A T R U S T E D R E S O U R C E
A T R U S T E D R E S O U R C E
F O R
F O R
Innovative Fabrics
Innovative Fabrics
A C R O S S T H E G L O B E .
A C R O S S T H E G L O B E .
Culp, Inc. | 1823 Eastchester Drive
Post Office Box 2686, High Point, NC 27265
(336) 889-5161 | www.culp.com
2 0 1 7 A N N U A L R E P O R T
2 0 1 7 A N N U A L R E P O R T
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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 CULP.
35%
Upholstery
Fabrics–
China-Produced
2017
Sales Mix
Upholstery
Fabrics–
U.S.-Produced
3%
Mattress
Fabrics
62%
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
Founder, 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
31.0%
Dividends
Investment in
Joint Venture
5.5%
2017 Capital
Allocation
Cap Ex
63.5%
Telephone: (336) 889-5161
Fax: (336) 887-7089
www.culp.com
Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233
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
Shareholder Information
Corporate Address
1823 Eastchester Drive
Post Office Box 2686
High Point, NC 27265
Stock Listing
Culp, Inc. common stock is traded on
the New York Stock Exchange under
the symbol CULP. As of July 20, 2017,
Culp, Inc. had approximately 4,330
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 20,
2017, at the company’s corporate offices,
1823 Eastchester Drive, High Point,
North Carolina.
Form 10-K and Quarterly Reports/
Investor Contact
The Form 10-K Annual Report of
Culp, Inc., as filed with the Securities
and Exchange Commission, is available
without charge to shareholders upon
written request. Shareholders may also
obtain copies of the corporate news
releases issued in conjunction with the
company’s quarterly results. These
requests and other investor contacts
should be directed to Kenneth R.
Bowling, Chief Financial Officer, at
the corporate address or at the investor
relations section at www.culp.com.
Analyst Coverage
These analysts cover Culp, Inc.:
Raymond James & Associates –
Budd Bugatch, CFA
Stifel Financial Corp –
John Baugh, CFA
Stonegate Capital Markets –
Marco Rodriguez, CFA
Value Line –
Craig Sirois
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F I N A N C I A L
Highlights
(Amounts in thousands, except per share data)
Net Sales
Income before income taxes
Net income
Net income per share:
Basic
Diluted
Average shares outstanding:
Basic
Diluted
Cash Returned to Shareholders
Cost of shares repurchased
Number of shares repurchased
Dividends paid
Cumulative funds returned to shareholders (2)
2017
2016
$ 309,544 $ 312,860 $ 310,166
22,956
15,071
29,696
22,334
27,898
16,935
2015
1.81
1.78
1.38
1.36
1.23
1.21
12,312
12,518
12,302
12,475
12,217
12,422
- $
-
6,280
48,952
2,397 $
101
8,140
745
43
7,579
Balance Sheet
Cash and cash equivalents, short term investments
and long-term investments held-to-maturity
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
$ 54,183 $ 42,146 $ 39,729
83,225
98,429
90,357
31.6%
32.0%
28.0%
205,634
-
148,630
-
175,142
171,300
-
128,812
-
2,200
119,427
1.8%
NET SALES
FISCAL YEARS 2013-17 (IN MILLIONS)
.
2
0
1
3
$
.
9
2
1
3
$
.
5
9
0
3
$
.
2
7
8
2
$
.
8
8
6
2
$
$350
$300
$250
$200
$150
‘13
‘14
‘15
‘16
‘17
PRE-TAX INCOME AND
PRE-TAXMARGIN
(EXCLUDING RESTRUCTURING)
FISCAL YEARS 2013-17 (IN MILLIONS)
9.6%
10%
8.9%
.
7
9
2
$
.
9
7
2
$
7.5%
7.4%
6.6%
.
0
3
2
$
.
3
0
2
$
.
0
9
1
$
$35
$30
$25
$20
$15
$10
‘13
‘14
‘15
‘16
‘17
CAPITAL EMPLOYED AND
RETURN ON CAPITAL(1)
FISCAL YEARS 2013-17 (IN MILLIONS)
32.0%
31.6%
29.4%
28.0%
25.5%
$100
$80
$60
$40
.
4
8
9
$
.
4
0
9
$
.
2
3
8
$
.
0
0
8
$
.
7
4
7
$
‘13
‘14
‘15
‘16
‘17
FREE CASH FLOW AND DIVIDENDS
AND SHARES REPURCHASED (1)
FISCAL YEARS 2013-17 (IN MILLIONS)
9%
8%
7%
6%
5%
4%
3%
2%
1%
32%
28%
24%
20%
16%
12%
8%
4%
$12
$10
$8
$6
$4
$2
Mattress Fabrics Segment Highlights
Net sales (3)
Operating income (3)
Operating income margin
Capital employed (1)
Return on capital (1)
Upholstery Fabrics Segment Highlights
Net sales (3)
Operating income (3)
Operating income margin
Capital employed (1)
Return on capital (1)
$ 190,805 $ 186,419 $ 179,739
21,671
26,496
29,380
15.4%
14.2%
12.1%
83,422
74,637
70,472
37.5%
36.7%
33.5%
$ 118,739 $ 126,441 $ 130,427
8,128
11,091
11,298
9.3%
8.9%
6.2%
16,006
17,025
14,026
63.8%
65.2%
48.7%
$20
$18
$16
$14
$12
$10
$8
$6
$4
.
1
3
1
$
.
8
3
1
$
.
1
3
1
$
$12.6
.
3
8
1
$
.
1
5
1
$
.
2
5
1
$
$10.5
$8.3
$6.3
$2.2
‘13
‘14
‘15
‘16
‘17
(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 17, 2017.
(3) See Note 16 of the Notes to Consolidated Financial Statements beginning on page 74 of the fiscal 2017 Form 10-K.
1
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F E L L O W
Shareholders
We are pleased to share another strong performance for Culp in
fiscal 2017 as a trusted resource for innovative fabrics around
the globe.
Overall, our sales for the year showed a slight decline from fiscal
2016, reflecting a more challenging retail environment for home
furnishings. Even against this backdrop, our mattress fabric
segment delivered another record performance with total annual
sales surpassing the previous year’s record level. Notably, our pre-tax
income for the year was $29.7 million, the highest in the company’s
history. We also achieved excellent cash flow from operations, free
cash flow and continued high returns on capital. Importantly, we
ended the year with no debt and $54.2 million in total cash and
investments, the highest level achieved in the company’s history.
Throughout fiscal 2017, we demonstrated consistent execution
of our product-driven strategy in both businesses, reflecting our
relentless focus on design creativity and product innovation. Our
ability to offer a diverse product mix and meet the changing
demands of our customers has served us well in the marketplace.
At the same time, we have continued to make substantial
investments in our growing mattress fabric business to enhance
our production capabilities, improve our operating efficiencies
and continue to provide exceptional customer service. Our
newest product introductions and ability to reach different market
segments have produced favorable results for the upholstery fabric
business, and we look forward to the opportunities ahead to build
on this momentum. Importantly, we have the financial strength
and cash flow generation to support our strategy and take advantage
of additional growth opportunities, including potential acquisitions,
for both businesses.
Cash Returned to Shareholders
In line with our capital allocation strategy, we returned $6.3
million to shareholders in fiscal 2017 through regular and special
dividends. Commencing in the third quarter, we raised our
quarterly cash dividend from $0.07 to $0.08 per share, or $0.32
per share on an annualized basis. Additionally, our strong balance
sheet and excellent free cash flow provided an opportunity to
announce another special dividend of $0.21 per share, paid in
July 2017. We are proud of our dividend history, as this marks
the fifth special dividend payment in the past six years for Culp.
The company did not repurchase any shares in fiscal 2017,
leaving $5.0 million available under the share repurchase program.
Notably, since June 2011, Culp has returned approximately
$50.0 million to shareholders in the form of regular and special
dividends and share repurchases, reflecting our unwavering
commitment to delivering value to our shareholders.
Mattress Fabric Segment
We delivered another record performance in fiscal 2017,
exceeding the previous year’s results with $190.8 million in sales,
the highest annual mattress fabric sales in Culp’s history. Our
focus on design and innovation with a favorable product mix of
mattress fabrics and sewn covers across most price points and style
trends has allowed us to execute our diversification strategy and
enhance our strong value proposition.
We are especially pleased to achieve these outstanding financial
and operating results during a period of major transition across our
production facilities. Operating income for the year was $29.4
million, another record performance and an 11.0 percent increase
over fiscal 2016. Return on capital in fiscal 2017 was 37.5 percent,
also a record for our mattress fabric segment and a considerable
return in such a highly capital-intensive business.
Throughout the past year, we made substantial investments and
significant changes within our multi-country production facilities
that will enable us to build upon our success and improve our
service to customers. Our expansion projects in North Carolina,
including a new distribution center and knitted fabric plant
consolidation, were substantially complete by the end of the fiscal
year, with additional equipment relocation and new installations
finalized during the first quarter of fiscal 2018. As a result, we have
expanded our capacity and created a more efficient production
platform to support our continuous improvement initiatives and
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2
Q U A L I T Y F A B R I C S
W I T H A F R E S H E Y E
F O R S T Y L E
3
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O U R D E S I G N T E A M H A S D O N E A N O U T S T A N D I N G J O B I N
K E E P I N G 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 .
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4
long-term growth strategy. Additionally, during the year, we
completed a major expansion project at our Canadian operation,
with additional finishing equipment and a new distribution
center that allows us to ship directly to our customers in Canada.
Together, these major investments significantly enhance our ability
to serve all of our customers and strengthen Culp’s leadership
position in North America.
Upholstery Fabric Segment
For fiscal 2017, upholstery fabric sales were $118.7 million, down
6.1 percent compared with the prior year. The modest decline
in annual sales reflects the soft retail environment for residential
furniture. However, we were able to increase margins and report
comparable profitability to last year. Operating income for the year
was $11.1 million and return on capital was 63.8 percent.
Our results for fiscal 2017 included a growing contribution from
CLASS, our mattress cover business. Importantly, CLASS has
allowed us to develop new products with our core customers and
to reach new customers and additional market segments, especially
the internet “bed in a box” space, with solid growth prospects.
Along with our other consolidation projects in North Carolina,
we moved our CLASS production platform during July 2017 to a
new location that offers more efficient and streamlined production
flow and access to a larger labor pool. Additionally, this facility
includes an expanded showroom and product development space
to further support our ability to capture new market opportunities
and respond to changing demand trends with more robust product
development activity.
In December 2016, we announced plans to expand our mattress
cover capacity through a new joint venture production facility
located in Haiti. The construction of this facility is underway and
we expect to commence operations in the fall of 2017. This new
mattress cover operation will complement our U.S. production
capabilities with additional capacity via a mirrored platform,
enhancing our ability to meet customer demand while remaining
cost-competitive.
We are pleased with the significant progress we made in fiscal 2017,
and we look forward to the opportunities ahead as we realize the
benefits of our latest capital improvements and expansion projects.
We enjoy a solid market position throughout the mattress industry
with strong customer relationships in all product categories.
More importantly, we have worked hard to create a sustainable
production and distribution platform that will favorably position
Culp for the long-term.
In spite of the market challenges, we continued to execute our
product-driven strategy with a sustained focus on innovation and
creative designs, offering a more diverse product mix and expanding
our sales into new markets. In fiscal 2017, we made progress in
each of these key areas of strategic focus. Our design team has
done an outstanding job in keeping pace with current style trends
and meeting the changing demands of our customers. Notably,
our “performance line” of highly durable, stain-resistant upholstery
fabrics has been well received by our customers and was a strong
performer for Culp in fiscal 2017. We are encouraged by the
momentum we are seeing in this product category, and we look
forward to the additional sales opportunities this provides for Culp.
While we faced a generally weaker sales environment in the
residential furniture market, we achieved meaningful sales growth
in the hospitality area, which accounted for a higher percentage of
our overall sales in fiscal 2017 compared with the prior year. This
trend is encouraging, as we continue our focus on diversifying our
sales mix. Our global production capabilities support this strategy
with the ability to leverage our flexible and scalable China platform
and deliver a favorable range of fabric styles and price points. Sales
of China produced fabrics accounted for 92 percent of upholstery
fabric sales in fiscal 2017.
Looking ahead, in spite of uncertain retail market conditions, we
have many reasons to be optimistic about the opportunities for
our upholstery fabric business. Our showing at the April furniture
market was encouraging with strong placements for Culp, especially
with our “performance line” of fabrics, providing confidence in our
sales prospects for fiscal 2018. We will continue to identify new
market opportunities, including exploring potential acquisitions in
the hospitality market that will complement our upholstery fabric
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W E D E M O N S T R A T E D C O N S I S T E N T E X E C U T I O N O F
O U R P R O D U C T - D R I V E N S T R A T E G Y I N B O T H B U S I N E S S E S .
business, which is principally in the residential market. As the overall
economy, housing market and consumer confidence improve, we
believe Culp is well positioned to benefit from a return to more
robust spending for home furnishings.
Balance Sheet
Maintaining a strong financial position has remained a top priority,
providing a distinct competitive advantage for Culp in today’s
marketplace. Notably, we ended the year with $54.2 million in total
cash and investments, a record level for Culp and up 29 percent
from the previous year’s ending balance of $42.1 million, with no
debt. This increase was achieved despite spending $14.0 million
for capital expenditures, including vendor-financed payments
and investment in our joint venture in Haiti, and returning $6.3
million to shareholders in regular and special dividends. Cash flow
from operations for fiscal 2017 was $33.0 million, compared with
$26.8 million in fiscal 2016. Free cash flow for the year was $18.3
million, compared with last year’s $15.2 million, representing a 20
percent increase.
As we look to fiscal 2018, our capital expenditures are expected
to be comparable to fiscal 2017 with modest projected growth
in working capital. We are well positioned to make the capital
investments and pursue any potential acquisitions that may develop
to support our growth strategy, as well as continue to return funds
to our shareholders.
Capital Allocation Strategy
The disciplined use of capital is an integral part of Culp’s overall
business strategy. We are proud of our consistent execution as we
again met our stated objectives for capital allocation in fiscal 2017.
As always, our top priority is to fund organic growth in both of
our businesses. As such, we made significant investments in our
growing mattress fabric business in fiscal 2017, including the Haiti
joint venture. In line with our commitment to use additional
cash for dividends and share repurchases, we increased our regular
quarterly dividend by 17 percent to $0.08 per share, or an annual
rate of $0.32 per share, commencing in the third quarter. We paid
another special dividend of $0.21 per share following the end of
fiscal 2017, affirming our commitment to our shareholders and our
confidence in Culp’s future growth prospects. The company did not
repurchase any shares in fiscal 2017.
Our total cash and investments of $54.2 million at the end of fiscal
2017 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. We
continue to look for suitable acquisitions that will add value to our
operations and enhance our product mix.
Looking Ahead
Our achievements in fiscal 2017 reflect our sustained focus on
design creativity and product innovation, the flexibility of our global
platform, our financial strength and the relevance of the Culp brand
in the marketplace – all assets that will continue to serve us well in
fiscal 2018 and beyond. We are proud of our leadership position
and our favorable reputation as a trusted resource for innovative
fabrics across the globe. As always, our strong performance would
not have been possible without the extraordinary effort of our long-
term associates throughout our operations who work hard every
day to exceed the expectations of our customers. We also recognize
the outstanding leadership and support of our management team
and board of directors. We are especially grateful to our valued
customers for their continued support of Culp.
In closing, we thank our fellow shareholders for your investment,
and we look forward to sharing our continued success in the
year ahead.
