 2015, was significant operational improvement in the mattress
cover business. The significant labor inefficiencies and unfavorable product mix, along with severe
weather conditions that pressured performance in the last half of fiscal 2014 did not impact the last half of
fiscal 2015.
35
Partially offsetting this gross profit improvement was an increase in SG&A expenses in fiscal 2015
compared to fiscal 2014. The increase was primarily due to the increase in net sales noted above and
higher incentive compensation expense reflecting stronger financial results in relation to pre-established
performance targets in fiscal 2015 compared to fiscal 2014.
Fiscal 2014 Acquisition
On May 8, 2013, we entered into an asset purchase and consulting agreement with Bodet & Horst GMBH
& Co. KG and certain affiliates (“Bodet & Horst”) that provided for, among other things, the purchase of
equipment and certain other assets from Bodet & Horst and the restructuring of prior consulting and non-
compete agreements pursuant to an earlier asset purchase and consulting agreement with Bodet & Horst
dated August 11, 2008. This agreement was accounted for as a business combination in accordance with
ASC Topic 805, Business Combinations. We agreed with Bodet & Horst to replace the prior non-compete
agreement that prevented us from selling certain mattress fabrics and products to a leading manufacturer,
which now allows us to make such sales. In addition, the prior consulting and non-compete agreement,
under which Bodet & Horst agreed not to sell most mattress fabrics in North America, was replaced,
expanded and extended pursuant to the new asset purchase and consulting agreement.
The purchase price for the equipment and the certain other assets noted below was $2.6 million in cash.
The following table presents the allocation of the acquisition cost to the assets acquired based on their fair
values:
(dollars in thousands)
Equipment
Non-compete agreement
Customer relationships
$
Fair Value
890
882
868
2,640
$
The company recorded its non-compete at its fair value based on a discounted cash flow valuation model.
The company recorded its customer relationships at its fair value based on a multi-period excess earnings
valuation model. This non-compete agreement is being amortized on a straight line basis over the fifteen
year life of the agreement. The customer relationships are being amortized on a straight line basis over
their useful life of seventeen years. The equipment is being amortized on a straight line basis over its
useful life of seven years.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant and equipment, goodwill, a non-
compete agreement and customer relationships associated with an acquisition.
(dollars in thousands)
May 3, 2015
April 27, 2014
% Change
Accounts receivable
and inventory
Property, plant & equipment
Goodwill
Non-compete agreement
Customer Relationships
$
41,328
$
36,229
33,773
11,462
979
766
36
29,040
11,462
1,041
817
14.1%
16.3%
0.0%
(6.0)%
(6.2)%
Accounts Receivable & Inventory
Accounts receivable and inventory increased due to the increased business volume in the fourth quarter of
fiscal 2015 compared to the same period a year ago. Net sales for the mattress fabric segment increased
10.4% in the fourth quarter of fiscal 2015 compared to the fourth quarter of fiscal 2014.
Property, Plant & Equipment
The $33.8 million at May 3, 2015, represented property, plant and equipment of $23.8 million and $10.0
million located in the U.S. and Canada, respectively. The $29.0 million at April 27, 2014, represented
property, plant, and equipment of $20.6 million and $8.4 million located in the U.S. and Canada,
respectively.
The increase in property, plant, and equipment for this segment was due to the capital expansion project
noted above, offset by depreciation expense.
Non-Compete Agreement and Customer Relationships
The decreases in carrying values of our non-compete agreement and customer relationships were
primarily due to amortization expense in fiscal 2015.
Upholstery Fabrics Segment
Net Sales
(dollars in thousands)
May 3, 2015
April 27, 2014
% Change
Twelve Months Ended
Non U.S. Produced
U.S Produced
Total
$
$
119,177
92%
$
115,991
11,250
8%
10,466
92%
8%
2.7%
7.5%
130,427
100%
$
126,457
100%
3.1%
The increase in net sales for our upholstery fabrics segment reflected our strategic focus on design and
product innovation. Our 100% owned China platform provided significant manufacturing flexibility to
produce a diverse product mix of fabric styles and price points, which allowed us to meet changing
customer demand in line with current furniture style trends. As a result, we were able to diversify our
customer base, including the hospitality market and the lifestyle retail category. Additionally, we
experienced higher demand for cut and sewn kits in fiscal 2015, which further supported our net sales for
the year.
Also contributing to this increase in net sales as compared to the prior year was the fact that fiscal 2015
included 53 weeks compared to 52 weeks in fiscal 2014.
37
Gross Profit and Operating Income
(dollars in thousands)
May 3, 2015
April 27, 2014
Change
Twelve Months Ended
Gross profit
$
Gross profit margin
SG&A expenses
Income from operations
Operating margin
22,690
17.4%
14,562
8,128
6.2%
$
21,429
16.9%
13,393
8,036
6.4%
5.9%
50bp
8.7%
1.1%
(20)bp
Our upholstery segment’s gross profit and gross profit margin increased compared to the same period a
year ago due primarily to the increase in net sales noted above and higher profit margins achieved on
certain product introductions. We also benefited from lower input costs, especially in the second half of
fiscal 2015. These lower input costs helped partially offset higher operational costs associated with our
operations in China.
This business segment's operating income slightly increased and operating margins slightly decreased in
fiscal 2015 compared to fiscal 2014. These trends were due to the increase in gross profit noted above and
the increase in SG&A expenses in fiscal 2015 compared to fiscal 2014. The increase in SG&A expenses
in fiscal 2015 was primarily due to the increase in net sales.
At the end of the third quarter of fiscal 2015 we closed our finished goods warehouse and distribution
facility located in Poznan, Poland, primarily as a result of ongoing economic weakness in Europe. As a
result, we incurred a charge of approximately $200,000 for closing related costs during fiscal 2015. No
corresponding charge was incurred in fiscal 2014.
Segment Assets
Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.
(dollars in thousands)
May 3, 2015
April 27, 2014
% Change
Accounts receivable
and inventory
$
29,905
$
31,854
Property, plant & equipment
1,467
1,573
(6.1)%
(6.7)%
Accounts Receivable & Inventory
At May 3, 2015, accounts receivable for this segment was $11.9 million compared with $12.8 million as
of April 27, 2014. This decrease was due to increased sales with customers with discounted payment
terms in fiscal 2015 compared with fiscal 2014, which resulted in customers paying off receivables more
quickly.
At May 3, 2015, inventory for this segment was $18.0 million compared with $19.0 million as of
April 27, 2014. This decrease is primarily due to improved inventory management and the reduction of
inventory associated with the closure of our Culp Europe operation located in Poland.
38
Property, Plant & Equipment
The $1.5 million at May 3, 2015, represented property, plant, and equipment located in the U.S. of
$848,000 and located in China of $619,000. The $1.6 million at April 27, 2014, represented property,
plant, and equipment located in the U.S. of $957,000, located in China of $572,000, and located in Poland
of $44,000.
Other Income Statement Categories
(dollars in thousands)
May 3, 2015
April 27, 2014
% Change
Twelve Months Ended
SG&A expenses
Interest expense
Interest income
Other expense
$
32,778
64
622
391
$
28,657
427
482
1,261
14.4%
(850.1)%
29.0%
(690.0)%
Selling, General and Administrative Expenses
The increase in SG&A expenses was primarily due to the increase in net sales noted above and higher
incentive compensation expense that reflected stronger financial results in relation to pre-established
performance targets in fiscal 2015 compared to fiscal 2014.
Interest Expense
Interest expense reflected lower outstanding balances of long-term debt in fiscal 2015 compared with
fiscal 2014. Also, interest expense was reduced by $171,000 for interest costs associated with the mattress
fabric segment capital expansion project that were capitalized during fiscal 2015. These interest costs will
be depreciated over the related assets' useful lives. No interest costs were capitalized in fiscal 2014.
Interest Income
The increase in interest income reflected higher cash and cash equivalent and short-term investment
balances held with foreign subsidiaries during fiscal 2015 compared to fiscal 2014. Cash and cash
equivalents and short-term investment balances held by our foreign subsidiaries earned higher interest
rates as compared to funds held in the United States.
Other Expense
The decrease in other expense was primarily due to more favorable foreign currency exchange rates
associated with operations located in China for fiscal 2015 compared with the same period a year ago. We
recorded a foreign currency exchange gain of $241,000 in fiscal 2015 compared to a foreign currency
exchange loss of $571,000 in fiscal 2014 regarding our operations located in China.
Also, a non-recurring charge of $206,000 was recorded in the first quarter of fiscal 2014 for the
settlement of litigation relating to the environmental claims associated with a closed facility, and there
was no comparable charge recorded in fiscal 2015.
39
Income Taxes
We recorded income tax expense of $7.9 million, or 34.3% of income before income tax expense, in
fiscal 2015 compared with income tax expense of $1.6 million, or 8.4% of income before income tax
expense, in fiscal 2014. The following schedule summarizes the principal differences between income tax
expense at the federal income tax rate and the effective income tax rate reflected in the consolidated
financial statements:
federal income tax rate
tax effects of Chinese foreign exchange gains (losses)
change in valuation allowance
change in North Carolina income tax rates
undistributed earnings from foreign subsidiaries
other
2015
34.0%
0.3
(0.2)
-
-
0.2
34.3%
Fiscal 2014 - Discrete Event
2014
34.0%
(1.3)
0.1
1.8
(26.3)
0.1
8.4%
During the third quarter of fiscal 2014, our operations in China achieved positive accumulated earnings and
profits for both U.S. income tax and financial reporting purposes for the first time since we determined our
undistributed earnings from foreign subsidiaries would not be reinvested indefinitely in the second quarter
of fiscal 2013. As a result, we recorded an income tax benefit of $5.4 million to recognize U.S. foreign
income tax credits of $9.9 million offset by the U.S. income tax effects of the undistributed earnings from
our China operations and foreign withholding taxes totaling $4.5 million. This $5.4 million income tax
benefit was treated as a discrete event in which the full income tax benefits of this adjustment were recorded
in the third quarter and full fiscal year 2014, as it pertained to a change in judgment on prior periods’
accumulated earnings and profits associated with our subsidiaries located in China.
In addition, an income tax charge of $352,000 was recorded during fiscal 2014 for the U.S. income tax
effects of the undistributed earnings and foreign withholding taxes incurred in fiscal 2014 from our
Canadian operations and the fourth quarter of fiscal 2014 from our China operations.
Liquidity and Capital Resources
Liquidity
Currently, our sources of liquidity include cash and cash equivalents, short-term investments, cash flow
from operations, and amounts available under our revolving credit lines. These sources have been
adequate for day-to-day operations, capital expenditures, long-term debt and line of credit payments,
common stock repurchases, and dividend payments. We believe our present cash and cash equivalents
and short-term investment balance of $42.1 million at May 1, 2016, cash flow from operations, and
current availability under our revolving credit lines will be sufficient to fund our business needs and our
contractual obligations (see commitments table below).
On August 11, 2015, we paid our last annual payment of $2.2 million on our unsecured term notes, and
we currently do not have any long-term debt or balances due on our revolving credit lines.
On March 10, 2016, we amended our Credit Agreement with Wells Fargo Bank, N.A. (Wells Fargo) to
increase our borrowing capacity from $10 million to $30 million. The purpose of the increase in our
revolving credit line with Wells Fargo is to support potential short term cash needs in different
jurisdictions within our global operations, mitigate our risk associated with foreign currency exchange
rate fluctuations, and support repatriation of earnings and profits from our foreign subsidiaries to the U.S.
for strategic purposes.
40
We currently hold cash and cash equivalents and short-term investments in foreign jurisdictions to
support the operational requirements of our foreign operations located in Canada and China and for U.S.
and foreign income tax planning purposes.
A summary of our cash and cash equivalents and short-term investments by geographic area follows:
(dollars in thousands)
Cayman Islands
China
Canada
United States
Poland
May 1,
2016
25,762
8,454
6,844
1,086
-
42,146
$
$
May 3,
2015
8,591
14,630
12,511
3,977
20
39,729
At May 1, 2016, our cash and cash equivalents and short-term investments totaled $42.1 million
compared with $39.7 million at May 3, 2015.This year over year increase was achieved despite spending
$11.5 million on capital expenditures mostly associated with our mattress fabrics segment, $8.1 million
on dividend payments, $2.4 million on common stock repurchases, $2.2 million on a long-term debt
payment, and $1.6 million on long-term investment purchases associated with our Rabbi Trust. This
spending was more than offset by net cash provided by operating activities of $26.8 million.
Our net cash provided by operating activities of $26.8 million was slightly higher than the same period a
year ago.
During fiscal 2016, we had a significant increase in cash and cash equivalents held in the Cayman Islands.
Since April 2015 and through the end of fiscal 2016, we distributed earnings and profits totaling $28.9
million from our subsidiaries located in China to our international holding company located in the
Cayman Islands. In addition, we distributed another $10.3 million in earnings and profits from China to
the Cayman Islands during the first quarter of fiscal 2017. This shift is primarily due to our strategy of
ultimately repatriating earnings and profits from our subsidiaries located in China to the U.S. ($3.1
million during fiscal 2016) and mitigating our risk to foreign currency exchange rate fluctuations for
assets and liabilities denominated in Chinese Yuan Renminbi. By reducing the amount of cash and cash
equivalents held in Chinese Yuan Renminbi, we are able to obtain a better balance of assets and liabilities
denominated in Chinese Yuan Renminbi, and therefore mitigate the risk in foreign currency exchange rate
fluctuations in China. In addition, transferring earnings and profits from China to the Cayman Islands will
provide increased flexibility to repatriate these earnings and profits to the U.S. for various strategic
purposes.
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 15, 2016, we announced that our board of directors approved the payment of a special cash
dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.07 per share. These
dividend payments are payable on July 15, 2016, to shareholders of record as of July 1, 2016.
