D E S I G N
I N N O V A T I O N
S E R V I C E
A N N U A L R E P O R T 2 0 1 8
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, China and Haiti.
Shares in Culp, Inc. are traded
on the New York Stock Exchange
under the symbol CULP
38%
Upholstery
Fabrics–
China-Produced
2018
Sales Mix
60%
Mattress
Fabrics
2%
Upholstery
Fabrics–
U.S.-Produced
28%
Dividends
19%
Acquisitions
2018
Capital
Allocation
50%
Cap Ex
3%
Investment in
Joint Venture
FINANCIAL Highlights
NET SALES
FISCAL YEARS 2014-18 (IN MILLIONS)
2
.
0
1
3
$
9
.
2
1
3
$
5
.
9
0
3
$
7
.
3
2
3
$
2
.
7
8
2
$
$350
$300
$250
$200
$150
‘14
‘15
‘16
‘17
‘18
PRE-TAX INCOME AND
PRE-TAXMARGIN
(EXCLUDING RESTRUCTURING)
FISCAL YEARS 2014-18 (IN MILLIONS)
$35
$30
$25
$20
$15
$10
9.6%
8.9%
7
.
9
2
$
9
.
7
2
$
8.3%
9
.
6
2
$
7.4%
6.6%
0
.
3
2
$
0
.
9
1
$
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
‘14
‘15
‘16
‘17
‘18
CAPITAL EMPLOYED AND
RETURN ON CAPITAL(1)
FISCAL YEARS 2014-18 (IN MILLIONS)
32.0%
31.6%
28.0%
25.5%
4
.
8
9
$
4
.
0
9
$
2
.
3
8
$
0
.
0
8
$
25.4%
8
.
4
1
1
$
32%
28%
24%
20%
16%
12%
8%
4%
$120
$100
$80
$60
$40
‘14
‘15
‘16
‘17
‘18
FREE CASH FLOW AND DIVIDENDS
AND SHARES REPURCHASED (1)
FISCAL YEARS 2014-18 (IN MILLIONS)
$20
$18
$16
$14
$12
$10
$8
$6
$4
1
.
3
1
$
8
.
3
1
$
1
.
5
1
$
2
.
5
1
$
7
.
8
1
$
3
.
3
1
$
$10.5
$8.3
$6.3
$6.8
$2.2
‘14
‘15
‘16
‘17
‘18
$12
$10
$8
$6
$4
$2
(Amounts in thousands, except per share data)
2018
2017
2016
Net Sales
Income before income taxes
Net income
Net income per share:
Basic
Diluted
Proforma net income (1)
Proforma 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)
$ 323,725 $ 309,544 $ 312,860
27,898
16,935
26,883
20,877
29,696
22,334
1.68
1.65
1.81
1.78
1.38
1.36
$ 18,828
1.51
1.49
–
–
–
–
–
–
12,431
12,633
12,312
12,518
12,302
12,475
–
–
6,843
56,903
– $
–
6,280
48,952
2,397
101
8,140
Balance Sheet
Total cash and investments
Capital employed at fiscal year-end (1)
Return on capital (1)
Total assets
Total debt (including long-term debt, current
maturities of long-term debt and line of credit)
Shareholders’ equity
$ 54,473 $ 54,183 $ 42,146
90,357
114,817
98,429
25.4%
31.6%
32.0%
217,984
–
163,376
205,634
175,142
–
148,630
–
128,812
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)
$ 192,597 $ 190,805 $ 186,419
26,496
25,861
29,380
13.4%
15.4%
14.2%
90,554
83,422
74,637
29.3%
37.5%
36.7%
$ 131,128 $ 118,739 $ 126,441
11,298
10,956
11,091
8.4%
9.3%
8.9%
25,386
16,006
17,025
55.2%
63.8%
65.2%
(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 16, 2018.
(3) See Note 18 of the Notes to Consolidated Financial Statements beginning on page 89 of the fiscal 2018 Form 10-K.
1
2
We believe our accomplishments over the past year
have enhanced our ability to serve our customers
and strengthen our competitive position.
Mattress Fabrics Segment
We delivered another solid sales performance in mattress
fabrics, despite some headwinds late in the fiscal year as
we began to realize the impact of lower-priced imported
mattresses. For fiscal 2018, mattress fabrics sales were $192.6
million, a new record for Culp.
We were pleased to achieve these results during a period of
major transition across all our production facilities. With
the substantial investments and significant changes in our
operations in fiscal 2018, we have enhanced our ability to
serve our customers. Our operating results for the year were
affected by the production disruptions and costs associated
with these changes. However, going forward, we have a
sustainable production and distribution platform that will
favorably position Culp for the long term, especially as market
conditions improve.
W
e are pleased to report another
year of growth and progress for
Culp in fiscal 2018, with higher
annual sales in both of our
businesses. Our mattress fabrics
segment had another record
year, and our upholstery fabrics
impressive
showed
segment
growth over the prior year, reversing multi-year trends of
reduced sales. These results demonstrate consistent execution
of our product-driven strategy, with a relentless focus on design
creativity and product innovation. Our ability to offer a diverse
product mix and reach new market segments, with the support
of our efficient and global manufacturing platform, has been a
key differentiator for Culp in the marketplace.
We had many important accomplishments in fiscal 2018
that will continue to enhance our operations and open new
markets for both businesses. We have realized the benefits
of substantial multi-year investments in our mattress fabrics
business, with enhanced production capabilities and improved
operating efficiencies, supported by exceptional customer
service. Following the end of the year, we announced a
majority investment in an e-commerce company primarily
focused on bedding accessories and home textile products that
will expand our addressable market for mattress fabrics. In
our upholstery fabrics business, we have continued to diversify
both our product and customer mix with favorable results, and
we completed an acquisition that will expand our reach in the
growing hospitality market for upholstery fabrics. Importantly,
we have the financial strength to support our strategy and
continue to pursue additional growth opportunities for Culp.
3
Design and innovation continue to distinguish Culp in the
marketplace and remain our top priorities to meet customer
style preferences and changing demand trends. With a full
complement of mattress fabrics and sewn covers across all
price points, we have continued to successfully execute our
product diversification strategy. Our sales for the year reflect
continued growth in CLASS, our mattress cover business.
Importantly, CLASS has allowed us to develop new products
with our existing customers and reach new customers and
additional market segments, especially the boxed bedding
space. Our new joint venture mattress cover production
facility in Haiti complements our existing production capacity
and further enhances our ability to expand our CLASS
business and remain cost competitive. We commenced
production in Haiti during the second quarter of fiscal 2018,
and we have the flexibility to add more capacity as needed to
meet changes in customer demand.
In line with our product diversification strategy, we launched
a new offering of bedding accessories, including mattress pads
and protectors, at the Las Vegas Market in January. This
new product line, being offered directly to bedding accessory
retailers under the brand name “Comfort Supply Company
by Culp”, introduced highly stylized, design-driven products
to the bedding accessories category. We are excited about the
growth potential for this innovative new product line as we
commenced sales in early fiscal 2019.
Following the end of fiscal 2018, we completed a majority
investment in eLuxury, an internet company offering bedding
accessories and home goods direct to consumers. eLuxury’s
primary products include a line of mattress pads manufactured
in Evansville, Indiana, in addition to handmade platform beds,
cotton bed sheets, and other bedding and bath items. Their
products are available on eLuxury’s own branded website,
eLuxury.com, Amazon and other leading online retailers for
specialty home goods.
strategic
T
substantially
investment
his
expands our addressable market and
provides an exciting new sales channel for
Culp to participate in the rapidly growing
space.
e-commerce direct-to-consumer
This business combination brings together
eLuxury’s experience in e-commerce, online
brand building, and direct-to-consumer
shopping and fulfillment expertise with Culp’s extensive global
production, sourcing and distribution capabilities. We also
have an opportunity to market our new products for Comfort
Supply Company by Culp, as well as other finished products
that we may develop, including items made from upholstery
fabrics, through this e commerce platform.
Looking ahead, we believe the investments we have made in our
global platform and our strategic initiatives over the past year
will further enhance our competitive advantage and leadership
position in mattress fabrics. While we expect the soft demand
trends and the impact of lower-priced imported mattresses to
continue to affect our business into the first half of fiscal 2019,
we remain optimistic about our long-term growth prospects.
4
Upholstery Fabrics Segment
For fiscal 2018, our upholstery fabric sales were $131.1
million, up 10.4 percent over fiscal 2017, reversing multi-
year trends of reduced sales. Throughout the year, we have
pursued a product-driven strategy with a sustained focus on
innovation and creative designs, supported by our substantial
global manufacturing platform. Our design team has done an
outstanding job in keeping pace with current style trends and
meeting the changing demands of our customers.
Our sales performance reflects the strength of our product
mix, led by continued growth in our line of highly durable,
stain-resistant performance fabrics, such as LiveSmart®. In
fiscal 2018, we launched a new website specifically for this
innovative product line along with a more aggressive marketing
campaign, and we remain optimistic about the additional sales
opportunities for Culp.
Notably, we had favorable sales trends in fiscal 2018 with
both our residential and hospitality market customers. As
we continue to diversify our customer base, we have been
seeking the right strategic business opportunity to support
our growing sales of upholstery fabrics designed for the
hospitality market. During the fourth quarter, we completed
the acquisition of Read Window Products, Inc., a source
for custom window treatments and other products for the
hospitality and commercial industries. Based in Knoxville,
Tennessee, Read Window Products is a turn-key provider of
window treatments offering measuring, sourcing, fabrication
and installation services. Adding window treatments to
our product line is a logical step in Culp’s evolution as a
complete source of fabrics for the hospitality market. We
are excited about the potential to leverage Culp’s outstanding
design capabilities, global platform, product innovation and
outstanding customer service with the added expertise of Read
Window Products as we extend our market reach.
Although fiscal 2018 sales were up, our operating results for the
year were lower primarily due to unfavorable currency exchange
rates in China, particularly in the second half of the year.
We have also seen a continued decline in sales for products
manufactured in our U.S.-based operation in Anderson, South
Carolina. For fiscal 2018, products from the Anderson facility
accounted for 6.0 percent of total upholstery fabric sales. With
the declining volumes, this operation reached a level in the
fourth quarter of fiscal 2018 where we determined it is not
sustainable to continue. Therefore, we will be closing the
Anderson facility and expect to cease production by October
30, 2018. During this transition period, we will work closely
with our customers to fulfill any outstanding orders, and we
also intend to develop alternative fabrics supplied from other
Culp locations to ensure their needs are met. We appreciate
the hard work and dedication of our loyal associates and the
community of Anderson for its many years of support for Culp.
5
We are proud of our dividend history, as we have continued
to increase the quarterly cash dividend every year since we
reinstated dividend payments in 2012. The company did
not repurchase any shares in fiscal 2018, leaving $5.0 million
available under the share repurchase program. Notably, since
June 2011, Culp has returned approximately $57.0 million to
shareholders in the form of regular and special dividends and
share repurchases.
Looking Ahead
We believe our accomplishments over the past year have
enhanced our ability to serve our customers and strengthen
our competitive position. The investments we have made to
improve our global manufacturing capabilities and our strategic
initiatives will support our continued growth, especially as
market conditions improve. We are working hard to integrate
the operations of Read Window Products and eLuxury, and we
are excited about the added value they bring to Culp. We will
continue to leverage our core strengths of design, innovation
and service that are synonymous with the Culp brand in the
marketplace. As always, we are grateful for the opportunity
to serve our valued customers, and we are fortunate to have an
extraordinary team of associates who are dedicated to exceeding
their expectations. We also recognize the outstanding leadership
and valuable support of our management team and board of
directors. Together, we look forward to the opportunities ahead
for Culp.
Finally, we thank our fellow shareholders for the support your
investment provides
Sincerely,
Franklin N. Saxon
President and Chief Executive Officer
Robert C. Culp, III
Chairman of the Board
Looking ahead, we will continue to pursue our strategy to
diversify both our products and customers and identify new
market opportunities for Culp’s upholstery fabrics. While we
are seeing some overall softness in retail demand for home
furnishings, we believe we are well positioned for the long term.
Balance Sheet
0
ur results for fiscal 2018 reflect solid execution
of our strategy and our unwavering focus on
sound financial management. We were pleased
to end the year with a strong balance sheet. As
of April 29, 2018, we reported $54.5 million
in cash and investments, slightly higher than
the amount reported at the end of fiscal 2017,
with no outstanding debt. Cash flow from
operations was $27.5 million, compared with $34.1 million
in fiscal 2017. Free cash flow for the year was $13.3 million,
after spending $12.4 million in capital expenditures, including
vendor-financed payments, and making the investment in Haiti.
At the same time, we returned $6.8 million to shareholders in
regular and special dividends.
As we look to fiscal 2019, we expect to return to a maintenance
level of capital expenditures. We have a strong foundation,
and we are well positioned to continue to make the necessary
investments to support our operations and continue to return
funds to our shareholders.
Capital Allocation Strategy
Our capital allocation strategy is fundamental to Culp’s
business and supports our commitment to delivering value to
our shareholders. Our top priority is to fund organic growth
in both of our businesses. In fiscal 2018, we made additional
investments in our mattress fabrics operations as we reached
the end of a multi-year expansion project. Another stated
objective for capital allocation is to seek suitable acquisitions
that add value to our operations and enhance our product mix.
As such, we were pleased to complete the acquisition of Read
Window Products in fiscal 2018 and finalize our investment in
eLuxury following the end of the year. Notably, we closed on
both transactions without incurring any debt.
In line with our commitment to use additional cash for
dividends and share repurchases, commencing in the third
quarter, we raised our quarterly cash dividend from $0.08 to
$0.09 per share, or $0.36 per share on an annualized basis.
6
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 29, 2018
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 29, 2018, 12,450,276 shares of common stock were outstanding. As of October 29, 2017, the
aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $351,475,688
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 19, 2018 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 .......................................................................................................... 4
Segments ........................................................................................................................... 4
Overview of Industry and Markets ................................................................................... 6
Overview of Bedding Industry .......................................................................................... 7
Overview of Residential and Commercial Furniture Industry .......................................... 7
Products ............................................................................................................................ 8
Manufacturing and Sourcing............................................................................................. 9
Product Design and Styling ............................................................................................ 10
Distribution ..................................................................................................................... 11
Sources and Availability of Raw Materials .................................................................... 12
Seasonality ...................................................................................................................... 12
Competition .................................................................................................................... 13
Environmental and Other Regulations ............................................................................ 13
Employees ....................................................................................................................... 14
Customers and Sales ....................................................................................................... 14
Net Sales by Geographic Area ........................................................................................ 15
Backlog ........................................................................................................................... 15
Risk Factors ........................................................................................................................ 17
Unresolved Staff Comments ............................................................................................... 21
Properties ............................................................................................................................ 22
Legal Proceedings ............................................................................................................... 23
Mine Safety Disclosure ....................................................................................................... 23
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities ............................................................................... 23
Selected Financial Data ...................................................................................................... 26
Management’s Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................................................................... 27
Item No.
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
Quantitative and Qualitative Disclosures About Market Risk ............................................ 53
8.
9.
9A.
9B.
Consolidated Financial Statements and Supplementary Data............................................. 54
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ......................................................................................................................... 95
Controls and Procedures ..................................................................................................... 95
Other Information ............................................................................................................... 97
Item No.
10.
11.
12.
13.
14.
Page
PART III
Directors, Executive Officers, and Corporate Governance................................................. 97
Executive Compensation .................................................................................................... 97
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ............................................................................................. 97
Certain Relationships, Related Transactions, and Director Independence ......................... 98
Principal Accountant Fees and Services ............................................................................. 98
15.
Exhibits and Financial Statement Schedules ...................................................................... 99
PART IV
Documents Filed as Part of this Report .............................................................................. 99
Exhibits ............................................................................................................................. 101
Financial Statement Schedules ......................................................................................... 101
Signatures ......................................................................................................................... 102
Exhibit Index .................................................................................................................... 103
16.
Form 10-K Summary ........................................................................................................ 101
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
due to 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 potential acquisitions, 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, general economic conditions, as well
as our success in finalizing acquisition negotiations and integrating acquired businesses. 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,
with the recent addition of window treatment products and installation services.
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. As of
the end of fiscal 2018, we had active production facilities located in North Carolina, Tennessee,
and South Carolina; Quebec, Canada; Shanghai, China; and a joint venture facility in Haiti. 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, Canada, and China to facilitate distribution of
our products. Over the past decade, the portion of total company sales represented by fabrics
produced outside of the U.S. and Canada has increased, while sales of goods produced in the
U.S. have decreased. This trend is related primarily to the upholstery fabrics segment, where
94% of our sales in fiscal 2018 consisted of fabrics produced in Asia, while the mattress fabrics
business remains mostly based in North America.
Total net sales in fiscal 2018 were $323.7 million. The mattress fabrics segment had net sales of
$192.6 million (60% of total net sales), while the upholstery fabrics segment had net sales of
$131.1 million (40% of total net sales).
During fiscal 2018, 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 the introduction of new designs to keep current
2
with industry trends. At the same time, it allows us to differentiate our products and respond to
shifting demand trends. These efforts helped lead to an overall increase in net sales during fiscal
2018, even in the face of challenging industry conditions, with both business segments
experiencing higher revenues for the year.
In addition to internal strategic actions, both business segments have made acquisitions to
expand our product offering and enhance our ability to reach new customers and markets. The
upholstery segment acquired Read Window Products, a window treatments company late in
fiscal 2018, providing expanded capacity and additional capabilities for our growing hospitality
business. Since the end of the fiscal year, our mattress fabrics division announced a definitive
agreement to acquire a majority interest in eLuxury, an e-commerce company offering bedding
accessories and home products direct to consumers. These acquisitions represent a continuation
of our efforts to diversify our product offerings and expand the markets into which we sell those
products, as industry demand from our traditional markets has been inconsistent during the past
several years.
We have continued to experience positive responses from customers to our innovative designs
and new products introduced during these years. An increasing percentage of our sales are now
based on new product introductions. In 2018 the mattress fabrics segment launched Comfort
Supply Company by Culp, a new marketing effort focusing on direct sales to retailers and
providing products to the bedding accessories market. The upholstery fabrics segment has
experienced strong demand for its new LiveSmart brand of performance fabrics.
In fiscal 2018, the mattress fabrics segment completed a number of strategic investments in
capital projects and expansion initiatives that have been underway for several years.
Investments have been targeted at expanding capacity, continuing improvements in service
capabilities, maintaining a flexible approach to fabric sourcing, and dealing with challenging
industry conditions. These expenditures included expansion projects to provide increased
manufacturing capacity and more efficient equipment for this segment, following earlier
successful acquisitions. The mattress fabrics segment significantly enhanced its efficiency and
its distribution capabilities in both the U.S. and Canada during early fiscal 2018. This segment
has also continued to expand its design capabilities with additional personnel, product software,
and a new system for cataloguing designs to enhance innovation. Finally, the addition of
eLuxury in fiscal 2019 is expected to expand the addressable market and add an important new
sales channel for the mattress fabrics business.