Sincerely,
Franklin N. Saxon
President and Chief Executive Officer
Robert C. Culp, III
Chairman of the Board
6
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2017
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, smaller reporting company, or an emerging growth company. See definition of “large accelerated
filer, accelerated filer, smaller reporting company, and emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
NO
YES
As of April 30, 2017, 12,356,631 shares of common stock were outstanding. As of October 30, 2016, the
aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $304,910,582
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 20, 2017 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 ................................................................................... 5
Overview of Bedding Industry.......................................................................................... 6
Overview of Residential and Commercial Furniture Industry .......................................... 6
Products ............................................................................................................................ 6
Manufacturing and Sourcing............................................................................................. 8
Product Design and Styling .............................................................................................. 9
Distribution ....................................................................................................................... 9
Sources and Availability of Raw Materials .................................................................... 10
Seasonality ...................................................................................................................... 10
Competition .................................................................................................................... 11
Environmental and Other Regulations ............................................................................ 11
Employees ....................................................................................................................... 12
Customers and Sales ....................................................................................................... 12
Net Sales by Geographic Area ........................................................................................ 13
Backlog ........................................................................................................................... 13
Risk Factors ........................................................................................................................ 15
Unresolved Staff Comments ............................................................................................... 18
Properties ............................................................................................................................ 19
Legal Proceedings ............................................................................................................... 20
Mine Safety Disclosure ....................................................................................................... 20
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities ............................................................................... 20
Selected Financial Data ...................................................................................................... 23
Management’s Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................................................................... 24
Item No.
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
Quantitative and Qualitative Disclosures About Market Risk ............................................ 46
8.
9.
9A.
9B.
Consolidated Financial Statements and Supplementary Data............................................. 47
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ......................................................................................................................... 81
Controls and Procedures ..................................................................................................... 81
Other Information ............................................................................................................... 83
Item No.
10.
11.
12.
13.
14.
Page
PART III
Directors, Executive Officers, and Corporate Governance ................................................. 83
Executive Compensation .................................................................................................... 83
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ............................................................................................. 83
Certain Relationships, Related Transactions, and Director Independence ......................... 84
Principal Accountant Fees and Services ............................................................................. 84
15.
Exhibits and Financial Statement Schedules ...................................................................... 85
PART IV
Documents Filed as Part of this Report .............................................................................. 85
Exhibits ............................................................................................................................... 87
Financial Statement Schedules ........................................................................................... 87
Signatures ........................................................................................................................... 88
Exhibit Index ...................................................................................................................... 89
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,” and their derivatives, and include but are
not limited to statements about expectations for our future operations, production levels, sales, profit
margins, profitability, operating income, capital expenditures, working capital levels, income taxes,
SG&A or other expenses, pre-tax income, 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 us adversely. Changes in consumer tastes or preferences toward products
not produced by us could erode demand for our products. Changes in the value of the U.S. dollar versus
other currencies could affect our financial results because a significant portion of our operations are
located outside the United States. Strengthening of the U.S. dollar against other currencies could make
our products less competitive on the basis of price in markets outside the United States, and strengthening
of currencies in Canada and China can have a negative impact on our sales in the U.S. of products
produced in those places. Also, economic and political instability in international areas could affect our
operations or sources of goods in those areas, as well as demand for our products in international markets.
Further information about these factors, as well as other factors that could affect our future operations or
financial results and the matters discussed in forward-looking statements are included in the “Risk
Factors” section of this report in Item 1A. 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 used for covering
mattresses and foundations and other bedding products; and upholstery fabrics, including cut and sewn
kits, primarily used in 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. In addition, Culp places great emphasis on providing creative designs, 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 fifteen active
production facilities as of the end of fiscal 2017, 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, plus a new distribution facility in
Canada, 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
92% of our sales in fiscal 2017 consist of fabrics produced in Asia, while the mattress fabrics business
remains mostly based in North America.
Total net sales in fiscal 2017 were $309.5 million. The mattress fabrics segment had net sales of $190.8
million (62% of total net sales), while the upholstery fabrics segment had net sales of $118.7 million
(38% of total net sales).
During fiscal 2017, both segments continued to build upon strategic initiatives and structural changes that
were implemented over the last several years. A number of steps were taken to consolidate and
streamline operations, while adding capacity where necessary. The flexible manufacturing and sourcing
platform created through these changes has allowed Culp to place a greater emphasis on product
innovation and introduction of new designs to keep current with industry trends and differentiate our
products, and at the same time allows the company to focus its efforts on shifting demand trends.
Although we did not experience continued sales growth in fiscal 2017, the company was still able to set
another record for income before income taxes.
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Industry demand in our principal markets has been somewhat challenged during the past two years, with
more difficult conditions in upholstered furniture than in the bedding industry. During this period, we
have worked to maintain sales levels in both of our business segments in the face of weaker demand. At
the same time, we have balanced our drive for higher sales against a desire to avoid sacrificing profits at
the expense of higher revenue. We have continued to experience positive responses from customers to
our innovative designs and new products introduced during these years, and our profits have responded
accordingly. Sales and operating income in mattress fabrics increased 2% and 11%, respectively, during
fiscal 2017. Net sales for upholstery fabrics were 6% lower in fiscal 2017, but operating income in that
segment declined by only 2%, primarily due to a more profitable mix of products sold and the positive
impact of foreign currency exchange rate changes. An increasing percentage of our sales are now based
on new product introductions. For the company as a whole, while net sales declined by 1% for fiscal
2017, pre-tax income was $29.7 million, the highest level in company history, exceeding the record level
of the previous year.
The mattress fabrics segment has continued to make strategic investments in capital projects and
expansion initiatives. Investments have been targeted at expanded capacity, continuing improvements in
service capabilities, maintaining a flexible approach to fabric sourcing, and dealing with challenging
industry conditions. These expenditures included expansion projects to provide increased manufacturing
capacity and more efficient equipment for this segment, following several successful acquisitions. The
mattress fabrics segment significantly enhanced its distribution capabilities in both the U.S. and Canada
during fiscal 2017. This segment has also furthered its design capabilities with additional personnel,
product software, and a new system for cataloguing designs to enhance innovation.
The upholstery fabrics segment operates on a flexible variable cost model, with most of its fabrics now
sourced in Asia. This division has focused its efforts in recent years on innovation in its products and
exploration of new markets. An emphasis on product innovation has caused an increase in profit margins
as compared to recent years when the company had somewhat higher overall upholstery sales, and new
products continue to be introduced. In fiscal 2017, the company developed and began to market new
lines of performance fabrics, which have become a growth category for the upholstery division. In
addition, the upholstery segment continues to seek new market opportunities, with a recent example being
emphasis on sales to the hospitality market, mostly to hotels and motels.
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” until July 13, 2017, at which time the Company’s ticker symbol changed to “CULP.” Our
fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30. Our executive offices
are located in High Point, North Carolina. References in this document to “Culp,” the “company,” “we,”
“our,” and “us” refer to Culp, Inc. and its consolidated subsidiaries.
Culp maintains an Internet website at www.culp.com. We will make this annual report and our other
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to these reports available free of charge on our Internet site as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.
Information included on our website is not incorporated by reference into this annual report.
3
Segments
Our two operating segments are mattress fabrics and upholstery fabrics. The following table sets forth
certain information for each of our segments.
Sales by Fiscal Year ($ in Millions) and Percentage of Total Company Sales
Segment
Mattress Fabrics
Upholstery Fabrics
Non-U.S.-Produced
U.S.-Produced
Total Upholstery
Total company
Fiscal 2017
$190.8
$109.0
$9.7
$118.7
$309.5
(62%)
(35%)
(3%)
(38%)
(100%)
Fiscal 2016
$186.4
$115.3
$11.2
$126.5
$312.9
(60%)
(37%)
(3%)
(40%)
(100%)
Fiscal 2015
$179.7
$119.2
$11.3
$130.5
$310.2
(58%)
(38%)
(4%)
(42%)
(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 fabrics 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 of the Stokesdale plants and the St. Jerome plant manufacture and finish knitted and
jacquard (damask) fabric. Both of these facilities now offer finished goods distribution capabilities, with
the new distribution facility in Canada added during fiscal 2017. The main Stokesdale plant continues to
house the division offices.
Culp Home Fashions had capital expenditures totaling $70 million during the past ten years with
especially high spending levels during the past three fiscal years. These expenditures provided for
increased knit machine capacity, faster and more efficient weaving machines, and the initial capital
required for our sewn cover business, while also allowing us
leading edge
technology through support of modernization and expansion projects. These capital expenditures
also provided high technology finishing equipment for woven and knitted fabric and a much improved
platform for warehousing and distribution, including the distribution facility in Canada noted above.
to maintain our
Asset acquisition transactions in fiscal 2009 and fiscal 2014 allowed us to enhance and secure our
competitive position and to expand 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 improving 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 Lava), 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 has
allowed us to have two mirrored manufacturing facilities and great flexibility in meeting demand for
mattress covers from bedding producers. In fiscal 2017, in response to continued growth in mattress
4
cover demand, we entered into a joint venture with A Lava to construct a second location for CLASS in
Haiti, which is expected to begin production of mattress covers during the second quarter of fiscal 2018.
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 92% 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.
We continue to expand 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.
Our upholstery fabrics business has moved from one that relied on a large fixed capital base that is
difficult to adjust to a more flexible and scalable marketer of upholstery fabrics that meets changing levels
of customer demand and tastes. 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.
After six consecutive years of sales growth, sales declined slightly in fiscal 2016 and by 6% in fiscal
2017, mainly as a result of challenging demand conditions for upholstered furniture in those years. We
were able to maintain solid growth in operating income through fiscal 2016. In fiscal 2017, operating
income fell by only 2%, reflecting our focus on better margin products and more favorable foreign
currency exchange rates. We believe our success over the longer term and our ability to maintain
operating income margins is due largely to 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. Our progress has been achieved through a
unique business model that has enabled the upholstery fabrics 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 meet continually changing demand levels and consumer preferences. Most recently, we
have implemented additional steps to grow net sales, including an emphasis on markets beyond
residential furniture, such as the hospitality market.
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 fabrics used in the
hospitality industry (primarily hotels and motels), upholstered office seating and modular office systems
sold primarily for use in offices and other institutional settings, 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.
5
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 minor portion of total U.S.
bedding sales. The primary reasons 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 fashion. Another trend has been the growth in non-
traditional sources for retail mattress sales such as internet and “bed in a box” sales, as well as 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, however, has been uneven and often weak in recent years. In general, 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.
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.
6
Mattress Fabrics Segment
Mattress fabrics segment sales constituted 58% to 62% 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 38% to 42% 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.
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 specialty beds), sewn from mattress fabrics
produced by our facilities or sourced from others.
Upholstery Fabrics
Woven jacquards
Woven dobbies
Velvets
Suedes
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 that 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.
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Faux leathers
Cut and sewn kits
Sueded or knitted base cloths which are overprinted with polyurethane, and
composite products consisting of a base fabric that is coated with a top layer
of polyurethane, which simulates the look and feel of leather.
Covers made from various types of upholstery fabrics and cut and sewn to
specifications of furniture manufacturing customers for use on specific
furniture frames.
Manufacturing and Sourcing
Mattress Fabrics Segment
Our mattress fabrics segment operates five manufacturing plants, with four located in North Carolina and
one in St. Jerome, Quebec, Canada. Over the past ten fiscal years, we made capital expenditures of
approximately $70 million to consolidate our production facilities and to modernize both knit and
weaving equipment, enhance and provide knit and woven finishing capabilities, and expand capacity.
The result has been an increase in manufacturing efficiency and reductions in operating costs, as well as
expanded product offerings and capacity.
Jacquard mattress fabrics and knitted fabrics are produced at both our main Stokesdale facility and our St.
Jerome plant. The majority of finishing and inspection processes for mattress fabrics are conducted at the
main Stokesdale plant, and the St. Jerome plant has added knit finishing and inspection, along with
distribution capabilities, within the past year. We have a joint marketing arrangement with a producer of
sewn mattress covers for bedding. This arrangement includes an additional manufacturing facility to
produce and market sewn mattress covers. The mattress cover operation is being further expanded
through a joint venture to construct an additional mattress cover facility in Haiti, which is expected to
begin production during the second quarter of fiscal 2018.
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, certain converted fabric
products, and some sewn mattress covers using our Culp 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
8
in China who are willing to commit significant capacity to meet our needs while working with our
product development team to meet the demands of our 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. The company invests
significant resources to stay ahead of current design trends, including maintaining a trained and active
design staff, investing in research and development activities such as participation in international design
shows, and systems for creating and cataloguing new designs. Price point delineation is accomplished
through fabric quality as well as variation in design. Additionally, consumers are drawn to the mattress
that is the 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 primary 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.
Distribution
Mattress Fabrics Segment
The vast majority of our shipments of mattress fabrics originate from our facilities in Stokesdale, North
Carolina, and we have additional distribution capabilities in Canada and China. Through arrangements
9
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 2017, 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 primarily 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. From fiscal 2015 through fiscal 2017, our profitability was aided by lower raw material
prices due to lower oil prices, among other factors.
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
10
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.
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.
11
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
currently 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 April 30, 2017, we had 1,325 employees, compared to 1,217 at the end of fiscal 2016. Overall, our
total number of employees has expanded gradually 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 15% of the company’s
workforce) are represented by a local, unaffiliated union. The collective bargaining agreement for these
employees expires on February 1, 2020. 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.
Fiscal
2017
793
148
-
380
528
4
1,325
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
2015
631
Fiscal
2016
682
Fiscal
2014
592
134
-
397
531
4
1,217
129
-
424
553
4
1,188
129
4
438
571
4
1,167
Fiscal
2013
577
121
5
464
590
4
1,171
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 22%
of the company’s overall sales in fiscal 2017, and (2) Tempur + Sealy International, Inc., accounting for
approximately 10% of our overall sales in fiscal 2017. Our mattress fabrics customers also include many
small and medium-size bedding manufacturers.
12
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 11% of the
company’s consolidated sales in fiscal 2017.
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 2017
Fiscal 2016
Fiscal 2015
$241,236
77.9%
$244,930 78.3%
$242,833 78.3%
$ 29,995
9.7%
$31,667 10.1%
$ 30,758 10.0%
34,695
3,618
11.2%
1.2%
31,927
4,336
10.2%
1.4%
31,855 10.3%
1.4%
4,720
$ 68,308
22.1%
$67,930
21.7%
$ 67,333 21.7%
$309,544 100%
$312,860
100%
$310,166
100%
United States
North America
(Excluding
USA)(1)
Far East and
Asia(2)
All other areas
Subtotal
(International)
Total
(1) Of this amount, $22.3 million, $24.2 million, and $24.1 million are attributable to shipments to Mexico
in fiscal 2017, 2016, and 2015, respectively.
(2) Of this amount, $26.6 million, $23.1 million, and $26.5 million are attributable to shipments to China
in fiscal 2017, 2016, and 2015, respectively.
Sales are attributed to individual countries based upon the location that the company ships its products to
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.
13
Upholstery Fabrics Segment
Although it is difficult to predict the amount of backlog that is “firm,” we have reported the portion of the
upholstery fabric backlog from customers with confirmed shipping dates within five weeks of the end of
the fiscal year. On April 30, 2017, the portion of the upholstery fabric backlog with confirmed shipping
dates prior to June 5, 2017 was $9.2 million, all of which are expected to be filled during the first quarter
of fiscal 2018, compared with $8.4 million as of the end of fiscal 2016 (for confirmed shipping dates prior
to June 6, 2016).