During fiscal 2016, dividend payments totaled $8.1 million, of which $5.0 million represented a special
cash dividend payment in the first quarter of $0.40 per share, and $3.1 million represented our regular
quarterly cash dividend payments ranging from $0.06 to $0.07 per share.
41
During fiscal 2015, dividend payments totaled $7.6 million, of which $4.9 million represented a special
cash dividend payment in the first quarter of $0.40 per share, and $2.7 million represented our regular
quarterly cash dividend payments ranging from $0.05 to $0.06 per share.
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 February 25, 2014, we announced that our board of directors approved an authorization for us to
acquire up to $5.0 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 2016, we purchased 100,776 shares of our common stock at a cost of $2.4 million, all of
which was purchased during the third quarter. During fiscal 2015, we purchased 43,014 shares of our
common stock at a cost of $745,000, all of which were purchased in the first and second quarters.
At May 1, 2016, we had $1.9 million available for additional repurchases of our common stock pursuant
to the authorization by our board of directors dated February 25, 2014. On June 15, 2016, we announced
that our board of directors increased the authorization for us to acquire up to $5.0 million of our common
stock.
Working Capital
Accounts receivable at May 1, 2016, were $23.5 million, a decrease of 18% compared with $28.7 million
at May 3, 2015. This decrease is primarily due to improved cash collections with customers associated
with both our business segments in the fourth quarter of fiscal 2016 compared with the fourth quarter of
fiscal 2015. Days’ sales in receivables were 28 days and 33 days during the fourth quarters of fiscal 2016
and 2015, respectively.
Inventories at May 1, 2016 were $46.5 million, an increase of 9% compared with $42.5 million at May 3,
2015. This increase is mostly associated with our mattress fabrics segment and is due to customers
requiring us to hold higher inventory levels of key products. Inventory turns were 5.3 and 6.4 during the
fourth quarters of fiscal 2016 and 2015, respectively.
Accounts payable-trade as of May 1, 2016, was $24.0 million, a decrease of 15% compared with
$28.4 million at May 3, 2015. This decrease is due to the timing of payments to suppliers in the fourth
quarter of fiscal 2016 compared to the fourth quarter of fiscal 2015.
Operating working capital (accounts receivable and inventories, less accounts payable –trade and capital
expenditures) was $45.8 million at May 1, 2016, compared with $41.8 million at May 3, 2015. Operating
working capital turnover was 7.0 in fiscal 2016 compared to 7.7 in fiscal 2015.
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. On August 11,
2015, we paid our last annual payment of $2.2 million and this agreement has been paid in full.
42
Revolving Credit Agreement –United States
At May 3, 2015, our Credit Agreement with Wells Fargo provided for an unsecured revolving loan
commitment of $10.0 million to be used to finance working capital and general corporate purposes.
Interest was charged at a rate (applicable interest rate of 1.78% at May 3, 2015) equal to the one-month
LIBOR rate plus a spread based on the ratio of debt to EBITDA as defined in the agreement. The Credit
Agreement contained customary financial and other covenants as defined in the agreement and was set to
expire August 31, 2015.
Effective July 10, 2015, we amended the Credit Agreement to extend the expiration date to August 31,
2017 and maintain the annual capital expenditure limit of $12 million.
We entered into a Second Amendment to our Credit Agreement dated March 10, 2016. The terms of the
Second Amendment include, among other things, provisions that (i) increase our line of credit under the
Credit Agreement to $30 million, (ii) increase the annual limit on capital expenditures by the company to
$15 million, (iii) add a new financial covenant to establish a minimum level of unencumbered liquid
assets, (iv) eliminate certain financial covenants, (v) amend the pricing matrix that provides for interest
payable on obligations under the agreement as a variable spread over LIBOR, based on the company’s
ratio of debt to EBITDA (applicable interest rate of 1.89% at May 1, 2016), and (vi) provide that
obligations under the Credit Agreement are to be secured by a pledge of 65% of the common stock of
Culp International Holdings Ltd, our subsidiary located in the Cayman Islands.
The purpose of the increase in our revolving credit line with Wells Fargo is to support potential short term
cash needs in different jurisdictions within our global operations, mitigate our risk associated with foreign
currency exchange rate fluctuations, and support repatriation of earnings and profits from our foreign
subsidiaries to the U.S. for various strategic purposes.
At May 1, 2016, and May 3, 2015, there were $250,000 in outstanding letters of credit (all of which
related to workers compensation) provided by the Credit Agreement. There were no borrowings
outstanding under the agreement at May 1, 2016, and May 3, 2015.
Revolving Credit Agreement - China
At May 3, 2015, we had an unsecured credit agreement associated with our operations in China that
provided for a line of credit up to 40 million RMB and was set to expire on February 9, 2016. On March
8, 2016, we renewed this credit agreement. This renewal extended the expiration date to March 8, 2017
and maintained the existing available line of credit of 40 million RMB ($6.2 million USD). This
agreement has an interest rate determined by the Chinese government and there were no outstanding
borrowings as of May 1, 2016 and May 3, 2015.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. At May 1, 2016, the company was in compliance with these financial covenants.
43
Commitments
The following table summarizes our contractual payment obligations and commitments for each of the
next five fiscal years (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
Capital expenditures
Accounts payable –
capital expenditures
Operating leases
Interest expense
Line of credit
Long-term debt –
principal
Total (1)
$ 5,623
3,750
1,240
224
2,567
-
-
-
$ 8,414
-
1,178
-
-
-
4,928
-
405
-
-
-
1,645
-
-
48
-
-
-
48
-
-
18
-
-
-
18
-
-
-
-
-
-
-
10,613
224
4,216
-
-
-
15,053
Note: Payment Obligations by End of Each Fiscal Year
(1) At May 1, 2016, we had $14.9 million of total gross unrecognized tax benefits, of which $11.1
million and $3.8 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 including tax examinations, legal proceedings, competent authority proceedings,
changes in regulatory tax laws, or interpretations of those tax laws, or expiration of statutes of
limitation. As a result of these inherent uncertainties, the company cannot reasonably estimate the
timing of payment of these amounts. Of the $14.9 million in total gross unrecognized tax benefits,
$6.9 million would not be subject to cash payments due to the company’s U.S. federal and state net
operating loss carryforwards.
Capital Expenditures
Capital expenditures on a cash basis were $11.5 million and $10.5 million for fiscal 2016 and 2015,
respectively. These capital expenditures primarily pertained to our mattress fabrics segment. Depreciation
expense was $6.7 million and $5.8 million for fiscal 2016 and 2015, respectively, and primarily pertained
to our mattress fabrics segment.
For fiscal 2017, we are projecting capital expenditures for the company as a whole to approximate the
$11.5 million spent in fiscal 2016. Depreciation expense for the company as a whole is projected to be
$7.0 million in fiscal 2017. 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. Funding for capital expenditures is expected to be primarily from cash provided by
our operations.
44
Accounts Payable – Capital Expenditures
At May 1, 2016, we had total amounts due regarding capital expenditures totaling $224,000, which
pertain to outstanding vendor invoices, none of which are financed. This amount due of $224,000 is
required to be paid in full during fiscal 2017.
Purchase Commitments – Capital Expenditures
At May 1, 2016, we had open purchase commitments to acquire a building and equipment for our mattress
fabrics segment totaling $10.6 million. The $10.6 million open purchase commitments include $9.3 million
associated with the construction of a new building noted below.
Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located
in North Carolina that will expand our distribution capabilities and office space at a current estimated cost of
$11.2 million. This agreement required an installment payment of $1.9 million in April 2016 and requires
remaining installment payments to be made in the next three fiscal years as follows: Fiscal 2017- $4.3
million; Fiscal 2018- $3.8 million; and Fiscal 2019- $1.2 million. Interest will be charged on the outstanding
installment payments at a rate of $2.25% plus the current 30 day LIBOR rate. Also, we are required to issue
a letter of a credit totaling $5.0 million with the contractor being the beneficiary. In addition to the interest
that will be charged on the outstanding installment payments, there will be 0.1% unused fee calculated on
the balance of the $5.0 million letter of credit less the amount outstanding per month.
The construction of this new building is currently expected to be completed in December 2016.
Handling Costs
We record warehousing costs in SG&A expenses. These costs were $4.2 million, $3.8 million, and $3.5
million, in fiscal 2016, 2015, and 2014 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 $60.9 million or 19.5% of net sales, in fiscal 2016, $51.8 million or 16.7% of net
sales, in fiscal 2015, and $45.4 million, or 15.8% of net sales, in 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.
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. As of May 1, 2016, accounts receivable from
furniture manufacturers totaled approximately $9.1 million, and accounts receivable from bedding
manufacturers totaled approximately $14.4 million. Additionally, as of May 1, 2016, the aggregate
45
accounts receivable balance of our ten largest customers was $12.8 million, or 55% of trade accounts
receivable. No customers within the upholstery fabrics segment accounted for 10% or more of
consolidated accounts receivable as of May 1, 2016. One customer within the mattress fabrics segment
represented 16% of consolidated accounts receivable at May 1, 2016.
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 $1.1 million and $851,000 at May 1, 2016, and May 3,
2015, respectively.
Inventory Valuation. We operate as a “make-to-order” and “make-to-stock” business. Although
management closely monitors demand in each product area to decide which patterns and styles to hold in
inventory, the increasing availability of low cost imports and the gradual shifts in consumer preferences
expose the company to markdowns of inventory.
Management continually examines inventory to determine if there are indicators that the carrying value
exceeds its net realizable value. Experience has shown that the most significant indicator of the need for
inventory markdowns is the age of the inventory and the planned discontinuance of certain patterns. As a
result, the company provides inventory valuation markdowns based upon set percentages for inventory
aging categories, generally using six, nine, twelve and fifteen month categories. We also provide
inventory valuation write-downs based on the planned discontinuance of certain products based on the
current market values at that time as compared to their current carrying values. While management
believes that adequate markdowns for excess and obsolete inventory have been made in the consolidated
financial statements, significant unanticipated changes in demand or changes in consumer tastes and
preferences could result in additional excess and obsolete inventory in the future.
The reserve for inventory markdowns was $3.1 million and $2.6 million at May 1, 2016, and May 3,
2015, 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. In accordance with ASU No. 2011-08, Intangibles
– Goodwill and Other, we performed our annual impairment test on a qualitative basis. 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 May 1, 2016, 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.
46
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 $590,000 and $922,000 million against our net deferred tax
assets at May 1, 2016 and May 3, 2015, respectively. Our valuation allowance of $590,000 at May 1,
2016, represents a $518,000 valuation allowance against certain U.S. state net operating loss
carryforwards and credits and a valuation allowance of $72,000 against our loss carryforwards associated
with our Culp Europe operation located in Poland. Our valuation allowance of $922,000 at May 3, 2015,
represents a $561,000 valuation allowance against certain U.S. state net operating loss carryforwards and
credits and a valuation allowance of $361,000 against our loss carryforwards associated with our Culp
Europe operation located in Poland.
Refer to Note 9 located in the notes to the consolidated statements for disclosures regarding our assessment of
our recorded valuation allowance as of May 1, 2016 and May 3, 2015, respectively.
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. Also, we assess the recognition of U.S. foreign income
tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-
not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax
credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized,
an adjustment to our provision for income taxes will be recognized at that time.
At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6
million. At the same date, the deferred tax liability associated with our undistributed earnings from our
foreign subsidiaries totaled $604,000, which included U.S. income and foreign withholding taxes totaling
$38.5 million, offset by U.S. foreign income tax credits of $37.9 million.
In accordance with ASC Topic 740, we must recognize the income tax impact from an uncertain income
tax position only if it is more likely than not that the income tax position will be sustained on examination
by the taxing authorities, based on the technical merits of the position. The income 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
income tax positions are recorded as income tax expense. Significant judgment is required in the
identification of uncertain income tax positions and in the estimation of penalties and interest on uncertain
income tax positions.
At May 1, 2016, we had $14.9 million of total gross unrecognized tax benefits, of which $11.1 million
and $3.8 million were classified as net non-current deferred income taxes and income taxes payable –
long-term, respectively, in the accompanying consolidated balance sheets.
Stock-Based Compensation. ASC Topic 718, “Compensation-Stock Compensation”, 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 our board of directors. Equity
awards issued to non-employees are measured at the earlier date of when the performance criteria are met
or at the end of each reporting period.
Compensation expense for unvested incentive stock options and time vested stock awards are amortized
on a straight-line basis over the remaining vesting periods. At May 1, 2016, there were no unvested
47
incentive stock options or time vested restricted stock awards. Therefore, there was no unrecognized
compensation cost related to these types of equity based awards at May 1, 2016. Our common stock
awards issued to our board of directors vest immediately, and therefore, compensation cost was measured
at the closing price of our common stock on the date of grant and recognized in full at that time.
Compensation expense for performance based restricted stock units are recorded based on an assessment
each reporting period of the probability if certain performance goals will be met during the contingent
vesting period. If performance goals are not probable of occurrence, no compensation expense will be
recognized. Performance goals that were previously deemed probable and were not or expected to be met,
previously recognized compensation cost will be reversed. At May 1, 2016, the remaining compensation
cost related to the performance based restricted stock units was $3.7 million.
We recorded $2.7 million, $786,000, and $710,000 of compensation expense within selling, general, and
administrative expense for our equity based awards in fiscal 2016, 2015, and 2014, respectively.
Excess income 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 carryforward.
Our equity incentive plans are described more fully in Note 12 in the notes to the consolidated financial
statements.
Adoption of New Accounting Pronouncements
Refer to Note 1 located in the notes to the consolidated statements for recently adopted accounting
pronouncements for fiscal 2016.
Recently Issued Accounting Standards
Refer to Note 1 located in the notes to the consolidated statements for recently issued accounting
pronouncements for fiscal 2017 and beyond.
