2 0 1 9 A N N U A L R E P O R T
Commitment
to Excellence
Rob Culp
1946-2018
A tribute to Robert G. Culp, III
In fiscal 2019, Culp lost a great leader,
friend, and one of our founders, Robert G.
Culp, III. Rob started the company in 1972
with his father, Robert G. Culp, Jr. He was
named President of the company in 1981
and Chief Operating Officer in 1985. The
Board of Directors named Rob as Chief
Executive Officer in 1988, and he served
in that capacity until 2007. He also served
as Chairman of the Board of Directors from 1990 until
the time of his death. Under Rob’s leadership, Culp grew
from a small converter of fabrics to a public company
that has become one of the world’s largest marketers
of mattress fabrics for bedding and upholstery fabrics
for furniture, with global operations and approximately
1,400 employees worldwide.
As a loving and devoted husband, father, and
grandfather, Rob cherished his family, and he was
also deeply committed to his home community of
High Point through various philanthropic efforts. In
the example of his parents, he gave of his time and
resources humbly and without a need for recognition.
Rob was an avid supporter of his beloved alma mater,
the University of North Carolina, where he received his
bachelor’s degree in economics. He earned his MBA
from the Wharton School of Business at the University
of Pennsylvania. Rob also served as a member of the
board of directors of Old Dominion Freight
Line, Leggett & Platt and Slumberland. He
was well respected throughout the home
furnishings industry and remained active in
trade associations throughout his career.
Rob enjoyed very strong relationships with
our valued customers and deep ties within
our industry. Known as a true servant-
leader, he was highly admired by all who
had the privilege to work with him, both
within the Culp family and throughout the markets
we serve. Rob embodied the company’s commitment
to excellence and integrity in everything he did. He
mentored countless employees, seeing their potential
and helping them develop, and he made sure each and
every associate knew he or she was a valuable member
of the team. A cheery greeting from Rob was a given in
our offices and at all of our plants around the globe.
We are deeply grateful for Rob’s outstanding leadership,
innovative vision, tireless work ethic, and unwavering
commitment to the company, our associates, and our
customers. Inspired by his example, we will continue
to pursue a strategy that honors his legacy and delivers
greater value to both our customers and shareholders.
The Culp name will live on in our community and the
home furnishings industry, a symbol of excellence
known and beloved around the world.
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.
1
Mattress
Fabrics
49%
Home
Accessories
5%
2019
Sales
Mix
46%
Upholstery
Fabrics
49%
Acquisitions
2019
Capital
Allocation
19%
Dividends
13%
Share
Repurchases
19%
Cap Ex
Shares in Culp, Inc. are traded on
the New York Stock Exchange
under the symbol CULP.
Financial Highlights
2
(Amounts in thousands, except per share data)
Net Sales
Income before income taxes
Income before income taxes margin
Net income attributable to Culp, Inc.
common shareholders
Net income attributable to Culp, Inc.
common shareholders per share:
Basic
Diluted
Adjusted income before income taxes (1)
Adjusted income before income taxes margin
Adjusted net income attributable to Culp, Inc.
common shareholders (1)
Average shares outstanding:
Basic
Diluted
2019
$ 296,669
11,996
2018
2017
$ 323,725 $ 309,544
29,696
26,883
4.0%
8.3%
9.6%
5,676
20,877
22,334
0.46
0.45
14,737
5.0%
1.68
1.65
-
-
5,126
18,828
1.81
1.78
-
-
-
12,462
12,548
12,431
12,633
12,312
12,518
Cash Returned to Shareholders
Cost of shares repurchased
Number of shares repurchased
Dividends paid
Cumulative funds returned to shareholders (2)
$
3,323
161
4,732
65,072
-
-
6,843
56,903
-
-
6,280
48,952
Balance Sheet
Total cash and investments
Capital employed at fiscal year-end (1)
Return on capital (1)
Total assets
Total debt (including subordinated loan payable,
long-term debt, current maturities of long-term
$ 45,009
125,331
$ 54,473
114,817
$ 54,183
98,429
11.7%
25.4%
31.6%
219,726
217,984
205,634
debt and line of credit)
Shareholders’ equity attributable to Culp
675
159,993
-
163,376
-
148,630
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)
Home Accessories Segment Highlights
Net sales (3)
Operating income (3)
Operating income margin
Capital employed (1)
Return on capital (1)
$ 145,059
11,608
$ 192,597
25,861
$ 190,805
29,380
8.0%
13.4%
15.4%
72,397
77,726
70,468
15.2%
34.3%
45.0%
$ 135,654
10,823
$ 131,128
10,956
$ 118,739
11,091
8.0%
8.4%
9.3%
19,415
20,370
16,006
55.0%
58.1%
63.8%
$ 15,956
(735)
(4.6)%
3,403
N.M.