14
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.
Our business faces several risks associated with doing business in China.
We source a variety of fabrics from a limited number of strategic suppliers in China, and we operate three
upholstery manufacturing facilities in Shanghai, China. The Chinese economy is characterized by
extensive state ownership, control, and regulation. Therefore, our business is continually subject to the
15
risk of changes in Chinese laws and regulations that could have an adverse effect on our suppliers and
manufacturing operations. Any changes in policies governing tariffs, imports and exports, taxation,
inflation, environmental regulations, foreign currency exchange rates, the labor market, property, and
financial regulations could have an adverse effect on our business. Further, the Chinese legal system is
continuing to develop and evolve, and the enforcement of rules and regulations is not always consistent or
uniform. Moreover, any potential civil unrest, natural disasters, or other threats could disrupt or increase
the costs of operating in China. The Chinese economy poses additional risks to our business, including
fluctuating rates of inflation and currency exchange rates, a declining labor force participation rate, and
rising employee wages. In addition, changes in the political climate or trade policy of the United States,
such as increased duties or tariffs on Chinese imports, may adversely affect our business. Any of the risks
associated with our Chinese operations and sources could cause unanticipated increases in operating costs
or disruptions in business, which could negatively impact our ultimate financial results.
We may have difficulty managing the outsourcing arrangements 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 consisting of property, plant and equipment and 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.
16
Increases in energy costs would increase our operating costs and could adversely affect
earnings.
Higher prices for electricity, natural gas, and fuel increase our production and shipping costs. A
significant shortage, increased prices, or interruptions in the availability of these energy sources would
increase the costs of producing and delivering products to our customers, and would be likely to adversely
affect our earnings. In many cases, we are not able to pass along the full extent of increases in our
production costs to customers through price increases. Energy costs have varied significantly during
recent fiscal years, and remain a volatile element of our costs. 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
22% of consolidated net sales, and Tempur Sealy International, Inc. accounting for approximately 10% of
consolidated net sales, in fiscal 2017. In the upholstery fabrics segment, La-Z-Boy Incorporated
accounted for approximately 11% of consolidated net sales during fiscal 2017, 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 in both
segments 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 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.
17
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 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
18
ITEM 2. PROPERTIES
Our corporate headquarters are located in High Point, North Carolina. As of the end of fiscal 2017 (April
30, 2017), we leased our corporate headquarters and owned or leased fifteen facilities associated with our
mattress and upholstery fabric operations. The following is a list of our principal administrative and
production facilities. Our facilities listed below are organized by business segment.
Location
Principal Use
Administrative:
High Point, North Carolina (1)
Mattress Fabrics:
Stokesdale, North Carolina
Stokesdale, North Carolina
Stokesdale, North Carolina (3)
High Point, North Carolina (1)
High Point, North Carolina
Summerfield, North Carolina (3)
St. Jerome, Quebec, Canada
Upholstery Fabrics:
Anderson, South Carolina
Burlington, North Carolina (2)
Burlington, North Carolina
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Upholstery fabric division
offices and corporate
headquarters
Manufacturing and
headquarters office
Distribution center
Manufacturing
Manufacturing
Warehouse and offices
Manufacturing
Manufacturing
Manufacturing
Finished goods distribution
Design center
Manufacturing and offices
Manufacturing and offices
Manufacturing and warehousing
Warehouse and offices
Warehouse
Approx.
Total Area
(Sq. Ft.)
Expiration
of Lease
29,812
2025
299,163
Owned
220,222
56,950
63,522
65,886
39,320
202,500
99,000
132,000
15,000
68,677
89,857
89,857
64,583
48,610
Owned
2017
2023
2020
2017
Owned
Owned
-
2021
2018
2020
2018
2020
2018
____________________________________________________
(1) Includes all options to renew.
(2) This lease agreement is currently on a month to month basis.
(3) The lease regarding this facility expires after our fiscal year end of April 30, 2017, and will not be renewed.
The production that resides as this location is currently being moved to an existing mattress fabrics facility.
We believe that our facilities are in good condition, well-maintained and suitable and adequate for present
utilization. In the upholstery fabrics segment, we have the ability to source upholstery fabric from outside
suppliers to meet current and expected demand trends and further increase our output of finished goods. This
ability to source upholstery fabric is part of our long-term strategy to have a low-cost platform that is
scalable, but not capital intensive. In the mattress fabrics segment, management has estimated that it is
currently performing at near capacity. Also, we have the ability to source additional mattress fabric from
outside suppliers to further increase our ultimate output of finished goods.
19
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the company, or its subsidiaries, is a party to or of which any of
their property is the subject that are required to be disclosed under this item.
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.
Correspondence should be mailed to:
Computershare
P.O. Box 505000
Louisville, KY 40233
Overnight correspondence should be sent to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202
(800) 254-5196
(781) 575-2879 (Foreign shareholders)
www.computershare.com/investor
Stock Listing
Prior to July 13, 2017, Culp, Inc. common stock was traded on the New York Stock Exchange (“NYSE”)
under the symbol CFI. Effective July 13, 2017, Culp, Inc. common stock started trading on the NYSE
under the symbol CULP. As of April 30, 2017, Culp, Inc. had approximately 4,326 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
20
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)
-
$5,000,000
Period
January 30, 2017 to
March 5, 2017
March 6, 2017
April 2, 2017
to
-
$ -
-
$5,000,000
April 3, 2017 to April
30, 2017
-
$ -
-
$5,000,000
Total
-
$ -
-
$5,000,000
(1) 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 13, 2017, 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 $0.08 per share. These
dividend payments are payable on July 17, 2017, to shareholders of record as of July 3, 2017.
During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special
cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular
quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
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.
Sales of Unregistered Securities
There were no sales of unregistered securities during fiscal 2017, 2016, or 2015.
Performance Comparison
The following graph shows changes over the five fiscal years ending April 30, 2017, 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.
21
The graph assumes an initial investment of $100 at the end of fiscal 2012 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.
22
ITEM 6. SELECTED FINANCIAL DATA
fiscal
2016
fiscal
2015
fiscal
2014
fiscal
2013
percent
change
2017/2016
(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
loss from investment in unconsolidated joint venture
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)
(1) Debt includes long-term and current maturities of long-term debt and line of credit.
(2) P/E ratios based on trailing 12-month diluted net income per share.
$
$
$
$
$
$
$
$
fiscal
2017
309,544
240,309
69,235
39,157
30,078
-
(299)
681
29,696
7,339
23
22,334
7,085
12,312
12,518
1.81
1.78
0.51
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
12.03
10.50
40,869
51,651
205,634
18,771
6,280
-
148,630
98,429
22.4%
9.7%
7.2%
24.7%
0.0%
7.3
29
5.0
37.80
25.57
32.10
21
14
42.1
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
-1.1%
-3.0%
6.3%
6.5%
6.1%
0.0%
69.9%
10.6%
6.4%
-33.1%
100.0%
31.9%
6.2%
0.1%
0.3%
31.2%
30.9%
-22.7%
14.6%
-10.8%
29.2%
17.4%
75.3%
-22.9%
0.0%
15.4%
8.9%
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
(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 (held-to-maturity),
long-term investments (rabbi trust), 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.
23
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 2017 and
2016 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 and commercial 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)
April 30, 2017
May 1, 2016
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
309,544
69,235
22.4%
39,157
30,078
9.7%
29,696
7,339
22,334
$
312,860
65,111
20.8%
36,773
28,338
9.1%
27,898
10,963
16,935
Change
(1.1)%
6.3%
160bp
6.5%
6.1%
60bp
6.4%
(33.1)%
31.9%
Overall, our net sales were slightly lower in fiscal 2017 compared to a year ago, with mattress fabric net
sales increasing 2.4% and upholstery fabric net sales decreasing 6.1%. The decrease in upholstery fabric
net sales was primarily due to the soft retail environment for residential furniture that persisted for most
of fiscal 2017.
Income Before Income Taxes
Despite the decrease in net sales noted above, income before income taxes increased 6.4% compared to
the same period a year ago. This was primarily due to the improvement in profitability from our mattress
24
fabrics segment, due to lower raw material costs and the benefits of our capital investments, partially
offset by higher SG&A expenses.
Income Taxes
We recorded income tax expense of $7.3 million, or 24.7% of income before income tax expense, in
fiscal 2017, compared with income tax expense of $11.0 million, or 39.3% of income before income tax
expense, in fiscal 2016. This decrease primarily represents an income tax benefit of $3.4 million for the
reversal of an uncertain income tax position associated with foreign jurisdictions in which the statute of
limitations expired.
See the Segment Analysis section located in the Results of Operations for further details.
Liquidity
At April 30, 2017, our cash and cash equivalents, short-term investments, and long-term investments
(held-to-maturity) totaled $54.2 million compared with $42.1 million at May 1, 2016. This increase from
the end of fiscal 2016 was primarily due to net cash provided by operating activities of $33.0 million,
partially offset by $12.9 million in capital expenditures (of which $1.1 million was vendor-financed) that
were mostly associated with our mattress fabric segment, $1.1 million in our investment in an
unconsolidated joint venture located in Haiti, $6.3 million in dividend payments, and $1.4 million in long-
term investment purchases associated with our Rabbi Trust that funds our deferred compensation plan.
Our net cash provided by operating activities of $33.0 million in fiscal 2017 increased $6.2 million
compared with $26.8 million in fiscal 2016. The increase in our net cash provided by operating activities
is primarily due to increased earnings in fiscal 2017.
Currently, we do not have any borrowings outstanding under our credit agreements.
Dividend Program
On June 13, 2017, 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 $0.08 per share. These
dividend payments are payable on July 17, 2017, to shareholders of record as of July 3, 2017.
During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special
cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular
quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
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.
Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as
business needs or market conditions change.
Common Stock Repurchases
On June 15, 2016, 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.
25
During fiscal 2017, there were no repurchases of our common stock.
At April 30, 2017, we had $5.0 million available for additional repurchases 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.
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Income from operations
Interest income, net
Other expense
Income before income taxes
Income taxes *
Loss from investment in unconsolidated joint venture
Net income
* Calculated as a percentage of income before income taxes.
Fiscal Fiscal
2016
100.0%
79.2
20.8
11.7
9.1
0.0
(0.2)
8.9
39.3
0.0
5.4%
2017
100.0%
77.6
22.4
12.7
9.7
0.1
(0.2)
9.6
24.7
0.0
7.2%
Fiscal
2015
100.0%
82.1
17.9
10.6
7.3
0.2
(0.1)
7.4
34.3
0.0
4.9%
26
2017 compared with 2016
Segment Analysis
Mattress Fabrics Segment
(dollars in thousands)
April 30, 2017
May 1, 2016
Change
Twelve Months Ended
Net sales
Gross profit
Gross profit margin
SG&A expenses
Income from operations
Operating margin
Net Sales
$
$
190,805
43,065
22.6%
13,685
29,380
15.4%
186,419
38,718
20.8%
12,223
26,496
14.2%
2.4%
11.2%
180bp
12.0%
10.9%
120bp
Our mattress fabrics segment reported year-over-year improvement in net sales, in spite of disruptions
within the mattress industry and a soft retail sales environment. Our focus on design and innovation
continues to remain our top priority and has allowed us to provide a favorable product mix of mattress
fabrics and cut and sew covers across most price points and style trends. Our mattress cover business,
known as CLASS, has continued to perform well. The growth in CLASS has allowed us to develop new
products with existing customers and reach new customers and additional market segments, especially the
growing internet bed in a box space. Our scalable and flexible manufacturing platform supports our focus
on design and innovation, and we have made significant capital investments to improve our operating
efficiencies and overall capacity.
Industry disruptions and demand trends have caused some short-term uncertainty in the mattress
fabrics industry. Some of these disruptions involve major customers of our mattress fabrics
business, including changes to the distribution channels of at least one significant customer. As a
result, we have indications from a customer that there will be reductions in orders from them, but
at the same time, we have indications from other large customers that our levels of business with
them are expected to increase. The structure of our supply arrangements and contracts with
major customers is such that it is difficult to make predictions with certainty, and this is further
complicated by the just in time (JIT) order and delivery model used in the bedding industry.
Nonetheless, we are cautiously optimistic that we will not experience a significant negative
impact on our mattress fabrics business related to these issues. While industry disruptions and
demand issues in the bedding industry may affect sales trends in the short term, we believe that
challenges with certain customers will at least be partially offset by increased sales and
opportunities with others.
27
Gross Profit and Operating Income
Overall
Our mattress fabric gross profit and operating income increased in fiscal 2017 compared to fiscal 2016.
The increase in this segment’s operating income primarily reflects lower raw material costs and benefits
of our capital investments. Additionally, operating income for mattress fabrics was negatively affected by
SG&A expenses relating to higher inventory warehousing costs, design and sales expenses, and non-
recurring plant facility consolidation charges (approximately $560,000 for fiscal 2017) associated with
the expansion projects located in North Carolina noted below.
In addition to the industry disruptions and demand trends discussed above, this segment’s operating
income will continue to be affected during the first quarter of fiscal 2018 by non-recurring plant
consolidation charges associated with the expansion projects located in North Carolina.
Capital Projects
During fiscal 2017, we continued to make substantial capital investments and significant changes within
our multi-country production facilities that are designed to enhance our operations and improve product
delivery performance. Below is a summary of our capital projects:
Our building expansion projects in North Carolina, including a new distribution center and
knitted fabric plant consolidation, were substantially complete as of the fourth quarter of fiscal
2017.
We expect to have all of the associated equipment relocated and new installations finalized by the
end of the first quarter of fiscal 2018.
We completed expansion of our Canadian operations in the fourth quarter of fiscal 2017, with
additional finishing equipment and a new distribution center that will allow us to ship directly to
our customers in Canada.
We are moving our CLASS production platform to a new location in July 2017 that offers a more
efficient and streamlined production flow and access to a larger labor pool. Additionally, this
facility will include expanded showroom and production development space.
Joint Venture
Effective January 1, 2017, Culp International Holdings, Ltd. (Culp), a wholly-owned subsidiary of Culp,
Inc., entered into a joint venture agreement, pursuant to which Culp owns fifty percent of CLASS
International Holdings, Ltd (CLIH). CLIH will produce cut and sewn mattress covers, and its operations
will be located in a modern industrial park in northeastern Haiti, which borders the Dominican Republic.
CLIH is currently expected to commence production in the second quarter of fiscal 2018 and will
complement our mattress fabric operations with a mirrored platform that will enhance our ability to meet
customer demand while adding a lower cost operation to our platform.
During fiscal 2017, CLIH incurred a $46,000 net loss that pertained to start-up operating expenses in the
fourth quarter. Our equity in this net loss was $23,000, which represents the company's fifty percent
ownership in CLIH.
28
The following table summarizes information on assets, liabilities and members’ equity of our equity
method investment in CLIH:
(dollars in thousands)
total assets
total liabilities
total members’ equity
Segment Assets
April 30,
2017
2,258
46
2,212
$
$
$
May 1,
2016
-
-
-
$
$
$
Segment assets consist of accounts receivable, inventory, property, plant and equipment, investment in an
unconsolidated joint venture, goodwill, a non-compete agreement and customer relationships associated
with an acquisition.