48
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 May 1, 2016, our U.S. revolving credit agreement had an interest rate equal to the one-month
LIBOR rate plus a spread based on our ratio of debt to EBITDA as defined in the agreement. Our
revolving credit line associated with our China subsidiaries bears interest at a rate determined by
the Chinese government. At May 1, 2016, there were no borrowings outstanding under any of
our revolving credit lines.
We are exposed to market risk from changes in the value of foreign currencies for our
subsidiaries domiciled in Canada and China. 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 China, although there is no assurance that we will be able to
continually maintain this natural hedge. Our foreign subsidiaries use the United States dollar as
their functional currency. A substantial portion of the company’s imports purchased outside the
United States are denominated in U.S. dollars. A 10% change in the above exchange rates at
May 1, 2016, 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
Board of Directors and Shareholders
Culp, Inc.:
We have audited the accompanying consolidated balance sheets of Culp, Inc. (a North Carolina
Corporation) and Subsidiaries (the “Company”) as of May 1, 2016 and May 3, 2015, 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 May 1, 2016. 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 May 1, 2016 and
May 3, 2015 and the results of their operations and their cash flows for each of the three years in
the period ended May 1, 2016 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
May 1, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated July 15, 2016 expressed an unqualified opinion.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new
accounting guidance in fiscal 2016 and 2015, related to the presentation of deferred income
taxes.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
July 15, 2016
50
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data and preferred and common stock shares)
May 1, 2016 and May 3, 2015
ASSETS
current assets:
cash and cash equivalents
short-term investments
accounts receivable, net
inventories
income taxes receivable
other current assets
total current assets
property, plant and equipment, net
goodwill
deferred income taxes
long-term investments
other assets
total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt
accounts payable - trade
accounts payable - capital expenditures
accrued expenses
income taxes payable
total current liabilities
income taxes payable - long-term
deferred income taxes
deferred compensation
total liabilities
commitments and contingencies (notes 10 and 11)
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 12,265,489 at
May 1, 2016 and 12,219,121 at May 3, 2015
capital contributed in excess of par value
accumulated earnings
accumulated other comprehensive loss
total shareholders' equity
total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
2016
2015
$
$
$
37,787
4,359
23,481
46,531
155
2,477
114,790
39,973
11,462
2,319
4,025
2,573
175,142
-
23,994
224
11,922
180
36,320
3,841
1,483
4,686
46,330
$
$
$
29,725
10,004
28,749
42,484
229
2,440
113,631
36,078
11,462
5,169
2,415
2,545
171,300
2,200
28,414
990
11,129
325
43,058
3,792
982
4,041
51,873
-
-
614
43,795
84,547
(144)
128,812
175,142
611
43,159
75,752
(95)
119,427
171,300
$
$
51
CONSOLIDATED STATEMENTS OF NET INCOME
For the years ended May 1, 2016, May 3, 2015 and April 27, 2014
(dollars in thousands, except per share data)
2016
2015
2014
net sales
cost of sales
gross profit
selling, general and administrative expenses
income from operations
interest expense
interest income
other expense, net
income before income taxes
income tax expense (note 9)
net income
net income per share-basic
net income per share-diluted
$
$
$
$
312,860
247,749
65,111
36,773
28,338
-
(176)
616
27,898
10,963
16,935
$1.38
$1.36
$
$
310,166
254,599
55,567
32,778
22,789
64
(622)
391
22,956
7,885
15,071
$1.23
$1.21
287,162
238,256
48,906
28,657
20,249
427
(482)
1,261
19,043
1,596
17,447
$1.43
$1.41
The accompanying notes are an integral part of these consolidated financial statements.
52
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended May 1, 2016, May 3, 2015 and April 27, 2014
Net income
Other comprehensive loss
Unrealized losses on investments
Unrealized holding losses on investments
Reclassification adjustment for realized loss included in net income
Total other comprehensive loss
Comprehensive income
2016
2015
2014
$
16,935
$
15,071
$
17,447
(176)
127
(49)
(35)
-
(35)
(114)
-
(114)
$
16,886
$
15,036
$
17,333
The accompanying notes are an integral part of the consolidated financial statements.
53
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
common
stock
shares
common
stock
amount
capital
contributed
in excess of
par value
Accumulated
earnings
accumulated
other
comprehensive
income (loss)
total
shareholders'
equity
$
12,224,894
-
-
-
$
611
-
-
-
$
41,901
-
710
-
$
53,017
17,447
-
-
$
54
-
-
(114)
(dollars in thousands, except common stock shares)
For the years ended May 1, 2016,
May 3, 2015 and April 27, 2014
balance, April 28, 2013
net income
stock-based compensation
unrealized loss on investments
excess tax benefit related to stock-based
compensation
fully vested common stock award
common stock issued in connection
with exercise of stock options
common stock issued surrendered for
withholding taxes payable
dividends paid
balance, April 27, 2014
net income
stock-based compensation
unrealized loss on investments
excess tax benefit related to stock-based
compensation
common stock repurchased
fully vested common stock award
common stock issued in connection
with exercise of stock options
common stock issued surrendered for
withholding taxes payable
dividends paid
balance, May 3, 2015
net income
stock-based compensation
unrealized loss on investments
excess tax benefit related to stock-based
compensation
common stock repurchased
common stock issued in connection with vesting
of performance-based restricted stock units
fully vested common stock award
common stock issued in connection
with exercise of stock options
common stock issued surrendered for
withholding taxes payable
dividends paid
-
3,000
23,125
(989)
-
12,250,030
-
-
-
-
(43,014)
3,000
10,100
(995)
-
12,219,121
-
-
-
-
(100,776)
115,855
3,000
54,500
(26,211)
-
-
1
-
-
612
-
-
-
-
(2)
-
1
-
-
611
-
-
-
-
(5)
6
-
3
(1)
143
-
193
(15)
-
42,932
-
786
-
109
(743)
-
93
(18)
-
43,159
-
2,742
-
841
(2,392)
(6)
-
197
(746)
95,583
17,447
710
(114)
143
-
194
(15)
(2,204)
111,744
15,071
786
(35)
109
(745)
-
94
(18)
(7,579)
119,427
16,935
2,742
(49)
841
(2,397)
-
-
200
(747)
(8,140)
128,812
-
-
-
-
(2,204)
68,260
15,071
-
-
-
-
-
-
-
(7,579)
75,752
16,935
-
-
-
-
-
-
-
-
(8,140)
84,547
$
-
-
-
-
-
(60)
-
-
(35)
-
-
-
-
-
-
(95)
-
-
(49)
-
-
-
-
-
-
(144)
$
balance, May 1, 2016
12,265,489
$
614
$
43,795
$
The accompanying notes are an integral part of these consolidated financial statements.
54
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended May 1, 2016, May 3, 2015, and April 27, 2014
(dollars in thousands)
2016
2015
2014
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-based compensation
deferred income taxes
gain on sale of equipment
realized loss on sale of short-term investments
foreign currency exchange (gains) losses
changes in assets and liabilities, net of effects of acquisition of assets:
accounts receivable
inventories
other current assets
other assets
accounts payable-trade
accrued expenses and deferred compensation
income taxes
net cash provided by operating activities
cash flows from investing activities:
capital expenditures
net cash paid for acquisition of assets (notes 2 and 13)
purchase of short-term investments
proceeds from the sale of short-term investments
purchase of long-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 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 financing activities
effect of exchange rate changes on cash and cash equivalents
increase in cash and cash equivalents
$
16,935
$
15,071
$
17,447
6,671
170
2,742
(841)
4,192
(35)
127
(40)
4,476
(4,407)
(206)
(46)
(3,785)
751
91
26,795
(11,475)
-
(104)
5,612
(1,649)
-
(18)
233
(7,401)
7,000
(7,000)
(2,200)
(134)
(2,397)
(8,140)
200
841
(11,830)
498
8,062
5,773
187
786
(109)
3,179
(78)
-
(84)
(1,636)
(1,883)
(151)
(117)
1,964
3,372
(163)
26,111
(10,461)
-
(5,355)
1,628
(1,650)
320
(18)
727
(14,809)
-
(538)
(2,200)
-
(745)
(7,579)
94
109
(10,859)
(21)
422
5,312
169
710
(143)
(1,727)
(283)
-
626
(3,857)
(2,200)
(270)
(72)
4,131
34
342
20,219
(5,258)
(2,640)
(1,945)
810
(765)
-
(30)
407
(9,421)
-
-
(2,200)
(83)
-
(2,204)
194
143
(4,150)
(875)
5,773
cash and cash equivalents at beginning of year
29,725
29,303
23,530
cash and cash equivalents at end of year
$
37,787
$
29,725
$
29,303
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 – Our operations are classified into two business segments: mattress fabrics and
upholstery fabrics. The mattress fabrics segment manufacturers, sources, and sells fabrics and mattress
covers to bedding manufacturers. The upholstery fabrics segment sources, manufacturers, and sells
fabrics primarily to residential furniture manufacturers. The majority of our revenues are 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, Burlington,
NC and Anderson, SC.
At the end of our third quarter of fiscal 2015, we closed our finished goods warehouse and distribution
facility located in Poznan, Poland, primarily as a result of the ongoing economic concerns in Europe.
Currently, we remain interested in developing business in Europe, and we are assessing the best strategy
for selling upholstery fabric into this market as business conditions improve.
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
2016, 2015, and 2014.
Fiscal Year – Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30.
Fiscal 2016 and 2014 each included 52 weeks. Fiscal 2015 included 53 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.
A summary of our cash and cash equivalents by geographic area follows:
(dollars in thousands)
Cayman Islands
China
Canada
United States
Poland
May 1,
2016
25,762
8,454
3,550
21
-
37,787
$
$
May 3,
2015
8,591
13,018
5,178
2,918
20
29,725
56
Throughout the year, we have cash balances regarding our U.S. operations in excess of federally insured
amounts on deposit with a financial institution. We have not experienced any losses in such accounts.
Management believes we are not exposed to any significant credit risk related to cash and cash
equivalents.
Short-Term Investments – Our short-term investments consist of bond funds that are classified as
available-for-sale and a deposit account with a maturity in excess of more than three months. Our short
term investments had an accumulated unrealized loss totaling $100,000 and $95,000 at May 1, 2016 and
May 3, 2015, respectively. Our short-term investments were recorded at its fair value of $4.4 million and
$10.0 million at May 1, 2016 and May 3, 2015, respectively. The fair value of our short-term investments
approximates its cost basis.
A summary of our short-term investments by geographic area follows:
(dollars in thousands)
Canada
China
United States
May 1,
2016
3,294
-
1,065
4,359
$
$
May 3,
2015
7,333
1,612
1,059
10,004
Long-Term Investments – Effective January 1, 2014, we established a Rabbi Trust to set aside funds for
participants of our deferred compensation plan (the “Plan”) and enable the participants to credit their
contributions to various investment options of the Plan. The investments associated with the Rabbi Trust
consist of investments in a money market fund and various mutual funds that are classified as available
for sale.
Our long-term investments are classified as available for sale and were recorded at its fair value of $4.0
million and $2.4 million at May 1, 2016 and May 3, 2015, respectively. Our long-term investments had
an accumulated unrealized loss totaling $44,000 at May 1, 2016. At May 3, 2015, our accumulated gains
or losses regarding our long-term investments were immaterial. The fair value of long-term investments
approximates its cost basis.
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
57
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.
Interest Costs – We charge interest costs incurred on our long-term debt and lines of credit to operations.
Interest costs charged to operations were $58,000, $235,000, and $427,000 in fiscal years 2016, 2015, and
2014, respectively.
We capitalize interest costs incurred on funds used to construct property, plant, and equipment. The
capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s
estimated useful life. Interest costs of $58,000 and $171,000 were capitalized for the construction of
qualifying fixed assets for fiscal 2016 and 2015, respectively. No interest costs were capitalized for the
construction of property, plant, and equipment during fiscal 2014.
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 Net Income in the period in which they occur.
A summary of our foreign currency exchange gains (losses) by geographic area follows:
(dollars in thousands) 2016
(70)
China
76
Canada
-
Poland
6
$
$
2015
241
(108)
(2)
131
2014
(571)
(44)
(50)
(665)
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. In accordance with ASU No. 2011-08, Intangibles-
Goodwill and Other (ASC Topic 350), we performed our annual impairment test on a qualitative basis.
Based on our qualitative assessments as of May 1, 2016 and May 3, 2015, we determined that our
goodwill was not impaired using a more likely than not standard.
Our goodwill of $11.5 million at May 1, 2016 and May 3, 2015, 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
58
tax bases of our assets and liabilities and operating loss and tax credit carryforwards at income tax rates
expected to be in effect when such amounts are realized or settled. The effect on deferred income taxes of
a change in tax rates is recognized in income (loss) in the period that includes the enactment date.
We evaluate our deferred income taxes to determine if a valuation allowance is required. We 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 we operate 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.
We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or
eventually distributed to our U.S. parent company. We are required to record a deferred tax liability for
undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Also, we assess the
recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments
and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is
determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign
income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at
that time.
We 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 income 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.
Revenue Recognition – Revenue is primarily recognized upon shipment and when title and risk of loss
pass to the customer. Provision is currently made for estimated product returns, claims and allowances.
Management considers historical claims and return experience, among other things, when establishing the
allowance for returns and allowances.
Shipping and Handling Costs – Revenue received for shipping and handling costs, which is immaterial
for all periods presented, is included in net sales. Shipping costs, principally freight, that comprise
payments to third-party shippers are classified as cost of sales. Handling costs represent finished goods
warehousing costs incurred to store, move, and prepare products for shipment in the company’s various
distribution facilities. Handling costs were $4.2 million, $3.8 million and $3.5 million in fiscal 2016,
2015, and 2014, 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 12. ASC 718,
“Compensation – Stock Compensation”, 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 at 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.