-
-
-
-
-
-
-
-
-
-
(1) See reconciliation tables at the end of the report.
(2) Includes dividends paid and shares repurchased since June 2011 through July 16, 2019.
(3) See Note 21 of the Notes to Consolidated Financial Statements beginning on page 110 of the fiscal
2019 Form 10-K.
NET SALES
FISCAL YEARS 2015-19 (IN MILLIONS)
.
2
0
1
3
$
.
9
2
1
3
$
.
5
9
0
3
$
.
7
3
2
3
$
.
7
6
9
2
$
$350
$300
$250
$200
$150
‘15
‘16
‘17
‘18
‘19
PRE-TAX INCOME AND PRE-TAX MARGIN (1)
(EXCLUDING RESTRUCTURING, AND OTHER NON-RECURRING
CHARGES AND CREDITS)
FISCAL YEARS 2015-19 (IN MILLIONS)
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
32%
28%
24%
20%
16%
12%
8%
4%
$35
$30
$25
$20
$15
$10
9.6%
8.9%
8.3%
.
9
6
2
$
.
7
9
2
$
7.4%
.
0
3
2
$
.
9
7
2
$
5.0%
.
7
4
1
$
‘15
‘16
‘17
‘18
‘19
CAPITAL EMPLOYED AND
RETURN ON CAPITAL(1)
FISCAL YEARS 2015-19 (IN MILLIONS)
32.0% 31.6%
28.0%
25.4%
.
8
4
1
1
$
.
3
5
2
1
$
11.7%
$120
$100
$80
$60
.
4
8
9
$
.
4
0
9
$
.
2
3
8
$
‘15
‘16
‘17
‘18
‘19
FREE CASH FLOW AND DIVIDENDS AND
SHARES REPURCHASED (1)
FISCAL YEARS 2015-19 (IN MILLIONS)
$20
$18
$16
$14
$12
$10
$8
$6
$4
$2
.
.
1
3
1
$
0
6
1
$
.
0
5
1
$
.
7
8
1
$
.
3
3
1
$
$10.5
$8.3
$6.3
$6.8
.
5
1
1
$
$8.1
$12
$10
$8
$6
$4
$2
‘15
‘16
‘17
‘18
‘19
Fellow Shareholders:
3
Fiscal 2019 was a tumultuous year for Culp. While
our upholstery fabrics segment achieved another
year of overall higher annual sales, we faced
a number of significant headwinds throughout
the year. In particular, the continued influx of
low-priced imported mattresses from China and
uncertainties surrounding international tariffs,
as well as an overall weaker retail environment
during the second half of fiscal 2019, affected our
operating results. Additionally, in December 2018,
our company suffered a profound loss with the
passing of our beloved friend, colleague, and one
of the company’s founders, Rob Culp, III. Rob was
widely recognized as a visionary and passionate
leader who built a company known for innovation
and an unwavering commitment to our customers.
He was highly admired and respected both within
our organization and throughout the industries we
serve, and we miss the sharp wit, generosity, and
kindness he shared daily with our dedicated team
of associates.
In spite of these challenges, throughout fiscal
2019 we remained committed to Rob’s vision of
excellence and serving the needs of our valued
customers. We continued to execute our product-
driven strategy in each of our business segments,
with a relentless focus on design creativity and
product innovation. We also built upon strategic
initiatives implemented over the last several years
to further streamline operations, improve our
cost structure, and maximize efficiencies. These
initiatives included consolidating the weaving
operations of our mattress fabrics segment to
one facility, expanding production of our CLASS
sewn mattress covers in Haiti and China to
meet customer demand in the growing boxed
bedding market, and developing strategic supplier
relationships in Vietnam late in fiscal 2019 for
additional sourcing of cut and sewn kits for our
upholstery fabrics segment. Our flexible, global
manufacturing and sourcing platform has continued
to support our business segments, allowing us to
differentiate our products and respond to shifting
demand trends.