(dollars in thousands)
Accounts receivable
and inventory
Property, plant & equipment
Goodwill
Investment in unconsolidated
joint venture
Non-compete agreement
Customer Relationships
April 30, 2017
47,038
$
$
May 1, 2016
43,472
% Change
8.2%
48,916
11,462
1,106
828
664
37,480
11,462
-
903
715
30.5%
0.0%
100%
(8.3)%
(7.1)%
Accounts Receivable & Inventory
As of April 30, 2017, accounts receivable and inventory increased $3.6 million compared with May 1,
2016. This included an increase in inventory of $2.5 million, as a result of having higher inventory levels
to meet expected demand trends for new production introductions, and a $1.1 million increase in accounts
receivable primarily due to the extension of discount credit terms with certain key customers that
occurred in the fourth quarter of fiscal 2017.
Property, Plant & Equipment
The $48.9 million at April 30, 2017, represents property, plant and equipment of $34.0 million and $14.9
million located in the U.S. and Canada, respectively. 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.
As of April 30, 2017, property, plant, and equipment increased $11.4 million compared with May 1,
2016. This increase is due to capital expenditures of $17.6 million that primarily relate to the construction
of a new building (see Note 11 of the consolidated financial statements for further details) and purchases
and installation of machinery and equipment, partially offset by depreciation expense of $6.2 million for
fiscal 2017.
Investment in Unconsolidated Joint Venture
Our investment in unconsolidated joint venture represents our fifty percent ownership of CLIH noted
above.
29
Non-Compete Agreement and Customer Relationships
The decreases in carrying values of our non-compete agreement and customer relationships at April 30,
2017, compared with May 1, 2016, are primarily due to amortization expense in fiscal 2017.
Upholstery Fabrics Segment
Net Sales
(dollars in thousands)
April 30, 2017
May 1, 2016
Twelve Months Ended
Non U.S. Produced
U.S Produced
Total
$
$
109,012
9,727
118,739
92%
8%
100%
$
$
115,167
11,274
126,441
91%
9%
100%
% Change
(5.3)%
(13.7)%
(6.1)%
Our decrease in net sales primarily reflects the soft retail environment for residential furniture that has
persisted for most of fiscal 2017 and our strategy to change our product mix to improve our profitability.
In spite of the challenging demand trends, we continued to execute our product-driven strategy with a
focus on design and innovation. As a result, we have seen positive demand trends for our performance
line of highly durable and stain resistant upholstery fabrics. We have also experienced meaningful sales
growth in the hospitality segment, which accounted for a higher percentage of overall upholstery fabric
net sales in fiscal 2017. The hospitality segment is a key area of focus in our product diversification
strategy.
Our 100% owned China platform supports our marketing efforts with the manufacturing flexibility to
adapt to changing furniture market trends and consumer style preferences.
Gross Profit and Operating Income
(dollars in thousands)
April 30, 2017
May 1, 2016
Change
Twelve Months Ended
Gross profit
$
Gross profit margin
SG&A expenses
Income from operations
Operating margin
26,170
22.0%
15,079
11,091
9.3%
$
26,393
20.9%
15,094
11,298
8.9%
(0.8)%
110bp
(0.1)%
(1.8)%
40bp
Despite the decrease in net sales noted above, our gross profit and operating margins increased in fiscal
2017 compared with the same period a year ago. This trend reflects our strategy to enhance both our
customer and product mix to improve our profitability, and lower operating expenses due to more
favorable currency exchange rates in China.
30
Segment Assets
Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.
(dollars in thousands)
April 30, 2017
May 1, 2016
Accounts receivable
and inventory
$
29,021
$
26,540
% Change
9.4%
Property, plant & equipment
1,879
1,564
20.1%
Accounts Receivable & Inventory
As of April 30, 2017, accounts receivable and inventory increased $2.5 million compared with May 1,
2016. This increase was due to an increase in inventory of $2.5 million, as a result of customers requiring
us to hold higher inventory levels of key products.
Property, Plant & Equipment
The $1.9 million at April 30, 2017, represents property, plant, and equipment located in the U.S. of $1.2
million and located in China of $655,000. 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.
Other Income Statement Categories
(dollars in thousands)
April 30, 2017
May 1, 2016
% Change
Twelve Months Ended
SG&A expenses
Interest income
Other expense
$
39,157
299
681
$
36,773
176
616
6.5%
69.9%
10.6%
Selling, General and Administrative Expenses
The increase in SG&A expenses for fiscal 2017 compared with fiscal 2016, was primarily due to higher
incentive compensation expense reflecting stronger financial results in relation to pre-established
performance targets. The increase was also due to higher inventory warehousing costs, design and sales
expenses, and non-recurring plant facility consolidation charges (approximately $560,000 for fiscal 2017)
associated with our mattress fabrics segment.
Interest Expense
Interest costs charged to operations were $158,000 and $58,000 for fiscal 2017 and 2016, respectively.
The interest costs charged to operations were fully offset by interest costs for the construction of
qualifying fixed assets that were capitalized and will be amortized over the related assets’ useful lives.
Interest Income
Interest income increased for fiscal 2017 compared with fiscal 2016. The increase was due to
management’s decision at the end of the second quarter of fiscal 2017 to invest approximately $31.0
million in investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years.
31
The purpose of this investment was to earn a higher rate of return on our excess cash located in the
Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and
ability to hold these investments until maturity.
Other Expense
Other expense for fiscal 2017 was comparable to fiscal 2016.
Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $7.3 million, or 24.7% of income before income tax expense, in
fiscal 2017 compared with income tax expense of $11.0 million, or 39.3% of income before income tax
expense, in fiscal 2016. 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
reversal of foreign uncertain income tax position
other
Deferred Income Taxes – Valuation Allowance
Summary
2017
34.0%
1.6
(0.2)
-
(11.6) -
2016
34.0%
4.4
(1.2)
0.7
0.9
24.7%
1.4
39.3%
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. Refer to Note 9 located in the notes
to the consolidated financial statements for disclosures regarding our assessments of our recorded
valuation allowance as of April 30, 2017 and May 1, 2016, respectively.
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.
Refer to Note 9 located in the notes to the consolidated financial statements for disclosures regarding our
assessments of our recorded deferred income tax liability balances associated with our undistributed
earnings from our foreign subsidiaries as of April 30, 2017 and May 1, 2016, respectively.
32
Uncertainty in Income Taxes
Our gross unrecognized income tax benefit of $12.2 million at April 30, 2017, relates to tax positions for
which significant change is reasonably possible within the next year. This amount primarily relates to
double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal
and state income tax returns filed by us remain subject to examination for income tax years 2005 and
subsequent due to loss carryforwards. Canadian federal and provincial (Quebec) returns filed by us
remain subject to examination for income tax years 2013 and subsequent. Income tax returns associated
with our operations located in China are subject to examination for income tax year 2012 and subsequent.
Currently, the Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal years
2014 through 2016, and no adjustments have been proposed at this time. We currently expect this
examination to be completed during fiscal 2018. During the third quarter of fiscal 2017, Revenue Quebec
commenced an examination of our Canadian provincial (Quebec) income tax returns for fiscal years 2013
through 2015, and no adjustments have been proposed at this time. We currently expect this examination
to be completed during fiscal 2018.
In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax
position can be recognized in the first interim period if the more-likely-than-not recognition threshold is
met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the
statute of limitations for the relevant taxing authority to examine and challenge the tax position has
expired. If it is determined that any of the above conditions occur regarding our uncertain income tax
positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.
During the fiscal 2017, we recognized an income tax benefit of $3.4 million for the reversal of an
uncertain income tax position associated with certain foreign jurisdictions in which the statute of
limitations expired. Accordingly, of this $3.4 million income tax benefit, $2.1 million and $1.3 million
were treated as discrete events in which the full income tax effects of these adjustments were recorded in
the third and fourth quarters, respectively.
Income Taxes Paid
We reported income tax expense of $7.3 million and $11.0 million in fiscal 2017 and 2016, respectively.
Currently, we are not paying income taxes in the United States as we have an estimated $9.0 million in
operating loss carryforwards at April 30, 2017. However, we did have income tax payments of $5.5
million in fiscal 2017 and $6.7 million in fiscal 2016. Our income tax payments are associated with our
subsidiaries located in China and Canada.
33
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 for fiscal 2016 outperformed overall industry trends. Our focus on design and
innovation allowed us to create a diversified product mix of products from mattress fabrics to finished
cover. As a result, we achieved significant progress in our mattress cover business during fiscal 2016
compared to the same period a year earlier. This has allowed us to reach new customers and additional
market segments, especially the internet bedding space.
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 increased gross profit and operating income reflected the benefits of our capital investments that were
placed into service in the last half of fiscal 2015, which included 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.
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.
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.
34
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 was 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, represented 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, represented
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 was 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, compared with May 3, 2015 were primarily due to amortization expense in fiscal 2016.
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)%
35
Our decrease in net sales reflected softer retail demand for home furnishings and our strategy to change
our 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 earlier and
by the closure of our finished goods warehouse and distribution facility located in Poland during the third
quarter of fiscal 2015.
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
The increases in this segment's gross profit and operating income reflected the benefits of our strategic
focus on product innovation and sales diversification. The benefits included an enhanced product mix that
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.
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 was 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.
36
Property, Plant & Equipment
The $1.6 million at May 1, 2016, represented 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, represented property, plant,
and equipment located in the U.S. of $848,000 and located in China of $619,000.
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 was 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 reflected 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.
Interest Income
Interest income decreased in fiscal 2016 compared with fiscal 2015. This trend reflected 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 earned 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.
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.
37
Income Taxes
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:
2016
34.0%
4.4
(1.2)
0.7
1.4
39.3%
2015
34.0%
0.3
(0.2)
-
0.2
34.3%
federal income tax rate
tax effects of Chinese foreign exchange gains
change in valuation allowance
change in North Carolina income tax rates
other
Liquidity and Capital Resources
Liquidity
Overall
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, debt payments, common stock repurchases, and
dividend payments. We believe our present cash and cash equivalents and short-term investment balance
of $23.2 million at April 30, 2017, 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).
At April 30, 2017, our cash and cash equivalents, short-term investments, and long-term investments
(held-to-maturity) totaled $54.2 million compared with $42.1 million at May 1, 2016. This increase from
the end of fiscal 2016 was primarily due to net cash provided by operating activities of $33.0 million,
partially offset by $12.9 million in capital expenditures (of which $1.1 million was vendor financed) that
were mostly associated with our mattress fabric segment, $1.1 million in our investment in an
unconsolidated joint venture located in Haiti, $6.3 million in dividend payments, and $1.4 million in long-
term investment purchases associated with our Rabbi Trust that funds our deferred compensation plan.
Our net cash provided by operating activities of $33.0 million in fiscal 2017 increased $6.2 million
compared with $26.8 million in fiscal 2016. The increase in our net cash provided by operating activities
is primarily due to increased earnings in fiscal 2017.
Currently, we do not have any borrowings outstanding under our credit agreements.
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.
38
By Geographic Area
We currently hold cash and cash equivalents, short-term investments, and long-term investments (held-to-
maturity) in the U.S. and our foreign jurisdictions to support operational requirements, to mitigate our risk
to foreign exchange rate fluctuations, and for U.S. and foreign income tax planning purposes.
A summary of our cash and cash equivalents, short-term investments, and long-term investments (held-to-
maturity) by geographic area follows:
(dollars in thousands)
Cayman Islands
China
Canada
United States
April 30,
2017
34,966
12,722
4,268
2,228
54,184
$
$
$
$
May 1,
2016
25,762
8,454
6,844
1,086
42,146
Since April 2015, we distributed earnings and profits totaling $39.2 million from our subsidiaries located
in China to our international holding company located in the Cayman Islands. This shift was primarily
due to our strategy of mitigating our risk to foreign exchange rate fluctuations for assets and liabilities
denominated in Chinese Yuan Renminbi. By limiting 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 Yan Renminbi, and therefore mitigate the risk of foreign currency exchange rate fluctuations in
China. In addition, transferring earnings and profits from China to the Cayman Islands provides increased
flexibility to ultimately repatriate these earnings and profits to the U.S. for various strategic purposes.
Currently, we do not intend to repatriate any earnings and profits to the U.S. until after our U.S. loss
carryforwards are fully utilized, which we currently expect to occur in approximately one fiscal year.
During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in
investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years. The
purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman
Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to
hold these investments until maturity.
Dividend Program
On June 13, 2017, 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 $0.08 per share. These
dividend payments are payable on July 17, 2017, to shareholders of record as of July 3, 2017.
During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special
cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular
quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
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.
Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as
business needs or market conditions change.
39
Common Stock Repurchases
On June 15, 2016, 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 2017, there were no repurchases of our common stock.
At April 30, 2017, we had $5.0 million available for additional repurchases of our common stock.
Working Capital
Accounts receivable at April 30, 2017, were $24.6 million, an increase of 5% compared with
$23.5 million at May 1, 2016. This increase was primarily due to the extension of discount credit terms
with certain key customers associated with our mattress fabrics segment that occurred in the fourth
quarter of fiscal 2017. Days’ sales in receivable were 29 days and 28 days during the fourth quarters of
fiscal 2017 and 2016, respectively.
Inventories at April 30, 2017, were $51.5 million, an increase of 11% compared with $46.5 million at
May 1, 2016. This increase is mostly associated with customers requiring us to hold higher inventory
levels of key products associated with the upholstery fabrics segment and to meet expected demand trends
for new product introductions in the mattress fabrics segment. Inventory turns were 5.0 and 5.3 during the
fourth quarters of fiscal 2017 and 2016, respectively.
Accounts payable-trade at April 30, 2017, was $29.1 million, an increase of 21% compared with
$24.0 million at May 1, 2016. This increase is associated with the increase in our inventories noted
above.
Operating working capital (accounts receivable and inventories, less accounts payable –trade and capital
expenditures) was $40.9 million at April 30, 2017, compared with $45.8 million at May 1, 2016.
Operating working capital turnover was 7.3 in fiscal 2017 compared to 7.0 in fiscal 2016.
Financing Arrangements
Currently, we have revolving credit agreements with banks for our U.S parent company and our
operations located in China. The purposes of our revolving credit lines of credit are to support
potential short term cash needs in different jurisdictions, mitigate our risk associated with foreign
currency exchange rate fluctuations, and ultimately repatriate earnings and profits from our
foreign subsidiaries to the U.S. for various strategic purposes. Our revolving credit agreements
require us to maintain compliance with certain financial covenants as defined in the respective
agreements.
At April 30, 2017, we were in compliance with all of our financial covenants.
Refer to Note 10 located in the notes to the consolidated financial statements for further details
of our revolving credit agreements.
40
Commitments
The following table summarizes our contractual payment obligations and commitments for each of the
next five fiscal years (in thousands):
2018
2019
2020
2021
2022
Thereafter
Total
$ 2,094
Capital expenditures
Accounts payable -
capital expenditures
Operating leases
Interest expense
Total (1)
4,767
2,154
91
$ 9,106
-
1,322
1,307
-
2,629
-
-
911
-
911
-
-
127
-
127
-
-
78
-
78
-
$ 2,094
6,089
-
4,577
-
-
91
- $ 12,851
Note: Payment Obligations by End of Each Fiscal Year
(1) At April 30, 2017, we had $12.2 million of total gross unrecognized tax benefits, of which $11.8
million and $467,000 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 $12.2 million in total gross unrecognized tax benefits,
$3.8 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 $12.9 million (of which $1.1 million was vendor-financed) for
fiscal 2017, compared with $11.5 million for fiscal 2016. Capital expenditures for fiscal 2017 and 2016
mostly related to our mattress fabrics segment.
Depreciation expense was $7.1 million for fiscal 2017 compared with $6.7 million for fiscal 2016.
Depreciation expense for fiscal 2017 and 2016 mostly related to our mattress fabrics segment.