Performance goals that were previously deemed probable and were not or expected to be met, previously
recognized compensation cost was reversed. Excess tax benefits related to our equity incentive plans are
59
reflected as financing cash inflows on the Statements 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 and
long-term investments. The fair value measurements of our financial instruments are described more fully
in Note 13.
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
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes,
an amendment to FASB ASC Topic 740, which simplifies the presentation of deferred income taxes on an
entity’s classified balance sheet. Currently, entities that are required to issue a classified balance sheet
present a net current and net noncurrent deferred income tax asset or liability for each tax jurisdiction.
The amendments in this ASU require entities to offset all deferred income tax assets and liabilities for
each tax jurisdiction and present a net deferred income tax asset or liability as a single noncurrent amount.
The recognition and measurement guidance for deferred income tax assets and liabilities are not affected
by this amendment. This amended guidance is effective for fiscal years and interim periods within those
fiscal years, beginning after December 15, 2016. Early adoption is permitted and the standard may be
applied either retrospectively or on a prospective basis to all deferred income tax assets and liabilities.
We adopted this amendment during fiscal 2016 on a retrospective basis. Accordingly, we reclassified our
current deferred income taxes to noncurrent on our May 3, 2015 Consolidated Balance Sheet, which
increased noncurrent deferred income taxes $4.7 million and decreased noncurrent deferred tax liabilities
$68,000.
Recently Issued Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on
accounting for certain share-based payment awards. The amended guidance requires that share-based
compensation awards with terms of a performance target that affects vesting, and that could be achieved
after the requisite service period, be treated as a performance condition. As such, the performance target
should not be reflected in estimating the grant-date fair value of the award and compensation cost should
be recognized in the period in which it becomes probable that the performance target will be achieved.
The guidance will be effective in our fiscal 2017 first quarter. The guidance will permit an entity to apply
the amendments in the update either (a) prospectively to all awards granted or modified after the effective
date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning
of the earliest annual period presented in the consolidated financial statements and to all new or modified
awards thereafter. Currently, we do not have any share-based payment awards with terms of a
performance target that affects vesting and could be achieved after the requisite service period. We are
currently assessing the impact that this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, Revenue from
Contracts with Customers. The amendments in this ASU are intended to enhance the comparability of
revenue recognition practices and will be applied to all contracts with customers. Improved disclosures
related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under
the amended guidance. In April 2015, the FASB issued ASU 2015-24, Revenue from Contracts with
Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and
60
on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new
revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2017. We are therefore required to apply the new revenue guidance in our fiscal 2019
interim and annual financial statements. This ASU can be adopted either retrospectively or as a
cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this
guidance will have on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which
changed the measurement principle for inventory from the lower of cost or market to lower of cost and
net realizable value. This ASU is effective for fiscal years and interim periods within those fiscal years,
beginning after December 15, 2016. We are therefore required to apply this guidance in our fiscal 2018
interim and annual financial statements. We are currently assessing the impact that this guidance will
have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which increases transparency
and comparability among companies accounting for lease transactions. The most significant change of
this update will require the recognition of lease assets and liabilities on the balance sheet for operating
lease arrangements with lease terms greater than twelve months for lessees. This update will require a
modified retrospective application which includes a number of optional practical expedients related to the
identification and classification of leases commenced before the effective date. This ASU is effective for
fiscal years and interim periods within those fiscal years, beginning after December 18, 2018. We are
therefore required to apply this guidance in our fiscal 2020 interim and annual financial statements. We
are currently assessing the impact that this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718):
Improvements to Employee Shares-Based Payment Accounting." ASU 2016-09 is intended to improve
the accounting for share-based payment transactions as part of the FASB’s simplification initiative. ASU
2016-09 changes several aspects of the accounting for share-based payment award transactions,
including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of
cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of
employee taxes paid on the statement of cash flows when an employer withholds shares for tax-
withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and
interim periods within those years for public companies. We are therefore required to apply this guidance
in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that
ASU 2016-09 will have on its consolidated financial statements.
There are no other new accounting pronouncements that are expected to have a significant impact on our
consolidated financial statements.
2. BUSINESS COMBINATIONS – MATTRESS FABRIC SEGMENT
On May 8, 2013, we entered into an asset purchase and consulting agreement with Bodet & Horst GMBH
& Co. KG and certain affiliates (“Bodet & Horst”) that provided for, among other things, the purchase of
equipment and certain other assets from Bodet & Horst and the restructuring of prior consulting and non-
compete agreements pursuant to an earlier asset purchase and consulting agreement with Bodet & Horst
dated August 11, 2008. This agreement was accounted for as a business combination in accordance with
ASC Topic 805, Business Combinations. We agreed with Bodet & Horst to replace the prior non-compete
agreement that prevented us from selling certain mattress fabrics and products to a leading manufacturer,
with a non-compete agreement that now allows us to make such sales. In addition, the prior consulting
and non-compete agreement, under which Bodet & Horst agreed not to sell most mattress fabrics in
North America, was replaced, expanded, and extended pursuant to the new asset purchase and consulting
agreement.
61
The purchase price for the equipment and the certain other assets noted below was $2.6 million in cash.
The following table presents the allocation of the acquisition cost to the assets acquired based on their fair
values:
(dollars in thousands)
Equipment (Note 13)
Non-compete agreement (Notes 7 and 13)
Customer relationships (Notes 7 and 13)
$
Fair Value
890
882
868
2,640
$
The company recorded its non-compete at its fair value based on a discounted cash flow valuation model.
The company recorded its customer relationships at its fair value based on a multi-period excess earnings
valuation model. This non-compete agreement is being amortized on a straight line basis over the fifteen
year life of the agreement. The customer relationships are being amortized on a straight line basis over
their useful life of seventeen years. The equipment is being amortized on a straight line basis over its
useful life of seven years.
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
(dollars in thousands)
customers
allowance for doubtful accounts
reserve for returns and allowances and discounts
May 1, May 3,
2015
30,338
(851)
(738)
28,749
2016
25,531
(1,088)
(962)
23,481
$
$
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2016
(851)
beginning balance
(363)
provision for bad debts
write-offs, net of recoveries
126
(1,088)
ending balance
$
$
2015
(573)
(421)
143
(851)
2014
(780)
139
68
(573)
A summary of the activity in the allowance for returns and allowances and discounts
follows:
(dollars in thousands) 2016
(738)
beginning balance
provision for returns and allowances
(2,825)
and discounts
credits issued
ending balance
2,601
(962)
$
$
2015
(479)
(2,733)
2,474
(738)
2014
(543)
(2,094)
2,158
(479)
62
4.
INVENTORIES
A summary of inventories follows:
(dollars in thousands)
raw materials
work-in-process
finished goods
5.
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
May 1,
2016
5,462
2,972
38,097
46,531
May 3,
2015
5,374
2,766
34,344
42,484
May 1,
2016
836
16,126
1,340
64,114
8,212
2,896
93,524
(53,551)
39,973
May 3,
2015
741
15,312
1,320
57,286
7,340
1,966
83,965
(47,887)
36,078
$
$
$
$
** Shorter of life of lease or useful life.
At May 1, 2016, we had total amounts due regarding capital expenditures totaling $224,000, which
pertain to outstanding vendor invoices, none of which are financed. The total outstanding amount of
$224,000 is required to be paid in full in fiscal 2017.
At May 3, 2015, we had total amounts due regarding capital expenditures totaling $990,000, which
pertained to outstanding vendor invoices, none of which are financed.
We did not finance any of our capital expenditures in fiscal 2016, 2015, and 2014.
6. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands)
beginning balance
loss on impairment
acquisitions
ending balance
2016
$ 11,462
-
-
$ 11,462
2015
11,462
-
-
11,462
2014
11,462
-
-
11,462
The goodwill balance relates to the mattress fabrics segment.
63
7. OTHER ASSETS
A summary of other assets follows:
(dollars in thousands)
cash surrender value – life insurance
non-compete agreement, net
customer relationships, net
other
Non-Compete Agreement
May 1,
2016
357
903
715
598
2,573
$
$
May 3,
2015
339
979
766
461
2,545
In connection with the asset purchase and consulting agreement with Bodet & Horst on May 8, 2013 (see
note 2), we restructured our prior non-compete agreement pursuant to our asset purchase and consulting
agreement dated August 11, 2008. We agreed with Bodet & Horst to replace the prior non-compete
agreement that prevented us from selling certain mattress fabrics and products to a leading manufacturer,
with a non-compete agreement that will now allow us to make such sales. In addition, the prior consulting
and non-compete agreement, under which Bodet & Horst agreed not to sell mattress fabrics in North
America, was replaced, expanded, and extended pursuant to the new asset purchase and consulting
agreement. We recorded this non-compete agreement at its fair value based on a discounted cash flow
valuation model. This non-compete agreement is amortized on a straight line basis over the fifteen year
life of the agreement.
The gross carrying amount of this non-compete agreement was $2.0 million at May 1, 2016 and May 3,
2015, respectively. Accumulated amortization for this non-compete agreement was $1.1 million at May 1,
2016 and May 3, 2015, respectively.
Amortization expense for this non-compete agreement was $75,000 in fiscal years 2016, 2015, and 2014,
respectively. The remaining amortization expense for the next five years and thereafter follows: FY 2017
- $75,000; FY 2018 - $75,000; FY 2019 - $75,000; FY 2020 - $75,000; FY 2021 - $75,000, and
Thereafter - $528,000.
The weighted average amortization period for the non-compete agreement is 12 years as of May 1, 2016.
Customer Relationships
In connection with the asset purchase and consulting agreement with Bodet & Horst noted above, we
purchased certain customer relationships. We recorded the customer relationships at their fair value based
on a multi-period excess earnings valuation model. The gross carrying amount of these customer
relationships was $868,000 at May 1, 2016 and May 3, 2015, respectively. Accumulated amortization for
these customer relationships was $153,000 and $102,000 at May 1, 2016 and May 3, 2015, respectively.
The customer relationships are amortized on a straight-line basis over their seventeen year useful life.
Amortization expense for the customer relationships was $51,000 for fiscal years 2016, 2015, and 2014,
respectively. The remaining amortization expense for the next five fiscal years and thereafter follows: FY
2017 - $51,000; FY 2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; FY 2021 - $51,000; and
Thereafter - $460,000.
The weighted average amortization period for our customer relationships is 14 years as of May 1, 2016.
Cash Surrender Value - Life Insurance
On May 16, 2014, we entered into an agreement with a former employee and his irrevocable trust (the “Trust”)
dated September 7, 1995. As a result of this agreement, a previous split dollar life insurance agreement in
which we purchased a policy on the life of this former employee and his spouse, in which we retained
64
ownership of the policy, paid premiums to support the policy, had the right to receive cash surrender value of
the policy upon the second to die of the former employee and his spouse, with the Trust receiving the
remainder of the policy’s death benefit ($2.5 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 policy totaling $320,000 during the second
quarter of fiscal 2015.
We had one life insurance contract with a death benefit of $1.4 million at May 1, 2016 and May 3, 2015,
respectively. Our cash surrender value - life insurance balance of $357,000 and $339,000 at May 1, 2016
and May 3, 2015, respectively, are collectible upon death of the respective insured.
8. ACCRUED EXPENSES
A summary of accrued expenses follows:
(dollars in thousands)
compensation, commissions and related benefits
advertising rebates
interest
other
9.
INCOME TAXES
Income Tax Expense and Effective Income Tax Rate
Total income tax expense was allocated as follows:
May 1,
2016
10,011
870
-
1,041
11,922
$
$
May 3,
2015
9,081
1,002
37
1,009
11,129
(dollars in thousands)
income from operations
shareholders’ equity, related to
the tax benefit arising from stock
based compensation
2016
$ 10,963
(841)
$ 10,122
2015
7,885
(109)
7,776
2014
1,596
(143)
1,453
\
65
Income tax expense attributable to income from operations consists of:
(dollars in thousands)
current
federal
state
foreign
deferred
federal
state
undistributed earnings – foreign subsidiaries
U.S. operating loss carryforwards
foreign
valuation allowance
2016
2015
$
-
6
6,765
6,771
(1,205)
305
(1,129)
5,467
1,086
(332)
4,192
$ 10,963
-
(7)
4,713
4,706
(849)
(52)
(260)
4,487
(92)
(55)
3,179
7,885
2014
-
-
3,323
3,323
1,065
416
(5,018)
1,838
(42)
14
(1,727)
1,596
Income (loss) before income taxes related to the company’s foreign and U.S. operations consists of:
(dollars in thousands)
Foreign
China
Canada
Poland
Total Foreign
United States
2016
2015
2014
$ 14,130
3,647
(62)
17,715
10,183
$ 27,898
12,531
2,695
(260)
14,966
7,990
22,956
11,512
2,149
(370)
13,291
5,752
19,043
The following schedule summarizes the principal differences between the income tax expense at the
federal income tax rate and the effective income tax rate reflected in the consolidated financial
statements:
federal income tax rate
tax effects of Chinese foreign exchange gains
change in valuation allowance
change in North Carolina income tax rates
undistributed earnings from foreign subsidiaries
other
2016
34.0%
4.4
(1.2)
0.7
-
1.4
39.3%
2015
34.0%
0.3
(0.2)
-
-
0.2
34.3%
2014
34.0%
(1.3)
0.1
1.8
(26.3)
0.1
8.4%
66
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
foreign income tax credits - U.S.
alternative minimum tax credit - U.S.