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. This strategic focus helped lead to a 10% sales
increase for upholstery fabrics in fiscal 2018, reversing a multi-year trend of sales declines.
The acquisition of Read Window Products is another step in expanding our products and
enhancing our capabilities, building upon an emphasis over the past several years to grow sales
in the hospitality market. Our new line of performance fabrics has continued to perform very
well, adding to our growth in upholstery fabric sales.
Additional information about trends and developments in each of our business segments is
provided in the “Segments” discussion below.
3
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.
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 2018
192.6
122.6
8.5
131.1
323.7
(60%)
(38%)
(2%)
(40%)
(100%)
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%)
Additional financial information about our operating segments can be found in Note 18 to the
Consolidated Financial Statements included in Item 8 of this report.
Mattress Fabrics. The mattress fabrics segment, 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. The division also has a joint venture mattress cover
facility in Haiti. The Stokesdale plant and the St. Jerome plant manufacture and finish knitted
and jacquard (damask) fabric. Both of these facilities now offer finished goods distribution
capabilities, with a new distribution facility in Canada added during fiscal 2017. The
Stokesdale plant continues to house the division offices.
Culp Home Fashions had capital expenditures totaling $74 million during the past ten years
with especially high spending levels during the past four 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 to maintain our
leading edge technology through modernization and expansion projects. These capital
4
expenditures also provided high technology finishing equipment for woven and knitted fabric
and a much improved U.S. platform for warehousing and distribution, along with the new
distribution facility in Canada noted above.
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.
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 greater flexibility in meeting demand for mattress covers from
bedding producers. In fiscal 2017, in response to continued growth in mattress cover demand,
we entered into a joint venture with A Lava to construct a second location for CLASS in Haiti,
and that facility began production of mattress covers during the second quarter of 2018.
As noted above, fiscal 2018 marked the completion of several multi-year capital projects for the
mattress fabrics business, including consolidating certain operations, expanding capacity,
improving efficiency and customer service, and maintaining our flexible approach to fabric
sourcing. The mattress fabrics division also established Comfort Supply Company by Culp
during fiscal 2018, which focuses on sales of mattress pads and protectors, and related
products. This platform provides a new outlet for direct sales to retailers for our bedding
accessory products. In early fiscal 2019, we announced a majority interest investment in
eLuxury, an online retailer of bedding accessories and home goods. The eLuxury investment
represents our first foray into direct-to-consumer sales, adding a new sales channel and an
expanded addressable market for our products. After completing significant projects to become
more cost-effective and efficient in our traditional mattress fabrics business, these latest
initiatives have increased the potential customer base and range of products we can sell
compared to one year earlier.
Upholstery Fabrics. The upholstery fabrics segment markets fabrics for residential and
commercial furniture, including jacquard woven fabrics, velvets, micro denier suedes, woven
dobbies, knitted fabrics, piece-dyed woven products, and polyurethane “leather look” fabrics.
This segment currently operates fabric manufacturing facilities in Anderson, South Carolina;
Knoxville, Tennessee; and Shanghai, China. We market fabrics produced in these three
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 94% 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
5
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 in fiscal 2016 and 2017, mainly as a
result of challenging demand conditions for upholstered furniture, before increasing by 10% in
fiscal 2018. Our higher sales in fiscal 2018 were supported by our efforts to expand the breadth
of this segment’s customer base to include more residential furniture manufacturers, including
customers in international markets, as well as the growing success of our line of performance
fabrics, such as LiveSmart. We believe our success over the longer term 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. In recent years, we have
implemented additional steps to grow net sales, including an emphasis on markets beyond
residential furniture, such as the hospitality market. One result of these efforts was the
acquisition during fiscal 2018 of Read Window Products, a supplier of window treatments and
other products for the hospitality and commercial industries. This acquisition represents a
significant expansion of our production capabilities in the hospitality market, along with the
addition of window treatment installation services.
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, a great 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.
6
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.
Until recently, the U.S. bedding industry has largely remained a North American-based
business, with limited competition from imports. This dynamic has mainly been due to short
lead times demanded by mattress manufacturers and retailers, the customized nature of product
lines, the relatively low direct labor content in mattresses, and strong brand recognition.
Imports of bedding into the U.S. had been increasing gradually in recent years, but this trend
has significantly accelerated over the past year, especially for lower priced bedding. The result
has been a decline in sales for the major U.S. bedding manufacturers, which has affected major
suppliers, including Culp, to those manufacturers.
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 fiscal years 2008 and 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.
7
Products
As described above, our products include mattress fabrics and upholstery fabrics, which are our
identified operating segments. These fabrics are sold in roll form and as sewn mattress covers
by the mattress fabrics segment, and in roll form and as cut and sewn kits by the upholstery
fabrics segment.
Mattress Fabrics Segment
Mattress fabrics segment sales constituted 60% 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 40% 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
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.
8
Velvets
Suedes
Faux leathers
Cut and sewn kits
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.
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 four manufacturing plants, with two located in North
Carolina, one in St. Jerome, Quebec, Canada and a joint venture facility in Haiti. Over the past
ten fiscal years, we made capital expenditures of approximately $74 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 Stokesdale facility and
our St. Jerome plant. The majority of finishing and inspection processes for mattress fabrics are
conducted at the Stokesdale plant, with the St. Jerome plant providing additional capacity for
knit finishing and inspection, along with distribution capabilities. 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 has been further expanded through a joint venture mattress cover facility in
Haiti, which began production during the second quarter of fiscal 2018. In early fiscal 2019, we
added an e-commerce manufacturing facility and distribution location in connection with our
acquisition of eLuxury.
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 sewn mattress covers using our Culp
China platform.
9
Upholstery Fabrics Segment
The upholstery fabrics division currently operates two manufacturing facilities in the U.S. and
three in China. One of the U.S. plants is our recently acquired window treatments production
facility in Knoxville, Tennessee. The other U.S. plant is located in Anderson, South Carolina,
and mainly produces velvet upholstery fabrics with some production of certain decorative
fabrics. The company announced in early fiscal 2019 that the Anderson plant would be phased
out and closed during the first half of the current fiscal year.
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 micro denier suedes and
polyurethane fabrics) that are not produced anywhere within the U.S. We have found
opportunities to develop significant relationships with key overseas suppliers in China that
allow us to source products on a cost-effective basis, while limiting our investment of capital in
manufacturing assets. We source unfinished and finished fabrics, as well as a portion of our cut
and sewn kits, from a limited number of strategic suppliers in China who are willing to commit
significant capacity to meet our needs while working with our product development team to
meet 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. We invest
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 implementing 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
10
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 introductions to 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 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.”
11
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), 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 and continuing into fiscal
2018, our profitability was aided by lower raw material prices due to lower oil prices, among
other factors. Later in fiscal 2018, we began to experience higher raw material prices.
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 today is less seasonal than it once was. In the past, seasonality
resulted from one-week closings of our manufacturing facilities and the facilities of most of our
customers in the United States during our first and third fiscal quarters for the holiday weeks of
July 4th and Christmas. This effect has become much 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, to a larger extent, 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, often causing sales to be higher in advance of these holiday
periods and sometimes lower during or immediately following the same periods.
12
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. In addition, our bedding
customers are facing increasing competition from imports of finished beds, which indirectly
compete with our mattress fabrics by replacing potential sales of our fabrics to those customers.
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. It is uncertain if, when, and in what form, a mandatory carbon
13
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 29, 2018, we had 1,392 employees, compared to 1,325 at April 30, 2017. Overall, our total
number of employees has increased steadily over the past five years primarily due to the growth in our
mattress fabrics segment. The increase in the number of employees in our upholstery fabrics segment can
be attributed to the acquisition of Read Window Products, LLC.
The hourly employees at our manufacturing facility in Canada (approximately 12% 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
2018
847
188
-
353
541
4
1,392
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
2016
682
Fiscal
2017
793
Fiscal
2015
631
148
-
380
528
4
1,325
134
-
397
531
4
1,217
129
-
424
553
4
1,188
Fiscal
2014
592
129
4
438
571
4
1,167
Major customers for our mattress fabrics include the leading bedding manufacturers: Serta-
Simmons Bedding (SSB), Tempur + Sealy International (TSI), and Corsicana Bedding. Our
largest customer in the mattress fabrics segment is Serta Simmons Holdings, LLC, accounting
for approximately 25% of the company’s overall sales in fiscal 2018. Our mattress fabrics
customers also include many small and medium-size bedding manufacturers.
14
Upholstery Fabrics Segment
Our major customers for upholstery fabrics are leading manufacturers of upholstered furniture,
including Ashley, Flexsteel, Franklin Fusion, Jonathan Louis, and La-Z-Boy (La-Z-Boy
Residential and England). Major customers for the company’s fabrics for commercial furniture
include Irwin Seating and HON Industries. Our largest customer in the upholstery fabrics segment is
La-Z-Boy Incorporated, which accounted for 12% of the company’s consolidated sales in fiscal 2018.
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 2018
Fiscal 2017
Fiscal 2016
$249,529
77.0%
$241,236 77.9%
$244,930 78.3%
$ 27,844
8.6%
$29,995
9.7%
$ 31,667 10.1%
40,671
5,681
12.6%
1.8%
34,695
3,618
11.2%
1.2%
31,927 10.2%
1.4%
4,336
$ 74,196
23.0%
$68,308
22.1%
$ 67,930 21.7%
$323,725 100%
$309,544
100%
$312,860
100%
United States
North America
(Excluding
USA)(1)
Far East and
Asia(2)
All other areas
Subtotal
(International)
Total
(1) Of this amount, $21.9 million, $22.3 million, and $24.2 million are attributable to shipments to Mexico
in fiscal 2018, 2017, and 2016, respectively.
(2) Of this amount, $32.6 million, $26.6 million, and $23.1 million are attributable to shipments to China
in fiscal 2018, 2017, and 2016, 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 18 in
the consolidated financial statements.
Backlog
Mattress Fabrics Segment
The backlog for mattress fabric is not a reliable predictor of future shipments because the majority of
sales are on a just-in-time basis.
15
Upholstery Fabrics Segment
Although it is difficult to predict the amount of backlog that is “firm,” we have reported the portion of the
upholstery fabric backlog from customers with confirmed shipping dates within five weeks of the end of
the fiscal year. On April 29, 2018, the portion of the upholstery fabric backlog with confirmed shipping
dates prior to June 4, 2018 was $9.4 million, all of which are expected to be filled during the first quarter
of fiscal 2019, compared with $9.2 million as of the end of fiscal 2017 (for confirmed shipping dates prior
to June 5, 2017).
16
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, especially 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, tariffs, 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.
17
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 five 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 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,
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, we recently
announced the closure of our Anderson, SC upholstery fabrics facility during the first quarter
fiscal 2019. Currently, management estimates that the fair market value of our property, plant,
and equipment exceeds its carrying value by approximately $400,000, and for this reason, no
charge for impairment is expected to be recorded in connection with this decision. However, we
18
are currently working with our customers to fulfill any outstanding or future orders, and through
this process, we will be able to determine a good faith estimate of any inventory write-downs.
Our goodwill has increased during fiscal 2018 in connection with our acquisition of Read
Window Products, LLC and is expected to increase further due our recent acquisition of eLuxury
in the first quarter of fiscal 2019.
There is no assurance that future write-downs of fixed assets, goodwill, or other intangible assets
will not occur if business conditions were to 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 can significantly increase our costs and negatively affect
earnings. Late in fiscal 2018, we began to experience higher raw material prices and resulting
impacts on our profits. A continuation of this trend would result in continuing downward
pressure on our profit margins and earnings.
Increases in energy costs would increase our operating costs and could adversely affect
earnings.
Higher prices for electricity, natural gas, and fuel increase our production and shipping costs. A
significant shortage, increased prices, or interruptions in the availability of these energy sources
would increase the costs of producing and delivering products to our customers, and would be
likely to adversely affect our earnings. In many cases, we are not able to pass along the full
extent of increases in our production costs to customers through price increases. 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 25% of consolidated net sales in fiscal 2018. In the upholstery
fabrics segment, La-Z-Boy Incorporated accounted for approximately 12% of consolidated net
sales during fiscal 2018, 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
19
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 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.
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. In fiscal 2018, we launched a
new platform for direct sales to retailers of bedding accessory products, and in fiscal 2019 we
acquired a majority interest in an e-commerce retailer of bedding accessories and other home
goods. Greater dependence on technology systems and e-commerce 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, including
internet selling, 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, infrastructure, or result in data leakage in-house or
at our third-party providers and business partners. Failures of technology or related systems, or
20
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, tariffs, 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.
21
ITEM 2. PROPERTIES
Our corporate headquarters are located in High Point, North Carolina. As of the end of fiscal 2018 (April
29, 2018), we leased our corporate headquarters and owned or leased sixteen 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
Mattress Fabrics:
Stokesdale, North Carolina
Stokesdale, North Carolina
High Point, North Carolina
High Point, North Carolina
St. Jerome, Quebec, Canada
Ouanaminthe, Haiti (3)
Upholstery Fabrics:
Anderson, South Carolina
Burlington, North Carolina
Burlington, North Carolina
Knoxville, Tennessee
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Approx.
Total Area
(Sq. Ft.)
Expiration
of Lease (1)
29,812
2025
299,163
Owned
220,222
63,522
65,886
202,500
80,000
Owned
(2)
2020
Owned
2025
Upholstery fabric division
offices and corporate
headquarters
Manufacturing and
headquarters office
Distribution center
Manufacturing
Warehouse and offices
Manufacturing
Manufacturing
99,000
132,000
15,000
36,700
Owned
Manufacturing
2019
Finished goods distribution
2021
Design center
Manufacturing and offices
2033
Manufacturing and offices 27,900 2019
2021
Manufacturing and offices
2020
Manufacturing and offices
2021
Manufacturing and warehousing
2020
Warehouse and offices
2021
Warehouse
68,677
89,857
89,861
64,583
48,610
____________________________________________________
(1) Includes all options to renew.
(2) This lease agreement is currently on a month to month basis.
(3) This leased facility pertains to our 50% owned joint venture associated with Class International Holdings, Ltd
(See note 7 in the notes to the consolidated financial statements for further details).
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.
22
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 commenced trading on the
NYSE under the symbol CULP. As of April 29, 2018, Culp, Inc. had approximately 4,532 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 – Simon R. Shoucair
Stifel Financial Corp - John A. Baugh, CFA
Stonegate Capital Partners, Inc. – Marco Rodriguez, CFA
23
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 29, 2018 to
March 4, 2018
March 5, 2018
April 1, 2018
to
-
$ -
-
$5,000,000
April 2, 2018 to April
29, 2018
-
$ -
-
$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, 2018, we announced that our board of directors approved a regular quarterly cash dividend
payment of $0.09 per share. These dividend payments are payable on July 16, 2018, to shareholders of
record as of July 2, 2018.
During fiscal 2018, dividend payments totaled $6.8 million, of which $2.6 million represented a special
cash dividend payment of $0.21 per share, and $4.2 million represented our regular quarterly cash
dividend payments ranging from $0.08 to $0.09 per share.
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.
Sales of Unregistered Securities
There were no sales of unregistered securities during fiscal 2018, 2017, or 2016.
Performance Comparison
The following graph shows changes over the five fiscal years ending April 29, 2018 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 four companies (including the company) in the textile
industry, and (3) the Standard & Poor’s 500 Index.
24
The graph assumes an initial investment of $100 at the end of fiscal 2013 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.
25
ITEM 6. SELECTED FINANCIAL DATA
(amounts in thousands, except per share, ratios & other, stock data)
INCOME STATEMENT DATA
net sales
cost of sales
gross profit
selling, general, and administrative expenses
income from operations
interest expense
interest income
other expense
income before income taxes
income taxes
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
2018
fiscal
2017
fiscal
2016
fiscal
2015
fiscal
2014
percent
change
2018/2017
4.6%
7.8%
-6.6%
-5.1%
-8.7%
100.0%
78.6%
49.5%
-9.5%
-21.8%
1056.5%
-6.5%
8.3%
1.0%
0.9%
-7.2%
-7.3%
7.8%
9.1%
22.2%
0.3%
6.0%
-60.4%
9.0%
0.0%
9.9%
16.6%
$
$
$
$
$
$
$
$
323,725
259,092
64,633
37,172
27,461
94
(534)
1,018
26,883
5,740
266
20,877
7,672
12,431
12,633
1.68
1.65
0.55
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
13.12
12.03
10.50
49,939
51,794
217,984
7,439
6,843
-
163,376
114,817
20.0%
8.5%
6.4%
21.4%
0.0%
7.1
29
4.9
34.05
26.15
30.10
21
16
22.1
40,869
51,651
45,794
39,973
205,634
175,142
18,771
6,280
-
148,630
98,429
10,708
8,140
-
128,812
90,357
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
20.8%
9.1%
5.4%
39.3%
0.0%
7.0
27
5.6
35.23
22.72
26.24
26
17
67.3
310,166
254,599
55,567
32,778
22,789
64
(622)
391
22,956
7,885
-
15,071
5,773
12,217
12,422
1.23
1.21
0.62
9.77
41,829
36,078
171,300
11,174
7,579
2,200
119,427
83,225
17.9%
7.3%
4.9%
34.3%
2.6%
7.7
34
6.1
29.19
16.60
26.02
24
14
38.6
287,162
238,256
48,906
28,657
20,249
427
(482)
1,261
19,043
1,596
-
17,447
5,312
12,177
12,414
1.43
1.41
0.18
9.12
41,120
31,376
160,935
5,310
2,204
4,986
111,744
80,038
17.0%
7.1%
6.1%
8.4%
6.2%
7.0
35
6.0
21.10
14.93
18.61
15
11
27.5
(3) Capital employed does not include cash and cash equivalents, short-term investments (available for sale), short-term investments (held-to-maturity),
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,
account payable - capital expenditures, and deferred revenue.
26
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 2018, 2017,
and 2016 each included 52 weeks. Our operations are classified into two business segments: mattress
fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources and primarily sells
fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment sources,
manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers and with
the recent acquisition of Read Window Products we now provide window treatment products and
installation services.
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.
Executive Summary
Results of Operations
(dollars in thousands)
April 29,2018
April 30, 2017
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
323,725
64,633
20.0%
37,172
27,461
8.5%
26,883
5,740
20,877
$
309,544
69,235
22.4%
39,157
30,078
9.7%
29,696
7,339
22,334
Change
4.6%
(6.6)%
(240)bp
(5.1)%
(8.7)%
(120)bp
(9.5)%
(21.8)%
(6.5)%
Overall, our net sales increased in fiscal 2018 compared with a year ago, with mattress fabric net sales
increasing slightly by 1% and upholstery fabric net sales increasing 10%. These results reflect our
strategic focus on product innovation and creativity and ability to provide a diverse product mix that
meets the changing demands of our customers in both business segments.