For fiscal 2018, we are projecting capital expenditures (including those that are vendor-financed) to be
comparable to fiscal 2017. Depreciation expense for the company as a whole is projected to be $8.0
million for fiscal 2018. The estimated capital expenditures and depreciation expense for fiscal 2018
primarily relate to our mattress fabrics segment. These are management’s current expectations only, and
changes in our business 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
operating activities.
Accounts Payable – Capital Expenditures
At April 30, 2017, we had total amounts due regarding capital expenditures totaling $6.1 million, of which
$5.1 million is financed and pertains to completed work for the construction of a new building (see below).
Of the total $6.1 million, $4.8 million is required to be paid in fiscal 2018, with a remaining amount of $1.3
million due in fiscal 2019 (May 2018).
At May 1, 2016, we had total amounts due regarding capital expenditures totaling $224,000, which
pertained to outstanding vendor invoices, none of which were financed. This amount was paid in full in
fiscal 2017.
41
Purchase Commitments - Capital Expenditures
At April 30, 2017, we had open purchase commitments to acquire a building and equipment for our mattress
fabrics segment totaling $7.2 million. The $7.2 million includes $5.1 million (all of which represents
completed work) 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 cost of $11.3
million. This agreement required an installment payment of $1.9 million in April 2016, $4.3 million in fiscal
2017, $3.8 million in fiscal 2018, and $1.3 million in fiscal 2019. Interest is being 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.
This new building is currently expected to be fully operational by the end of our first quarter of fiscal 2018.
Handling Costs
We record warehousing costs in SG&A expenses. These costs were $4.6 million, $4.2 million, and $3.8
million, in fiscal 2017, 2016, and 2015 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 $64.6 million or 20.9% of net sales, in fiscal 2017, $60.9 million or 19.5% of net
sales, in fiscal 2016, and $51.8 million, or 16.7% of net sales, in fiscal 2015.
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 April 30, 2017, accounts receivable from
furniture manufacturers totaled approximately $9.1 million, and accounts receivable from bedding
manufacturers totaled approximately $15.5 million. Additionally, as of April 30, 2017, the aggregate
accounts receivable balance of our ten largest customers was $13.8 million, or 56% of trade accounts
receivable. No customers within the upholstery fabrics segment accounted for 10% or more of
consolidated accounts receivable as of April 30, 2017. One customer within the mattress fabrics segment
represented 18% of consolidated accounts receivable at April 30, 2017.
42
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 $414,000 and $1.1 million at April 30, 2017, and May 1,
2016, 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 $3.4 million and $3.1 million at April 30, 2017, and May 1,
2016, respectively.
Goodwill. Management assesses goodwill for impairment at the end of each fiscal year or between
annual tests if an event 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 April 30, 2017, relates to the mattress fabrics segment.
Although we believe we have based the impairment testing on reasonable estimates and assumptions, the
use of different estimates and assumptions could result in materially different results.
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred income
taxes are recognized for temporary differences between the financial statement carrying amounts and the
tax bases of the company’s assets and liabilities and operating loss and tax credit carryforwards at income
tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred income
taxes of a change in tax rates is recognized in income (loss) in the period that includes the enactment date.
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation
allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance
should be established based on the consideration of all available evidence using a “more likely than not”
standard with significant weight being given to evidence that can be objectively verified. Since the
company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-
by-jurisdiction basis, taking into account the effects of local tax law. Based on this assessment, we
43
recorded a partial valuation allowance of $536,000 and $590,000 million against our net deferred tax
assets at April 30, 2017 and May 1, 2016, respectively. Our valuation allowance of $536,000 at April 30,
2017, represents a $464,000 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 $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.
Refer to Note 9 located in the notes to the consolidated statements for additional disclosures regarding our
assessment of our recorded valuation allowance as of April 30, 2017 and May 1, 2016, 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 April 30, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling $146.9
million. At the same date, the deferred tax liability associated with our undistributed earnings from our
foreign subsidiaries totaled $497,000, which included U.S. income and foreign withholding taxes totaling
$44.0 million, offset by U.S. foreign income tax credits of $43.5 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 April 30, 2017, we had $12.2 million of total gross unrecognized tax benefits, of which $11.8 million
and $467,000 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 restricted stock awards are
amortized on a straight-line basis over the remaining vesting periods. At April 30, 2017, there were 1,200
shares of time vested restricted stock awards that were unvested and no unvested incentive stock options.
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 is recorded based on an
assessment each reporting period of the probability that certain performance goals will be met during the
contingent vesting period. If performance goals are not probable of occurrence, no compensation expense
44
will be recognized. Performance goals that were previously deemed probable and were not or are not
expected to be met, previously recognized compensation cost will be reversed. At April 30, 2017, the
remaining compensation cost related to our performance based restricted stock units was $3.9 million.
We recorded $3.4 million, $2.7 million, and $786,000 of compensation expense within selling, general,
and administrative expense for our equity based awards in fiscal 2017, 2016, and 2015, 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 2017.
Recently Issued Accounting Standards
Refer to Note 1 located in the notes to the consolidated statements for recently issued accounting
pronouncements for fiscal 2018 and beyond.
45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our revolving credit lines.
At April 30, 2017, our U.S. revolving credit agreement requires interest to be charged at a rate
(applicable interest rate of 2.45% at April 30, 2017) as a variable spread over LIBOR 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
April 30, 2017, 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
April 30, 2017, would not have had a significant impact on our results of operations or financial
position.
46
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 April 30, 2017 and May 1, 2016, and the
related consolidated statements of net income, comprehensive income, shareholders’ equity, and
cash flows for each of the three years in the period ended April 30, 2017. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Culp, Inc. and Subsidiaries as of April 30, 2017 and
May 1, 2016 and the results of their operations and their cash flows for each of the three years in
the period ended April 30, 2017 in conformity with accounting principles generally accepted in
the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
April 30, 2017, 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 14, 2017 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
July 14, 2017
47
2017
2016
20,795
2,443
24,577
51,482
-
2,894
102,191
51,651
11,462
419
30,945
5,466
1,106
2,394
205,634
29,101
4,767
11,947
287
46,102
1,322
467
3,593
5,520
57,004
$
$
$
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
-
-
618
47,415
100,601
(4)
148,630
205,634
614
43,795
84,547
(144)
128,812
175,142
$
$
$
$
$
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data and preferred and common stock shares)
April 30, 2017 and May 1, 2016
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 - held-to-maturity
long-term investments - rabbi trust
investment in unconsolidated joint venture
other assets
total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
accounts payable - trade
accounts payable - capital expenditures
accrued expenses
income taxes payable
total current liabilities
accounts payable - capital expenditures
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 12,356,631 at
April 30, 2017 and 12,265,489 at May 1, 2016
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.
48
CONSOLIDATED STATEMENTS OF NET INCOME
For the years ended April 30, 2017, May 1, 2016 and May 3, 2015
(dollars in thousands, except per share data)
2017
2016
2015
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 tax expense (note 9)
loss from investment in unconsolidated joint venture (note 6)
net income
net income per share-basic
net income per share-diluted
$
$
$
$
309,544
240,309
69,235
39,157
30,078
-
(299)
681
29,696
7,339
23
22,334
$1.81
$1.78
$
$
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
The accompanying notes are an integral part of these consolidated financial statements.
49
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended April 30, 2017, May 1, 2016 and May 3, 2015
Net income
$
22,334
$
16,935
$
15,071
2017
2016
2015
Other comprehensive income (loss)
Unrealized gains (losses) on investments
Unrealized holding gains (losses) on investments
Reclassification adjustment for realized loss included in net income
Total other comprehensive income (loss)
128
12
140
(176)
127
(49)
(35)
-
(35)
Comprehensive income
$
22,474
$
16,886
$
15,036
The accompanying notes are an integral part of the consolidated financial statements.
50
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands, except common stock shares)
For the years ended April 30, 2017,
May 1, 2016 and May 3, 2015
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
balance, May 1, 2016
net income
stock-based compensation
unrealized gain on investments
excess tax benefit related to stock-based
compensation
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
common
stock
shares
common
stock
amount
capital
contributed
in excess of
par value
Accumulated
earnings
accumulated
other
comprehensive
loss
total
shareholders'
equity
$
12,250,030
-
-
-
$
612
-
-
-
$
42,932
-
786
-
-
(43,014)
3,000
10,100
(995)
-
12,219,121
-
-
-
-
(100,776)
115,855
3,000
54,500
(26,211)
-
12,265,489
-
-
-
-
49,192
4,800
68,000
-
(2)
-
1
-
-
611
-
-
-
-
(5)
6
-
3
(1)
-
614
-
-
-
-
2
-
3
(30,850)
(1)
109
(743)
-
93
(18)
-
43,159
-
2,742
-
841
(2,392)
(6)
-
197
(746)
-
43,795
-
3,358
-
657
(2)
-
585
(978)
$
68,260
15,071
-
-
-
-
-
-
-
(7,579)
75,752
16,935
-
-
-
-
-
-
-
-
(8,140)
84,547
22,334
-
-
-
-
-
-
-
(6,280)
100,601
$
$
(60)
-
-
(35)
-
-
-
-
-
-
(95)
-
-
(49)
-
-
-
-
-
-
-
(144)
-
-
140
-
-
-
-
-
(4)
$
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
22,334
3,358
140
657
-
-
588
(979)
(6,280)
148,630
balance, April 30, 2017
12,356,631
$
618
$
47,415
$
The accompanying notes are an integral part of these consolidated financial statements.
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 30, 2017, May 1, 2016, and May 3, 2015
(dollars in thousands)
2017
2016
2015
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
loss from investment in unconsolidated joint venture
realized loss on sale of short-term investments
foreign currency exchange losses (gains)
changes in assets and liabilities:
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
investment in unconsolidated joint venture
purchase of short-term investments
proceeds from the sale of short-term investments
purchase of long-term investments (held-to-maturity)
purchase of long-term investments (rabbi trust)
proceeds from life insurance policies
payments on life insurance policies
proceeds from the sale of equipment
net cash used in investing activities
cash flows from financing activities:
proceeds from lines of credit
payments on lines of credit
payments on vendor-financed capital expenditures
payments on long-term debt
debt issuance costs
repurchases of common stock
dividends paid
proceeds from common stock issued
excess tax benefit related to stock options exercised
net cash used in financing activities
effect of exchange rate changes on cash and cash equivalents
(decrease) increase in cash and cash equivalents
$
22,334
$
16,935
$
15,071
7,085
244
3,358
(657)
4,667
(131)
23
12
78
(1,555)
(5,437)
(495)
30
5,828
563
(2,966)
32,981
(11,858)
(1,129)
(44)
2,000
(31,020)
(1,351)
-
(18)
141
(43,279)
9,000
(9,000)
(1,050)
-
(2)
-
(6,280)
37
657
(6,638)
(56)
(16,992)
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
cash and cash equivalents at beginning of year
37,787
29,725
29,303
cash and cash equivalents at end of year
$
20,795
$
37,787
$
29,725
The accompanying notes are an integral part of these consolidated financial statements.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business – 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 and commercial furniture manufacturers. The majority of our revenues are
derived in North America. The company has wholly owned mattress fabric operations located in
Stokesdale, NC, High Point, NC, and Quebec, Canada and a fifty percent owned cut and sew mattress
cover operation located in Haiti. The company has wholly owned 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.
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
2017, 2016, and 2015.
Effective January 1, 2017, Culp International Holdings, Ltd. (Culp), a wholly-owned subsidiary of Culp,
Inc., entered into a joint venture agreement, pursuant to which Culp owns fifty percent of CLASS
International Holdings, Ltd (CLIH). CLIH will produce cut and sewn mattress covers, and its operations
will be located on the northeast border of Haiti, which borders the Dominican Republic.
Culp’s investment in CLIH will be accounted for under the equity method of accounting in accordance
with ASC Topic 823 – Investments – Equity Method and Joint Ventures. The equity method of accounting
is required for an investee entity (i.e. CLIH) that is not consolidated but over which the reporting entity
(i.e. Culp Inc.) exercises significant influence. Whether or not a reporting entity exercises significant
influence with respect to an investee depends on an evaluation of several factors including, representation
on the investee’s board of directors, voting rights, and ownership level. Under the equity method of
accounting, CLIH’s accounts are not reflected within our Consolidated Balance Sheets and Statements of
Net Income. Our share of earnings and losses from CLIH will be reflected in the caption “Income (loss)
from investment in unconsolidated joint venture” in the Consolidated Statements of Net Income. Our
carrying value in CLIH is reflected in the caption “Investment in unconsolidated joint venture” in our
Consolidated Balance Sheets.
If our carrying value in CLIH is reduced to zero, no further losses will be recorded in our consolidated
financial statements. However, if CLIH subsequently reports income, we will not record our share of such
income until it equals the amount of its share of losses previously recognized.
53
Fiscal Year – Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30.
Fiscal 2017 and 2016 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:
April 30, May 1,
(dollars in thousands)
China
Cayman Islands
Canada
United States
2017
12,722
4,020
2,906
1,147
20,795
$
$
2016
8,454
25,762
3,550
21
37,787
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. Our short-term investments had an accumulated unrealized loss totaling $47,000 and
$100,000 at April 30, 2017 and May 1, 2016, respectively. Our short-term investments were recorded at
its fair value of $2.4 million and $4.4 million at April 30, 2017 and May 1, 2016, 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
United States
April 30, May 1,
2016
3,294
1,065
4,359
2017
1,362
1,081
2,443
$
$
Long-Term Investments (Rabbi Trust) – We have 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 $5.5
million and $4.0 million at April 30, 2017 and May 1, 2016, respectively. Our long-term investments had
an accumulated unrealized gain totaling $43,000 at April 30, 2017 and an accumulated unrealized loss
totaling $44,000 at May 1, 2016. The fair value of our long-term investments associated with our Rabbi
Trust approximates its cost basis.
54
Long-Term Investments (Held-To-Maturity) – During the second quarter of fiscal 2017, management
decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities
ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our
excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we
have the positive intent and ability to hold these investments until maturity. Our held-to-maturity
investments will be recorded as either current or noncurrent on our Consolidated Balance Sheets, based
on the contractual maturity dated and stated at amortized cost.
At April 30, 2017, the amortized cost of our held-to-maturity investments $30.9 million and the fair value
was $30.8 million.
Accounts Receivable – Substantially all of our accounts receivable are due from manufacturers in the
bedding and furniture industries. We grant credit to customers, a substantial number of which are located
in North America and generally do not require collateral. We record an allowance for doubtful accounts
that reflects estimates of probable credit losses. Management continuously performs credit evaluations of
our customers, considering numerous inputs including financial position, past payment history, cash
flows, management ability, historical loss experience and economic conditions and prospects. We do not
have any off-balance sheet credit exposure related to our customers.
Inventories – We account for inventories at the lower of first-in, first-out (FIFO) cost or market.
Management continually examines inventory to determine if there are indicators that the carrying value
exceeds its net realizable value. Experience has shown that the most significant indicators of the need for
inventory markdowns are the age of the inventory and the planned discontinuance of certain patterns. As
a result, we provide inventory valuation write-downs based upon established percentages based on the age
of the inventory that are continually evaluated as events and market conditions require. Our inventory
aging categories are six, nine, twelve, and fifteen months. We also provide inventory valuation write-
downs based on the planned discontinuance of certain products based on the current market values at that
time as compared to their current carrying values.
Property, Plant and Equipment – Property, plant and equipment are recorded at cost and depreciated
over their estimated useful lives using the straight-line method. Major renewals and betterments are
capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When properties or
equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are
removed from the accounts. Amounts received on disposal less the book value of assets sold are charged
or credited to income from operations.