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
unrecognized tax benefits – U.S.
property, plant and equipment (2)
goodwill
other
total deferred tax liabilities
Net deferred tax asset
2016
2015
$
$
545
2,660
5,311
1,173
1,436
1,320
326
6,888
147
(6,888)
(590)
12,328
(604)
(4,168)
(5,210)
(1,325)
(185)
(11,492)
836
444
2,251
4,497
1,155
-
1,320
447
12,133
361
(10,349)
(922)
11,337
(1,733)
-
(4,022)
(1,197)
(198)
(7,150)
4,187
(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 approximately $18.0 million with related future
tax benefits of $6.9 million at May 1, 2016. These carryforwards principally expire in 10-19 years, fiscal
2026 through fiscal 2035. Our U.S. foreign income tax credits of $1.4 million expire in 10 years, fiscal
2026. Our alternative minimum tax credit carryforward of approximately $1.3 million for federal income
tax purposes does not expire.
At May 1, 2016, our non-current deferred income tax asset of $2.3 million represents $1.7 million and
$572,000 from our operations located in the U.S. and China, respectively. At May 3, 2015, our non-
current deferred income tax asset of $5.2 million represents $4.3 million and $868,000 from our
operations located in the U.S. and China, respectively.
Our non-current deferred income tax liability balances of $1.5 million and $982,000 at May 1, 2016 and
May 3, 2015, respectively, pertain 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-
67
by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at May 1,
2016, we recorded a partial valuation allowance of $590,000, of which $518,000 pertained to certain U.S.
state net operating loss carryforwards and credits and $72,000 pertained to loss carryforwards associated
with our Culp Europe operation located in Poland. Based on our assessment at May 3, 2015, we recorded
a partial valuation allowance of $922,000, of which $561,000 pertained to certain U.S. state net operating
loss carryforwards and credits and $361,000 pertained to loss carryforwards associated with our Culp
Europe operation located in Poland.
No valuation allowance was recorded against our net deferred tax assets associated with our operations
located in China and Canada at May 1, 2016 and May 3, 2015, respectively.
United States
Our partial valuation allowance against our U.S. net deferred assets totaled $518,000, $561,000, and
$666,000 at May 1, 2016, May 3, 2015, and April 27, 2014, respectively. These valuation allowances
pertain to 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 would not be realized prior to their respective
expiration dates. We recorded income tax benefits of $43,000, $105,000, and $56,000 that reduced our
valuation allowance against our U.S. net deferred tax assets in fiscal years 2016, 2015, and 2014,
respectively. These income tax benefits pertain to a change in estimate of the recoverability of our U.S.
state net loss operating carryforwards at the end of the respective prior fiscal year.
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 a history of cumulative pre-tax losses.
Based on the negative evidence, as supported by our cumulative pre-tax loss history and the short
carryforward period of five years imposed by the Polish government, we recorded an income tax charge
of $241,000 during fiscal 2013 to establish a full valuation allowance against Culp Europe’s net deferred
tax assets.
Our partial valuation allowance against our loss carryforwards associated with our Culp Europe operation
located in Poland totaled $72,000 at May 1, 2016. Our full valuation allowance against our loss
carryforwards associated with our Culp Europe operation located in Poland totaled $361,000 and
$311,000 at May 3, 2015 and April 27, 2014, respectively. These valuation allowances pertain to net
operating loss carryforwards in which it is “more likely than not” that these net operating loss
carryforwards would not be realized prior to their respective expiration dates.
During fiscal 20 16, we recorded an income tax benefit of $289,000 for a change in estimate of the
recoverability of our net loss operating carryforwards at the end of the respective prior fiscal year. During
fiscal 2015 and 2014, we recorded an income tax charge of $50,000 and $70,000, respectively, for an
increase in the full valuation allowance against our net deferred tax assets associated with our Culp
Europe operations.
Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries
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. Also, we assess the recognition of U.S. foreign
income tax credits associated with foreign withholding and income tax payments and whether it is more-
likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign
68
income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will
not be realized, an adjustment to our provision for income taxes will be recognized at that time.
At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6
million. At the same date, the deferred tax liability associated with our undistributed earnings from our
foreign subsidiaries totaled $604,000, which included U.S. income and foreign withholding taxes totaling
$38.5 million, offset by U.S. foreign income tax credits of $37.9 million.
At May 3, 2015, we had accumulated earnings and profits from our foreign subsidiaries totaling $85.2
million. At the same date, the deferred tax liability associated with our undistributed earnings from our
foreign subsidiaries totaled $1.7 million, which included U.S. income and foreign withholding taxes
totaling $32.4 million, offset by U.S. foreign income tax credits of $30.7 million.
Fiscal 2014 - Discrete Event
During the third quarter of fiscal 2014, our operations in China achieved positive accumulated earnings
and profits for both U.S. income tax and financial reporting purposes for the first time since we
determined our undistributed earnings from foreign subsidiaries would not be reinvested indefinitely in
the second quarter of fiscal 2013. As a result, we recorded an income tax benefit of $5.4 million to
recognize U.S. foreign income tax credits of $9.9 million offset by the U.S. income tax effects of the
undistributed earnings from our China operations and foreign withholding taxes totaling $4.5 million.
This $5.4 million income tax benefit was treated as a discrete event in which the full income tax benefits
of this adjustment were recorded in the third quarter and full fiscal year 2014, as it pertained to a change
in judgment on prior periods’ accumulated earnings and profits associated with our subsidiaries located in
China.
In addition, an income tax charge of $352,000 was recorded during fiscal 2014 for the U.S. income tax
effects of the undistributed earnings and foreign withholding taxes incurred in fiscal 2014 from our
Canadian operations and the fourth quarter of fiscal 2014 from our China operations.
Uncertainty in Income Taxes
The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands)
beginning balance
increases from prior period tax positions
decreases from prior period tax positions
increases from current period tax positions
ending balance
2016
$14,141
454
(77)
379
$ 14,897
2015
13,740
588
(187)
-
14,141
2014
13,166
756
(182)
-
13,740
At May 1, 2016, we had $14.9 million of total gross unrecognized tax benefits, of which $3.8 million
would favorably affect the income tax rate in future periods. At May 3, 2015, we had $14.1 million of
total gross unrecognized tax benefits, of which $3.8 million would favorably affect the income tax rate in
future periods.
As of May 1, 2016, we had $14.9 million of total gross unrecognized tax benefits, of which $11.1 million
and $3.8 million were classified as net non-current deferred income taxes and income taxes payable-long-
term, respectively, in the accompanying consolidated balance sheets. As of May 3, 2015, we had $14.1
million of total gross unrecognized tax benefits, of which $10.3 million and $3.8 million were classified
as net non-current deferred income taxes and income taxes payable- long-term, respectively, in the
accompanying consolidated balance sheets.
69
We elected to classify interest and penalties as part of income tax expense. At May 1, 2016 and May 3,
2015, the gross amount of interest and penalties due to unrecognized tax benefits was $978,000 and
$844,000, respectively.
The liability for uncertain tax positions at May 1, 2016, includes $14.9 million related to tax positions for
which significant change is reasonably possible in fiscal 2017. 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 2005 and subsequent due to loss
carryforwards. Canadian federal returns remain subject to examination for tax years 2009 and subsequent.
Canadian provincial (Quebec) returns remain subject to examination for tax years 2012 and subsequent.
Income tax returns for the company’s China subsidiaries are subject to examination for tax years 2011
and subsequent.
Income Taxes Paid
Income tax payments, net of income tax refunds, were $6.7 million in fiscal 2016, $4.8 million in 2015,
and $3.0 million in 2014.
10. LONG-TERM DEBT AND LINES OF CREDIT
A summary of long-term debt follows:
May 1, May 3,
2015
2,200
(2,200)
-
(dollars in thousands)
unsecured senior term notes
current maturities of long-term debt
long-term debt, less current maturities
2016
-
-
-
$
$
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 were due on the notes beginning August 11, 2011. 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.
On August 11, 2015, we paid our last annual payment of $2.2 million and this agreement has been paid in
full.
Revolving Credit Agreement –United States
At May 3, 2015, our Credit Agreement with Wells Fargo provided for an unsecured revolving loan
commitment of $10.0 million to be used to finance working capital and general corporate purposes.
Interest was charged at a rate (applicable interest rate of 1.78% at May 3, 2015) equal to the one-month
LIBOR rate plus a spread based on the ratio of debt to EBITDA as defined in the agreement. The Credit
Agreement contained customary financial and other covenants as defined in the agreement and was set to
expire August 31, 2015.
Effective July 10, 2015, we amended the Credit Agreement to extend the expiration date to August 31,
2017 and maintain the annual capital expenditure limit of $12 million.
We entered into a Second Amendment to our Credit Agreement dated March 10, 2016. The terms of the
Second Amendment include, among other things, provisions that (i) increase our line of credit under the
Credit Agreement to $30 million, (ii) increase the annual limit on capital expenditures by the company to
70
$15 million, (iii) add a new financial covenant to establish a minimum level of unencumbered liquid
assets, (iv) eliminate certain financial covenants, (v) amend the pricing matrix that provides for interest
payable on obligations under the agreement as a variable spread over LIBOR, based on the company’s
ratio of debt to EBITDA (applicable interest rate of 1.89% at May 1, 2016), and (vi) provide that
obligations under the Credit Agreement are to be secured by a pledge of 65% of the common stock of
Culp International Holdings Ltd, our subsidiary located in the Cayman Islands.
The purpose of the increase in our revolving credit line with Wells Fargo is to support potential short term
cash needs in different jurisdictions within our global operations, mitigate our risk associated with foreign
currency exchange rate fluctuations, and support repatriation of earnings and profits from our foreign
subsidiaries to the U.S. for various strategic purposes.
At May 1, 2016, and May 3, 2015, there were $250,000 in outstanding letters of credit (all of which
related to workers compensation) provided by the Credit Agreement. There were no borrowings
outstanding under the agreement at May 1, 2016, and May 3, 2015.
Revolving Credit Agreement - China
At May 3, 2015, we had an unsecured credit agreement associated with our operations in China that
provided for a line of credit up to 40 million RMB and was set to expire on February 9, 2016. On March
8, 2016, we renewed this credit agreement. This renewal extended the expiration date to March 8, 2017
and maintained the existing available line of credit of 40 million RMB ($6.2 million USD). This
agreement has an interest rate determined by the Chinese government and there were no outstanding
borrowings as of May 1, 2016 and May 3, 2015.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. At May 1, 2016, the company was in compliance with these financial covenants.
Interest paid during 2016, 2015, and 2014 totaled $95,000, $268,000, and $466,000, respectively.
11. 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 primarily 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 $3.0
million in fiscal 2016, $2.9 million in fiscal 2015, and $2.7 million in fiscal 2014. Future minimum rental
commitments for noncancellable operating leases are $2.6 million in fiscal 2017; $1.2 million in fiscal 2018;
$405,000 in fiscal 2019; $48,000 in fiscal 2020; and $18,000 in fiscal 2021. Management expects that in the
normal course of business, these leases will be renewed or replaced by other operating leases.
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. During fiscal 2014, this lease was on
a month to month basis at an amount of $12,704 per month. Effective October 1, 2014, we entered into a
new lease agreement with the partnership noted above. The new lease agreement requires monthly payments
of $13,000 for a three year term commencing on October 1, 2014 through September 30, 2017. This lease
contains two successive options to renew the lease with each renewal period being three years. The first and
second renewal terms would require monthly payments of $13,100 and $13,200, respectively.
71
Rents paid to entities owned by certain shareholders and officers of the company and their immediate
families totaled $156,000 in fiscal 2016; $155,000 in fiscal 2015; and $152,000 in fiscal 2014.
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 were Alan Shulman, Stanley Siegel, Ruth
Cherenson as Personal Representative of Estate of Alan Cherenson, and Adrienne Rolla and M.F. Rolla as
Executors of the Estate of Joseph Byrnes. The plaintiffs were partners in a general partnership that
formerly owned a manufacturing plant in West Hazleton, Pennsylvania (the “Site”). Approximately two
years after this general partnership sold the Site to defendants Chromatex, Inc. and Rossville Industries,
Inc., we leased and operated the Site as part of our Rossville/Chromatex division. The lawsuit involved
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 $14 million, plus
unspecified future environmental costs. Neither USEPA nor any other governmental authority asserted
any claim against us on account of these matters. The plaintiffs sought contribution from us and other
defendants and a declaration that the company and the other defendants were 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 have defended
ourselves vigorously with regards to the matters described in this litigation. In addition, we had an
indemnification agreement with certain other defendants in this litigation pursuant to which the other
defendants agreed to indemnify us for any damages we would incur as a result of the environmental
matters that are the subject of this litigation, although it was unclear whether the indemnitors had
significant assets.
In the first quarter of fiscal 2014, the parties to this lawsuit reached a tentative settlement of all matters,
which required us to contribute cash to a global settlement fund. Consequently, we recorded a charge of
$206,000 to other expense in the fiscal 2014 Consolidated Statement of Net Income. In the fourth quarter
of fiscal 2014, we paid the $206,000 tentative settlement amount. Subsequently, the settlement was
reviewed by the government and during the first quarter of fiscal 2015 the court approved the final
agreement by the parties involved. The lawsuit was dismissed on June 5, 2014.
Other Litigation
The company is involved in legal proceedings and claims which have arisen in the ordinary course of
business. Management has determined that it is not reasonably possible that these actions, when ultimately
concluded and settled, will have a material adverse effect upon the financial position, results of operations,
or cash flows of the company.
Purchase Commitments
At May 1, 2016, and May 3, 2015, we had open purchase commitments to acquire a building and equipment
for our mattress fabrics segment totaling $10.6 million and $2.3 million, respectively. The $10.6 million
open purchase commitments as of May 1, 2016, include $9.3 million associated with the construction of a
new building noted below.
Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located
in North Carolina that will expand our distribution capabilities and office space at a current estimated cost of
$11.2 million. This agreement required an installment payment of $1.9 million in April 2016 and requires
remaining installment payments to be made in the next three fiscal years as follows: Fiscal 2017- $4.3
72
million; Fiscal 2018- $3.8 million; and Fiscal 2019- $1.2 million. Interest will be charged on the outstanding
installment payments at a rate of $2.25% plus the current 30 day LIBOR rate. Also, we are required to issue
a letter of a credit totaling $5.0 million with the contractor being the beneficiary. In addition to the interest
that will be charged on the outstanding installment payments, there will be 0.1% unused fee calculated on
the balance of the $5.0 million letter of credit less the amount outstanding per month.
The construction of this new building is currently expected to be completed in December 2016.
12. STOCK-BASED COMPENSATION
Equity Incentive Plan Description
On September 16, 2015, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2015
Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is intended to update and replace our 2007 Equity
Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity based awards substantially similar
to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options
intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units, and other equity and cash related awards as
determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were
authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to
specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval
of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the
2007 Plan will be settled in accordance with their terms.
At May 1, 2016, there were 1,079,809 shares available for future equity based grants under the company’s
2015 Plan.
Stock Options
Under our 2007 Plan, employees, outside directors, and others associated with the company were granted
options to purchase shares of common stock at the fair market value on the date of grant.
No incentive or non-qualified stock options were granted in fiscal 2016, 2015 or 2014, respectively.
No compensation expense was recorded for incentive or non-qualified stock options in fiscal 2016 and
2015 as all incentive stock option awards were fully vested at the end of fiscal 2014. The company
recorded compensation expense of $10,000 within selling, general, and administrative expense for
incentive stock options in fiscal 2014.
The following tables summarize stock option activity for fiscal 2016, 2015, and 2014:
outstanding at beginning
of year
granted
exercised
canceled/expired
outstanding at end of year
2016
2015
2014
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
140,100 $
-
(54,500)
(2,000)
83,600
6.49
-
3.68
4.59
8.37
153,950 $ 6.70
-
9.31
7.27
6.49
-
(10,100)
(3,750)
140,100
182,825 $ 6.99
-
8.40
9.28
6.70
-
(23,125)
(5,750)
153,950
73
Range of
Exercise Prices
$4.59 - $5.41
$7.08 - $9.57
Options Outstanding
Number Weighted-Avg.
Options Exercisable
Number
Outstanding
Remaining Weighted-Avg.
at 5/01/16 Contractual Life Exercise Price
Exercisable Weighted-Avg.
at 5/01/16 Exercise Price
2,000
81,600
83,600
0.4
1.3
1.3
$5.41
$8.44
$8.37
2,000
81,600
83,600
$5.41
$8.44
$8.37
At May 1, 2016, the aggregate intrinsic value for options outstanding and exercisable was $1.5 million.
The aggregate intrinsic value for options exercised was $1.3 million, $87,000, and $224,000, in fiscal
2016, 2015, and 2014, respectively.
At May 1, 2016, there were no unvested incentive stock option awards. Therefore, there was no
unrecognized compensation cost related to the incentive stock option awards at May 1, 2016.
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 vested 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
vested in equal one-third installments on May 1, 2012, 2013, and 2014. The fair value (the closing price
of the company’s common stock) of this restricted stock award for key management employees was
measured at the date of grant (January 7, 2009) and was $1.88 per share. The fair value (the closing price
of the company’s common stock) of 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, May 1, 2013, and May 1, 2014 was $11.05, $16.25, and
$18.61, respectively.
The following table summarizes the time vested restricted stock activity for fiscal 2016, 2015, and 2014:
outstanding at beginning of year
granted
vested
outstanding at end of year
2016
Shares
-
-
-
-
2015
Shares
61,668
-
(61,668)
-
2014
Shares
123,335
-
(61,667)
61,668
During fiscal 2015, 61,668 shares of time vested restricted stock vested and had a weighted average fair
value of $257,000 or $4.17 per share. During fiscal 2014, 61,667 shares of time vested restricted stock
vested and had a weighted average fair value of $249,000 or $4.04 per share.
At April 27, 2014, there were 61,668 shares of time vested restricted stock outstanding and unvested. Of
the 61,668 shares outstanding and unvested, 35,000 shares were granted on January 7, 2009 and 26,668
shares were granted on July 1, 2009. At April 27, 2014, the weighted average fair value of these
outstanding and unvested shares was $4.17 per share.
74
At May 1, 2016, there were no outstanding and unvested shares of time vested restricted stock. Therefore,
there was no unrecognized compensation cost related to time vested restricted stock awards at May 1,
2016.
No compensation expense was recorded for time vested restricted stock awards in fiscal 2016 as all time
vested restricted stock awards were fully vested at the end of fiscal 2015. We recorded compensation
expense of $4,000 and $62,000 within selling, general, and administrative expense for time vested
restricted stock awards in fiscal 2015 and 2014, respectively.
Performance Based Restricted Stock Units
Fiscal 2016 Grant
On July 15, 2015, certain key members of management were granted performance based restricted stock
units which could earn up to 107,554 shares of common stock if certain performance targets are met as
defined in the related restricted stock unit agreements. These awards were valued based on the fair market
value on the date of grant. The fair value of these awards was $32.23 per share, 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.
On July 15, 2015, a non-employee was granted performance based restricted stock units which could earn
up to 10,364 shares of common stock if certain performance targets are met as defined in the related
restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the
performance criteria are met or the end of the reporting period. At May 1, 2016, this grant was unvested
and was measured at $26.24 per share, which represents the closing price of our common stock at the end
of the reporting period. The vesting of this award is over the requisite service period of three years.
Fiscal 2015
On June 24, 2014, certain key members of management were granted performance based restricted
common stock units which could earn up to 102,845 shares of common stock if certain performance
targets are met as defined in the related restricted stock unit agreements. These awards were valued based
on the fair market value on the date of grant. The fair value of these awards was $17.70 per share, 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.
On March 3, 2015, a non-employee was granted performance based restricted stock units which could
earn up to 28,000 shares of common stock if certain performance targets are met as defined in the related
restricted stock unit agreements. The fair value of this award is measured at the earlier date of when the
performance criteria are met or the end of the reporting period. At May 1, 2016, this grant was unvested
and was measured at $26.24 per share, which represents the closing price of the company’s common
stock at the end of the reporting period. The vesting of these awards is over the requisite service period of
16 months and 28 months for performance based restricted stock units which could earn up to 12,000 and
16,000 shares of common stock, respectively.
During the first quarter of fiscal 2017, 12,000 shares of common stock associated with this grant vested
and had a weighted average fair value of $345,000 or $28.77 per share.
Fiscal 2014
On June 25, 2013, certain key members of management were granted performance based restricted
common stock units which could earn up to 72,380 shares of common stock if certain performance targets
are met as defined in the related restricted stock unit agreements. These awards were valued based on the
fair market value on the date of grant. The fair value of these awards was $17.12 per share, which
75
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.
During the first quarter of fiscal 2017, 37,192 shares of common stock associated with this grant vested
and had a weighted average fair value of $637,000 or $17.12 per share.
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 related restricted stock unit agreements. These awards were valued based
on the fair market value on the date of grant. The fair value of these awards was $10.21 per share, 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.
During the first quarter of fiscal 2016, 115,855 shares of common stock associated with this grant vested
and had a weighted average fair value of $1.2 million or $10.21 per share
Overall
We recorded compensation expense of $2.6 million, $727,000, and $581,000 within selling, general, and
administrative expense for performance based restricted stock units in fiscal 2016, 2015 and 2014,
respectively. Compensation cost is recorded based on an assessment each reporting period of the
probability that 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 May 1, 2016, the remaining unrecognized compensation cost related to the performance based
restricted stock units was $3.7 million, which is expected to be recognized over a weighted average
vesting period of 1.9 years.
Common Stock Awards
On October 1, 2015, we granted a total of 3,000 shares of common stock to our outside directors. These
shares of common stock vested immediately and were measured at $31.77 per share, which represents the
closing price of the company's common stock at the date of grant.
On October 1, 2014, we granted a total of 3,000 shares of common stock to our outside directors. These
shares of common stock vested immediately and were measured at $17.95 per share, which represents the
closing price of the company's common stock at the date of grant.
On October 1, 2013, we granted a total of 3,000 shares of common stock to our outside directors. These
shares of common stock vested immediately and were measured at $18.84 per share, which represents the
closing price of the company's common stock at the date of grant.
We recorded $95,000, $55,000, and $57,000, of compensation expense within selling, general, and
administrative expense for these common stock awards for fiscal 2016, 2015, and 2014, respectively.
13. 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
76
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.
Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring
basis:
Fair value measurements at May 1, 2016 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:
Premier Money Market Fund
Low Duration Bond Fund
Intermediate Term Bond Fund
Strategic Income Fund
Limited Term Bond Fund
Large Blend Fund
Growth Allocation Fund
Mid Cap Value Fund
Other
$ 3,404
1,604
1,154
999
602
289
148
102
82
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$3,404
1,604
1,154
999
602
289
148
102
82
Fair value measurements at May 3, 2015 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
Premier Money Market Fund
Intermediate Term Bond Fund
Low Duration Bond Fund
Strategic Income Fund
Growth Allocation Fund
Other
$ 3,107
2,285
2,181
2,096
1,008
85
45
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$3,107
2,285
2,181
2,096
1,008
85
45
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.
77
The fair value of the company’s long-term debt is estimated by discounting the future cash flows at rates
currently offered to the company for similar debt instruments of comparable maturities. At May 3, 2015,
the carrying value of the company’s long-term debt was $2.2 million and the fair value was $2.3 million.
Nonrecurring Basis
During fiscal 2016 and 2015, we did not have any financial assets that were required to be measured at
fair value on a nonrecurring basis.
During fiscal 2014, we had no assets that are required to be measured at fair value on a nonrecurring basis
other than the assets acquired from Bodet & Horst (see note 2) that were acquired at fair value.
Fair value measurements during fiscal 2014 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:
Equipment
Non-compete Agreement
Customer Relationships
$ -
-
-
$ 890
-
-
$ -
882
868
$ 890
882
868
The equipment was classified as level 2 as the fair value was determined using quoted market prices from
a third party. The non-compete agreement was recorded at its fair value using a discounted cash flow
valuation model that used significant unobservable inputs and was classified as level 3. The customer
relationships were recorded at fair value using a multi-period excess earnings valuation model that used
significant unobservable inputs and was classified as level 3.
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
2016
2015
2014
12,302
173
12,217
205
12,177
237
12,475
12,422
12,414
All options to purchase shares of common stock were included in the computation of diluted net income
for fiscal years 2016, 2015 and 2014, as the exercise price of the options was less than the average market
price of common shares.
At May 1, 2016 and May 3, 2015, there were no outstanding and unvested shares of time vested restricted
common stock and therefore, the computation of basic net income per share was not affected. The
78
computation of basic net income did not include 61,668 shares of time vested restricted common stock as
these shares were unvested for fiscal 2014.
15. BENEFIT PLANS
Defined Contribution 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 $843,000, $798,000, and $696,000 in fiscal years
2016, 2015, and 2014, respectively.
Deferred Compensation Plan
We have a nonqualified deferred compensation plan (the “Plan”) covering officers and certain key
members of management. The Plan provides for participant deferrals on a pre-tax basis that are subject to
annual deferral limits by the IRS and non-elective contributions made by the company. Participant
deferrals and non-elective contributions made by the company are immediately vested.
Our contributions to the Plan were $180,000, $174,000 and $166,000 in fiscal years 2016, 2015, and
2014, respectively. Our nonqualified deferred compensation plan liability of $4.7 million and $4.0
million at May 1, 2016 and May 3, 2015, were recorded in deferred compensation in the 2016 and 2015
Consolidated Balance Sheets, respectively.
Effective January 1, 2014, we established a Rabbi Trust (the “Trust”) to set aside funds for the
participants of the Plan and enable the participants to direct their contributions to various investment
options in the Plan. The investment options of the Plan consist of a money market fund and various
mutual funds. The funds set aside in the Trust are subject to the claims of our general creditors in the
event of the company’s insolvency as defined in the Plan.
The investment assets of the Trust are recorded at their fair value of $4.0 million and $2.4 million at May
1, 2016 and May 3, 2015, and were recorded in long-term investments in the 2016 and 2015 Consolidated
Balance Sheets, respectively. The investment assets of the Trust are classified as available for sale and
accordingly, changes in their fair values are recorded in other comprehensive income (loss).
16. SEGMENT INFORMATION
The company’s operations are classified into two business segments: mattress fabrics and upholstery
fabrics. The mattress fabrics segment manufacturers, sources, and sells fabrics and mattress covers to
bedding manufacturers. The upholstery fabrics segment manufacturers, sources, and sells fabrics
primarily to residential furniture manufacturers.
Net sales denominated in U.S. dollars accounted for 93%, 92% and 88% of total consolidated net sales in
2016, 2015, and 2014, respectively. International sales accounted for 22%, 22% and 19% of net sales in
2016, 2015, and 2014, respectively, and are summarized by geographic area as follows:
(dollars in thousands)
north america (excluding USA) (1)
far east and asia (2)
all other areas
2016
$ 31,667
31,927
4,336
$ 67,930
2015
2014
30,758
31,855
4,720
67,333
15,556
33,487
6,041
55,084
(1) Of this amount, $24.2 million, $24.1 million, and $9.3 million are attributable to shipments to
Mexico in fiscal 2016, 2015, and 2014, respectively.
79
(2) Of this amount $23.1 million, $26.5 million, and $32.2 million are attributable to shipment to
China in fiscal 2016, 2015, and 2014, respectively.
Sales are attributed to individual countries based upon location that the company ships its products to for
delivery to customers.
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, all costs
related to being a public company, and other miscellaneous expenses. 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, goodwill, a non-
compete agreement and customer relationships associated with an acquisition.