27
Income Before Income Taxes
Despite the increase in net sales noted above, income before income taxes decreased 9.5% compared to
the same period a year ago. This decrease was primarily due to higher operating costs associated with our
upholstery fabric operations located in China resulting from unfavorable foreign currency exchange rates
that mostly occurred in the second half of fiscal 2018, a decline in profitability in our U.S. upholstery
fabric operation located in Anderson, South Carolina, resulting from changing consumer style preferences
and reduced customer demand, and disruptions from the consolidation of our U.S. mattress fabric
production facilities that occurred during the first half of fiscal 2018. Profits were also affected by lower
demand from bedding customers late in fiscal 2018 due to a significant increase in lower priced imported
mattresses.
Income Taxes
We recorded income tax expense of $5.7 million, or 21.4% of income before income tax expense, in
fiscal 2018 compared with income tax expense of $7.3 million, or 24.7% of income before income tax
expense, in fiscal 2017. Our income tax expense of $5.7 million in fiscal 2018 includes an income tax
benefit totaling $2.1 million associated with the 2017 Tax Cuts and Jobs Act, which represents an income
tax benefit of $4.3 million that pertains to the one-time mandatory repatriation tax, partially offset by a
$2.2 million income tax charge for the re-measurement of our U.S. deferred income taxes resulting from
the reduction in the U.S. federal corporate income tax rate. Our income tax expense of $7.3 million in
fiscal 2017 included an income tax benefit totaling $3.4 million pertaining to the reversal of an uncertain
income tax position associated with a foreign jurisdiction in which the statute of limitations expired.
See the Segment Analysis section located in the Results of Operations for further details.
Liquidity
At April 29, 2018, our cash and cash equivalents, short-term investments (available for sale), and short-
term and long-term investments (held-to-maturity) totaled $54.5 million compared with $54.2 million at
April 30, 2017. The slight increase from the end of fiscal 2017 was primarily due to net cash provided by
operating activities of $27.5 million, mostly offset by $11.8 million in capital expenditures (of which $3.8
million was vendor financed) that were mostly associated with our mattress fabric segment, $4.5 million
used for the acquisition of Read Window Products, LLC, and $661,000 for our investment in a joint
venture located in Haiti, $6.8 million to our shareholders in the form of regular quarterly and special
dividend payments, $1.9 million in contributions to our Rabbi Trust that funds our deferred compensation
plan, and $1.5 million in employee withholding tax payments associated with the vesting of certain stock-
based compensation awards.
Our net cash provided by operating activities of $27.5 million in fiscal 2018 decreased $6.6 million
compared with $34.1 million in fiscal 2017. The decrease is primarily due to decreased income from
operations noted above.
At April 29, 2018, we did not have any borrowings outstanding under our revolving credit agreements.
Dividend Program
On June 13, 2018, we announced that our board of directors approved a regular quarterly cash dividend
payment of $0.09 per share. These dividend payments are payable on July 16, 2018, to shareholders of
record as of July 2, 2018.
28
During fiscal 2018, dividend payments totaled $6.8 million, of which $2.6 million represented a special
cash dividend payment of $0.21 per share, and $4.2 million represented our regular quarterly cash
dividend payments ranging from $0.08 to $0.09 per share.
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
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 2018 and 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.
At April 29, 2018, 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
2017
100.0%
77.6
22.4
12.7
9.7
0.1
(0.2)
9.6
24.7
0.0
7.2%
2018
100.0%
80.0
20.0
11.5
8.5
0.1
(0.3)
8.3
21.4
0.1
6.4%
Fiscal
2016
100.0%
79.2
20.8
11.7
9.1
0.0
(0.2)
8.9
39.3
0.0
5.4%
29
2018 compared with 2017
Segment Analysis
Mattress Fabrics Segment
(dollars in thousands)
April 29,2018
April 30, 2017
Change
Twelve Months Ended
Net sales
Gross profit
Gross profit margin
SG&A expenses
Income from operations
Operating margin
Net Sales
$
$
192,597
38,797
20.1%
12,935
25,861
13.4%
190,805
43,065
22.6%
13,685
29,380
15.4%
0.9%
(9.9)%
(250)bp
(5.5)%
(12.0)%
(200)bp
Although overall mattress fabrics sales increased slightly in fiscal 2018 compared to the prior year, our
sales decreased 4.7% during the fourth quarter of fiscal 2018 compared to the fourth quarter of fiscal
2017. Our mattress fabrics net sales reflected more challenging market conditions with soft demand
trends across the bedding industry and the impact of lower priced imported mattresses that occurred
during the fourth quarter.
Our strategic focus on product innovation and creativity allows us to provide a diverse product mix that
meets the changing demands of our customers across most price points. Importantly, our net sales for
fiscal 2018 reflected continued growth in our mattress cover business known as CLASS. The growth in
CLASS has allowed us to develop new products with existing customers and reach new customers and
additional market segments, particularly the boxed bedding space.
Currently, we expect the soft demand trends and the impact of lower-priced imported mattresses to
continue into our first half of fiscal 2019.
Gross Profit and Operating Income
Overall
The decrease in mattress fabrics profitability primarily reflects higher operating costs that were incurred
in the first half of fiscal 2018 and were associated with production disruptions during a transition period
of substantial capital investment and supply chain enhancements designed to improve our operations and
product delivery performance.
Below is a summary of our significant capital projects and improvements that were ongoing in fiscal 2017
and were completed as of the second quarter of fiscal 2018:
Our building expansion projects in North Carolina, including a new distribution center and
knitted fabric plant consolidation, were completed during the first quarter of fiscal 2018.
30
All of our knitting and other fabric forming equipment was relocated into our expanded facility
located in North Carolina and placed into service as of the end of our second quarter of fiscal
2018.
We completed the relocation of our CLASS production platform to an existing facility in High
Point, North Carolina, as of the end of our second quarter of fiscal 2018. We believe this
relocation will provide a more efficient and streamlined production flow and access to a larger
labor pool. Additionally, this facility includes expanded showroom and production development
space.
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.
With these operational improvements behind us, we are now focused on further refinement of our overall
inspection and quality processes to support our continuous improvement initiatives. We expect to realize
greater operating efficiencies from these changes going forward.
Business Combination - eLuxury, LLC
Effective June 22, 2018, after the end of the fiscal year, we acquired a majority interest in eLuxury, an
internet company offering bedding accessories and home goods directly to consumers. The company’s
primary products include a line of mattress pads manufactured at eLuxury’s facility in Evansville,
Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, and other bedding items. Their
products are available on eLuxury’s own branded website, eLuxury.com, Amazon and other leading
online retailers for specialty home goods.
We believe this acquisition will provide a new sales channel for the bedding accessory category and will
expand our opportunity to participate in the rapidly growing e-commerce direct-to-consumer space. This
business combination brings together eLuxury’s experience in e-commerce, online brand building, and
direct-to-consumer shopping and fulfillment expertise with our global production, sourcing and
distribution capabilities. We also have an opportunity to market our new line of bedding accessories,
marketed under the brand name, ‘Comfort Supply Company by Culp’, as well as other finished products
that we may develop, including items made from upholstery fabrics, through this e-commerce platform.
The estimated purchase price for this acquisition is $12.5 million, of which $11.6 million was paid at
closing, with the remaining $874,000 amount to be paid based on holdback provisions defined in the
purchase agreement. The agreement contains a contingent consideration arrangement that requires us to
pay the seller based on adjusted EBITDA to be determined over a three-year period in relation to a pre-
established adjusted EBITDA target. We are currently performing our preliminary valuation of the
allocation of the purchase price among the assets and equity interest acquired and liabilities assumed.
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 produces cut and sewn mattress covers, and its operations are
located in a modern industrial park on the northeast border of Haiti, which borders the Dominican
Republic. CLIH commenced production in the second quarter of fiscal 2018 and complements our
mattress fabric operations with a mirrored platform that enhances our ability to meet customer demand
while adding a lower cost operation to our platform (see note 7 located in the notes to the consolidated
financial statements for further details).
31
Segment Assets
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 29,2018
43,935
$
April 30, 2017
47,038
$
% Change
(6.6)%
48,797
11,462
1,501
753
613
48,916
11,462
1,106
828
664
(0.2)%
0.0%
35.7%
(9.1)%
(7.7)%
Accounts Receivable & Inventory
As of April 29, 2018, accounts receivable and inventory decreased $3.1 million or 6.6%, compared with
April 30, 2017. This decrease is primarily due to the decrease in sales volume during the fourth quarter of
fiscal 2018 compared with the fourth quarter of fiscal 2017 noted above.
Property, Plant & Equipment
The $48.8 million at April 29, 2018, represents property, plant and equipment of $35.4 million and $13.4
million located in the U.S. and Canada, respectively. 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.
As of April 29, 2018, property, plant, and equipment was flat compared with April 30, 2017. The mattress
fabric segment incurred depreciation expense of $6.8 million and had capital spending of $6.7 million in
fiscal 2018.
Investment in Unconsolidated Joint Venture
Our investment in unconsolidated joint venture represents our fifty percent ownership of CLIH noted
above.
Non-Compete Agreement and Customer Relationships
The decreases in carrying values of our non-compete agreement and customer relationships at April 29,
2018, compared with April 30, 2017, are primarily due to amortization expense in fiscal 2018.
32
Upholstery Fabrics Segment
Net Sales
(dollars in thousands)
April 29, 2018
April 30, 2017
Twelve Months Ended
Non-U.S. Produced
U.S Produced
Total
$
$
122,635
8,493
131,128
94%
6%
100%
$
$
109,012
9,727
118,739
92%
8%
100%
% Change
12.5%
(12.6)%
10.4%
The increase in upholstery fabric net sales reflects our product-driven strategy with a sustained focus on
innovation and creative designs, supported by our manufacturing platform located in China. Our ability to
provide a diverse product offering has allowed us to reach new market segments. Our results reflect the
success of this strategy, highlighted by expanded sales of LiveSmart®, our popular “performance” line of
highly durable stain-resistant fabric. We have recently launched a new website specifically to promote
this innovative product line, along with a more aggressive marketing campaign.
Also, we achieved continued sales growth in fabrics designed for the hospitality market. In order to take
advantage of the growth opportunities in the hospitality market, we completed the acquisition of Read
Window Products, LLC during the fourth quarter of fiscal 2018 (see below for further details).
Gross Profit and Operating Income
(dollars in thousands)
April 29,2018
April 30, 2017
Change
Twelve Months Ended
Gross profit
$
Gross profit margin
SG&A expenses
Income from operations
Operating margin
25,836
19.7%
14,881
10,956
8.4%
$
26,170
22.0%
15,079
11,091
9.3%
(1.3)%
(230)bp
(1.3)%
(1.2)%
(90)bp
Despite the increase in net sales noted above, our profitability in upholstery fabrics decreased in fiscal
2018 compared with the same period a year ago. The decrease in profitability was primarily due to higher
operating costs associated with our operations located in China resulting from unfavorable foreign
exchange rates experienced in the second half of fiscal 2018, and a decline in profitability associated with
our U.S. upholstery fabric operation located in Anderson, South Carolina, resulting from changing
consumer style preferences and reduced customer demand for products made in this facility. (see below
for further details regarding closure of our Anderson, South Carolina plant facility).
Business Combination - Read Window Products, LLC
Effective April 1, 2018, we entered into an Asset Purchase Agreement (Agreement) to acquire certain
assets and assume certain liabilities of Read Window Products, Inc. (Read), a source of custom window
treatments for the hospitality and commercial industries. Based in Knoxville, Tennessee, Read is a turn-
key provider of window treatments offering measuring, sourcing, fabrication and installation services.
33
Read’s custom product line includes motorization, shades, drapery, upholstered headboards and shower
curtains. In addition, Read supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed
skirts, bolsters and pillows, for leading hospitality brands worldwide. The addition of window treatments
and other soft goods to our product line will allow us to be a more complete source of fabrics for the
hospitality market, in which we believe there are significant growth opportunities.
The purchase price for the net assets acquired was $5.7 million, of which $4.5 million was paid at closing
on April 1, 2018, $375,000 was paid in May 2018, and $763,000 is to be paid in June in 2019, subject to
certain conditions as defined in the Agreement.
The Agreement contains a contingent consideration arrangement that requires us to pay the former
shareholder of Read based on adjusted EBITDA as defined in the agreement for calendar year 2018 in
excess of fifty percent of a pre-established adjusted EBITDA target. Based on historical and projected
financial results in relation to the pre-established adjusted EBITDA target, we currently believe a
contingent payment will not be made, and therefore, no contingent liability has been recorded.
The following table presents the final allocation of the acquisition cost to the assets acquired and
liabilities assumed based on their fair values.
dollars in thousands)
Customer relationships (Note 8)
Goodwill (Note 6)
Inventory
Accounts receivable
Tradename (Note 8)
Property, plant & equipment
Other assets
Deferred revenue
Accounts payable
Accrued expenses
$
Fair Value
2,247
2,107
1,128
897
683
379
35
(903)
(719)
(174)
5,680
$
We recorded customer relationships at fair market value based on a multi-period excess earnings
valuation model. These customer relationships will be amortized on a straight-line basis over their nine-
year useful life. We recorded the tradename at fair market based on the relief from royalty method. This
tradename was determined to have an indefinite useful life and, therefore, is not being amortized.
Equipment will be depreciated on a straight-line basis over useful lives ranging from three to ten years.
Goodwill is deductible for income tax purposes over the statutory period of fifteen years.
Acquisition costs totaling $339,000 were included in selling, general, and administrative expenses in our
fiscal 2018 Consolidated Statement of Net Income.
34
The following unaudited pro forma consolidated results of operations for the years ending April 29, 2018
and April 30, 2017 have been prepared as if the acquisition of Read had occurred at May 2, 2016.
(dollars in thousands, except per share data)
Net Sales
Income from operations
Net income
Net income per share, basic
Net income per share, diluted
Years ended
April 29, 2018
$ 334,953
26,799
20,455
1.65
1.62
April 30, 2017
$ 321,398
30,441
22,552
1.83
1.80
The unaudited pro forma information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved had the acquisition been
consummated as of that time, nor is it intended to be a projection of future results.
Actual revenue and net income for the month of April 2018 were included in our Consolidated Statement
of Net Income and totaled $880,000 and $5,000, respectively.
Exit and Disposal Activity
On June 12, 2018, our board of directors decided to close our upholstery fabrics manufacturing facility in
Anderson, South Carolina. This closure is due to a continued decline in demand for the products
manufactured at this facility, reflecting a change in consumer style preferences. We expect to close the
facility by October 30, 2018. This action is expected to result in estimated cash charges of approximately
$450,000 for employee termination costs, and an undetermined non-cash charge associated with write-
downs of inventory. During this transition period, we will be working with our customers to fulfill any
outstanding and future orders, and through this process we will be able to determine a good faith estimate
of any write-downs of inventory. Currently, management estimates that the fair market value of the long-
lived assets at this facility exceeds their carrying amount of approximately $400,000, and for this reason
no charge for impairment of long-lived assets is expected to be recorded in connection with this decision.
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and goodwill,
customer relationships, and tradename in connection with the acquisition of Read.
(dollars in thousands)
April 29,2018
April 30, 2017
Accounts receivable
and inventory
Customer relationships
Goodwill
Tradename
Property, plant & equipment
$
35,826
$
29,021
2,226
2,107
683
2,445
-
-
-
1,879
% Change
23.4%
100.0%
100.0%
100.0%
30.1%
35
Accounts Receivable & Inventory
As of April 29, 2018, accounts receivable and inventory increased $6.8 million, or 23%, or compared
with April 30, 2017. This increase is primarily due to the increased sales volume during the fourth quarter
of fiscal 2018 compared with the fourth quarter of fiscal 2017 and accounts receivable and inventory
totaling $2.0 million that was acquired from Read as noted above.
Property, Plant & Equipment
The $2.4 million at April 29, 2018, represents property, plant, and equipment located in the U.S. of $1.8
million and located in China of $661,000. 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.
Customer Relationships, Goodwill, and Tradenname
Our customer relationships, goodwill, and tradename intangible assets were acquired in connection with
the acquisition of Read as noted above.
Other Income Statement Categories
(dollars in thousands)
April 29,2018
April 30, 2017
% Change
Twelve Months Ended
SG&A expenses
Interest expense
Interest income
Other expense
$
$
37,172
94
534
1,018
39,157
-
299
681
(5.1)%
100.0%
78.6%
49.5%
Selling, General and Administrative Expenses
SG&A expenses for fiscal 2018 compared with the fiscal 2017 included lower incentive compensation
expense reflecting weaker financial results in relation to pre-established financial targets, partially offset
by the following items that increased SG&A expenses:
Non-recurring charges associated with the consolidation of our mattress production facilities that
were primarily incurred during the first half of fiscal 2018.
Non-recurring legal and other professional fees incurred that relate to acquisition activity.
Interest Expense
Interest costs incurred were $194,000 during fiscal 2018 compared with $158,000 for the same period a
year ago. Our interest costs during fiscal 2018 and 2017 pertain to borrowings associated with our U.S.
revolving line of credit and with the construction of a new building associated with our mattress fabrics
segment (Refer to Notes 11 and 12 located in the notes to the consolidated financial statements for further
details).
The interest costs incurred during fiscal 2018 were partially offset by interest costs totaling $100,000 for
the construction of qualifying fixed assets that were capitalized through the second quarter. Interest costs
incurred during fiscal 2017 were fully offset by interest costs for the construction of qualifying fixed
assets that were capitalized. Interest costs that have been capitalized will be amortized over the related
assets’ useful lives.
36
Interest Income
Interest income increased during fiscal 2018 compared with the same period a year ago. The increase in
interest income 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 that primarily
ranged 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.
Other Expense
Other expense increased during fiscal 2018 compared with the same period a year ago. This increase was
mostly due to unfavorable foreign currency exchange rates associated with our operations located in
China.
Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $5.7 million, or 21.4% of income before income tax expense, in
fiscal 2018 compared with income tax expense of $7.3 million, or 24.7% of income before income tax
expense, in fiscal 2017. 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 the 2017 Tax Cuts and Jobs Act
tax effects of Chinese foreign exchange (losses) gains
reversal of foreign uncertain income tax position
tax effects of stock-based compensation
undistributed earnings from foreign subsidiaries
other
2018
30.4%
(7.6)
(2.8)
-
(1.8)
3.7
(0.5)
21.4%
2017 Tax Cuts and Jobs Act
2017
34.0%
-
1.6
(11.6)
-
-
0.7
24.7%
On December 22, 2017 (the “Enactment Date”), the Tax Cuts and Jobs Act (H.R.1) (the “Tax Act”) was
signed into law. The Tax Act contains significant changes to corporate taxation, including (i) the
reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing certain business
assets, (iii) a one-time mandatory repatriation tax (the “Transition Tax”) related to the transition of U.S.
international tax from a worldwide tax system to a territorial tax system, (iv) limitations on the use of
foreign tax credits to reduce the U.S. income tax liability, (v) the repeal of the domestic production
activities deduction, (vi) additional limitations on the deductibility of interest expense and executive
compensation, and (vii) the creation of new minimum taxes such as the base erosion anti-abuse tax and
Global Intangible Low Taxed Income tax.