Management reviews long-lived assets, which consist principally of property, plant and equipment, for
impairment whenever events or changes in circumstances indicate that the carrying value of the asset may
not be recovered. Recoverability of long-lived assets to be held and used is measured by a comparison of
the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash flows, the related cost and
accumulated depreciation are removed from the accounts and an impairment charge is recognized for the
excess of the carrying amount over the fair value of the asset. After the impairment loss is recognized, the
adjusted carrying amount is the new accounting basis. Assets to be disposed of by sale are reported at the
lower of the carrying value or fair value less cost to sell when the company has committed to a disposal
plan, and would be reported separately as assets held for sale in the Consolidated Balance Sheets.
Interest Costs – Interest costs charged to operations were $158,000, $58,000, and $235,000 in fiscal
years 2017, 2016, and 2015, 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 $158,000, $58,000 and $171,000 were capitalized for the
construction of qualifying fixed assets for fiscal 2017, 2016, and 2015, respectively.
55
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 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) 2017
111
China
(120)
Canada
-
Poland
(9)
$
$
2016
(70)
76
-
6
2015
241
(108)
(2)
131
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 April 30, 2017 and May 1, 2016, we determined that our
goodwill was not impaired using a more likely than not standard.
Our goodwill of $11.5 million at April 30, 2017 and May 1, 2016, respectively, relates to our mattress
fabrics segment.
Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred income
taxes are recognized for temporary differences between the financial statement carrying amounts and the
tax bases of our assets and liabilities and operating loss and tax credit carryforwards at income tax rates
expected to be in effect when such amounts are realized or settled. The effect on deferred income taxes of
a change in tax rates is recognized in income (loss) in the period that includes the enactment date.
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
56
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 $4.6 million, $4.2 million and $3.8 million in fiscal 2017,
2016, and 2015, 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 are not expected to be met,
previously recognized compensation cost was reversed. Excess tax benefits related to our equity incentive
plans are 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 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 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 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
57
financial statements and to all new or modified awards thereafter. This guidance was effective for the first
quarter of fiscal 2017 and did not have any impact on our consolidated financial statements as we
currently 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.
Recently Issued Accounting Pronouncements
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
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. The adoption of this guidance is not expected to have a material
impact 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 15, 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
but we expect this guidance to have a material impact on our financial position, as a result of the
requirement to recognize right-of-use assets and lease liabilities on our consolidated balance sheets.
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. This
guidance eliminates the APIC pool concept and requires that excess income tax benefits and deficiencies
be recorded in the income statement when awards are vested or are settled. This guidance also addresses
simplifications related to statement of cash flows classification, accounting for forfeitures, and minimum
statutory tax withholding requirements. This ASU is effective for fiscal years beginning after December
15, 2016, and interim periods within those fiscal years. Therefore, we are required to apply this guidance
in our fiscal 2018 interim and annual financial statements. The primary impact of adopting this ASU will
be the recognition of excess income tax benefits and deficiencies within income taxes, which will increase
the volatility within our provision for income taxes as the excess amounts are dependent on our common
stock price at the date the awards are vested or are settled. Currently, we do not expect the other
provisions within this guidance to have a material impact on our consolidated financial statements.
58
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments, to address the diversity in how certain cash
receipts and cash payments are presented in the statement of cash flows. This new guidance provides
clarity around the cash flow classification for eight specific issues in an effort to reduce the current and
potential future diversity in practice. This standard, which is to be applied retrospectively, will be
effective for the first interim period within annual reporting periods beginning after December 15, 2017,
and early adoption is permitted. We are therefore required to apply this new guidance in our fiscal 2019
interim and annual financial statements. We are currently assessing the impact that this guidance will
have on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers
of Assets Other Than Inventory, to reduce the diversity in practice and complexity associated with
accounting for the income tax consequences of intra-entity transfers of assets other than inventory.
Current GAAP prohibits recognition of deferred income taxes for an intra-entity transfer until the asset
has been sold to an outside party. The new pronouncement stipulates that an entity should recognize the
income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer
occurs. This new guidance will be effective for annual reporting periods beginning after December 15,
2017, including interim periods within those annual reporting periods, with early adoption permitted in
the first interim period only. We are therefore required to apply this new guidance in our fiscal 2019
interim and annual financial statements. The amendments are to applied on a modified retrospective basis
through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of
adoption. We are currently assessing the impact that this guidance will have on our consolidated financial
statements.
There are no other new accounting pronouncements that are expected to have a significant impact on our
consolidated financial statements.
2. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
(dollars in thousands)
customers
allowance for doubtful accounts
reserve for returns and allowances and discounts
April 30, May 1,
2016
25,531
(1,088)
(962)
23,481
2017
26,211
(414)
(1,220)
24,577
$
$
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2017
(1,088)
beginning balance
222
provision for bad debts
452
write-offs, net of recoveries
(414)
ending balance
$
$
2016
(851)
(363)
126
(1,088)
2015
(573)
(421)
143
(851)
59
A summary of the activity in the allowance for returns and allowances and discounts
follows:
(dollars in thousands) 2017
(962)
beginning balance
provision for returns and allowances
(3,061)
and discounts
credits issued
ending balance
2,803
(1,220)
$
$
2016
(738)
(2,825)
2,601
(962)
2015
(479)
(2,733)
2,474
(738)
3.
INVENTORIES
A summary of inventories follows:
(dollars in thousands)
raw materials
work-in-process
finished goods
April 30, May 1,
2016
5,462
2,972
38,097
46,531
2017
6,456
3,095
41,931
51,482
$
$
4. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
(dollars in thousands)
land and improvements
buildings and improvements
leasehold improvements
machinery and equipment
office furniture and equipment
capital projects in progress
depreciable lives
(in years)
0-10
7-40
**
3-12
3-10
accumulated depreciation and amortization
** Shorter of life of lease or useful life.
5. GOODWILL
April 30,
2017
836
19,071
1,541
67,709
8,936
12,901
110,994
(59,343)
51,651
$
$
May 1,
2016
836
16,126
1,340
64,114
8,212
2,896
93,524
(53,551)
39,973
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands)
beginning balance
loss on impairment
acquisitions
ending balance
2017
$ 11,462
-
-
$ 11,462
2016
11,462
-
-
11,462
2015
11,462
-
-
11,462
The goodwill balance relates to the mattress fabrics segment.
60
6.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Effective January 1, 2017, Culp International Holdings, Ltd. (Culp), a wholly-owned subsidiary of Culp,
Inc., entered into a joint venture agreement, pursuant to which Culp owns fifty percent of CLASS
International Holdings, Ltd (CLIH). CLIH will produce cut and sewn mattress covers, and its operations
will be located in a modern industrial park in northeastern Haiti, which borders the Dominican Republic.
CLIH is currently expected to commence production in the second quarter of fiscal 2018 and will
complement our mattress fabric operations with a mirrored platform that will enhance our ability to meet
customer demand while adding a lower cost operation to our platform.
During fiscal 2017, CLIH incurred a $46,000 net loss that pertained to start-up operating expenses in the
fourth quarter. Our equity in this net loss was $23,000, which represents the company’s fifty percent
ownership in CLIH.
The following table summarizes information on assets, liabilities and members’ equity of our equity
method investment in CLIH:
(dollars in thousands)
total assets
total liabilities
total members’ equity
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
April 30,
2017
2,258
46
2,212
May 1,
2016
-
-
-
$
$
$
April 30,
2017
376
828
664
526
2,394
May 1,
2016
357
903
715
598
2,573
$
$
$
$
$
We recorded our 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 April 30, 2017 and May 1,
2016, respectively. Accumulated amortization for this non-compete agreement was $1.2 million and $1.1
million at April 30, 2017 and May 1, 2016, respectively.
Amortization expense for this non-compete agreement was $75,000 in fiscal years 2017, 2016, and 2015,
respectively. The remaining amortization expense for the next five years and thereafter follows: FY 2018
- $75,000; FY 2019 - $75,000; FY 2020 - $75,000; FY 2021 - $75,000; FY 2022 - $75,000, and
Thereafter - $453,000.
The weighted average amortization period for the non-compete agreement is 11 years as of April 30,
2017.
61
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 April 30,
2017 and May 1, 2016, respectively. Accumulated amortization for these customer relationships was
$204,000 and $153,000 at April 30, 2017 and May 1, 2016, 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 2017, 2016, and 2015,
respectively. The remaining amortization expense for the next five fiscal years and thereafter follows: FY
2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; FY 2021 - $51,000; FY 2022 - $51,000; and
Thereafter - $409,000.
The weighted average amortization period for our customer relationships is 13 years as of April 30, 2017.
Cash Surrender Value - Life Insurance
We had one life insurance contract with a death benefit of $1.4 million at April 30, 2017 and May 1,
2016, respectively. Our cash surrender value - life insurance balances of $376,000 and $357,000 at April
30, 2017 and May 1, 2016, 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:
April 30,
2017
10,188
468
51
1,240
11,947
$
$
May 1,
2016
10,011
870
-
1,041
11,922
(dollars in thousands)
income from operations
shareholders’ equity, related to
the tax benefit arising from stock
based compensation
2017
$ 7,339
2016
10,963
(657)
(841)
$ 6,682
10,122
2015
7,885
(109)
7,776
62
Income tax expense attributable to income from operations consists of:
(dollars in thousands)
current
federal
state
foreign
foreign – reversal of uncertain tax position
deferred
federal
state
undistributed earnings – foreign subsidiaries
U.S. operating loss carryforwards
foreign
valuation allowance
2017
2016
2015
$
109
13
5,981
(3,431)
2,672
404
54
(101)
3,630
734
(54)
4,667
$ 7,339
-
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
Income (loss) before income taxes related to our foreign and U.S. operations consists of:
(dollars in thousands)
Foreign
China
Canada
Poland
Cayman Islands
Total Foreign
United States
2017
2016
2015
$ 13,650
4,918
(19)
154
18,703
10,993
$29,696
14,130
3,647
(62)
-
17,715
10,183
27,898
12,531
2,695
(260)
-
14,966
7,990
22,956
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
reversal of foreign uncertain income tax position
other
2017
34.0%
1.6
(0.2)
-
(11.6)
0.9
24.7%
2016
34.0%
4.4
(1.2)
0.7
-
1.4
39.3%
2015
34.0%
0.3
(0.2)
-
-
0.2
34.3%
63
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 (liability) asset
2017
2016
$
$
447
2,196
6,222
890
1,436
1,428
245
3,842
73
(3,842)
(536)
12,401
(497)
(7,936)
(5,546)
(1,478)
(118)
(15,575)
(3,174)
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
(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 $9.0 million with related future tax
benefits of $3.8 million at April 30, 2017. These carryforwards principally expire in 9-18 years, fiscal
2027 through fiscal 2035. Our U.S. foreign income tax credits of $1.4 million expire in 9 years, fiscal
2026. Our alternative minimum tax credit carryforward of approximately $1.4 million for federal income
tax purposes does not expire.
At April 30, 2017, our non-current deferred income tax asset of $419,000 pertained to our operations
located in China. 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 April 30, 2017, our non-current deferred income tax liability of $3.6 million represents $2.1 million
and $1.5 million from our operations located in Canada and the U.S., respectively. At May 1, 2016, our
non-current deferred income tax liability of $1.5 million pertained 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-
64
by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at April
30, 2017, we recorded a partial valuation allowance of $536,000, of which $464,000 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 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.
No valuation allowance was recorded against our net deferred tax assets associated with our operations
located in China and Canada at April 30, 2017 and May 1, 2016, respectively.
United States
Our partial valuation allowance against our U.S. net deferred assets totaled $464,000 and $518,000 at
April 30, 2017, and May 1, 2016, 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 $54,000, $43,000, and $105,000 that reduced our valuation allowance
against our U.S. net deferred tax assets in fiscal years 2017, 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
Our partial valuation allowance against our loss carryforwards associated with our Culp Europe operation
located in Poland totaled $72,000 at April 30, 2017 and May 1, 2016. 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 operation.
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 April 30, 2017, we had accumulated earnings and profits from our foreign subsidiaries totaling $146.9
million. At the same date, the deferred tax liability associated with our undistributed earnings from our
foreign subsidiaries totaled $497,000, which included U.S. income and foreign withholding taxes totaling
$44.0 million, offset by U.S. foreign income tax credits of $43.5 million.
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.
65
Uncertainty in Income Taxes
The following table sets forth the change in the company’s unrecognized tax benefit:
(dollars in thousands) 2017
beginning balance
increases from prior period tax positions
decreases from prior period tax positions
increases from current period tax positions
ending balance
** Amount includes a reduction to unrecognized tax benefits of $3,431 resulting from a lapse of the
applicable statute of limitations.
2015
2016
13,740
14,141
454
588
(77) (187)
379
-
14,141
14,897
(3,506) **
-
$ 12,245
$14,897
854
At April 30, 2017, we had $12.2 million of total gross unrecognized tax benefits, of which $467,000
would favorably affect the income tax rate in future periods. 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 April 30, 2017, we had $12.2 million of total gross unrecognized tax benefits, of which $11.8 million
and $467,000 were classified as net non-current deferred income taxes and income taxes payable-long-
term, respectively, in the accompanying consolidated balance sheets. As of May 1, 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.
We elected to classify interest and penalties as part of income tax expense. At April 30, 2017 and May 1,
2016, the gross amount of interest and penalties due to unrecognized tax benefits was $50,000 and
$978,000, respectively.
Our gross unrecognized income tax benefit of $12.2 million at April 30, 2017, relates to tax positions for
which significant change is reasonably possible within the next year. This amount primarily relates to
double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal
and state income tax returns filed by us remain subject to examination for income tax years 2005 and
subsequent due to loss carryforwards. Canadian federal and provincial (Quebec) returns filed by us
remain subject to examination for income tax years 2013 and subsequent. Income tax returns associated
with our operations located in China are subject to examination for income tax year 2012 and subsequent.
Currently, the Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal years
2014 through 2016, and no adjustments have been proposed at this time. We currently expect this
examination to be completed during fiscal 2018. During the third quarter of fiscal 2017, Revenue Quebec
commenced an examination of our Canadian provincial (Quebec) income tax returns for fiscal years 2013
through 2015, and no adjustments have been proposed at this time. We currently expect this examination
to be completed during fiscal 2018.
In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax
position can be recognized in the first interim period if the more-likely-than-not recognition threshold is
met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the
statute of limitations for the relevant taxing authority to examine and challenge the tax position has
expired. If it is determined that any of the above conditions occur regarding our uncertain income tax
positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.
During the fiscal 2017, we recognized an income tax benefit of $3.4 million for the reversal of an
uncertain income tax position associated with certain foreign jurisdictions in which the statute of
limitations expired. Accordingly, of this $3.4 million income tax benefit, $2.1 million and $1.3 million
were treated as discrete events in which the full income tax effects of these adjustments were recorded in
the third and fourth quarters, respectively.
66
Income Taxes Paid
Income tax payments, net of income tax refunds, were $5.5 million in fiscal 2017, $6.7 million in 2016,
and $4.8 million in 2015.
10. LINES OF CREDIT
Revolving Credit Agreement –United States
Our credit agreement with Wells Fargo Bank N.A. (“Wells Fargo”) provides a revolving loan
commitment of $30 million. Interest was charged at a rate (applicable interest rate of 2.45% and 1.89% at
April 30, 2017 and May 1, 2016, respectively) as a variable spread over LIBOR based on our ratio of debt
to EBITDA. The Credit Agreement contains certain financial and other covenants as defined in the
agreement and is set to expire on August 15, 2018.