Statements of operations for the company’s operating segments are as follows:
2016
2015
2014
(dollars in thousands)
net sales:
upholstery fabrics
mattress fabrics
gross profit:
upholstery fabrics
mattress fabrics
(dollars in thousands)
selling, general, and administrative expenses:
upholstery fabrics
mattress fabrics
unallocated corporate
total selling, general, and administrative
expenses
Income from operations:
upholstery fabrics
mattress fabrics
total segment income from operations
unallocated corporate expenses
total income from operations
interest expense
interest income
other expense
income before income taxes
130,427
179,739
310,166
22,690
32,877
55,567
126,457
160,705
287,162
21,429
27,477
48,906
$ 126,441
186,419
$ 312,860
26,393
38,718
65,111
$
$
$
2016
2015
2014
15,094
12,223
9,456
14,562
11,206
7,010
13,393
9,962
5,302
$
36,773
32,778
28,657
$
$
11,298
26,496
37,794
(9,456)
28,338
-
176
(616)
27,898
8,128
21,671
29,799
(7,010)
22,789
(64)
622
(391)
22,956
8,036
17,515
25,551
(5,302)
20,249
(427)
482
(1,261)
19,043
One customer within the upholstery fabrics segment represented 13% of consolidated net sales in fiscal
years 2016, 2015, and 2014, respectively. Two customers within the mattress fabrics segment represented
22%, 20%, and 21% of consolidated net sales in fiscal 2016, 2015, and 2014, respectively. No customers
within the upholstery fabrics segment accounted for 10% or more of net accounts receivable as of May 1,
2016 and May 3, 2015, respectively. One customer within the mattress fabrics segment accounted for
16% and 10% of net accounts receivable balance as of May 1, 2016 and May 3, 2015, respectively.
80
Balance sheet information for the company’s operating segments follow:
(dollars in thousands)
segment assets
mattress fabrics
current assets (1)
non-compete agreements, net
customer relationships
goodwill
property, plant, and equipment
total mattress fabrics assets
upholstery fabrics
current assets (1)
property, plant, and equipment
total upholstery fabrics assets
2016
2015
2014
$
$
$
$
43,472
903
715
11,462
37,480 (2)
94,032
41,328
979
766
11,462
33,773 (3)
88,308
36,229
1,041
817
11,462
29,040 (4)
78,589
26,540
29,905
1,564 (5) 1,467 (6)
28,104
31,372
31,854
1,573 (7)
33,427
total segment assets
122,136
119,680
112,016
non-segment assets
cash and cash equivalents
short-term investments
income taxes receivable
deferred income taxes
other current assets
property, plant, and equipment
long-term investments
other assets
total assets
capital expenditures (9):
mattress fabrics
upholstery fabrics
unallocated corporate
depreciation expense
mattress fabrics
upholstery fabrics
total segment depreciation expense
37,787
4,359
155
2,319
2,477
29,725
10,004
229
5,169
2,440
29,303
6,294
121
8,270
2,344
929 (8)
838 (8)
4,025
955
$ 175,142
2,415
800
171,300
763 (8)
765
1,059
160,935
$
$
$
$
9,666
626
416
10,708
5,837
834
6,671
10,454
468
252
11,174
5,034
739
5,773
4,380
827
103
5,310
4,694
618
5,312
(1) Current assets represent accounts receivable and inventory.
(2) The $37.5 million at May 1, 2016, represents property, plant, and equipment located in the U.S.
of $24.8 million and located in Canada of $12.7 million.
(3) The $33.8 million at May 3, 2015, represents property, plant, and equipment located in the U.S.
of $23.8 million and located in Canada of $10.0 million.
(4) The $29.0 million at April 27, 2014, represents property, plant, and equipment located in the
U.S. of $20.6 million and located in Canada of $8.4 million.
(5) The $1.6 million at May 1, 2016, represents property, plant, and equipment located in the U.S. of
$893 and located in China of $671.
(6) The $1.5 million at May 3, 2015, represents property, plant, and equipment located in the U.S. of
$848 and located in China of $619.
81
(7) The $1.6 million at April 27, 2014, represents property, plant, and equipment located in the U.S.
of $957, China of $572, and located in Poland of $44.
(8) The $929, $838, and $763 balance at May 1, 2016, May 3, 2015, and April 27, 2014, represent
property, plant, and equipment associated with unallocated corporate departments and corporate
departments shared by both the mattress and upholstery fabric segments.
(9) 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
May 1, 2016, the company’s statutory surplus reserve was $4.8 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 $4.8 million to assist with debt repayment, capital expenditures, and
other expenses of the company’s business.
18. COMMON STOCK REPURCHASE PROGRAM
On February 25, 2014, we announced that our board of directors approved an authorization for us to
acquire up to $5.0 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 2016, we purchased 100,776 shares of our common stock at a cost of $2.4 million, all of
which was purchased during the third quarter. During fiscal 2015, we purchased 43,014 shares of our
common stock at a cost of $745,000, all of which were purchased in the first and second quarters. During
fiscal 2014, there were no repurchases of our common stock.
At May 1, 2016, we had $1.9 million available for additional repurchases of our common stock pursuant
to the authorization by our board of directors dated February 25, 2014. On June 15, 2016, we announced
that our board of directors increased the authorization for us to acquire up to $5.0 million of our common
stock.
19. DIVIDEND PROGRAM
On June 15, 2016, we announced that our board of directors approved the payment of a special cash
dividend of $0.21 per share and a regular quarterly cash dividend payment of $0.07 per share. These
dividend payments are payable on July 15, 2016, to shareholders of record as of July 1, 2016.
82
During fiscal 2016, dividend payments totaled $8.1 million, of which $5.0 million represented a special
cash dividend payment in the first quarter of $0.40 per share, and $3.1 million represented our regular
quarterly cash dividend payments ranging from $0.06 to $0.07 per share.
During fiscal 2015, dividend payments totaled $7.6 million, of which $4.9 million represented a special
cash dividend payment in the first quarter of $0.40 per share, and $2.7 million represented our regular
quarterly cash dividend payments ranging from $0.05 to $0.06 per share.
During fiscal 2014, we paid regular quarterly cash dividends totaling $2.2 million that ranged from $0.04
to $0.05 per share.
Future dividend payments are subject to Board approval and may be adjusted at the Board’s discretion as
business needs or market conditions change.
83
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
dividends per share
book value
BALANCE SHEET DATA
operating working capital (3)
property, plant and equipment, net
total assets
capital expenditures
dividends paid
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
2016
4th quarter
fiscal
2016
3rd quarter
fiscal
2016
2nd quarter
fiscal
2016
1st quarter
fiscal
2015
4th quarter
fiscal
2015
3rd quarter
fiscal
2015
2nd quarter
fiscal
2015
1st quarter
$
$
$
$
$
$
77,253
60,640
16,613
9,261
7,352
-
(26)
211
7,167
3,566
3,601
1,782
12,257
78,466
61,903
16,563
9,337
7,226
-
(38)
85
7,179
2,317
4,862
1,705
12,331
76,956
61,223
15,733
9,433
6,300
-
(69)
225
6,144
2,373
3,771
1,629
12,343
80,185
63,983
16,202
8,741
7,461
24
(66)
95
7,408
2,707
4,701
1,555
12,277
78,846
62,674
16,172
9,605
6,567
15
(143)
10
6,685
1,772
4,913
1,528
12,219
81,269
66,867
14,402
8,375
6,027
-
(202)
307
5,922
2,110
3,812
1,432
12,219
73,991
61,713
12,278
7,379
4,899
-
(153)
162
4,890
1,889
3,001
1,414
12,218
76,060
63,345
12,715
7,419
5,296
68
(142)
(89)
5,459
2,115
3,344
1,399
12,212
12,434
12,486
12,484
12,456
12,440
12,417
12,401
12,404
0.29
0.29
0.07
10.50
45,794
39,973
175,142
3,631
859
-
128,812
90,357
21.5%
9.5
4.7
49.8
0.0
7.0
28
5.3
28.53
22.72
26.24
33.5
0.39
0.39
0.07
10.21
49,288
38,157
173,551
1,542
864
-
125,074
90,983
21.1%
9.2
6.2
32.3
0.0
7.2
31
5.1
31.15
22.61
25.32
68.8
0.31
0.30
0.06
9.96
43,303
38,319
168,947
2,575
741
-
122,975
88,297
20.4%
8.2
4.9
38.6
0.0
7.7
28
5.3
35.23
29.13
30.01
76.2
0.38
0.38
0.46
9.62
43,405
37,480
166,880
2,960
5,676
2,200
118,725
90,593
20.2%
9.3
5.9
36.5
2.4
7.7
29
5.6
33.64
25.22
30.25
90.5
0.40
0.39
0.06
9.77
41,829
36,078
171,300
2,490
733
2,200
119,427
83,225
20.5%
8.3
6.2
26.5
2.6
7.7
33
6.4
29.19
19.22
26.02
64.9
0.31
0.31
0.06
9.41
39,371
35,269
165,358
3,696
733
2,200
114,972
81,645
17.7%
7.4
4.7
35.6
2.7
7.5
32
7.0
22.74
18.50
20.09
26.8
0.25
0.24
0.05
9.14
37,645
33,204
156,162
2,728
611
2,200
111,674
79,430
16.6%
6.6
4.1
38.6
2.8
7.2
31
6.4
19.24
16.60
18.97
29.7
0.27
0.27
0.45
8.93
41,265
31,891
154,219
2,260
5,502
4,969
109,147
83,148
16.7%
7.0
4.4
38.7
6.0
7.1
31
6.0
19.05
17.11
17.87
33.7
(1) Debt includes long-term debt, current maturities of long-term debt, and line of credit.
(2) Capital employed does not include cash and cash equivalents, short-term investments, long-term investments,
current maturities of long-term debt, long-term debt, line of credit, noncurrent deferred tax assets and liabilities,
income taxes receivable and payable, and deferred compensation.
(3) Operating working capital for this calculation is accounts receivable and inventories, offset by accounts payable-trade
accounts payable - capital expenditures.
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended May 1, 2016, 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
May 1, 2016. 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, 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 the 2013
Internal Control – Integrated Framework. Based on this assessment, management concluded that our
internal control over financial reporting was effective at May 1, 2016.
Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated
financial statements as of and for the years ended May 1, 2016, May 3, 2015 and April 27, 2014 and has
audited the company’s effectiveness of internal controls over financial reporting as of May 1, 2016, as
stated in their report, which is included in Item 8 hereof.
During the quarter ended May 1, 2016, 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.
85
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 May 1, 2016, based on criteria established in the 2013 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 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 May 1, 2016, based on criteria established in the 2013 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 May 1, 2016, and our
report dated July 15, 2016 expressed an unqualified opinion those financial statements.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
July 15, 2016
86
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.
87
The following table sets forth information as of the end of fiscal 2016 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.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
Weighted-average exercise
price of outstanding
options, warrants and
rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plan
(excluding securities
reflected in column (a))
(c)
83,600
-
83,600
$8.37
-
$8.37
1,079,809
-
1,079,809
Plan Category
Equity compensation
plans approved by security
holders
Equity compensation
plans not approved by
security holders
Total
ITEM 13. CERTAIN RELATIONSHIPS AND 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.
88
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
Report of Independent Registered Public Accounting Firm .................................................................. 50
Consolidated Balance Sheets – May 1, 2016 and
May 3, 2015 ........................................................................................................................................ 51
Consolidated Statements of Net Income -
for the years ended May 1, 2016,
May 3, 2015 and April 27, 2014 ......................................................................................................... 52
Consolidated Statements of Comprehensive Income -
for the years ended May 1, 2016,
May 3, 2015 and April 27,2014………………………………………………………………… ....... 53
Consolidated Statements of Shareholders’ Equity -
for the years ended May 1, 2016,
May 3, 2015 and April 27, 2014 ......................................................................................................... 54
Consolidated Statements of Cash Flows -
for the years ended May 1, 2016,
May 3, 2015 and April 27, 2014 ......................................................................................................... 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, were filed as
Exhibit 3.1 to the company’s Form 8-K dated November 12, 2007, filed on November 13, 2007
(Commission File No. 001-12597) and are incorporated herein by reference.
89
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Second Amendment to the Credit Agreement dated as of March 10, 2016, by and between Culp,
Inc. and Wells Fargo N.A. was filed as Exhibit 10.1 to the company’s Form 10-Q for the quarter
ended January 31, 2016, filed March 11, 2016 (Commission File No. 001-12597), and
incorporated herein by reference.
Form of restricted stock unit agreement for restricted stock units granted pursuant to the 2015
Equity Incentive Plan was filed as Exhibit 10.3 to the company’s Form 10-Q for the quarter ended
August 2, 2015, filed September 11, 2015 (Commission File No. 001-12597), and incorporated
herein by reference. (*)
2015 Equity Incentive Plan, filed as Annex A to the company’s 2015 Proxy Statement, filed on
August 12, 2015 (Commission File No. 001-12597), and incorporated herein by reference. (*)
First Amendment to the Credit Agreement dated as of July 10, 2015, by and between Culp, Inc.
and Wells Fargo, N.A., was filed as Exhibit 10.1 to the company’s Form 10-K for the year ended
May 3, 2015, dated July 17, 2015, and incorporated herein by reference.