The corporate income tax rate reduction is effective as of January 1, 2018. Since we have a fiscal year
rather than a calendar year, we are subject to IRS rules relating to transitional income tax rates. As a
result, our fiscal 2018 federal statutory rate is a blended income tax rate of 30.4%. For fiscal 2019 and
beyond, we will utilize the enacted U.S. federal corporate income tax rate of 21%.
The key impacts of the Tax Act on our financial statements for fiscal 2018 were the re-measurement of
our U.S. deferred income tax balances to the new U.S. federal corporate income tax rate and the
37
determination of the income tax effects of the Transition Tax on our accumulated earnings and profits
associated with our foreign subsidiaries. While we have not yet completed our assessment of the effects
of the Tax Act, we were able to determine reasonable estimates for the impacts of the key items specified
above, and thus we reported provisional amounts for these items under guidance provided by SEC Staff
Accounting Bulletin No. 118 (“SAB 118”). Our estimates may change and revisions to these estimates
will be recorded during the measurement period allowed by SAB 118, which is not to extend beyond one
year from the Enactment Date.
Refer to Note 10 located in the notes to the consolidated financial statements for disclosures regarding our
assessments and provisional estimates recorded with regard to the Tax Act during fiscal 2018.
Deferred Income Taxes – Valuation Allowance
Summary
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation
allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance
should be established based on the consideration of all available evidence using a “more likely than not”
standard with significant weight being given to evidence that can be objectively verified. Since the
company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-
by-jurisdiction basis, taking into account the effects of local tax law.
Refer to Note 10 located in the notes to the consolidated financial statements for disclosures regarding our
assessments of our recorded valuation allowance as of April 29, 2018 and April 30, 2017, 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 10 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 29, 2018 and April 30, 2017, respectively.
Uncertainty in Income Taxes
At April 29, 2018, we had a $844,000 total gross unrecognized income tax benefit, of which $379,000
and $465,000 were classified as net non-current deferred income taxes and income taxes payable – long-
term, respectively, in the accompanying consolidated balance sheets. Our gross unrecognized income tax
benefit of $844,000 relates to double taxation under applicable income tax treaties with foreign tax
jurisdictions, in which currently, significant change is not expected within the next fiscal year.
United States federal income tax returns filed by us remain subject to examination for income tax years
2017 and subsequent. Canadian federal income tax returns filed by us remain subject to examination for
income tax years 2014 and subsequent. Canadian provincial (Quebec) income tax returns filed by us
remain subject to examination for income tax years 2016 and subsequent. Income tax returns associated
with our operations located in China are subject to examination for income tax year 2013 and subsequent.
38
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. This examination was
completed during the fourth quarter of fiscal 2018 with final adjustments totaling $4,000.
During the fourth quarter of fiscal 2016, the Internal Revenue Service commenced and examination of our
U.S. Federal income tax returns for fiscal years 2014 through 2016. This examination was effectively
settled during the fourth quarter of fiscal 2018 with no adjustment.
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.
Refer to Note 10 located in the notes to the consolidated financial statements for disclosures and
additional information regarding our uncertain income tax positions.
Income Taxes Paid
We reported income tax expense of $5.7 million and $7.3 million in fiscal 2018 and 2017, respectively.
However, our income tax payments totaled $4.0 million and $5.5 million for fiscal 2018 and 2017,
respectively. These income tax payments primarily relate to our subsidiaries located in China and Canada.
As a result of the Tax Act noted above, we do expect to start making income tax payments associated
with the Transition Tax in fiscal 2019. Taxpayers can elect to pay the Transition Tax over a period of
eight years, and we intend to make this election. Additionally, as part of the Tax Act, we expect to elect
out of using U.S. federal net loss operating carryforwards to offset the Transition Tax in order to fully
utilize our foreign tax credits. As a result, we have $7.4 million of U.S. federal net operating loss
carryforwards to apply against fiscal 2019 taxable income. This fact, coupled with the lower U.S.
corporate income tax rate and the immediate expensing of U.S. capital expenditures next year, is currently
expected to result in minimal U.S. cash income taxes paid in fiscal 2019.
39
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
During fiscal 2017, our mattress fabrics segment reported year-over-year improvement in net sales, in
spite of the ongoing issues that surrounded the mattress industry and a soft retail sales environment. Our
focus on design and innovation were a top priority and allowed us to have 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, continued to perform well. The growth in CLASS 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.
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 operating income reflected lower raw material costs and benefits from 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 plant facility
consolidation charges totaling $560,000 in fiscal 2017.
40
Segment Assets
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 increase was due to 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 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, represented 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, represented
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 was due to capital expenditures of $17.6 million that primarily relate to the
construction of a new building (see Note 12 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.
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.
41
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 reflected the soft retail environment for residential furniture that persisted for
most of fiscal 2017 and our strategy to enhance both our customer and product mix to improve our
profitability with a focus on design and innovation.
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 earlier. This trend reflected our strategy to enhance both our
customer and product mix to improve our profitability, and lower operating expenses associated with our
operations located in China resulting from more favorable currency exchange rates.
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.
42
Property, Plant & Equipment
The $1.9 million at April 30, 2017, represented 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, represented 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. This increase was also due to higher inventory warehousing costs, design and sales
expenses, and non-recurring plant facility consolidation charges totaling $560,000 for fiscal 2017 that
were associated with our mattress fabrics segment.
Interest Expense
Interest costs incurred were $158,000 and $58,000 during fiscal 2017 and 2016, respectively. The interest
costs inucrred 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 during 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 that ranged 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.
Other Expense
Other expense for fiscal 2017 was comparable to fiscal 2016.
43
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
reversal of foreign uncertain income tax position
other
2017
34.0%
1.6
2016
34.0%
4.4
(11.6) -
0.7
24.7%
0.9
39.3%
Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents, short-term investments (available
for sale), 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 (available for sale) totaling $23.7 million at April 29, 2018, 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 29, 2018, our cash and cash equivalents, short-term investments (available for sale), and short-
term and long-term investments (held-to-maturity) totaled $54.5 million compared with $54.2 million at
April 30, 2017. The slight increase from the end of fiscal 2017 was primarily due to net cash provided by
operating activities of $27.5 million, mostly offset by $11.8 million in capital expenditures (of which $3.8
million was vendor financed) that were mostly associated with our mattress fabric segment, $4.5 million
used for the acquisition of Read Window Products, LLC, and $661,000 for our investment in a joint
venture located in Haiti, $6.8 million to our shareholders in the form of regular quarterly and special
dividend payments, $1.9 million in contributions to our Rabbi Trust that funds our deferred compensation
plan, and $1.5 million in employee withholding tax payments associated with the vesting of certain stock-
based compensation awards.
Our net cash provided by operating activities of $27.5 million in fiscal 2018 decreased $6.6 million
compared with $34.1 million in fiscal 2017. The decrease in our net cash provided by operating activities
is primarily due to decreased income from operations.
At April 29, 2018, we did 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.
44
By Geographic Area
We currently hold cash and cash equivalents, short-term investments (available for sale), and short-term
and long-term investments (held-to-maturity) in the U.S. and our foreign jurisdictions to support
operational requirements, potential acquisitions, to mitigate our risk related 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 (available for sale), and short-term
and long-term investments (held-to-maturity) by geographic area follows:
(dollars in thousands)
Cayman Islands
United States
China
Canada
April 29,
2018
31,000
10,537
9,221
3,715
54,473
$
$
April 30,
2017
34,965
2,228
12,722
4,268
54,183
$
$
Currently, we are holding a significant amount of our cash and investments with our international holding
company located in the Cayman Islands. Our cash and investments located in this jurisdiction stemmed
from accumulated earnings and profits (totaling $50.4 million as of April 29, 2018) that were distributed
from our subsidiaries located in China. Our cash and investments held in the Cayman Islands are
currently expected to be used for the following business purposes:
Mitigate our risk related to foreign exchange rate fluctuations for assets and liabilities
denominated in Chinese Yuan Renminbi by holding more cash and investments denominated in
U.S. dollars.
Fund any potential acquisitions.
Repatriate earnings and profits generated from our China operations to the U.S. parent for various
strategic purposes. Currently, we have repatriated accumulated earnings and profits residing in
the Cayman Islands totaling $19.9 million as of April 29, 2018.
During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in
investment grade U.S. Corporate bonds with maturities that ranged 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.
Dividend Program
On June 13, 2018, we announced that our board of directors approved a regular quarterly cash dividend
payment of $0.09 per share. These dividend payments are payable on July 16, 2018, to shareholders of
record as of July 2, 2018.
During fiscal 2018, dividend payments totaled $6.8 million, of which $2.6 million represented a special
cash dividend payment of $0.21 per share, and $4.2 million represented our regular quarterly cash
dividend payments ranging from $0.08 to $0.09 per share.
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.
45
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
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 2018 and 2017, there were no repurchases of our common stock.
At April 29, 2018, we had $5.0 million available for additional repurchases of our common stock.
Working Capital
Accounts receivable at April 29, 2018, were $26.3 million, an increase of $1.7 million or 7%, compared
with $24.6 million at April 30, 2017. This increase in our accounts receivable primarily related to our
upholstery fabrics segment and resulted from an increase in net sales in the fourth quarter of fiscal 2018
compared with the fourth quarter of fiscal 2017, as well as accounts receivable totaling $897,000 that
were acquired from Read. Days’ sales in receivable were 30 days and 29 days during the fourth quarters
of fiscal 2018 and 2017, respectively.
Inventories at April 29, 2018 were $53.5 million, an increase of 4%, compared with $51.5 million at April
30, 2017. This increase was primarily due to an increase in the upholstery fabric segment’s inventory of
$4.8 million, resulting from increased sales volume in the fourth quarter of fiscal 2018 compared with the
fourth quarter of fiscal 2017, as well as inventory totaling $1.1 million that was acquired from Read. The
increase in the upholstery fabrics segment’s inventory was partially offset by a decrease in the mattress
fabric segment’s inventory of $2.8 million, resulting from decreased sales volume in the fourth quarter of
fiscal 2018 compared with the fourth quarter of fiscal 2017. Inventory turns were 4.8 and 5.0 during the
fourth quarters of fiscal 2018 and 2017, respectively.
Accounts payable-trade at April 29, 2018, were $27.2 million, a decrease of 6% compared with
$29.1 million at April 30, 2017. This decrease was primarily due to a decrease in the mattress fabric
segment’s accounts payable of $2.7 million, resulting from decreased sales volume in the fourth quarter
of fiscal 2018 compared with fiscal 2017, partially offset by accounts payable totaling $719,000 that was
assumed from Read.
Operating working capital (accounts receivable and inventories, less deferred revenue and accounts
payable –trade and capital expenditures) was $49.9 million at April 29, 2018, compared with $40.9
million at April 30, 2017. Operating working capital turnover was 7.1 in fiscal 2018 compared to 7.3 in
fiscal 2017.
46
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 related to 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 29, 2018, we were in compliance with all of our financial covenants.
Refer to Note 11 located in the notes to the consolidated financial statements for further details
of our revolving credit agreements.
Commitments
The following table summarizes our contractual payment obligations and commitments for each of the
next five fiscal years (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
Capital expenditures
Accounts payable -
capital expenditures
Operating leases
Interest expense
Total (1)
$ 2,003
-
-
1,776
2,640
19
$ 6,438
-
1,893
-
1,893
-
1,061
-
1,061
-
-
181
-
181
-
-
10
-
10
-
-
-
-
-
$ 2,003
1,776
5,785
19
$ 9,583
Note: Payment Obligations by End of Each Fiscal Year
(1) At April 29, 2018, we had $844,000 of total gross unrecognized tax benefits, of which $379,000 and
$465,000 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 $844,000 in total gross unrecognized tax benefits, $379,000 would not be
subject to cash payments due to the company’s U.S. federal net operating loss carryforwards.
Capital Expenditures
Capital expenditures on a cash basis were $11.8 million (of which $3.8 million was vendor financed) for
fiscal 2018, compared with $12.9 million (of which $1.1 million was vendor financed) for fiscal 2017.
Capital expenditures for fiscal 2018 and 2017 mostly related to our mattress fabrics segment.
Depreciation expense was $7.7 million for fiscal 2018 compared with $7.1 million for fiscal 2017.
Depreciation expense for fiscal 2018 and 2017 mostly related to our mattress fabrics segment.
For fiscal 2018, we are currently projecting capital expenditures to be in the range of $6 million to $7
million. 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.
47
Accounts Payable – Capital Expenditures
At April 29, 2018, we had total amounts due regarding capital expenditures totaling $1.8 million, of which
$1.4 million is financed and pertains to completed work for the construction of a new building (see below).
The total $1.8 million amount is required to be paid in full in fiscal 2019.
At April 30, 2017, we had total amounts due regarding capital expenditures totaling $6.1 million, of which
$5.1 million was financed and pertained to completed work for the construction of a new building (see
below). Of the total $6.1 million, $4.8 million and $1.3 million were required to be paid in fiscal 2018 and
2019, respectively.
Purchase Commitments - Capital Expenditures
At April 29, 2018, we had open purchase commitments to construct a building and equipment for our
mattress fabrics segment totaling $3.4 million. The 3.4 million includes $1.4 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 expands 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, $3.7 million in fiscal 2018, and $1.4 million in fiscal 2019 (which was paid in May 2018). Interest
was charged on the outstanding installment payments at a rate of $2.25% plus the current 30 day LIBOR
rate. Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor being the
beneficiary. In addition to the interest that was charged on the outstanding installment payments, there was a
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 was placed into service July 2017 (our first quarter of fiscal 2018).
Handling Costs
We record warehousing costs in SG&A expenses. These costs were $4.6 million, $4.6 million, and $4.2
million, in fiscal 2018, 2017, and 2016, respectively. Warehousing costs include the operating expenses
of our various finished goods distribution centers, such as personnel costs, utilities, building rent and
material handling equipment, and lease expense. Had these costs been included in cost of sales, gross
profit would have been $60.0 million or 18.5% of net sales, in fiscal 2018, $64.6 million or 20.9% of net
sales, in fiscal 2017, and $60.9 million, or 19.5% of net sales, in fiscal 2016.
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.
48
Accounts Receivable - Allowance for Doubtful Accounts
Substantially all of our accounts receivable are due from residential and commercial furniture and
bedding manufacturers. As of April 29, 2018, accounts receivable from furniture manufacturers totaled
$11.1 million, and accounts receivable from bedding manufacturers totaled 15.2 million. Additionally, as
of April 29, 2018, the aggregate accounts receivable balance of our ten largest customers was $13.8
million, or 52% of trade accounts receivable. One customer within the upholstery fabrics segment
accounted for 13% of consolidated accounts receivable at April 29, 2018. Two customers within the
mattress fabrics segment represented 20% of consolidated accounts receivable at April 29, 2018.
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 $357,000 and $414,000 at April 29, 2018, and April 30,
2017, 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 $4.1 million and $3.4 million at April 29, 2018, and April 30,
2017, 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.
At April 29, 2018, our goodwill totaled $13.6 million, of which $11.5 million and $2.1 million related to
the mattress fabrics and upholstery fabrics segments, respectively.
49
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.
Deferred Income Taxes – Valuation Allowance
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 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 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 10 located in the notes to the consolidated financial statements for disclosures regarding our
assessments of our recorded valuation allowance as of April 29, 2018 and April 30, 2017.
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.
For fiscal 2019 and beyond, the Tax Act allows a U.S. corporation a 100% dividend received deduction for
accumulated earnings and profits from a 10% owned foreign corporation. Therefore, a deferred tax liability
will only be required for withholding taxes that are incurred by foreign subsidiaries at the time their
accumulated earnings and profits are distributed.
Refer to Note 10 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 29, 2018 and April 30, 2017, respectively.
Uncertainty In Income Taxes
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.
50
Refer to Note 10 located in the notes to the consolidated financial statements for disclosures and
additional information regarding our uncertain income tax positions.
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 29, 2018, 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
will be recognized. Performance goals that were previously deemed probable and subsequently were not
or are not expected to be met, previously recognized compensation cost will be reversed. At April 29,
2018, the remaining compensation cost related to our performance based restricted stock units was $1.3
million.
We recorded $2.2 million, $3.4 million, and $2.7 million of compensation expense within selling, general,
and administrative expense for our equity-based awards in fiscal 2018, 2017, and 2016, respectively.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting". ASU No. 2016-09 was effective for
fiscal years and interim periods within those fiscal years, beginning after December 15, 2016.
Accordingly, we adopted this guidance during the first quarter of fiscal 2018. ASU No. 2016-09 aims to
simplify several aspects of accounting and financial reporting for share-based payment transactions. One
provision within this pronouncement requires that excess income tax benefits and deficiencies related to
share-based payments be recognized within income tax expense as a discrete event in the period in which
they occur, rather than within additional paid-in capital on our Consolidated Balance Sheet on a
prospective basis. The impact to our results of operations related to this provision during fiscal 2018 was
a reduction to income tax expense of $497,000. The impact of this provision on our future results of
operations will depend in part on the market prices for the shares of our common stock on the dates there
are taxable events related to the share-based awards, and therefore, the impact is difficult to predict. In
connection with another provision within ASU No. 2016-09, we have elected to account for forfeitures of
share-based awards as an estimate of the number of awards that are expected to vest, which is consistent
with our accounting policy prior to adoption.
Also, we adopted the provisions of ASU No. 2016-09 related to changes on the Consolidated Statements
of Cash Flows on a retrospective basis. As a result, we no longer classify excess income tax benefits as a
financing activity, which increased net cash provided by operating activities and reduced net cash
provided by financing activities by $657,000 and $841,000 for fiscal 2017 and 2016, respectively.
Additionally, we no longer classify payments for employee taxes when common stock shares are withheld
to satisfy the employer’s statutory income tax withholding obligation as an operating activity, which
increased net cash provided by operating activities and reduced net cash provided by financing activities
by $429,000 and $747,000 for fiscal 2017 and 2016, respectively.
51
Our equity incentive plans are described more fully in Note 13 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 2018.
Recently Issued Accounting Standards
Refer to Note 1 located in the notes to the consolidated statements for recently issued accounting
pronouncements for fiscal 2019 and beyond.
52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our revolving credit lines.
At April 29, 2018, our U.S. revolving credit agreement requires interest to be charged at a rate
(applicable interest rate of 3.36% at April 29, 2018) 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 29, 2018, 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 29, 2018, would not have had a significant impact on our results of operations or financial
position.