The purpose of our revolving credit line 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.
Outstanding borrowings are secured by a pledge of 65% of the common stock of Culp International
Holdings, Ltd. (our subsidiary located in the Cayman Islands), as required by the Credit Agreement.
There were no borrowings outstanding under the Credit Agreement at April 30, 2017 and May 1, 2016,
respectively.
At April 30, 2017 and May 1, 2016, there were $250,000 in outstanding letters of credit (all of which
related to workers compensation) provided by the Credit Agreement.
Effective August 1, 2016, we entered into a Third Amendment to our Credit Agreement that will allow us
to issue letters of credit not to exceed $7.5 million. On August 3, 2016, we issued a $5.0 million letter of
credit (all of which is currently outstanding and in addition to the $250,000 letter of credit noted above)
for the construction of a new building associated with our mattress fabrics segment (see Note 11 for
further details). This $5.0 million letter of credit will automatically be reduced in increments of $1.25
million on August 1, 2017, November 1, 2017, February 1, 2018, and May 15, 2018, respectively.
Revolving Credit Agreement - China
We have an unsecured credit agreement associated with our operations in China that provided for a line of
credit up to 40 million RMB ($5.8 million USD at April 30, 2017) and is set to expire on February 15,
2018.This agreement has an interest rate determined by the Chinese government and there were no
outstanding borrowings as of April 30, 2017 and May 1, 2016.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. At April 30, 2017, the company was in compliance with these financial covenants.
Interest paid during fiscal years 2017, 2016, and 2015 totaled $114,000, $95,000, and $268,000,
respectively.
67
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 one to five years with renewal
options for additional periods ranging up to nine years. The leases generally require the company to pay
real estate taxes, maintenance, insurance and other expenses. Rental expense for operating leases was $2.9
million in fiscal 2017, $3.0 million in fiscal 2016, and $2.9 million in fiscal 2015. Future minimum rental
commitments for noncancellable operating leases are $2.2 million in fiscal 2018; $1.3 million in fiscal 2019;
$911,000 in fiscal 2020; $127,000 in fiscal 2021; and $78,000 in fiscal 2022. 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. 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.
Rents paid to entities owned by certain shareholders and officers of the company and their immediate
families totaled $156,000 in fiscal 2017 and fiscal 2016 and $155,000 in fiscal 2015.
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.
Accounts Payable – Capital Expenditures
At April 30, 2017, we had total amounts due regarding capital expenditures totaling $6.1 million, of which
$5.1 million is financed and pertains to completed work for the construction of a new building (see below).
Of the total $6.1 million, $4.8 million is required to be paid in fiscal 2018, with a remaining amount of $1.3
million due in fiscal 2019 (May 2018).
At May 1, 2016, we had total amounts due regarding capital expenditures totaling $224,000, which
pertained to outstanding vendor invoices, none of which were financed. This amount was paid in full in
fiscal 2017.
Purchase Commitments - Capital Expenditures
At April 30, 2017, we had open purchase commitments to acquire a building and equipment for our mattress
fabrics segment totaling $7.2 million. The $7.2 million includes $5.1 million (all of which represents
completed work) 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 cost of $11.3
million. This agreement required an installment payment of $1.9 million in April 2016, $4.3 million in fiscal
2017, $3.8 million in fiscal 2018, and $1.3 million in fiscal 2019. Interest is being charged on the
outstanding installment payments at a rate of $2.25% plus the current 30 day LIBOR rate. Also, we are
68
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.
This new building is currently expected to be fully operational by the end of our first quarter of fiscal 2018.
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 April 30, 2017, there were 964,494 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 compensation expense was recorded for incentive or non-qualified stock options in fiscal 2017, 2016
and 2015 as all stock option awards were fully vested at the end of fiscal 2014.
The following tables summarize stock option activity for fiscal 2017, 2016, and 2015:
2017
2016
2015
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
83,600 $
-
(68,000)
-
15,600
8.37
-
8.65
-
7.14
140,100 $ 6.49
-
3.68
4.59
8.37
-
(54,500)
(2,000)
83,600
153,950 $ 6.70
-
9.31
7.27
6.49
-
(10,100)
(3,750)
140,100
outstanding at beginning
of year
granted
exercised
canceled/expired
outstanding at end of year
69
Options Outstanding
Number Weighted-Avg.
Options Exercisable
Number
Range of
Exercise Prices
$7.08 - $8.75
Outstanding
Remaining Weighted-Avg.
at 4/30/17 Contractual Life Exercise Price
Exercisable Weighted-Avg.
at 4/30/17 Exercise Price
15,600
1.1
$7.14
15,600
$7.14
At April 30, 2017, the aggregate intrinsic value for options outstanding and exercisable was $389,000.
The aggregate intrinsic value for options exercised was $1.7 million, $1.3 million, and $87,000 in fiscal
2017, 2016, and 2015, respectively.
At April 30, 2017, there were no unvested incentive stock option awards. Therefore, there was no
unrecognized compensation cost related to the incentive stock option awards at April 30, 2017.
Time Vested Restricted Stock Awards
On July 14, 2016, an employee was granted 1,200 shares of time vested restricted common stock units.
This award was valued based on the fair market value on the date of grant. The fair value of this award
was $28 per share, which represents the closing price of our common stock on the date of grant. The
vesting of this award was is over the requisite service period of 11 months.
The following table summarizes the time vested restricted stock activity for fiscal years 2017, 2016, and
2015:
outstanding at beginning of year
granted
vested
outstanding at end of year
2017
Shares
-
1,200
-
1,200
2016
Shares
-
-
-
-
2015
Shares
61,668
-
(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.
At April 30, 2017, the remaining unrecognized compensation cost related to our time vested restricted
common stock units was $5,000, which is expected to be recognized over the next 1.5 months.
We recorded compensation expense of $29,000 and $4,000 within selling, general, and administrative
expense for time vested restricted stock units in fiscal 2017 and 2015, respectively. No compensation
expense was recorded for time vested restricted stock awards in fiscal 2016 as all time vested restricted
stock awards granted prior to fiscal 2016 were fully vested at the end of fiscal 2015.
Performance Based Restricted Stock Units
We have granted performance based restricted stock units to certain key members of management and a
non-employee which could earn up to a certain number of shares of common stock if certain performance
targets are met as defined in the related restricted stock unit agreements. Our performance based restricted
stock units granted to key members of management were measured based on the fair market value (the
closing price of our common stock) on the date of grant. Our performance based restricted stock units
granted to a non-employee were measured based on the fair market value (the closing price of our
common stock) at the earlier date of when the performance criteria are met or the end of the reporting
period.
70
The following table summarizes information related to our grants of performance based restricted stock
units associated with key members of management for fiscal years 2017, 2016, and 2015:
(1)
(2)
Date of Grant
July 14, 2016
July 15, 2015
June 24, 2014
Restricted Stock
Units Awarded
107,880
107,554 $32.23
102,845
Vesting
Share Period
3 years
3 years
3 years
$17.70
$28.00
Price Per
(1) Amounts represent the maximum number of common stock shares that could be earned if certain
performance targets are met as defined in the related restricted stock unit agreements.
(2) Price per share represents the closing price of our common stock on the date of grant.
The following table summarizes information related to our grants of performance based restricted stock
units associated with a non-employee for fiscal years 2017, 2016, and 2015:
(1)
Date of Grant
July 14, 2016
July 15, 2015
March 3, 2015
March 3, 2015
Vesting
Restricted Stock
Share Period
Units Awarded
3 years
$32.10 (2)
11,549
3 years
10,364 $32.10 (2)
$32.10 (2)
16,000
28 months
$28.77 (3) 16 months
12,000
Price Per
(1) Amounts represent the maximum number of common stock shares that could be earned if certain
performance targets are met as defined in the related restricted stock unit agreements.
(2) The respective grant was unvested at the end of our reporting period. Accordingly, the price per share
represents the closing price of our common stock on April 30, 2017, the end of our reporting period.
(3) The respective grant vested during the first quarter of fiscal 2017. Accordingly, the price per share
represents the closing price of our common stock on the date the award vested.
The following table summarizes information related to our performance based restricted stock units that
vested during fiscal years 2017 and 2016. No performance based restricted stock units vested during fiscal
2015:
(1)
Fiscal Year
Fiscal 2017 - Management
Fiscal 2017 - Non-Employee
Fiscal 2016 - Management
Common Stock
Shares Vested
37,192
$637
12,000 $345
115,855
Weighted Average
Fair Value Per Share
$17.12 (2)
$28.77 (3)
$10.21 (2)
$1,183
Price
(1) Dollar amounts are in thousands.
(2) Price per share represents the closing price of our common stock on the date of grant.
71
(3) The respective grant vested during the first quarter of fiscal 2017. Accordingly, the price per share
represents the closing price of our common stock on the date the award vested.
Overall
We recorded compensation expense of $3.2 million, $2.6 million, and $727,000 within selling, general,
and administrative expense for performance based restricted stock units in fiscal 2017, 2016 and 2015,
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 April 30, 2017, the remaining unrecognized compensation cost related to the performance based
restricted stock units was $3.9 million, which is expected to be recognized over a weighted average
vesting period of 1.7 years.
Common Stock Awards
We granted a total of 4,800, 3,000, and 3,000 shares of common stock to our outside directors on October
3, 2016, October 1, 2015, and October 1, 2014, respectively. These shares of common stock vested
immediately and were valued based on the fair market value on the date of grant. The fair value of these
awards were $29.80, $31.77, and $17.95 per share, on October 3, 2016, October 1, 2015, and October 1,
2014, which represents the closing price of our common stock on the date of grant.
We recorded $143,000, $95,000, and $55,000, of compensation expense within selling, general, and
administrative expense for these common stock awards for fiscal 2017, 2016, and 2015, 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
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.
72
Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring
basis:
Fair value measurements at April 30, 2017 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:
U.S. Corporate Bonds
Premier Money Market Fund
Low Duration Bond Fund
Intermediate Term Bond Fund
Strategic Income Fund
Large Blend Fund
Growth Allocation Fund
Moderate Allocation Fund
Other
$ -
4,811
1,081
751
611
365
126
365
88
76
30,831
$
N/A
3
N/A
0,
N/A
8
N/A
3
N/A
1
N/A
N/A
N/A
$
-
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 30,831
4,811
1,081
751
611
365
126
88
76
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
1,604
1,154
1
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
Our U.S. corporate bonds were classified as level 2 as they are traded over the counter within a broker
network and not on an active market. The fair value of our U.S. corporate bonds is determined based on a
published source that provides an average bid price. The average bid price is based on various broker
prices that are determined based on market conditions, interest rates, and the rating of the respective U.S.
corporate bond.
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.
73
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
2017
2016
2015
12,312
206
12,302
173
12,217
205
12,518
12,475
12,422
All options to purchase shares of common stock were included in the computation of diluted net income
for fiscal years 2017, 2016 and 2015, as the exercise price of the options was less than the average market
price of common shares.
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 $924,000, $843,000, and $798,000 in fiscal years
2017, 2016, and 2015, 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 $185,000, $180,000 and $174,000 in fiscal years 2017, 2016, and
2015, respectively. Our nonqualified deferred compensation plan liability of $5.5 million and $4.7
million at April 30, 2017 and May 1, 2016, were recorded in deferred compensation in the 2017 and 2016
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 $5.5 million and $4.0 million at April
30, 2017 and May 1, 2016, and were recorded in long-term investments-rabbi trust in the 2017 and 2016
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
74
bedding manufacturers. The upholstery fabrics segment manufacturers, sources, and sells fabrics
primarily to residential and commercial furniture manufacturers.
Net sales denominated in U.S. dollars accounted for 92%, 93% and 92% of total consolidated net sales in
2017, 2016, and 2015, respectively. International sales accounted for 22% of net sales in 2017, 2016, and
2015, 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
2017
$ 29,995
34,695
3,618
$ 68,308
2016
2015
31,667
31,927
4,336
67,930
30,758
31,855
4,720
67,333
(1) Of this amount, $22.3 million, $24.2 million, and $24.1 million are attributable to shipments to
Mexico in fiscal 2017, 2016, and 2015, respectively.
(2) Of this amount $26.6 million, $23.1 million, and $26.5 million are attributable to shipment to
China in fiscal 2017, 2016, and 2015, 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, an
investment in an unconsolidated joint venture, a non-compete agreement and customer relationships
associated with an acquisition.
Statements of operations for the company’s operating segments are as follows:
(dollars in thousands)
net sales:
upholstery fabrics
mattress fabrics
gross profit:
upholstery fabrics
mattress fabrics
2017
2016
2015
$ 118,739
190,805
$ 309,544
$
$
26,170
43,065
69,235
126,441
186,419
312,860
26,393
38,718
65,111
130,427
179,739
310,166
22,690
32,877
55,567
75
2017
2016
2015
(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
$
15,079
13,685
10,393
15,094
12,223
9,456
14,562
11,206
7,010
$
39,157
36,773
32,778
$
$
11,091
29,380
40,471
(10,393)
30,078
-
299
(681)
29,696
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
One customer within the upholstery fabrics segment represented 11% of consolidated net sales in fiscal
2017 and 13% of consolidated net sales in fiscal years 2016 and 2015. Two customers within the mattress
fabrics segment represented 23%, 22%, and 20% of consolidated net sales in fiscal 2017, 2016, and 2015,
respectively. No customers within the upholstery fabrics segment accounted for 10% or more of net
accounts receivable as of April 30, 2017 and May 1, 2016, respectively. One customer within the mattress
fabrics segment accounted for 18% and 16% of net accounts receivable balance as of April 30, 2017 and
May 1, 2016, respectively.
76
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
investment in unconsolidated joint venture
property, plant, and equipment
total mattress fabrics assets
upholstery fabrics
current assets (1)
property, plant, and equipment
total upholstery fabrics assets
2017
2016
2015
$
47,038
828
664
11,462
1,106
48,916 (2)
$ 110,014
43,472
903
715
11,462
-
41,328
979
766
11,462
-
37,480 (3)
94,032
33,773 (4)
88,308
$
$
26,540
29,021
1,879 (5) 1,564 (6)
30,900
28,104
29,905
1,467 (7)
31,372
total segment assets
140,914
122,136
119,680
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 - held-to-maturity
long-term investments - rabbi trust
other assets
total assets
capital expenditures (9):
mattress fabrics
upholstery fabrics
unallocated corporate
depreciation expense
mattress fabrics
upholstery fabrics
total segment depreciation expense
20,795
2,443
-
419
2,894
856 (8)
30,945
5,466
902
$ 205,634
$
$
$
$
17,689
822
260
18,771
6,245
840
7,085
37,787
4,359
155
2,319
2,477
29,725
10,004
229
5,169
2,440
929 (8)
-
4,025
955
175,142
838 (8)
-
2,415
800
171,300
9,666
626
416
10,708
5,837
834
6,671
10,454
468
252
11,174
5,034
739
5,773
(1) Current assets represent accounts receivable and inventory.
(2) The $48.9 million at April 30, 2017, represents property, plant, and equipment located in the
U.S. of $34.0 million and located in Canada of $14.9 million.
(3) 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.
(4) 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.
(5) The $1.9 million at April 30, 2017, represents property, plant, and equipment located in the U.S.
of $1.2 million and located in China of $655.
77
(6) 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.
(7) 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.
(8) The $856, $929, and $838 balance at April 30, 2017, May 1, 2016, and May 3, 2015, 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 April
30, 2017, the company’s statutory surplus reserve was $4.5 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 $4.5 million to assist with debt repayment, capital expenditures, and
other expenses of the company’s business.