Our ability to offer a diverse product mix and reach
new market segments has been a key differentiator
for Culp in all of our marketplaces and will remain
our strategic focus going forward. Our acquisition
of Read Window Products in late fiscal 2018 allowed
us to expand our growing business in the hospitality
industry with a meaningful sales contribution,
and we further enhanced our market reach with
the establishment of Culp Home Accessories,
our finished products business offering bedding
accessories and home goods direct to both
consumers and businesses. Importantly, in spite of
the ongoing challenges for the year, we generated
cash flow from operations of $13.9 million and
free cash flow of $11.5 million for fiscal 2019, and
we have maintained a strong financial position,
providing the flexibility to support our operations
through a turbulent period and continue to pursue
additional growth opportunities. With our focused
efforts to protect our financial strength, Culp
continues to represent a strong and stable supplier
for our customers.
Mattress Fabrics Segment
For fiscal 2019, mattress fabric sales were $145.1
million, compared with $192.6 million in fiscal 2018.
These results reflect the ongoing disruptions and
uncertainties that have surrounded the domestic
bedding industry, primarily related to the high
volume of low-priced imported mattresses from
China that began in late fiscal 2018 and continued
through most of fiscal 2019. The supply of these
products affected most of our major customers,
resulting in reduced demand for our mattress
fabrics and covers throughout the year.
4
During March and April of 2019, import activity
began to slow in anticipation of the expected
anti-dumping ruling from the U.S. Department of
Commerce. This ruling came in May 2019, with
the Department imposing punitive anti-dumping
measures from 69 percent to as high as 1,731
percent against Chinese-made mattresses. We
believe these duties will ultimately provide some
relief for the domestic mattress industry, but
the anticipation of this ruling led to an influx of
these products at the end of calendar 2018 and
continuing through February 2019, and a weaker
mattress retail environment towards the end of
fiscal 2019 delayed the sale of this excess inventory.
This resulted in continued disruption in the bedding
industry and reduced demand for our products
through the end of the year.
Despite the turmoil, we continue to manage our
business in an efficient and responsible manner
and provide excellent service to our customers.
We have worked hard to create a sustainable
platform with enhanced capacity and distribution
capabilities, and the flexibility and scalability of our
operations have served us well, especially during
the difficult market conditions we face. In fiscal
2019, we consolidated our weaving operations to
one facility and expanded production of our CLASS
sewn mattress covers in Haiti and China to meet
customer demand. We also focused on controlling
costs, providing customers with products that
remain in demand, and upholding the exceptional
level of customer service that is a hallmark of
our business. We were pleased to achieve sound
profitability with an 8.0 percent operating margin
in fiscal 2019 in spite of the challenging business
environment, and we will continue to reinvest in
our business to maximize our operating efficiencies
and delivery capabilities in fiscal 2020 and beyond.
Additionally, our varied product mix of mattress
fabrics and sewn covers across most price points
and style trends has supported our diversification
strategy with favorable results. CLASS, our
mattress cover business, continued to perform well
in fiscal 2019 with the support of our global sewing
platform. We remain encouraged by the sales
trends with our core mattress cover customers,
as well as our ability to reach new customers
and additional market segments like the
popular and expanding boxed bedding space.
We have also continued to expand our design
capabilities, launching product software and a new
library system for cataloguing creations to drive
marketing and enhance innovation. Additionally,
we implemented a new digital marketing strategy
and expanded our social media presence to
enhance Culp’s brand awareness and increase
sales, especially with younger consumers.
While fiscal 2019 was a turbulent year for our
mattress fabrics business, we are optimistic about
the year ahead. Currently we expect the excess
supply of low-priced mattress imports from China
to continue through the first quarter of fiscal
2020, which will affect short term demand trends
and operating performance. We also continue to
monitor global trade uncertainties and the effect
of potential additional tariffs on our business.
Despite these ongoing challenges, we are pleased
to see some recent improvements in retail demand
trends, as well as many of our customers altering
their supply chains away from China. We have the
ability to leverage our creative designs, innovative
products, and global production capabilities to
enhance our leadership position and sustain Culp’s
competitive advantage, and we look forward to
the opportunities ahead for our mattress fabrics
business in fiscal 2020.
Upholstery Fabrics Segment
For fiscal 2019, upholstery fabric sales were $135.7
million, compared with $131.1 million in fiscal
2018. We were pleased to achieve another year of
higher annual sales, supported by a meaningful
contribution from our Read Window Products
acquisition late in fiscal 2018, but also partially
offset by the closure of our Anderson, South
Carolina, operation in the second quarter and
the impact of the additional external geopolitical
issues that affected our business. The ongoing
trade dispute between the U.S. and China and
uncertainties surrounding tariffs caused significant
disruptions across the supply chain for the
furniture industry, especially towards the end of our
fiscal year.