53
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Culp, Inc.:
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Culp, Inc. (a North Carolina
Corporation) and Subsidiaries (the “Company”) as of April 29, 2018 and April 30, 2017, 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 29, 2018, and the related notes (collectively referred to
as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the company as of April 29, 2018 and April 30, 2017, and the
results of its operations and its cash flows for each of the three years in the period ended April 29, 2018,
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) (“PCAOB”), the Company’s internal control over financial reporting as of April 29,
2018, 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 13, 2018 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since fiscal 2008.
Charlotte, North Carolina
July 13, 2018
54
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data and preferred and common stock shares)
April 29, 2018 and April 30, 2017
ASSETS
current assets:
cash and cash equivalents
short-term investments - available for sale
short-term investments - held to maturity
accounts receivable, net
inventories
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
deferred revenue
accrued expenses
income taxes payable
total current liabilities
accounts payable - capital expenditures
accrued expenses - long-term
income taxes payable - long-term
deferred income taxes
deferred compensation
total liabilities
commitments and contingencies (notes 11 and 12)
shareholders' equity:
preferred stock, $.05 par value, authorized 10,000,000 shares
common stock, $.05 par value, authorized 40,000,000
shares, issued and outstanding 12,450,276 at
April 29, 2018 and 12,356,631 at April 30, 2017
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.
55
2018
2017
$
$
$
21,228
2,451
25,759
26,307
53,454
2,870
132,069
51,794
13,569
1,458
5,035
7,326
1,501
5,232
217,984
27,237
1,776
809
9,325
1,437
40,584
-
763
3,758
2,150
7,353
54,608
$
$
$
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
-
-
623
48,203
114,635
(85)
163,376
217,984
618
47,415
100,601
(4)
148,630
205,634
$
$
CONSOLIDATED STATEMENTS OF NET INCOME
For the years ended April 29, 2018, April 30, 2017 and May 1, 2016
(dollars in thousands, except per share data)
2018
2017
2016
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 10)
loss from investment in unconsolidated joint venture (note 7)
net income
net income per share-basic
net income per share-diluted
$
$
$
$
323,725
259,092
64,633
37,172
27,461
94
(534)
1,018
26,883
5,740
266
20,877
$1.68
$1.65
$
$
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
The accompanying notes are an integral part of these consolidated financial statements.
56
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended April 29, 2018, April 30, 2017 and May 1, 2016
Net income
$
20,877
$
22,334
$
16,935
2018
2017
2016
Other comprehensive (loss) income
Loss on foreign currency cash flow hedge instrument, net of tax
Unrealized (losses) gains on investments
Unrealized holding (losses) gains on investments, net of tax
Reclassification adjustment for realized loss included in net income
Total other comprehensive (loss) income
(55)
(26)
-
(26)
(81)
-
128
12
140
140
-
(176)
127
(49)
(49)
Comprehensive income
$
20,796
$
22,474
$
16,886
The accompanying notes are an integral part of the consolidated financial statements.
57
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands, except common stock shares)
For the years ended April 29, 2018,
April 30, 2017 and May 1, 2016
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 surrendered for the cost of stock option
excercises and withholding taxes payable
dividends paid
balance, April 30, 2017
net income
stock-based compensation
loss on foreign currency cash flow hedge instrument
unrealized loss on investments
common stock issued in connection with vesting
of performance-based restricted stock units
fully vested common stock award
common stock issued in connection with vesting
of time-based restricted stock units
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
$
12,219,121
-
-
-
$
611
-
-
-
-
(100,776)
115,855
3,000
54,500
(26,211)
-
12,265,489
-
-
-
-
49,192
4,800
68,000
(30,850)
-
12,356,631
-
-
-
118,845
4,800
1,200
15,600
-
(5)
6
-
3
(1)
-
614
-
-
-
-
2
-
3
(1)
-
618
-
-
-
6
-
-
1
(46,800)
(2)
capital
contributed
in excess of
par value
$
43,159
-
2,742
-
841
(2,392)
(6)
-
197
(746)
-
43,795
-
3,358
-
657
(2)
-
585
(978)
-
47,415
-
2,212
-
(6)
-
-
110
(1,528)
balance, April 29, 2018
12,450,276
$
623
$
48,203
$
The accompanying notes are an integral part of these consolidated financial statements.
Accumulated
earnings
accumulated
other
comprehensive
loss
total
shareholders'
equity
$
75,752
16,935
-
-
$
(95)
-
-
(49)
-
-
-
-
-
(8,140)
84,547
22,334
-
-
-
-
-
-
-
(6,280)
100,601
20,877
-
-
-
-
-
-
(6,843)
114,635
$
-
-
-
-
-
-
(144)
-
-
140
-
-
-
-
-
-
(4)
-
-
(55)
(26)
-
-
-
-
(85)
$
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
20,877
2,212
(55)
(26)
-
-
-
111
(1,530)
(6,843)
163,376
58
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 29, 2018, April 30, 2017, and May 1, 2016
(dollars in thousands)
2018
2017
2016
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
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, net of effects of acquisition of assets:
accounts receivable
inventories
other current assets
other assets
accounts payable-trade
accrued expenses and deferred compensation
deferred revenue
income taxes
net cash provided by operating activities
cash flows from investing activities:
capital expenditures
net cash paid for acquisition of assets
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 the sale of long-term investments (rabbi trust)
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
common stock surrendered for withholding taxes payable
proceeds from common stock issued
net cash used in financing activities
effect of exchange rate changes on cash and cash equivalents
increase (decrease) in cash and cash equivalents
$
20,877
$
22,334
$
16,935
7,672
351
2,212
(2,482)
-
266
-
66
(299)
(24)
226
(81)
(4,028)
(1,562)
(94)
4,373
27,473
(8,005)
(4,541)
(661)
(49)
-
-
(1,902)
57
(18)
6
(15,113)
19,000
(19,000)
(3,750)
-
-
-
(6,843)
(1,530)
111
(12,012)
85
433
7,085
244
3,358
4,667
(131)
23
12
78
(1,555)
(5,437)
(495)
30
5,828
992
-
(2,966)
34,067
(11,858)
-
(1,129)
(44)
2,000
(31,020)
(1,351)
-
(18)
141
(43,279)
9,000
(9,000)
(1,050)
-
(2)
-
(6,280)
(429)
37
(7,724)
(56)
(16,992)
6,671
170
2,742
4,192
(35)
-
127
(40)
4,476
(4,407)
(206)
(46)
(3,785)
1,498
-
91
28,383
(11,475)
-
-
(104)
5,612
-
(1,649)
-
(18)
233
(7,401)
7,000
(7,000)
-
(2,200)
(134)
(2,397)
(8,140)
(747)
200
(13,418)
498
8,062
cash and cash equivalents at beginning of year
20,795
37,787
29,725
cash and cash equivalents at end of year
$
21,228
$
20,795
$
37,787
The accompanying notes are an integral part of these consolidated financial statements.
59
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, in which the majority of our revenues are derived in North America.
The mattress fabrics segment manufacturers, sources, and sells fabrics and mattress covers to bedding
manufacturers. At April 29, 2018, we had wholly-owned mattress fabric operations located in Stokesdale,
NC, High Point, NC, Quebec, Canada, and a fifty percent owned cut and sew mattress cover operation
located in Haiti. On June 22, 2018, we acquired a majority interest in eLuxury, LLC (eLuxury), an
internet company offering bedding accessories and home goods directly to consumers, whose primary
products include a line of mattress pads manufactured at eLuxury’s facility in Evansville, Indiana (see
Note 2 for further details regarding our business combinations).
The upholstery fabrics segment sources, manufacturers, and sells fabrics to residential and commercial
furniture manufacturers. At April 29, 2018, we had wholly-owned upholstery fabric operations located in
Shanghai, China, Burlington, NC, and a recently acquired business located in Knoxville, TN, (see Note 2
for further details regarding our business combinations), and Anderson, SC. On June 12, 2018, our board
of directors decided to close our upholstery fabrics manufacturing facility in Anderson, South Carolina,
due to continued decline in demand for the products manufactured at that facility (see note 22 for further
details regarding this exit and disposal activity).
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. 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 2018, 2017,
and 2016.
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).
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.
60
Fiscal Year – Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30.
Fiscal 2018, 2017, and 2016 each included 52 weeks.
Use of Estimates – The preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents – Cash and cash equivalents include demand deposit and money market
accounts. We consider all highly liquid instruments with original maturities of three months or less to be
cash equivalents.
A summary of our cash and cash equivalents by geographic area follows:
April 29, April 30,
(dollars in thousands)
United States
China
Canada
Cayman Islands
2018
9,452
9,221
2,349
206
21,228
$
$
2017
1,147
12,722
2,906
4,020
20,795
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 $91,000 and
$47,000 at April 29, 2018 and April 30, 2017, respectively. Our short-term investments were recorded at
its fair value of $2.5 million and $2.4 million at April 29, 2018 and April 30, 2017, respectively. The fair
value of our short-term investments approximates its cost basis.
A summary of our short-term investments by geographic area follows:
April 29, April 30,
(dollars in thousands)
Canada
United States
2018
1,366
1,085
2,451
$
$
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 $7.3
million and $5.5 million at April 29, 2018 and April 30, 2017, respectively. Our long-term investments
had an accumulated unrealized gain totaling $61,000 and $43,000 at April 29, 2018, and April 30, 2017,
respectively. The fair value of our long-term investments associated with our Rabbi Trust approximates
its cost basis.
Investments (Held-To-Maturity) – During the second quarter of fiscal 2017, management invested
approximately $31.0 million in investment grade U.S. Corporate bonds with maturities ranging from 2 to
61
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 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 29, 2018, the amortized cost of our held-to-maturity investments was $30.8 million and the fair
value was $30.6 million. At April 30, 2017, the amortized cost of our held-to-maturity investments $30.9
million and the fair value was $30.8 million.
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.
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 net realizable
value. 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 incurred were $194,000, $158,000, and $58,000 in fiscal years 2018, 2017,
and 2016, respectively.
62
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 $100,000, $158,000, and $58,000 were capitalized for the
construction of qualifying fixed assets for fiscal 2018, 2017, and 2016, respectively.
Foreign Currency Adjustments – The United States dollar is the functional currency for the company’s
Canadian and Chinese 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 (losses) gains by geographic area follows:
(dollars in thousands) 2018
(298)
China
(8)
Canada
(306)
$
$
2017
111
(120)
(9)
2016
(70)
76
6
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 (ASC Topic 350), we performed our annual impairment test on a qualitative basis.
Based on our qualitative assessments as of April 29, 2018 and April 30, 2017, we determined that our
goodwill was not impaired using a more likely than not standard.
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.
Deferred Income Taxes – Valuation Allowance
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.
Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries
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.
For fiscal 2019 and beyond, the 2017 Tax Cuts and Jobs Act allows a U.S. corporation a 100% dividend
received deduction for earnings and profits received from a 10% owned foreign corporation. Therefore, a
63
deferred tax liability will only be required for withholding taxes that are incurred by our foreign
subsidiaries at the time E&P is distributed.
Uncertainty in Income Taxes
We recognize the tax impact from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax impact recognized in the financial statements from such a position is measured based on
the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
Penalties and interest related to uncertain tax positions are recorded as income tax expense. Significant
judgment is required in the identification of uncertain tax positions and in the estimation of penalties and
interest on uncertain tax positions.
Revenue Recognition – Revenue associated with the sale of our upholstery and mattress fabric products
are primarily recognized upon shipment of inventory 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.
On April 1, 2018, we acquired Read Windows Products, LLC, a source of custom window treatments for
the hospitality and commercial industries, which involves the sale of certain products and installation
services. Revenue associated with the sale of products are recognized upon shipment of inventory and
when title and risk of loss pass to the customer. We recognize revenue on installation services as services
are rendered. Amounts billed and collected before the services are performed are included in deferred
revenues (see Note 2 for further details regarding our business combinations).
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, $4.6 million and $4.2 million in fiscal 2018,
2017, and 2016, respectively, and are included in selling, general and administrative expenses.
Sales and Other Taxes – Sales and other taxes collected from customers and remitted to governmental
authorities are presented on a net basis and, as such, are excluded from revenues.
Stock-Based Compensation – Our equity incentive plans are described more fully in Note 13. ASC 718,
“Compensation – Stock Compensation”, 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 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. Compensation cost recognized on
performance goals that were previously deemed probable and subsequently, were not or expected to be
met, previously recognized compensation cost was reversed.
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
14.
64
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
Measurement of Inventory
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. ASU No. 2015-11 was effective for fiscal years and interim periods within those
fiscal years, beginning after December 15, 2016. As a result, we adopted ASU No. 2015-11 in the first
quarter of fiscal 2018 and the adoption of this guidance did not have a significant impact on our
consolidated financial statements.
Stock-Based Compensation
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting". ASU No. 2016-09 was effective for
fiscal years and interim periods within those fiscal years, beginning after December 15, 2016.
Accordingly, we adopted this guidance during the first quarter of fiscal 2018. ASU No. 2016-09 aims to
simplify several aspects of accounting and financial reporting for share-based payment transactions. One
provision within this pronouncement requires that excess income tax benefits and deficiencies related to
share-based payments be recognized within income tax expense as a discrete event in the period in which
they occur, rather than within additional paid-in capital on our Consolidated Balance Sheet on a
prospective basis. The impact to our results of operations related to this provision during fiscal 2018 was
a reduction to income tax expense of $497,000. The impact of this provision on our future results of
operations will depend in part on the market prices for the shares of our common stock on the dates there
are taxable events related to the share-based awards, and therefore, the impact is difficult to predict. In
connection with another provision within ASU No. 2016-09, we have elected to account for forfeitures of
share-based awards as an estimate of the number of awards that are expected to vest, which is consistent
with our accounting policy prior to adoption.
Also, we adopted the provisions of ASU No. 2016-09 related to changes on the Consolidated Statements
of Cash Flows on a retrospective basis. As a result, we no longer classify excess income tax benefits as a
financing activity, which increased net cash provided by operating activities and reduced net cash
provided by financing activities by $657,000 and $841,000 for fiscal 2017 and 2016, respectively.
Additionally, we no longer classify payments for employee taxes when common stock shares are withheld
to satisfy the employer’s statutory income tax withholding obligation as an operating activity, which
increased net cash provided by operating activities and reduced net cash provided by financing activities
by $429,000 and $747,000 for fiscal 2017 and 2016, respectively.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, as amended, 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. The
new revenue standard will be 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. Currently, we are evaluating the impact this
guidance may have with regards to our recent acquisition of Read Window Products, LLC. However, we
do not expect this guidance to have a material impact on our results of operations and financial position,
65
but we do expect this guidance to have a material impact on the disclosures required in our notes to the
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 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 statement of cash flows, but we do expect this guidance to be applicable in determining how
we classify our contingent consideration payments associated with our business combinations (see note 2)
as either investing or financing activities. This guidance requires cash payments not made soon after the
acquisition date of a business combination by an acquirer to settle a contingent consideration liability
should be separated and classified as cash outflows from financing activities. In comparison, cash
payments made soon after the acquisition date should be separated and classified as cash outflows from
investing activities.
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 be applied on a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the
period of adoption. Currently, we do not expect that this guidance will have a material impact on our
results of operations and financial position,
There are no other new accounting pronouncements that are expected to have a significant impact on our
consolidated financial statements.
66
2. BUSINESS COMBINATIONS
Read Window Products, LLC
Effective April 1, 2018, we entered into an Asset Purchase Agreement (Agreement) to acquire certain
assets and assume certain liabilities of Read Window Products, Inc. (Read), a source of custom window
treatments for the hospitality and commercial industries. Based in Knoxville, Tennessee, Read is a turn-
key provider of window treatments offering measuring, sourcing, fabrication and installation services.
Read’s custom product line includes motorization, shades, drapery, upholstered headboards and shower
curtains. In addition, Read supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed
skirts, bolsters and pillows, for leading hospitality brands worldwide. The addition of window treatments
and other soft goods to our product line will allow us to be a more complete source of fabrics for the
hospitality market, in which we believe there are significant growth opportunities.
The purchase price for the net assets acquired was $5.7 million, of which $4.5 million was paid at closing
on April 1, 2018, $375,000 was paid in May 2018, and $763,000 is to be paid in June in 2019, subject to
certain conditions as defined in the Agreement.
The Agreement contains a contingent consideration arrangement that requires us to pay a former
shareholder of Read based on adjusted EBITDA as defined in the agreement for calendar year 2018 in
excess of fifty percent of a pre-established adjusted EBITDA target as defined in the agreement. Based on
historical and projected financial results in relation to the pre-established adjusted EBITDA target, we
currently believe a contingent payment will not be made, and therefore, no contingent liability has been
recorded.
The following table presents the final allocation of the acquisition cost to the assets acquired and
liabilities assumed based on their fair values.
(dollars in thousands)
Customer relationships (Note 8)
Goodwill (Note 6)
Inventory
Accounts receivable
Tradename (Note 8)
Property, plant & equipment
Other assets
Deferred revenue
Accounts payable
Accrued expenses
$
Fair Value
2,247
2,107
1,128
897
683
379
35
(903)
(719)
(174)
5,680
$
We recorded customer relationships at fair market value based on a multi-period excess earnings
valuation model. These customer relationships will be amortized on a straight-line basis over their nine-
year useful life. We recorded the tradename at fair market based on the relief from royalty method. This
tradename was determined to have an indefinite useful life and, therefore, is not being amortized.
Equipment will be depreciated on a straight-line basis over useful lives ranging from three to ten years.
The goodwill related to this acquisition is attributable to Read’s reputation with the products and services
they provide and the collective experience of management with regards to its operations, customers, and
industry. Goodwill is deductible for income tax purposes over the statutory period of fifteen years.
Acquisition costs totaling $339,000 were included in selling, general, and administrative expenses in our
fiscal 2018 Consolidated Statement of Net Income.
67
The following unaudited pro forma consolidated results of operations for the years ending April 29, 2018
and April 30, 2017 have been prepared as if the acquisition of Read had occurred at May 2, 2016.
(dollars in thousands, except per share data)
Net Sales
Income from operations
Net income
Net income per share, basic
Net income per share, diluted
Years ended
April 29, 2018
$ 334,953
26,799
20,455
1.65
1.62
April 30, 2017
$ 321,398
30,441
22,552
1.83
1.80
The unaudited pro forma information is presented for informational purposes only and is not necessarily
indicative of the results of operations that actually would have been achieved had the acquisition been
consummated as of that time, nor is it intended to be a projection of future results.
Actual revenue and net income for the month of April 2018 were included in our Consolidated Statement
of Net Income and totaled $880,000 and $5,000, respectively.
eLuxury
Effective June 22, 2018, after the end of the fiscal year, we acquired a majority interest in eLuxury, an
internet company offering bedding accessories and home goods directly to consumers. The company’s
primary products include a line of mattress pads manufactured at eLuxury’s facility in Evansville,
Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, and other bedding items. Their
products are available on eLuxury’s own branded website, eLuxury.com, Amazon and other leading
online retailers for specialty home goods.