18. COMMON STOCK REPURCHASE PROGRAM
On June 15, 2016, 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 2017, there were no repurchases of our common stock. 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 April 30, 2017, we had $5.0 million available for additional repurchases of our common stock.
19. DIVIDEND PROGRAM
On June 13, 2017, 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 $0.08 per share. These
dividend payments are payable on July 17, 2017, to shareholders of record as of July 3, 2017.
78
During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special
cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular
quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
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.
Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as
business needs or market conditions change.
79
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 before income taxes
income taxes
loss from investment in unconsolidated joint venture
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
2017
4th quarter
fiscal
2017
3rd quarter
fiscal
2017
2nd quarter
fiscal
2017
1st quarter
fiscal
2016
4th quarter
fiscal
2016
3rd quarter
fiscal
2016
2nd quarter
fiscal
2016
1st quarter
$
$
$
$
$
$
77,350
60,194
17,156
9,986
7,170
-
(134)
305
6,999
778
23
6,198
1,781
12,340
76,169
59,410
16,759
9,824
6,935
-
(124)
69
6,990
643
-
6,347
1,793
12,313
75,343
58,442
16,901
9,602
7,299
-
(15)
155
7,159
2,684
-
4,475
1,751
12,308
80,682
62,263
18,419
9,746
8,673
-
(25)
152
8,546
3,233
-
5,313
1,761
12,286
77,253
60,640
16,613
9,261
7,352
-
(26)
211
7,167
3,566
-
3,601
1,783
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
12,567
12,544
12,507
12,463
12,434
12,486
12,484
12,456
0.50
0.49
0.08
12.03
40,869
51,651
205,634
3,097
988
-
148,630
98,429
22.2%
9.3
8.0
11.1
0.0
7.3
29
5.0
34.50
30.25
32.10
37.7
0.52
0.51
0.08
11.56
40,973
50,333
191,056
6,590
985
-
142,314
97,788
22.0%
9.1
8.3
9.2
0.0
7.0
27
5.2
37.80
26.80
33.80
43.5
0.36
0.36
0.07
11.04
41,810
45,537
179,127
5,541
862
-
135,949
94,101
22.4%
9.7
5.9
37.5
0.0
7.0
23
5.2
34.30
26.72
28.15
45.9
0.43
0.43
0.28
10.68
43,486
41,745
183,360
3,543
3,445
7,000
131,435
94,599
22.8%
10.7
6.6
37.8
7.4
7.0
26
5.3
30.11
25.57
28.53
40.9
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
(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 (held-to-maturity),
long-term investments (rabbi trust), current maturities of 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 and
accounts payable - capital expenditures.
80
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 30, 2017, there were no disagreements on any matters of accounting
principles or practices or financial statement disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of
April 30, 2017. 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 April 30, 2017.
Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated
financial statements as of and for the years ended April 30, 2017, May 1, 2016 and May 3, 2015 and has
audited the company’s effectiveness of internal controls over financial reporting as of April 30, 2017, as
stated in their report, which is included in Item 8 hereof.
During the quarter ended April 30, 2017, 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.
81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Culp, Inc.:
We have audited the internal control over financial reporting of Culp, Inc. (a North Carolina corporation) and
Subsidiaries (the “Company”) as of April 30, 2017, 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 April 30, 2017, 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 April 30, 2017, and our
report dated July 14, 2017 expressed an unqualified opinion those financial statements.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
July 14, 2017
82
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.
83
The following table sets forth information as of the end of fiscal 2017 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)
15,600
-
15,600
$7.14
-
$7.14
964,494
-
964,494
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.
84
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 .................................................................. 47
Consolidated Balance Sheets – April 30, 2017 and
May 1, 2016 ........................................................................................................................................ 48
Consolidated Statements of Net Income -
for the years ended April 30, 2017,
May 1, 2016 and May 3, 2015 ............................................................................................................ 49
Consolidated Statements of Comprehensive Income -
for the years ended April 30, 2017,
May 1, 2016 and May 3, 2015………………………………………………………………… ......... 50
Consolidated Statements of Shareholders’ Equity -
for the years ended April 30, 2017,
May 1, 2016 and May 3, 2015 ............................................................................................................ 51
Consolidated Statements of Cash Flows -
for the years ended April 30, 2017,
May 1, 2016 and May 3, 2015 ............................................................................................................ 52
Notes to Consolidated Financial Statements ......................................................................................... 53
2.
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable, or not required, or
because the required information is included in the consolidated financial statements or notes thereto.
3.
Exhibits
The following exhibits are attached at the end of this report, or incorporated by reference herein.
Management contracts, compensatory plans, and arrangements are marked with an asterisk (*).
3(i)
3(ii)
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.
85
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
Written description of Non-employee Director compensation was filed as Exhibit 10.1 to the
company’s Form 10-Q dated December 9, 2016 (Commission File No. 001-12597), and
incorporated herein by reference.
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. (*)
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). (*)
86
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, 333-101805, 33-13310, 33-37027,
33-80206, 333-147663), dated March 20, 1987, May 21, 1997, April 26, 2001, April 25, 2001,
December 12, 2002, 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 14, 2017
24(b)
Power of Attorney of Kenneth R. Larson, dated July 14, 2017
24(c)
Power of Attorney of Kenneth W. McAllister, dated July14, 2017
24(d)
Power of Attorney of Fred A. Jackson, dated July14, 2017
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 89 under the subheading “Exhibit Index.”
c)
Financial Statement Schedules:
None
87
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 14th day
of July 2017.
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 14th day of July
2017.
/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.
88
EXHIBIT INDEX
Exhibit Number
Exhibit
21
23
24(a)
24(b)
24(c)
24(d)
31(a)
31(b)
32(a)
32(b)
List of subsidiaries of the company
Consent of Independent Registered Public Accounting Firm in connection
with the registration statements of Culp, Inc. on Form S-8 (File Nos. 333-
207195, 333-101805, 33-13310, 33-37027, 33-80206, 333-147663), dated
March 20, 1987, May 21, 1997, April 26, 2001, April 25, 2001, December 12,
2002, and September 30, 2015 and on Form S-3 and S-3/A (File No. 333-
141346).
Power of Attorney of Patrick B. Flavin, dated July 14, 2017
Power of Attorney of Kenneth R. Larson, dated July 14, 2017
Power of Attorney of Kenneth W. McAllister, dated July 14, 2017
Power of Attorney of Fred A. Jackson, dated July 14, 2017
Certification of Principal Executive Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-
Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
89
Exhibit 21
LIST OF SUBSIDIARIES OF CULP, INC.
Name of Subsidiary
Jurisdiction of Incorporation
Culp Fabrics (Shanghai) Co., Ltd.
Culp International Holdings Ltd.
Rayonese Textile Inc.
Culp Europe
People’s Republic of China
Cayman Islands
Canada
Poland
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated July 14, 2017, with respect to the consolidated financial statements and
internal control over financial reporting included in the Annual Report of Culp, Inc. on Form 10-K for
the fiscal year ended April 30, 2017. We hereby consent to the incorporation by reference of said reports
in the Registration Statements of Culp, Inc. on Forms S-8 (File No. 333-207195, File No. 333-101805,
File No. 33-13310, File No. 33-37027, File No. 33-80206, and File No. 333-147663), and on Form S-3
and Form S-3/A (File No. 333-141346).
/s/ Grant Thornton LLP
Raleigh, North Carolina
July 14, 2017
Exhibit 24(a)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a
North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and
lawful agent and attorney-in-fact to sign for the undersigned, as a director of the Corporation, the
Corporation's Annual Report on Form 10-K for the year ended April 30, 2017 to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of
1934, as amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as herein authorized.
/s/
Patrick B. Flavin
Patrick B. Flavin
Date: July 14, 2017
Exhibit 24(b)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a
North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and
lawful agent and attorney-in-fact to sign for the undersigned as a director of the Corporation the
Corporation's Annual Report on Form 10-K for the year ended April 30, 2017 to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of
1934, as amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as herein authorized.
/s/
Kenneth R. Larson
Kenneth R. Larson
Date: July 14, 2017
Exhibit 24(c)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a
North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and
lawful agent and attorney-in-fact to sign for the undersigned as a director of the Corporation the
Corporation's Annual Report on Form 10-K for the year ended April 30, 2017 to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of
1934, as amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as herein authorized.
/s/
Kenneth W. McAllister
Kenneth W. McAllister
Date: July 14, 2017
Exhibit 24(d)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a
North Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and
lawful agent and attorney-in-fact to sign for the undersigned as a director of the Corporation the
Corporation's Annual Report on Form 10-K for the year ended April 30, 2017 to be filed with the
Securities and Exchange Commission, Washington, D.C., under the Securities Exchange Act of
1934, as amended, and to sign any amendment or amendments to such Annual Report, hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact, as herein authorized.
/s/
Fred A. Jackson
Fred A. Jackson
Date: July 14, 2017
Exhibit 31(a)
CERTIFICATIONS
I, Franklin N. Saxon, certify that:
1.
I have reviewed this report on Form 10-K of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
/s/ Franklin N. Saxon
Franklin N. Saxon
Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 2017
Exhibit 31(b)
CERTIFICATIONS
I, Kenneth R. Bowling, certify that:
1.
I have reviewed this report on Form 10-K of Culp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
/s/ Kenneth R. Bowling
Kenneth R. Bowling
Chief Financial Officer
(Principal Financial Officer)
Date: July 14, 2017
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32(a)
In connection with the Annual Report of Culp, Inc. (the “Company”) on Form 10-K for the fiscal
year ended April 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Franklin N. Saxon, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Franklin N. Saxon
Franklin N. Saxon
Chief Executive Officer
July 14, 2017
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the
electronic version of this written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32(b)
In connection with the Annual Report of Culp, Inc. (the “Company”) on Form 10-K for the fiscal
year ended April 30, 2017 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Kenneth R. Bowling, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Kenneth R. Bowling
Kenneth R. Bowling
Chief Financial Officer
July 14, 2017
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the
electronic version of this written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
THIS PAGE INTENTIONALLY LEFT BLANK
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CONSOLIDATED ADJUSTED EFFECTIVE INCOME TAX RATE
FOR THE TWELVE MONTHS ENDED APRIL 30, MAY 1, 2016, AND MAY 3, 2015
(Amounts in Thousands)
Consolidated Effective GAAP Income Tax Rate (1)
Non-Cash U.S. Income Tax Expense
Reversal of Foreign Uncertain Income Tax Position
Other Non-Cash Foreign Income Tax Expense
Consolidated Adjusted Effective Income Tax Rate (2)
Twelve Months Ended
April 30,
2017
24.7%
(18.2)%
11.6%
(0.6)%
17.5%
May 1,
2016
39.3%
(20.3)%
–
(0.4)%
18.6%
May 3,
2015
34.3%
(18.2)%
–
(0.4)%
15.7%
(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.
Net cash provided by operating activities
Minus: Capital Expenditures
Minus: Investment in unconsolidated joint venture
Add: Proceeds from the sale of equipment
Add: Proceeds from life insurance policies
Minus: Payments on life insurance policy
Minus: Payments on vendor-financed capital expenditures
Minus: Purchase of long-term investments (Rabbi Trust)
Add: Excess tax benefits related to stock-based compensation
Effect of exchange rate changes on cash and cash equivalents
Free Cash Flow
FREE CASH FLOW RECONCILIATION
FY 2017
$ 32,981
(11,858)
(1,129)
141
-
(18)
(1,050)
(1,351)
657
(56)
$ 18,317
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
SUMMARY OF CASH AND INVESTMENTS
APRIL 30, 2017 and May 1, 2016
(Amounts in Thousands)
Amounts
April 30,
2017*
$ 20,795
2,443
30,945
$ 54,183
May 1,
2016
$ 37,787
4,359
–
$ 42,146
Cash and cash equivalents
Short-term investments
Long-term investments (Held-To-Maturity)
Total cash and investments
* Derived from audited financial statements.
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IMPORTANT INFORMATION
This document includes “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,” and their
derivatives, and include but are not limited to statements about expectations for our future operations, production levels, sales, profit margins,
profitability, operating income, capital expenditures, working capital levels, income taxes, SG&A or other expenses, pre-tax income, 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 us adversely. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products.
Changes in the value of the U.S. dollar versus other currencies could affect our financial results because a significant portion of our operations are
located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis
of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales in the
U.S. of products produced in those places. Also, economic and political instability in international areas could affect our operations or sources of
goods in those areas, as well as demand for our products in international markets. Further information about these factors, as well as other factors
that could affect our future operations or financial results and the matters discussed in forward-looking statements are included in Item 1A “Risk
Factors” in our Form 10-K filed with the Securities and Exchange Commission on July 14, 2017, for the fiscal year ended April 30, 2017, and
included as part of this annual report. 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.
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, less investment in unconsolidated joint venture, plus any proceeds from sales of equipment, plus any proceeds from
life insurance policies, less payment on life insurance policy, less payments on vendor-financed capital expenditures, less the purchase of long-
term investments associated with our Rabbi Trust, plus excess tax benefits related to stock-based compensation, and plus or minus the effects of
exchange rate changes on cash and cash equivalents. Details of these calculations and a reconciliation to information from our GAAP financial
statements are 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 are 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 reductions in income taxes due to the utilization of our U.S. net operating
loss (NOL) carryforwards, reversal of any uncertain income tax positions, and other 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 note that 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.
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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 CULP.
35%
Upholstery
Fabrics–
China-Produced
2017
Sales Mix
Upholstery
Fabrics–
U.S.-Produced
3%
Mattress
Fabrics
62%
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
Founder, 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
31.0%
Dividends
Investment in
Joint Venture
5.5%
2017 Capital
Allocation
Cap Ex
63.5%
Telephone: (336) 889-5161
Fax: (336) 887-7089
www.culp.com
Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 505000
Louisville, KY 40233
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
Shareholder Information
Corporate Address
1823 Eastchester Drive
Post Office Box 2686
High Point, NC 27265
Stock Listing
Culp, Inc. common stock is traded on
the New York Stock Exchange under
the symbol CULP. As of July 20, 2017,
Culp, Inc. had approximately 4,330
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 20,
2017, at the company’s corporate offices,
1823 Eastchester Drive, High Point,
North Carolina.
Form 10-K and Quarterly Reports/
Investor Contact
The Form 10-K Annual Report of
Culp, Inc., as filed with the Securities
and Exchange Commission, is available
without charge to shareholders upon
written request. Shareholders may also
obtain copies of the corporate news
releases issued in conjunction with the
company’s quarterly results. These
requests and other investor contacts
should be directed to Kenneth R.
Bowling, Chief Financial Officer, at
the corporate address or at the investor
relations section at www.culp.com.
Analyst Coverage
These analysts cover Culp, Inc.:
Raymond James & Associates –
Budd Bugatch, CFA
Stifel Financial Corp –
John Baugh, CFA
Stonegate Capital Markets –
Marco Rodriguez, CFA
Value Line –
Craig Sirois
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A T R U S T E D R E S O U R C E
A T R U S T E D R E S O U R C E
F O R
F O R
Innovative Fabrics
Innovative Fabrics
A C R O S S T H E G L O B E .
A C R O S S T H E G L O B E .
Culp, Inc. | 1823 Eastchester Drive
Post Office Box 2686, High Point, NC 27265
(336) 889-5161 | www.culp.com
2 0 1 7 A N N U A L R E P O R T
2 0 1 7 A N N U A L R E P O R T
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