Culp, Inc. Deferred Compensation Plan For Certain Key Employees Amendment No. 1, was filed
as Exhibit 10.2 to the company’s Form 10-K for the year ended May 3, 2015, dated July 17, 2015,
and incorporated herein by reference. (*)
Written description of Non-employee Director Compensation, filed as Exhibit 10.1 to the
company’s Form 10-Q for the quarter ended August 3, 2014, dated September 12, 2014
(Commission File No. 001-12597) , and is incorporated herein by reference. (*)
2002 Stock Option Plan was filed as Exhibit 10(a) to the company’s Form 10-Q for the quarter
ended January 26, 2003, filed on March 12, 2003 (Commission File No. 001-12597), and is
incorporated herein by reference. (*)
Form of stock option agreement for options granted to executive officers pursuant to the 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, filed on September 11, 2007 (Commission File No. 001-12597) 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 (Commission File No. 001-12597), and is 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, filed on December 12,
2007 (Commission File No. 001-12597) and incorporated herein by reference. (*)
Form of stock option agreement for options granted to executive officers pursuant to the 2007
Equity Incentive Plan, filed as Exhibit 10.1 to the company’s Form 10-Q for the quarter ended
August 3, 2008, filed on September 10, 2008 (Commission File No. 001-12597), and incorporated
herein by reference. (*)
10.12 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, filed on July 12, 2012 (Commission File No. 001-
12597), and is incorporated herein by reference. (*)
10.13
10.14
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, filed on September 7, 2012 (Commission File No. 001-12597), 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 (Commission File No. 001-12597). (*)
90
10.15
10.16
21
23
Credit Agreement dated as of August 13, 2013, by and between Culp, Inc. and Wells Fargo, N.A.,
was filed as Exhibit 10.1 to the company’s Form 10-Q for the quarter ended July 28, 2013, filed
on September 6, 2013 (Commission File No. 001-12597), and is incorporated herein by reference.
Amended and Restated Deferred Compensation Plan for Certain Key Employees was filed as
Exhibit 10.1 to the company’s Form 10-Q for the quarter ended January 26, 2014, filed on March
7, 2014, and is incorporated herein by reference. (*)
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. 333-207195, 333-59512, 333-59514, 333-27519,
333-101805, 33-13310, 33-37027, 33-80206, 33-62843, 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, November 27, 2007, and September 30, 2015 and on Form S-3 and S-
3/A (File No. 333-141346).
24(a)
Power of Attorney of Patrick B. Flavin, dated July 15, 2016
24(b)
Power of Attorney of Kenneth R. Larson, dated July 15, 2016
24(c)
Power of Attorney of Kenneth W. McAllister, dated July15, 2016
24(d)
Power of Attorney of Fred A. Jackson, dated July15, 2016
31(a)
31(b)
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
32(a)
Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
32(b)
Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
b)
Exhibits:
The exhibits to this Form 10-K are filed at the end of this Form 10-K immediately preceded by an index. A
list of the exhibits begins on page 93 under the subheading “Exhibit Index.”
c)
Financial Statement Schedules:
None
91
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, CULP, INC. has
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day
of July 2016.
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 15th day of July
2016.
/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/ Fred A. Jackson
Fred A. Jackson
(Director)
/s/ Kenneth R. Bowling
Kenneth R. Bowling
Chief Financial Officer
(principal financial officer)
/s/ Thomas B. Gallagher, Jr.
Thomas B. Gallagher, Jr.
Corporate Controller
(principal accounting officer)
* By Kenneth R. Bowling, Attorney-in-Fact, pursuant to Powers of Attorney filed with the Securities
and Exchange Commission.
92
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CONSOLIDATED ADJUSTED EFFECTIVE INCOME TAX RATE, NET INCOME AND EARNINGS PER SHARE
FOR THE TWELVE MONTHS ENDED MAY 1, 2016, MAY 3, 2015, AND APRIL 27, 2014
(Amounts in Thousands)
Consolidated Effective GAAP Income Tax Rate (1)
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)
Twelve Months Ended
May 1,
2016
39.3%
–
(20.3)%
(0.4)%
18.6%
May 3,
2015
34.3%
–
(18.2)%
(0.4)%
15.7%
April 27,
2014
8.4%
26.3%
(17.1)%
–
17.6%
As reported
May 1,
2016
$ 27,898
10,963
$ 16,935
1.38
$
1.36
$
12,302
12,475
Adjustments
Adjustments
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
Notes:
(1) Calculated by dividing consolidated income tax expense by consolidated income before income taxes.
(2) Represents estimated cash income tax expense for our subsidiaries located in Canada and China divided by consolidated income before income taxes.
(3) Proforma income taxes calculated using the Consolidated Adjusted Effective Income Tax Rate as reflected above.
$
–
$ (5,774)
$ 5,774
$
0.47
0.46
$
12,302
12,475
–
(4,281)
4,281
0.35
0.34
12,217
12,422
$
$
$
$
$
May 1, 2016
Proforma Net
of Adjustments
$ 27,898
5,189
$ 22,709
1.85
$
1.82
$
12,302
12,475
As reported
May 3,
2015
$ 22,956
7,885
$ 15,071
1.23
$
1.21
$
12,217
12,422
May 3, 2015
Proforma Net
of Adjustments
$ 22,956
3,604
$ 19,352
1.58
$
1.56
$
12,217
12,422
As reported
April 27,
2014
$ 19,043
1,596
$ 17,447
$
1.43
1.41
$
12,177
12,414
April 27, 2014
Proforma Net
Adjustments of Adjustments
$
–
$ 1,756
$ (1,756)
$ (0.14)
$ (0.14)
12,177
12,414
$ 19,043
3,352
$ 15,691
1.29
$
1.26
$
12,177
12,414
FREE CASH FLOW RECONCILIATION
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
Minus: Purchase of long-term investments
Add: Excess tax benefits related to stock-based compensation
Effect of exchange rate changes on cash and cash equivalents
Free Cash Flow
FY 2016
$ 26,795
(11,475)
233
–
(18)
(1,649)
841
498
$ 15,225
FY 2015
$ 26,111
(10,461)
727
320
(18)
(1,650)
109
(21)
$ 15,117
IMPORTANT INFORMATION
This document 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 or
alter such statements whether as a result of new information, future events or otherwise. 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,” “project,” “anticipate,” “depend” 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, capital expenditures, income taxes, 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. Finally, increases in market prices
for petrochemical products can significantly affect the prices we pay for raw materials, driving up our operating costs and putting downward pressure on our
profits. 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, is included in Item 1A “Risk Factors” in our Form 10-K filed with the Securities and Exchange Commission on July 14, 2016, for the fiscal
year ended May 1, 2016, and included as part of this annual report.
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, plus any proceeds from sales of equipment, plus any proceeds from life insurance policies, minus payments on life insurance policies, plus excess
tax benefits related to stock-based compensation, minus the purchase of long-term investments, 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 may 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 return on capital, both for the entire company and for individual business segments. We define return on capital as
operating income (on an annualized basis if at a point other than the end of the fiscal year) divided by average capital employed. Operating income excludes
certain non-recurring charges, and average capital employed is calculated over rolling two – five fiscal periods, depending on which quarter is being presented.
Details of these calculations and a reconciliation to information from our GAAP financial statements is set forth in this report. We believe return on capital is an
accepted measure of earnings efficiency in relation to capital employed, but it is a non-GAAP performance measure that is not defined or calculated in the same
manner by all companies. This measure should not be considered in isolation or as an alternative to net income or other performance measures, but we believe
it provides useful information to investors by comparing the operating income we produce to the asset base used to generate that income. Also, annualized
operating income does not necessarily indicate results that would be expected for the full fiscal year. We note that, particularly for return on capital measured at
the segment level, not all assets and expenses are allocated to our operating segments, and there are assets and expenses at the corporate (unallocated) level that
may provide support to a segment’s operations and yet are not included in the assets and expenses used to calculate that segment’s return on capital. Thus, the
average return on capital for the company’s segments will generally be different from the company’s overall return on capital. Management uses return on capital to
evaluate the company’s earnings efficiency and the relative performance of its segments.
This document contains disclosures about our consolidated adjusted effective income tax rate, which is a non-GAAP liquidity measure that represents our
estimated cash expenditures for income taxes. The consolidated adjusted effective income tax rate is calculated by eliminating the non-cash items that affect
our GAAP income tax expense, including adjustments to valuation allowances for deferred tax assets, reductions in income taxes due to net operating loss
(NOL) carryforwards, and non-cash foreign income tax expenses. Currently we do not pay income taxes in the U.S. due to NOL carryforward amounts, and thus
the consolidated adjusted effective income tax rate represents income tax expense for our subsidiaries located in China and Canada. A reconciliation of our
consolidated adjusted effective income tax rate to our consolidated effective GAAP income tax rate is set forth in this report. We believe this information is useful
to investors because it demonstrates the amount of cash, as a percentage of income before income taxes, expected to be required to fund our income tax liabilities
incurred for the periods reported. Our consolidated income tax expense on a GAAP basis can vary widely over different reporting periods due to the effects of
non-cash items, and we believe the calculation of our consolidated adjusted effective tax rate is helpful in comparing financial reporting periods and the amount
of income tax liability that we are or will be required to pay to taxing authorities in cash. We also note that, because the consolidated adjusted effective income tax
rate used to calculate adjusted net income is based on annualized amounts and estimates, adjusted net income for any quarter or year-to-date period does not
necessarily indicate results that could be expected for the full fiscal year. In addition, non-cash reductions in our U.S. NOL carryforwards are based on pre-tax losses
in prior periods and will not be available to reduce taxes on current earnings once the NOL carryforward amounts are utilized. Management uses the consolidated
adjusted effective income rate to analyze the effect that income tax expenditures are likely to have on cash balances and overall liquidity.
This document contains disclosures about our adjusted net income, which is a non-GAAP performance measure that incorporates the consolidated adjusted
effective income tax rate discussed in the preceding paragraph. Adjusted net income is calculated by multiplying the consolidated adjusted effective income
tax rate by the amount of income before income taxes shown on our income statement. Because the consolidated adjusted effective income tax rate eliminates
non-cash items that affect our GAAP income tax expense, adjusted net income is intended to demonstrate the amount of net income that would be generated
by our operations if only the cash portions of our income tax expense are deducted from income before income taxes. As noted above, our consolidated income
tax expense on a GAAP basis can vary widely over different reporting periods due to the effect of non-cash items, and we believe the calculation of adjusted
net income is useful to investors because it eliminates these items and aids in the analysis of comparable financial periods by reflecting the amount of earnings
available after the deduction of tax liabilities that are paid in cash. Adjusted net income should not be viewed in isolation by investors and should not be used as
a substitute for net income calculated in accordance with GAAP. We also note that, because the consolidated adjusted effective income tax rate used to calculate
adjusted net income is based on annualized amounts and estimates, adjusted net income for any quarter or year-to-date period does not necessarily indicate
results that could be expected for the full fiscal year. In addition, the limitations on the usefulness of consolidated adjusted effective income tax rates described in
the preceding paragraph also apply to the usefulness of adjusted net income, since consolidated adjusted effective income tax rates are used to calculate adjusted
net income. Management uses adjusted net income to help it analyze the company’s earnings and performance after taking certain tax matters into account when
comparing comparable quarterly and year-to-date periods.
Corporate Directory
Robert G. Culp, III
Chairman of the Board
Director (E)
Franklin N. Saxon
President and Chief Executive Officer
Director (E)
Robert G. Culp, IV
President, Culp Home Fashions
division
Boyd B. Chumbley
President, Culp Upholstery
Fabrics division
Kenneth R. Bowling
Senior Vice President, Chief Financial
Officer, Treasurer and Corporate
Secretary
Thomas B. Gallagher, Jr.
Corporate Controller, Assistant
Treasurer and Assistant Corporate
Secretary
Patrick B. Flavin
Retired President and Chief
Investment Officer,
Flavin, Blake & Co., Inc., an
investment management
company
Stamford, CT
Director (A,C,N)
Fred A. Jackson
Retired Chief Executive Officer,
American & Efird LLC, a global textile
manufacturer
Mt. Holly, NC
Director (A,C,N)
Kenneth R. Larson
Owner and Chief Executive Officer,
Slumberland Furniture,
a retailer of furniture and bedding
Little Canada, MN
Director (A,C,N)
Kenneth W. McAllister
Member/Manager, The McAllister
Firm PLLC, a law firm
High Point, NC
Director (A,C,E,N,L)
Board Committees:
A- Audit
C- Compensation
E- Executive
N- Corporate Governance and Nominating
L- Lead Director
Shareholder Information
Corporate Address
1823 Eastchester Drive
Post Office Box 2686
High Point, NC 27265
Telephone: (336) 889-5161
Fax: (336) 887-7089
www.culp.com
Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 30170
College Station, TX, 77842
Shareholder Services: (800) 254-5196
www.computershare.com/investor
Independent Registered Public
Accounting Firm
Grant Thornton LLP
Charlotte, NC 28244
Legal Counsel
Robinson, Bradshaw & Hinson, PA
Charlotte, NC 28246
Form 10-K and Quarterly Reports/
Investor Contact
The Form 10-K Annual Report of
Culp, Inc., as filed with the Securities
and Exchange Commission,
is available without charge to
shareholders upon written request.
Shareholders may also obtain copies
of the corporate news releases
issued in conjunction with the
company’s quarterly results. These
requests and other investor contacts
should be directed to Kenneth R.
Bowling, Chief Financial Officer,
at the corporate address or at the
investor relations section at
www.culp.com
Analyst Coverage
These analysts cover Culp, Inc.:
Raymond James & Associates –
Budd Bugatch, CFA
Stifel Financial Corp –
John Baugh, CFA
Stonegate Capital Markets –
Marco Rodriguez, CFA
Value Line –
Craig Sirois
Stock Listing
Culp, Inc. common stock is traded
on the New York Stock Exchange
under the symbol CFI. As of July 21,
2016, Culp, Inc. had approximately
3,100 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 Wednesday,
September 21, 2016, at the
company’s corporate offices,
1823 Eastchester Drive, High Point,
North Carolina.
Culp, Inc.
1823 Eastchester Drive
Post Office Box 2686
High Point, NC 27265
(336) 889-5161
www.culp.com