We believe this acquisition will provide a new sales channel for the bedding accessory category and will
expand our opportunity to participate in the rapidly growing e-commerce direct-to-consumer space. This
business combination brings together eLuxury’s experience in e-commerce, online brand building, and
direct-to-consumer shopping and fulfillment expertise with our global production, sourcing and
distribution capabilities. We also have an opportunity to market our new line of bedding accessories,
marketed under the brand name, ‘Comfort Supply Company by Culp’, as well as other finished products
that we may develop, including items made from upholstery fabrics, through this e-commerce platform.
The estimated purchase price for this acquisition is $12.5 million, of which $11.6 million was paid at
closing, with the remaining $874,000 amount to be paid based on holdback provisions defined in the
purchase agreement. The agreement contains a contingent consideration arrangement that requires us to
pay the seller based on adjusted EBITDA to be determined over a three-year period in relation to a pre-
established adjusted EBITDA target. We are currently performing our preliminary valuation of the
allocation of the purchase price among the assets and equity interest acquired and liabilities assumed.
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3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
April 29, April 30,
(dollars in thousands)
customers
allowance for doubtful accounts
reserve for returns and allowances and discounts
2018
28,097
(357)
(1,433)
26,307
$
$
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2018
(414)
beginning balance
57
provision for bad debts
-
write-offs, net of recoveries
(357)
ending balance
$
$
2017
(1,088)
222
452
(414)
2017
26,211
(414)
(1,220)
24,577
2016
(851)
(363)
126
(1,088)
A summary of the activity in the allowance for returns and allowances and discounts
follows:
(dollars in thousands) 2018
(1,220)
beginning balance
(3,295)
provision for returns and allowances
and discounts
credits issued
ending balance
3,082
(1,433)
$
$
2017
(962)
(3,061)
2,803
(1,220)
2016
(738)
(2,825)
2,601
(962)
4.
INVENTORIES
A summary of inventories follows:
(dollars in thousands)
raw materials
work-in-process
finished goods
April 29, April 30,
2017
6,456
3,095
41,931
51,482
2018
6,024
3,264
44,166
53,454
$
$
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
(dollars in thousands)
land and improvements
buildings and improvements
leasehold improvements
machinery and equipment
office furniture and equipment
capital projects in progress
depreciable lives
(in years)
0-10
7-40
**
3-12
3-10
accumulated depreciation and amortization
** Shorter of life of lease or useful life.
69
April 29,
2018
963
31,022
1,993
72,924
9,514
2,086
118,502
(66,708)
51,794
$
$
April 30,
2017
836
19,071
1,541
67,709
8,936
12,901
110,994
(59,343)
51,651
6. GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands)
beginning balance
acquisition of assets (note 2)
loss on impairment
ending balance
2018
$ 11,462
2,107
-
$ 13,569
2017
11,462
-
-
11,462
2016
11,462
-
-
11,462
7.
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 produces cut and sewn mattress covers, and its operations are
located in a modern industrial park on the northeast border of Haiti, which borders the Dominican
Republic. CLIH commenced production in the second quarter of fiscal 2018 and complements our
mattress fabric operations with a mirrored platform that enhances our ability to meet customer demand
while adding a lower cost operation to our platform.
CLIH incurred a net loss of $532,000 and $46,000 in fiscal 2018 and 2017, respectively. CLIH’s net loss
in fiscal 2017 pertained to initial start up operating expenses incurred during the fourth quarter. Culp’s
equity interests in these net losses were $266,000 and $23,000 in fiscal 2018 and 2017, respectively.
The following table summarizes information of assets, liabilities and members’ equity of our equity
method investment in CLIH:
(dollars in thousands)
total assets
total liabilities
total members’ equity
8. OTHER ASSETS
A summary of other assets follows:
(dollars in thousands)
customer relationships, net
tradename
non-compete agreement, net
cash surrender value – life
other
April 29,
2018
3,130
128
3,002
April 30,
2017
2,258
46
2,212
$
$
$
April 29,
2018
2,839
683
753
393
564
5,232
April 30,
2017
664
-
828
376
526
2,394
$
$
$
$
$
70
Customer Relationships
A summary of the change in the carrying amount of our customer relationships follows:
(dollars in thousands)
beginning balance
acquisition of assets (note 2)
amortization expense
loss on impairment
ending balance
2018
664
2,247
(72)
-
2,839
$
$
2017
715
(51)
-
664
2016
766
-
(51)
-
715
In connection with our asset purchase agreement with Read (see note 2) on April 1, 2018, we purchased
certain customer relationships. We recorded these customer relationships at fair market value totaling
$2.2 million based on a multi-period excess earnings valuation model. These customer relationships will
be amortized on a straight-line basis over their nine-year useful life.
Additionally, we have customer relationships from a prior acquisition with a carrying amount of $613,000
at April 29, 2018. These customer relationships are being amortized on a straight-line basis over their
seventeen-year useful life.
The gross carrying amount of our customer relationships was $3.1 million and $868,000 at April 29, 2018
and April 30, 2017, respectively. Accumulated amortization for these customer relationships was
$276,000 and $204,000 at April 29, 2018 and April 30, 2017, respectively.
The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2019 -
$301,000; FY 2020 - $301,000; FY 2021 - $301,000; FY 2022 - $301,000; FY 2023 - $301,000; and
Thereafter - $1,334,000.
The weighted average amortization period for our customer relationships is 9.6 years as of April 29, 2018.
Tradename
In connection with the asset purchase agreement noted above, we purchased the tradename associated
with Read. We recorded this tradename at fair market value totaling $683,000 based on the relief from
royalty method. This tradename was determined to have an indefinite useful life and, therefore, is not
being amortized.
Non-Compete Agreement
A summary of the change in the carrying amount of our non-compete agreement follows:
(dollars in thousands)
beginning balance
amortization expense
loss on impairment
ending balance
2018
828
(75)
-
753
$
$
2017
903
(75)
-
828
2016
978
(75)
-
903
W have a non-compete agreement from a prior acquisition that is being 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 29, 2018 and April
30, 2017, respectively. Accumulated amortization for this non-compete agreement was $1.3 million and
$1.2 million at April 29, 2018 and April 30, 2017, respectively.
71
The remaining amortization expense for the next five years and thereafter follows: FY 2019 - $75,000;
FY 2020 - $75,000; FY 2021 - $75,000; FY 2022 - $75,000; FY 2023 - $75,000, and Thereafter -
$378,000.
The weighted average amortization period for the non-compete agreement is 10 years as of April 29,
2018.
Cash Surrender Value - Life Insurance
We had one life insurance contract with a death benefit of $1.4 million at April 29, 2018 and April 30,
2017, respectively. Our cash surrender value - life insurance balance of $393,000 and $376,000 at April
29, 2018 and April 30, 2017, respectively, are collectible upon death of the respective insured.
9. ACCRUED EXPENSES
A summary of accrued expenses follows:
(dollars in thousands)
compensation, commissions and related benefits
advertising rebates
interest
other
April 29,
2018
6,918
750
20
2,400
10,088
$
$
April 30,
2017
10,188
468
51
1,240
11,947
At April 29, 2018, we had accrued expenses totaling $10.1 million, of which $9.3 million and $763,000
were classified as current accrued expenses and long-term accrued expenses, respectively, in the
accompanying Consolidated Balance Sheets. As of April 30, 2017, we had accrued expense totaling $11.9
million, all of which were classified as current accrued expenses, in the accompanying Consolidated
Balance Sheets.
10. INCOME TAXES
Income Tax Expense and Effective Income Tax Rate
Total income tax expense was allocated as follows:
(dollars in thousands)
income from operations
shareholders’ equity, related to
the tax benefit arising from stock
based compensation
2018
$ 5,740
2017
7,339
2016
10,963
-
(657)
$ 5,740
6,682
(841)
10,122
72
Income tax expense attributable to income from operations consists of:
(dollars in thousands)
current
federal
state
2017 Tax Cuts and Jobs Act
foreign
foreign – reversal of uncertain tax position
deferred
federal
state
2017 Tax Cuts and Jobs Act (1)
undistributed earnings – foreign subsidiaries
U.S. operating loss carryforwards
foreign
valuation allowance (1)
2018
2017
2016
$ (1,367)
9
109
13
4,854 -
5,981
4,726
(3,431)
-
2,672
8,222
4,295
112
(6,903)
(195)
-
93
116
(2,482)
$ 5,740
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
(1) The income tax benefit of $6,903 includes a charge of $4,550 for the establishment of a valuation
allowance against U.S. foreign tax credits that are more-likely-than not to be realized as a result of the
2017 Tax Cuts and Jobs Act.
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
2018
2017
2016
$ 11,036
5,985
-
339
17,360
9,523
$26,883
13,650
4,918
(19)
154
18,703
10,993
29,696
14,130
3,647
(62)
-
17,715
10,183
27,898
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 the 2017 Tax Cuts and Jobs Act
tax effects of Chinese foreign exchange (losses) gains
reversal of foreign uncertain income tax position
tax effects of stock-based compensation
undistributed earnings from foreign subsidiaries
other
2018
30.4%
(7.6)
(2.8)
-
(1.8)
3.7
(0.5)
21.4%
2017
34.0%
-
1.6
(11.6)
-
-
0.7
24.7%
2016
34.0%
-
4.4
-
-
-
0.9
39.3%
73
Deferred Income Taxes - Overall
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 liabilities
2018
2017
$
316
2,217
3,438
117
5,720
-
226
2,513
76
-
(5,204)
9,419
(4,256)
(380)
(4,352)
(1,046)
(77)
(10,111)
(692)
$
447
2,196
6,222
890
44,917
1,428
245
3,842
73
(3,842)
(536)
55,882
(43,978)
(7,936)
(5,546)
(1,478)
(118)
(59,056)
(3,174)
(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 $11.5 million with related future
tax benefits of $2.5 million at April 29, 2018. These carryforwards principally expire in fiscal years 2027
through fiscal 2035. Our U.S. foreign income tax credits of $5.7 million will expire 10 years from when
the associated earnings and profits from our foreign subsidiaries are repatriated to the U.S.
2017 Tax Cuts and Jobs Act
On December 22, 2017 (the “Enactment Date”), the Tax Cuts and Jobs Act (H.R.1) (the “Tax Act”) was
signed into law. The Tax Act contains significant changes to corporate taxation, including (i) the
reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing certain business
assets, (iii) a one-time mandatory repatriation tax (the “Transition Tax”) related to the transition of U.S.
international tax from a worldwide tax system to a territorial tax system, (iv) limitations on the use of
foreign tax credits to reduce the U.S. income tax liability, (v) the repeal of the domestic production
activities deduction, (vi) additional limitations on the deductibility of interest expense and executive
compensation, and (vii) the creation of new minimum taxes such as the base erosion anti-abuse tax
(“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax.
The corporate income tax rate reduction is effective as of January 1, 2018. Since we have a fiscal year
rather than a calendar year, we are subject to IRS rules relating to transitional income tax rates. As a
result, our fiscal 2018 federal statutory rate is blended income tax rate of 30.4%. For fiscal 2019 and
beyond, we will utilize the enacted U.S. federal corporate income tax rate of 21%.
74
The key impacts of the Tax Act on our financial statements for fiscal 2018 were the re-measurement of
our U.S. deferred income tax balances to the new U.S. federal corporate income tax rate and the
determination of the income tax effects of the Transition Tax on our accumulated earnings and profits
associated with our foreign subsidiaries. While we have not yet completed our assessment of the effects
of the Tax Act, we were able to determine reasonable estimates for the impacts of the key items specified
above, and thus we reported provisional amounts for these items under guidance provided by SEC Staff
Accounting Bulletin No. 118 (“SAB 118”). Our estimates may change and revisions to these estimates
will be recorded during the measurement period allowed by SAB 118, which is not to extend beyond one
year from the Enactment Date.
The provisional estimates related to our U.S. deferred income tax balances and Transition Tax may
change due to a variety of factors that include, (i) actual versus estimates of accumulated earnings and
profits associated with our foreign subsidiaries, (ii) utilization of our foreign income tax credits, (iii)
anticipated guidance from the U.S. Department of Treasury about implementing the Tax Act and (iv)
potential guidance from the Securities and Exchange Commission and Financial Accounting Standards
Board related to the Tax Act.
In order to determine the effects of the new U.S. federal corporate income tax rate on our U.S. deferred
income tax balances, ASC Topic 740 “Income Taxes” (ASC Topic 740), requires the re-measurement of
our U.S. deferred income tax balances as of the Enactment Date of the Tax Act, based on income tax rates
at which our U.S. deferred income tax balances are expected to reverse in the future. The provisional
amount determined for the re-measurement of our U.S. net deferred income taxes was an income tax
charge of $2.2 million during fiscal 2018.
The Transition tax is based on our total post-1986 foreign earnings and profits (“E&P”) that were
previously deferred from U.S. income tax and applicable income tax rates associated with E&P held in
cash and other specified assets (the “aggregate foreign cash position”). Also, E&P was not permanently
reinvested prior to the Tax Act. The provisional amount determined for the income tax effects of the
Transition Tax was an income tax benefit of $4.3 million during fiscal 2018. This $4.3 million income tax
benefit relates to an income tax benefit of $18.0 million for the release of deferred income tax liabilities
related to E&P, an income tax benefit of $11.7 million that relates to the reduction in our U.S. Federal
income tax rate pursuant to the Tax Act on the effective settlement on an IRS exam related to E&P,
partially offset by an income tax charge for the write-off and the establishment of a valuation allowance
against our unused foreign tax credits totaling $25.4 million. The Transition Tax may be paid over a
period of eight years at the election of the taxpayer and we intend to make this election.
In addition to the above mentioned key impacts of the Tax Act on fiscal 2018, the Tax Act also
establishes new tax laws that will be effective for our fiscal 2019 which include the creation of new
minimum taxes such as the BEAT and GILTI taxes. We have not yet made a policy election with respect
to the accounting treatment of these taxes. We can either account for these taxes as expensed when
incurred or factor such amounts in the measurement of our U.S. deferred income taxes. We are currently
evaluating our selection of an accounting policy, which will depend, in part, on analyzing our facts to
determine what the impact is expected to be under each method.
Deferred Income Taxes – Valuation Allowance
Summary
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation
allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance
should be established based on the consideration of all available evidence using a “more likely than not”
standard with significant weight being given to evidence that can be objectively verified. Since the
company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-
by-jurisdiction basis, taking into account the effects of local tax law.
75
Based on our assessments at April 29, 2018 and April 30, 2017, valuation allowances against our deferred
income taxes pertain to the following jurisdictions:
(dollars in thousands)
U.S. foreign income tax credits
U.S. state loss carryforwards and credits
Polish loss carryforwards
April 29,
2018
4,550
578
76
5,204
$
$
April 30,
2017
-
464
72
536
A summary of the change in the valuation allowances against our deferred income taxes follows:
(dollars in thousands)
beginning balance
establishment of valuation allowance (1)
change in estimate (2)
ending balance
$
$
2018
536
4,550
118
5,204
2017
590
-
(54)
536
2016
922
-
(332)
590
(1) The establishment of this valuation allowance pertains to U.S. foreign tax credits that are more-
likely-than not to be realized as a result of the Tax Act.
(2) Amounts pertain to a change in estimate of the recoverability of certain deferred income tax
assets as of the end of the respective prior fiscal year.
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.
During the fiscal 2018, the Tax Act imposed a Transition Tax on our undistributed E&P associated with
our foreign subsidiaries. The Tax Act required us to determine E&P as of November 2, 2017 and
December 31, 2017 (the “Measurement Dates”), in which the greater E&P amount of the Measurement
Dates is subject to the Transition Tax. As a result, we had provisional estimates of E&P prior to
participation exemption totaling $156.7 million subject to the Transition Tax and provisional estimates
totaling $42.2 million for foreign tax credits that could be used to reduce the Transition Tax subject to
certain limitations as defined in the Tax Act.
For fiscal 2019 and beyond, the Tax Act allows a U.S. corporation a 100% dividend received deduction
for E&P received from a 10% owned foreign corporation. Therefore, a deferred tax liability will only be
required for withholding taxes that are incurred by our foreign subsidiaries at the time E&P is distributed.
As a result, at April 29, 2018, we recorded a deferred tax liability of $4.3 million for withholding taxes on
undistributed E&P from our foreign subsidiaries.
76
Uncertainty in Income Taxes
Overall
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.
The following table sets forth the change in the company’s unrecognized income tax
benefit:
(dollars in thousands) 2018
beginning balance
increases from prior period tax positions
decreases from prior period tax positions (1) (11,751)
increases from current period tax positions
ending balance
$12,245
350
-
844
$
2017
14,897
854
2016
14,141
454
(3,506) (77)
379
14,897
-
12,245
(1) The $11.8 million reduction in our unrecognized income tax benefits during fiscal 2018 is mostly
associated with the reduction in our U.S. Federal income tax rate pursuant to the Tax Act on the
effective settlement on an IRS exam. The $3.5 million reduction in our unrecognized income tax
benefits during fiscal 2017 is due to a lapse of applicable statute of limitations in a foreign
jurisdiction.
At April 29, 2018, we had $844,000 of total gross unrecognized tax benefits, of which $465,000 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 $467,000 would favorably affect the income tax rate in future
periods.
At April 29, 2018, we had $844,000 of total gross unrecognized tax benefits, of which $379,000 and
$465,000 were classified as net non-current deferred income taxes and income taxes payable-long-term,
respectively, in the accompanying Consolidated Balance Sheets. 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.
We elected to classify interest and penalties as part of income tax expense. At April 29, 2018 and April
30, 2017, the gross amount of interest and penalties due to unrecognized tax benefits was $40,000 and
$50,000, respectively.
Our gross unrecognized income tax benefit of $844,000 at April 29, 2018, relates to income tax positions
for which significant change is currently not expected within the next year. This amount primarily relates
to double taxation under applicable income tax treaties with foreign tax jurisdictions. United States
federal income tax returns filed by us remain subject to examination for income tax years 2017 and
subsequent. Canadian federal income tax returns filed by us remain subject to examination for income tax
years 2014 and subsequent. Canadian provincial (Quebec) income tax returns filed by us remain subject
to examination for income tax years 2016 and subsequent. Income tax returns associated with our
operations located in China are subject to examination for income tax year 2013 and subsequent.
77
Income Tax Exams
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. This examination was
completed during the fourth quarter of fiscal 2018 with final adjustments totaling $4,000.
During the fourth quarter of fiscal 2016, the Internal Revenue Service commenced and examination of our
U.S. Federal income tax returns for fiscal years 2014 through 2016. This examination was effectively
settled during the fourth quarter of fiscal 2018 with no adjustment.
Income Taxes Paid
Income tax payments, net of income tax refunds, were $4.0 million, $5.5 million, and $6.7 million during
fiscal years 2018, 2017, and 2016, respectively.
11. 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 3.36% and 2.45% at
April 29, 2018 and April 30, 2017, 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 29, 2018 and April 30, 2017,
respectively.
At April 29, 2018 and April 30, 2017, there were $250,000 in outstanding letters of credit (all of which
related workers compensation) provided by the Credit Agreement.
Effective August 1, 2016, we entered into a Third Amendment to our Credit Agreement which allows 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 ($1.25 million was outstanding at April 29, 2018 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 12
for further details). This $1.25 million outstanding letter of credit automatically expired on May 15, 2018.
Revolving Credit Agreement - China
We have an unsecured credit agreement associated with our operations in China that provides for a line of
credit up to 40 million RMB ($6.3 million USD at April 29, 2018) and is set to expire on March 2, 2019.
This agreement has an interest rate determined by the Chinese government and there were no outstanding
borrowings as of April 29, 2018 and April 30, 2017.
78
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. At April 29, 2018, the company was in compliance with these financial covenants.
Interest paid during fiscal years 2018, 2017, and 2016 totaled $181,000, $114,000, and $95,000,
respectively.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases- Overall
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 twelve years. The leases generally require the company to pay
real estate taxes, maintenance, insurance and other expenses. Rental expense for operating leases was $3.0
million in fiscal 2018, $2.9 million in fiscal 2017, and $3.0 million in fiscal 2016. Future minimum rental
commitments for noncancellable operating leases are $2.6 million in fiscal 2019; $1.9 million in fiscal 2020;
$1.1 million in fiscal 2021; $181,000 in fiscal 2022; and $10,000 in fiscal 2023. Management expects that in
the normal course of business, these leases will be renewed or replaced by other operating leases.
Operating Leases- Related Parties
In connection with an asset purchase agreement with Read (see note 2) on April 1, 2018, we assumed the
lease of the building where the operation is located. This lease is with an executive of Read. The lease
agreement requires monthly payments of $18,000 per month for a term of 3 years, expiring on March 31,
2021. The lease contains four successive options to renew the lease with each renewal period being three
years at prices determined at the date of renewal as defined in the agreement. Rents paid to the executive
of Read totaled $18,000 during fiscal 2018.
Additionally, 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. Currently, this
facility is being leased on a month to month basis at an amount of $13,000 per month. Rents paid to entities
owned by certain shareholders and officers of the company and their immediate families totaled $156,000
in fiscal 2018, 2017, and 2016, respectively.
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 29, 2018, we had total amounts due regarding capital expenditures totaling $1.8 million, of which
$1.4 million is financed and pertains to completed work for the construction of a new building (see below).
The total $1.8 million amount is required to be paid in full in fiscal 2019.
At April 30, 2017, we had total amounts due regarding capital expenditures totaling $6.1 million, of which
$5.1 million was financed and pertained to completed work for the construction of a new building (see
below). Of the total $6.1 million, $4.8 million and $1.3 million were required to be paid in fiscal 2018 and
2019, respectively.
79
Purchase Commitments - Capital Expenditures
At April 29, 2018, we had open purchase commitments to construct a building and equipment for our
mattress fabrics segment totaling $3.4 million. The $3.4 million includes $1.4 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 expands our distribution capabilities and office space at a cost of $11.3 million. This
agreement required an installment payment of $1.9 million in April 2016, $4.3 million in fiscal 2017, $3.7
million in fiscal 2018, and $1.4 million in fiscal 2019 (which was paid in May 2018). Interest was charged
on the outstanding installment payments at a rate of $2.25% plus the current 30 day LIBOR rate. Also, we
were required to issue a letter of a credit totaling $5.0 million with the contractor being the beneficiary.
In addition to the interest that was charged on the outstanding installment payments, there was a 0.1%
unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per
month (see note 11 for further details).
This new building was placed into service July 2017 (our first quarter of fiscal 2018).
13. 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 updated and replaced 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 29, 2018, there were 978,908 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.
80
The following tables summarize stock option activity during fiscal 2018, 2017, and 2016:
2018
2017
2016
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
15,600 $
-
(15,600)
-
-
7.14
-
7.14
-
-
83,600 $ 8.37
-
8.65
-
7.14
-
(68,000)
-
15,600
140,100 $ 6.49
-
3.68
4.59
8.37
-
(54,500)
(2,000)
83,600
outstanding at beginning
of year
granted
exercised
canceled/expired
outstanding at end of year
At April 29, 2018, there were no option shares of common stock outstanding and exercisable. Therefore,
there was no unrecognized compensation cost related to incentive stock option awards at April 29, 2018.
No compensation expense was recorded for incentive or non-qualified stock options in fiscal 2018, 2017
and 2016 as all stock option awards were fully vested prior to fiscal 2016.
The aggregate intrinsic value for options exercised was $393,000, $1.7 million, and $1.3 million, in fiscal
2018, 2017, and 2016, respectively.
Time-Based Restricted Stock Awards
The following table summarizes the time vested restricted stock activity during fiscal years 2018, 2017,
and 2016:
outstanding at beginning of year
granted
vested
outstanding at end of year
The following table summarizes information related to our grants of time-based restricted stock awards
associated with a key member of management during fiscal years 2018 and 2017:
2018
Shares
1,200
1,200
(1,200)
1,200
2017
Shares
-
1,200
-
1,200
2016
Shares
-
-
-
-
(1)
Restricted Stock
Awarded
(2)
Price Per
Vesting
Share Period
1,200 $32.50
1,200
$28.00
11 months
11 months
Date of Grant
July 13, 2017
June 14, 2016
During the first quarter of fiscal 2018, 1,200 shares of common stock associated with the June 14, 2016
grant vested and had a weighted average fair value of $34,000 or $28 per share.
At April 29, 2018, 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 $38,000 and $29,000 within selling, general, and administrative
expense for time vested restricted stock units in fiscal 2018 and 2017, 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.
81
Performance Based Restricted Stock Units
We have granted performance based restricted stock units to executives and other 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 on the date of grant. Our performance based restricted stock units granted to a non-
employee were measured based on the fair market value at the earlier date of when the performance
criteria are met or the end of the reporting period.
Executive Management
On July 13, 2017, we granted performance-based restricted stock units to members of executive
management (NEOs) which could earn up to a certain number of shares of common stock if certain
performance targets are met over a three-fiscal year performance period as defined in the related restricted
stock unit agreements. The number of shares of common stock that are earned based on the performance
targets that have been achieved will be adjusted based on a market-based total shareholder return
component as defined in the related restricted stock unit agreements.
Compensation cost is measured based on the fair market value on the date of grant (July 13, 2017). The
fair market value per share was determined using the Monte Carlo simulation model for the market-based
total shareholder return component and the closing price of our common stock for the performance-based
components.
The following table provides assumptions used to determine the fair market value of the market-based
total shareholder return component using the Monte Carlo simulation model on the date of grant of July
13, 2017:
Closing price of our common stock
Expected volatility of our common stock
Expected volatility of peer companies
Risk-free interest rate
Dividend yield
Correlation coefficient of peer companies
$ 32.50
31.0%
16.5%
1.56%
1.66%
0.46
On July 14, 2016 and July 15, 2015, we granted performance-based restricted stock units to NEOs which
could earn up to a certain number of shares of common stock if certain performance targets were met over
a three-fiscal year performance period as defined in the related restricted stock unit agreements. These
awards were measured based on the fair market value (closing price of our common stock) on the date of
grant. No market-based total shareholder return component was included in these awards.
Other Key Employees and a Non-Employee
We granted performance-based restricted stock units which could earn up to a certain number of shares of
common stock if certain performance targets are met over a three-fiscal year performance period as
defined in the related restricted stock unit agreements. Our performance based restricted stock units
granted to other key employees 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. No market-based
total shareholder return component was included in these awards.
82
Overall
The following table summarizes information related to our grants of performance based restricted stock
units associated with NEOs and key employees that are currently unvested:
Date of Grant
July 13, 2017 (1)
July 13, 2017 (2)
July 14, 2016 (1) (2)
July 15, 2015 (1) (2)
(3)
Restricted Stock
Units Awarded
78,195
44,000
107,880
107,554
Price Per
Share
$31.85 (4)
$32.50 (5)
$28.00 (5)
$32.23 (5)
Vesting
Period
3 years
3 years
3 years
3 years
(1) Performance-based restricted stock units awarded to NEOs.
(2) Performance-based restricted stock units awarded to key employees.
(3) 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.
(4) Price per share represents the fair market value per share ($0.98 per $1 or a reduction of $0.65 to the
closing price of the our common stock) determined using the Monte Carlo simulation model for the
market-based total shareholder return component and the closing price of our common stock ($32.50) for
the performance-based components of the performance-based restricted stock units granted to our NEOs
on July 13, 2017.
(5) 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 that are currently unvested:
Date of Grant
July 13, 2017
July 14, 2016
July 15, 2015
(1)
Restricted Stock
Units Awarded
10,200
11,549
10,364
Price Per
Share
$30.10 (2)
$30.10 (2)
$30.10 (2)
Vesting
Period
3 years
3 years
3 years
(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 29, 2018, the end of our reporting period.
83
The following table summarizes information related to our performance based restricted stock units that
vested during the fiscal 2018, 2017, and 2016:
Common Stock
Shares Vested
102,845
16,000
37,192
12,000
115,855
(3)
Weighted Average
Fair Value
$1,820
$520
$637
$345
$1,183
Price
Per Share
$17.70 (4)
$32.50 (5)
$17.12 (4)
$28.77 (5)
$10.21 (4)
Fiscal Year
Fiscal 2018 (1)
Fiscal 2018 (2)
Fiscal 2017 (1)
Fiscal 2017 (2)
Fiscal 2016 (1)
(1) NEOs and key employees.
(2) Non-employee
(3) Dollar amounts are in thousands.
(4) Price per share represents closing price of our common stock on the date of grant.
(5) The respective grants vested during the first quarter of fiscal 2018 or 2017, respectively. Accordingly,
the price per share represents the closing price of our common stock on the date the award vested.
We recorded compensation expense of $2.0 million, $3.2 million and $2.6 million within selling, general,
and administrative expense associated with our performance based restricted stock units for fiscal 2018,
2017, and 2016, 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 29, 2018, the remaining unrecognized compensation cost related to the performance based
restricted stock units was $1.3 million, which is expected to be recognized over a weighted average
vesting period of 1.3 years.
Common Stock Awards
The following table summarizes information related to our grants of common stock to our outside
directors during fiscal 2018, 2017, and 2016:
Date of Grant
October 2, 2017
October 3, 2016
October 1, 2015
Common Stock
Awarded
4,800
4,800
3,000
(1)
Price Per
Share
$33.20
$29.80
$31.77
Vesting
Period
Immediate
Immediate
Immediate
(1) Price per share represents closing price of our common stock on the date of grant.
We recorded $159,000, $143,000, and $95,000, of compensation expense within selling, general, and
administrative expense for these common stock awards for fiscal 2018, 2017, and 2016, respectively.
84
14. Fair Value of Financial Instruments
ASC Topic 820 establishes a fair value hierarchy that distinguishes between assumptions based on market
data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an
asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair
value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2
inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The
hierarchy consists of three broad levels as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable, and
Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect
those that market participants would use.
Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring
basis:
Fair value measurements at April 29, 2018 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
Large Blend Fund
Growth Allocation Fund
Moderate Allocation Fund
Other
Liabilities:
$ 6,492
1,085
747
619
402
169
113
150
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
$ 6,492
1,085
747
619
402
169
113
150
EURO Foreign Exchange Contract
N/A
$ 55
N/A
$ 55
85
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:
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
88
76
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
$4,811
1,081
751
611
365
126
88
76
Liabilities:
None
N/A
N/A
N/A
N/A
Our EURO foreign exchange contract was recorded at a fair value provided by our bank and is classified
within level 2 of the fair value hierarchy. Most derivative contracts are not listed on an exchange and
require the use of valuation models. In accordance with ASC Topic 820, we attempted to maximize the
use of observable inputs used in the valuation models used to determine the fair value of this contract.
Derivative contracts valued based on valuation models with significant unobservable inputs and that are
not actively traded, are classified within level 3 of the fair value hierarchy.
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.
Nonrecurring Basis
At April 29, 2018, we had no assets that were required to be measured at fair value on a nonrecurring
basis other than the assets acquired from Read (see note 2) that were acquired at fair value:
Fair value measurements at April 29, 2018 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:
Customer Relationships
Goodwill
Inventory
Tradename
Equipment
Liabilities:
None
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
86
$2,247
2,107
1,128
683
379
$ 2,247
2,107
1,128
683
379
N/A
N/A
These customer relationships were recorded at fair market value using a multi-period excess earnings
valuation model that used significant unobservable inputs and were classified as level 3. The tradename
was recorded at fair market value using the royalty from relief method that used significant unobservable
inputs and were classified as level 3.
Additionally, we acquired certain current assets such as accounts receivable and other assets and assumed
certain liabilities such as deferred revenue, accounts payable and accrued expenses. Based on the nature
of these items and their short maturity, the carrying amount of these items approximated their fair values.
See note 2 for the allocation of the acquisition cost to the assets acquired and liabilities assumed based on
their fair values.
15. DERIVATIVES
During the fourth quarter, we entered into a EURO foreign exchange contract to mitigate the risk of foreign
exchange rate fluctuations associated with certain capital expenditures. The contract effectively converts our
EURO capital expenditures at a fixed EURO foreign exchange rate compared with the United States dollar
of 1.263 and is due to expire in August 2018.
In accordance with the provisions of ASC Topic 815, Derivatives and Hedging, our EURO foreign
exchange contract was designated as a cash flow hedge, with the fair value of these financial instruments
recorded in other assets and changes in fair value recorded in accumulated other comprehensive income.
ASC Topic 815 requires disclosure of gains and losses on derivative instruments in the following tabular
format.
(Amounts in Thousands)
Fair Values of Derivative Instruments
April 29, 2018
April 30,2017
Derivatives designated as hedging instruments
under ASC Topic 815
Euro Foreign Exchange Contract
Balance
Sheet
Location
Accrued
Expenses
Fair
Value
Balance
Sheet
Location
Fair
Value
$55
N/A
$-
Derivatives in
ASC Topic 815
Net Investment
Hedging
Relationships
Amt of Gain (Loss) (net of
tax) Recognized in OCI on
Derivative (Effective
Portion) and recorded in
Accrued Expenses at Fair
Value
Location of Gain or
(Loss) Reclassified
from Accumulated OCI
into Income
(Effective Portion)
Amount of Gain or (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount Excluded
from Effectiveness
Testing)
Amount of Gain (loss) (net of tax)
Recognized in Income on
Derivative (Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
2018
2017
2016
2018
2017
2016
2018
2017
2016
EURO Foreign
Exchange Contract
$(55)
$-
$-
Other Exp
$-
$-
$-
Other Exp
$-
$-
$-
87
16. NET INCOME PER SHARE
Basic net income per share is computed using the weighted-average number of shares outstanding during
the period. Diluted net income per share uses the weighted-average number of shares outstanding during
the period plus the dilutive effect of stock-based compensation calculated using the treasury stock
method. Weighted average shares used in the computation of basic and diluted net income per share are
as follows:
(in thousands)
weighted-average common
shares outstanding, basic
dilutive effect of stock-based compensation
weighted-average common
shares outstanding, diluted
2018
2017
2016
12,431
202
12,312
206
12,302
173
12,633
12,518
12,475
All options to purchase shares of common stock were included in the computation of diluted net income
for fiscal years 2018, 2017, and 2016, as the exercise price of the options was less than the average
market price of common shares.
17. 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 $1.1 million, $924,000, and $843,000 during
fiscal years 2018, 2017, and 2016, 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 $192,000, $185,000 and $180,000 in fiscal years 2018, 2017, and
2016, respectively. Our nonqualified deferred compensation plan liability of $7.4 million and $5.5
million at April 29, 2018 and April 30, 2017, were recorded in deferred compensation in the 2018 and
2017 Consolidated Balance Sheets, respectively.
We have 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 $7.3 million and $5.5 million at April
29, 2018 and April 30, 2017, and were recorded in long-term investments-rabbi trust in the 2018 and
2017 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).
88
18. SEGMENT INFORMATION
The company’s operations are classified into two business segments: mattress fabrics and upholstery
fabrics. The mattress fabrics segment manufacturers, sources, and primarily sells fabrics and mattress
covers to 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 90%, 92% and 93% of total consolidated net sales in
fiscal 2018, 2017, and 2016, respectively. International sales accounted for 23% of net sales in fiscal 2018
and 22% of net sales in fiscal years 2017 and 2016, and are summarized by geographic area as follows:
(dollars in thousands)
north america (excluding USA) (1)
far east and asia (2)
all other areas
2018
$ 27,844
40,671
5,681
$ 74,196
2017
2016
29,995
34,695
3,618
68,308
31,667
31,927
4,336
67,930
(1) Of this amount, $21.9 million, $22.3 million, and $24.2 million are attributable to shipments to
Mexico in fiscal 2018, 2017, and 2016, respectively.
(2) Of this amount $32.6 million, $26.6 million, and $23.1 million are attributable to shipments to
China in fiscal 2018, 2017, and 2016, 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. The upholstery fabrics segment also includes in segment assets goodwill,
customer relationships, and tradename associated with the acquisition of Read Window Products, LLC.
(see note 2 for further details).
89
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
2018
2017
2016
$ 131,128
192,597
$ 323,725
$
$
25,836
38,797
64,633
118,739
190,805
309,544
26,170
43,065
69,235
126,441
186,419
312,860
26,393
38,718
65,111
2018
2017
2016
(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
$
$
$
$
14,881
12,935
9,356
37,172
10,956
25,861
36,817
(9,356)
27,461
(94)
534
(1,018)
26,883
15,079
13,685
10,393
39,157
11,091
29,380
40,471
(10,393)
30,078
-
299
(681)
29,696
15,094
12,223
9,456
36,773
11,298
26,496
37,794
(9,456)
28,338
-
176
(616)
27,898
One customer within the upholstery fabrics segment represented 12%, 11%, and 13% of
consolidated net sales in fiscal 2018, 2017 and 2016, respectively. One customer within the mattress
fabrics segment represented 13% of consolidated net sales in fiscal 2018, 2017, and 2016,
respectively. One customer within the upholstery fabrics segment accounted for 13% of the net
accounts receivable balance as of April 29, 2018 and no customers within the upholstery fabrics
segment accounted for 10% or more of net accounts receivable as of April 30, 2017. Two customers
within the mattress fabrics segment accounted for 20% and 22% of the net accounts receivable
balance as of April 29, 2018 and April 30, 2017, respectively.
The hourly employees at our manufacturing facility in Canada (approximately 12% of our
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.
90
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)
customer relationships
tradename
goodwill
property, plant, and equipment
total upholstery fabrics assets
2018
2017
2016
$
43,935
753
613
11,462
1,501
48,797 (2)
$ 107,061
47,038
828
664
11,462
1,106
48,916 (3)
110,014
$
$
29,021
-
-
-
35,826
2,226
683
2,107
2,445 (5) 1,879 (6)
43,287
30,900
43,472
903
715
11,462
-
37,480 (4)
94,032
26,540
-
-
-
1,564 (7)
28,104
total segment assets
150,348
140,914
122,136
non-segment assets
cash and cash equivalents
short-term investments – available for sale
short-term investments – held-to-maturity
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
21,228
2,451
25,759
-
1,458
2,870
20,795
2,443
-
-
419
2,894
552 (8)
856 (8)
5,035
7,326
957
$ 217,984
30,945
5,466
902
205,634
37,787
4,359
-
155
2,319
2,477
929 (8)
-
4,025
955
175,142
capital expenditures (9):
mattress fabrics
upholstery fabrics
unallocated corporate
depreciation expense
mattress fabrics
upholstery fabrics
total segment depreciation expense
$
$
$
$
6,713
488
238
7,439
6,850
822
7,672
17,689
822
260
18,771
6,245
840
7,085
9,666
626
416
10,708
5,837
834
6,671
(1) Current assets represent accounts receivable and inventory.
(2) The $48.8 million at April 29, 2018, represents property, plant, and equipment located in the
U.S. of $35.4 million and located in Canada of $13.4 million.
(3) 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.
(4) 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.
91
(5) The $2.4 million at April 29, 2018, represents property, plant, and equipment located in the U.S.
of $1.8 million and located in China of $661.
(6) 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.
(7) 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.
(8) The $552, $856, and $929 balance at April 29, 2018, April 30, 2017, and May 1, 2016, represent
property, plant, and equipment associated with unallocated corporate departments and corporate
departments shared by both the mattress and upholstery fabric segments located in the U.S.
(9) Capital expenditure amounts are stated on an accrual basis. See Consolidated Statement of Cash
Flows for capital expenditure amounts on a cash basis.
19. STATUTORY RESERVES
The company’s subsidiaries located in China are required to transfer 10% of their net income, as
determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to
a statutory surplus reserve fund until such reserve balance reaches 50% of the company’s registered
capital.
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of April
29, 2018, the company’s statutory surplus reserve was $4.6 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 $4.6 million to assist with debt repayment, capital expenditures, and
other expenses of the company’s business.
20. 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 2018 and 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.
At April 29, 2018, we had $5.0 million available for additional repurchases of our common stock.
92
21. DIVIDEND PROGRAM
On June 13, 2018, we announced that our board of directors approved a regular quarterly cash dividend
payment of $0.09 per share. These dividend payments are payable on July 16, 2018, to shareholders of
record as of July 2, 2018.
During fiscal 2018, dividend payments totaled $6.8 million, of which $2.6 million represented a special
cash dividend payment of $0.21 per share, and $4.2 million represented our regular quarterly cash
dividend payments ranging from $0.08 to $0.09 per share.
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.
22. EXIT AND DISPOSAL ACTIVITIES
On June 12, 2018, our board of directors decided to close our upholstery fabrics manufacturing facility in
Anderson, South Carolina. This closure is due to a continued decline in demand for the products
manufactured at this facility, reflecting a change in consumer style preferences. We expect to close the
facility by October 30, 2018. This action is expected to result in estimated cash charges of approximately
$450,000 for employee termination costs, and an undetermined non-cash charge associated with write-
downs of inventory. During this transition period, we will be working with our customers to fulfill any
outstanding and future orders, and through this process, we will be able to determine a good faith estimate
of any write-downs of inventory. Currently, management estimates that the fair market value of the long-
lived assets at this facility exceeds their carrying amount of approximately $400,000, and for this reason
no charge for impairment of long-lived assets is expected to be recorded in connection with this decision.
93
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 (loss)
depreciation
weighted average shares outstanding
weighted average shares outstanding,
assuming dilution
PER SHARE DATA
net income (loss) per share - basic
net income (loss) per share - diluted
dividends per share
book value
BALANCE SHEET DATA
operating working capital (3)
property, plant and equipment, net
total assets
capital expenditures
dividends paid
lines of credit (1)
shareholders' equity
capital employed (2)
RATIOS & OTHER DATA
gross profit margin
operating income margin
net income (loss) margin
effective income tax rate
Debt-to-total capital employed ratio (1) (2)
operating working capital turnover (3)
days sales in receivables
inventory turnover
STOCK DATA
stock price
high
low
close
daily average trading volume (shares)
fiscal
2018
4th quarter
fiscal
2018
3rd quarter
fiscal
2018
2nd quarter
fiscal
2018
1st quarter
fiscal
2017
4th quarter
fiscal
2017
3rd quarter
fiscal
2017
2nd quarter
fiscal
2017
1st quarter
$
$
$
$
$
$
78,184
63,424
14,760
8,296
6,464
26
(143)
115
6,466
(6,217)
17
12,666
1,992
12,450
85,310
67,707
17,603
9,959
7,644
31
(132)
229
7,516
8,208
56
(748)
1,966
12,436
80,698
64,894
15,804
9,415
6,389
37
(128)
321
6,159
2,108
75
3,976
1,905
12,440
79,533
63,068
16,465
9,501
6,964
-
(131)
353
6,742
1,640
118
4,984
1,807
12,399
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
12,611
12,436
12,580
12,590
12,567
12,544
12,507
12,463
1.02
1.00
0.09
13.12
49,939
51,794
217,984
1,568
1,121
-
163,376
114,817
18.9%
8.3
16.2
(96.1)
0.0
7.1
30
4.8
32.29
27.40
30.10
18.3
(0.06)
(0.06)
0.09
12.22
47,760
51,838
216,844
1,274
1,119
-
152,182
109,165
20.6%
9.0
(0.9)
109.2
0.0
7.4
28
5.2
34.05
26.15
31.35
17.4
0.32
0.32
0.08
12.31
46,620
52,530
201,043
1,529
995
-
153,080
109,373
19.6%
7.9
4.9
34.2
0.0
7.4
27
5.2
33.25
27.00
31.95
24.4
0.40
0.40
0.29
12.03
42,608
52,912
207,904
3,068
3,608
5,000
149,677
108,222
20.7%
8.8
6.3
24.3
4.6
7.4
25
4.7
34.00
30.60
30.65
27.9
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
(1) Debt represents outstanding borrowings on our lines of credit.
(2) Capital employed does not include cash and cash equivalents, short-term investments (available-for-sale), short-term investments (held-to-maturity),
long-term investments (held-to-maturity), long-term investments (rabbi trust), lines of credit, noncurrent deferred tax assets and liabilities,
income taxes receivable and payable, and deferred compensation.
(3) Operating working capital for this calculation is accounts receivable and inventories, offset by accounts payable-trade,
accounts payable - capital expenditures, and deferred revenue.
94
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 29, 2018, 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 29, 2018. 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 29, 2018.
Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated
financial statements as of and for the years ended April 29, 2018, April 30, 2017 and May 1, 2016 and has
audited the company’s effectiveness of internal controls over financial reporting as of April 29, 2018, as
stated in their report, which is included in Item 8 hereof.
During the quarter ended April 29, 2018, 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.
95
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 29, 2018, based on criteria established in the 2013 Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of April 29, 2018, 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) (“PCAOB”), the consolidated financial statements of the Company as of and for the
year ended April 29, 2018, and our report dated July 13, 2018 expressed “an unqualified opinion” on
those financial statements.
Basis for opinion
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 are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and limitations of internal control over financial reporting
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.
/s/ GRANT THORNTON LLP
Charlotte, North Carolina
July 13, 2018
96
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.
97
The following table sets forth information as of the end of fiscal 2018 regarding shares of 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)
-
-
-
$-
-
$-
978,908
-
978,908
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.
98
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 .................................................................. 54
Consolidated Balance Sheets – April 29, 2018 and
April 30, 2017 ..................................................................................................................................... 55
Consolidated Statements of Net Income -
for the years ended April 29, 2018,
April 30, 2017 and May 1, 2016 ......................................................................................................... 56
Consolidated Statements of Comprehensive Income -
for the years ended April 29, 2018,
April 30, 2017 and May 1, 2016………………………………………………………………… ...... 57
Consolidated Statements of Shareholders’ Equity -
for the years ended April 29, 2018,
April 30, 2017 and May 1, 2016 ......................................................................................................... 58
Consolidated Statements of Cash Flows -
for the years ended April 29, 2018,
April 30, 2017 and May 1, 2016 ......................................................................................................... 59
Notes to Consolidated Financial Statements.......................................................................................... 60
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.
99
10.1
Written description of Annual Incentive Plan. (*)
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Form of restricted stock unit agreement for restricted stock units granted to executive officers
pursuant to the 2015 Equity Incentive Plan was filed as Exhibit 10.1 to the company’s Form 10-Q
dated September 8, 2017 (Commission File No. 001-12597), and incorporated herein by reference.
(*)
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. (*)
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. (*)
100
10.15
10.16
10.17
21
23
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). (*)
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.
24(a)
Power of Attorney of Patrick B. Flavin, dated July 13, 2018
24(b)
Power of Attorney of Kenneth R. Larson, dated July 13, 2018
24(c)
Power of Attorney of Kenneth W. McAllister, dated July13, 2018
24(d)
Power of Attorney of Fred A. Jackson, dated July13, 2018
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 103 under the subheading “Exhibit Index.”
c)
Financial Statement Schedules:
None
None
ITEM 16. FORM 10-K SUMMARY
101
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 13th day
of July 2018.
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 13th day of July
2018.
/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.
102
EXHIBIT INDEX
Exhibit Number
Exhibit
10.1
Written Description of Annual Incentive Plan
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.
Power of Attorney of Patrick B. Flavin, dated July 13, 2018
Power of Attorney of Kenneth R. Larson, dated July 13, 2018
Power of Attorney of Kenneth W. McAllister, dated July 13, 2018
Power of Attorney of Fred A. Jackson, dated July 13, 2018
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
103
Exhibit 10.1
Written Description of Annual Incentive Plan
The annual incentive plan is structured to provide potential bonus payments to the participants
based upon an economic value added (EVA) performance measurement, which is derived from
return on capital employed. The plan was created pursuant to the Culp Inc. 2015 Equity
Incentive Plan and provides for bonuses based upon the EVA of the entire Company in the case
of certain executives, and upon the EVA of one of the Company’s two divisions for other
executives.
EVA is calculated under the incentive plan by determining the capital employed in the portion of
the Company that employs the award recipient (the Company or one of the Company’s two
divisions, referred to herein as a “reporting unit’), and then multiplying the capital employed by
a cost of capital (stated as a percentage) to determine the “capital charge” for each reporting unit.
The sum of operating income (prior to bonus payments and excluding non-recurring items)
earned by a reporting unit for each month during the fiscal year in excess of the capital charge
for the reporting unit for that month is deemed to be the economic value added, or EVA,
produced by the reporting unit for the year. To the extent that EVA is produced by a reporting
unit in a fiscal year, a sharing percentage is used to determine the bonus pool for the award
recipients from that reporting unit. The bonus pool is divided among the recipients from the
reporting unit in accordance with proportions established by the Compensation Committee,
stated as a target bonus opportunity. The Committee also establishes a target amount of EVA for
each reporting unit. The sharing percentage for award recipients increases if the reporting unit
achieves EVA above the target level. Bonus amounts are paid in cash.
Exhibit 21
LIST OF SUBSIDIARIES OF CULP, INC.
Name of Subsidiary
Jurisdiction of Incorporation
Culp Fabrics (Shanghai) Co., Ltd.
Culp International Holdings Ltd.
Rayonese Textile Inc.
Read Window Products, LLC
Culp Europe
People’s Republic of China
Cayman Islands
Canada
United States (Tennessee)
Poland
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated July 13, 2018, with respect to the consolidated financial statements and
internal control over financial reporting included in the Annual Report of Culp, Inc. on Form 10-K for the
fiscal year ended April 29, 2018. 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).
/s/ Grant Thornton LLP
Raleigh, North Carolina
July 13, 2018
Exhibit 24(a)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a North
Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and lawful agent
and attorney-in-fact to sign for the undersigned, as a director of the Corporation, the Corporation's Annual
Report on Form 10-K for the year ended April 29, 2018 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 13, 2018
Exhibit 24(b)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a North
Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and lawful agent
and attorney-in-fact to sign for the undersigned as a director of the Corporation the Corporation's Annual
Report on Form 10-K for the year ended April 29, 2018 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 13, 2018
Exhibit 24(c)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned director of CULP, INC., a North
Carolina corporation, hereby constitutes and appoints KENNETH R. BOWLING the true and lawful agent
and attorney-in-fact to sign for the undersigned as a director of the Corporation the Corporation's Annual
Report on Form 10-K for the year ended April 29, 2018 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 13, 2018
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 29, 2018 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 13, 2018
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 13, 2018
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 13, 2018
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 29, 2018 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 13, 2018
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 29, 2018 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 13, 2018
A signed original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the
electronic version of this written statement required by Section 906 has been provided to Culp, Inc. and
will be retained by Culp, Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
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PROFORMA CONSOLIDATED INCOME TAXES AND NET INCOME
FOR TWELVE MONTHS ENDED APRIL 29, 2018
(Amounts in Thousands)
Income before income taxes
Income taxes*
Loss from investment in unconsolidated joint venture
Net income
Net income per share-basic
Net income per share-diluted
Average shares outstanding-basic
Average shares outstanding-diluted
As Reported
April 29,
2018
$ 26,883
5,740
266
$ 20,877
$
$
1.68
1.65
12,431
12,633
Amounts (2)
Adjustments (1)
$
$
$
$
–
2,049
–
(2,049)
(0.16)
(0.16)
12,431
12,633
April 29, 2018
Proforma Net
of Adjustments
$ 26,883
7,789
266
$ 18,828
Percent of Sales
As Reported
April 29,
2018
8.3%
21.4%
0.1%
6.4%
April 29, 2018
Proforma Net
of Adjustments
8.3%
29.0%
0.1%
5.8%
1.51
$
$
1.49
12,431
12,633
(1) Adjustments represent the income tax effects of the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017, of which an income tax benefit of $4.3 million pertains to reduction in our U.S. Federal income tax rate
pursuant to the TCJA on the effective settlement on an IRS exam and the mandatory repatriation of undistributed earnings and profits associated with our foreign subsidiaries partially offset by a $2.2 million charge that
relates to the revaluation of our U.S. deferred income taxes as a result of the reduction in our annual effective income tax rate pursuant to the TCJA.
(2) No proforma adjustments were applicable for the comparative twelve-month period ending April 30, 2017, as the TCJA was not enacted or effective prior to December 22, 2017.
* Percent of sales column for income taxes is calculated as a % of income before income taxes.
FREE CASH FLOW RECONCILIATION
Net cash provided by operating activities
Minus: Capital Expenditures
Minus: Investment in unconsolidated joint venture
Minus: Premium payment on life insurance policy
Plus: Proceeds from the sale of equipment
Minus: Payments on vendor-financed capital expenditures
Plus: Proceeds from the sale of long-term investments (Rabbi Trust)
Minus: Purchase of long-term investments (Rabbi Trust)
Effects of exchange rate changes on cash and cash equivalents
Free Cash Flow
FY 2018
$ 27,473
(8,005)
(661)
(18)
6
(3,750)
57
(1,902)
85
$ 13,285
FY 2017
$ 34,067
(11,858)
(1,129)
(18)
141
(1,050)
–
(1,351)
(56)
$ 18,746
FY 2016
$ 28,383
(11,475)
–
(18)
233
–
–
(1,649)
498
$ 15,972
SUMMARY OF CASH AND INVESTMENTS
APRIL 29, 2018, APRIL 30, 2017 and MAY 1, 2016
(Amounts in Thousands)
Amounts
April 30,
2017*
$ 20,795
2,443
–
30,945
$ 54,183
April 29,
2018*
$ 21,228
2,451
25,759
5,035
$ 54,473
May 1,
2016*
$ 37,787
4,359
–
–
$ 42,146
Cash and cash equivalents
Short-term investments - Available for Sale
Short-term investments - Held-To-Maturity
Long-term investments - Held-To-Maturity
Total cash and investments
* Derived from audited financial statements.
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 due to 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 potential acquisitions, 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, general economic conditions, as well as our success in finalizing acquisition negotiations, and integrating
acquired businesses. 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. 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 13, 2018, for the fiscal year ended April 29, 2018, 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 premium payments on our life insurance policy, less payments on vendor-financed capital expenditures, less the
purchase of long-term investments associated with our Rabbi Trust, plus proceeds from the sale of long-term investments associated with our Rabbi
Trust, 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 proforma income statement information, which discloses adjusted net income, a non-GAAP measure that eliminates
income tax expense associated with the U.S. Income Tax Reform Act (the Tax Act) enacted on December 22, 2017. We have included this
proforma information in order to exclude the income tax effects of the Tax Act that are not expected to occur on a regular basis. Details of
these calculations and a reconciliation to information from our GAAP financial statements are set forth in this report. Management believes
this presentation is useful to investors in that it aids in the comparison of financial results among comparable financial periods. However, this
information should not be viewed as a substitute for net income calculated in accordance with GAAP. In addition, calculation of the income tax
expense associated with the Tax Act involves numerous estimates and assumptions, which we have made in good faith. In order to determine the
income tax effects of the Tax Act, estimates were and will be required based on projections of U.S. taxable income, capital expenditures, working
capital, employee compensation, cash flow requirements of our U.S. Parent and foreign subsidiaries. Our estimates may change based on actual
versus projected results and revisions to our estimates will be recorded during the measurement period allowed by the Securities and Exchange
Commission, which is not to extend beyond one year from the enactment date.
THIS PAGE LEFT INTENTIONALLY BLANK
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)
Shareholder Information
Corporate Address
1823 Eastchester Drive
Post Office Box 2686
High Point, NC 27265
Telephone: (336) 889-5161
Fax: (336) 887-7089
www.culp.com
Registrar and Transfer Agent
Computershare Investor Services
P.O. Box 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
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 –
Simon R. Shoucair
Kenneth R. Larson
Owner and Chief Executive Officer,
Slumberland Furniture,
a retailer of furniture and bedding
Little Canada, MN
Director (A,C,N)
Kenneth W. McAllister
Member/Manager, The McAllister
Firm PLLC, a law firm
High Point, NC
Director (A,C,E,N,L)
Board Committees:
A- Audit
C- Compensation
E- Executive
N- Corporate Governance and Nominating
L- Lead Director
Stock Listing
Culp, Inc. common stock is traded on
the New York Stock Exchange under
the symbol CULP. As of July 20, 2018,
Culp, Inc. had approximately 4,530
shareholders based on the number of
holders of record and an estimate of
the number of individual participants
represented by security position listings.
Annual Meeting
Shareholders are cordially invited to
attend the annual meeting to be held at
9:00 a.m. on Thursday, September 20,
2018, at the company’s corporate offices,
1823 Eastchester Drive, High Point,
North Carolina.
Culp, Inc. | 1823 Eastchester Drive
Post Office Box 2686, High Point, NC 27265
(336) 889-5161 | www.culp.com