Throughout the year,
we pursued a product-
driven strategy with
a sustained focus
on innovation and
creative designs,
supported by our
5
Our ability to provide a diverse product offering allowed us to
reach new market segments and expand our customer base
in both the residential and hospitality markets in fiscal 2019.
6
7
Our varied product mix of mattress fabrics and sewn covers
across most price points and style trends has supported
our diversification strategy with favorable results.
7
substantial global platform. Our design team has
done an outstanding job reflecting current style
trends and meeting the changing demands of
our customers. Additionally, higher sales were
supported by our efforts to expand the breadth
of our customer base to include a broader range
of residential furniture customers, including
e-commerce, and reaching additional international
markets. We also saw continued growth in our
popular and expanding line of highly durable,
stain-resistant, LiveSmart® “performance fabrics.”
We are particularly excited about the launch of
LiveSmart Evolve™, a new line of fabrics featuring
our LiveSmart® performance technology combined
with recycled fibers to deliver a sustainable textile
product for a new generation of environmentally
conscious consumers. This new sustainable
product category was launched in the first quarter
of fiscal 2020 and supports Culp’s ongoing efforts
to reduce landfill waste and design products for
the betterment of tomorrow. We are also pleased
with the contribution from Read Window Products,
as fiscal 2019 marked the first full year of sales
for Read’s custom window treatments and other
products for the hospitality market. Our ability
to provide a diverse product offering allowed
us to reach new market segments and expand
our customer base in both the residential and
hospitality markets in fiscal 2019.
Looking ahead, we expect the soft retail demand
trends for furniture, as well as the impact of the
continued uncertainties surrounding tariffs and the
associated geopolitical risks, to continue affecting
our business at least through the early part of fiscal
2020. Late in fiscal 2019, we developed strategic
relationships in Vietnam for additional sourcing
of our cut and sewn kits, which has allowed us to
begin altering our supply chains to meet customer
demands in conjunction with the ongoing trade
disputes between the U.S. and China. This flexible
manufacturing and sourcing platform allows us to
differentiate our products and respond to shifting
demand trends, which we believe positions us well
for the long term. Above all, we remain focused
on providing innovative products that meet the
changing demands of our valued customers.
Home Accessories Segment
Commencing in the third quarter of fiscal 2019,
we began reporting a new home accessories
business segment, which includes the operations
of eLuxury, our e-commerce and finished products
business offering bedding accessories and
home goods. For the period since the June 2018
majority investment in eLuxury, sales for this
segment were $16.0 million.
Since our investment in eLuxury, we have
worked hard to establish this new
business segment and create
a combined platform that
supports both business-
to-consumer and
business-to-business
sales of finished products.
During the second half of
fiscal 2019, we developed
and launched new products in
coordination with Culp’s other
divisions, including mattress pads
and mattress protectors made with
Culp mattress fabrics and dog beds
made with our LiveSmart® performance fabrics.
We experienced some delays and increased costs
as we worked through typical product roll-out,
sampling and marketing issues for these new
products, and also saw reduced demand for
legacy mattress pad products during fiscal 2019.
We are also monitoring continued global trade
uncertainties and how additional tariffs may affect
some of our finished products. However, we are
encouraged by more recent sales trends on legacy
products, as well as our progress related to new
products, which we have now introduced to various
marketplaces. Additionally, we are focused on
expanding our sales channels beyond eLuxury’s
e-commerce platform to reach business retailers,
both in brick and mortar stores and through their
online platforms, as well as customers in the
hospitality industry.
Balance Sheet
Our ability to maintain a strong financial position
has been an important advantage for Culp,
especially as we experienced more challenging
business conditions this past year. We were
pleased to end fiscal 2019 with a strong balance
sheet, reporting $45.0 million in cash and
investments and a $675,000 subordinated loan
payable as of April 28, 2019. We have maintained
this position despite spending $4.8 million for
capital expenditures, including vendor financed
payments and investments in Haiti, funding $12.1
million in acquisition-related costs, and returning
$8.1 million to shareholders in regular dividends
and share repurchases. Additionally, in spite of the
headwinds for the year, we generated cash flow
from operations of $13.9 million in fiscal 2019, and
free cash flow of $11.5 million for the year.
For fiscal 2020, we will remain focused on
disciplined financial management. We are well
positioned to execute our growth strategy and make
the right investments to support our operations and
continue to serve our valued customers.
Capital Allocation Strategy
Our capital allocation strategy is inherent in
every aspect of our overall business strategy and
reinforces our commitment to deliver value to
our shareholders. Following the completion of a
multi-year expansion and efficiency project in our
mattress fabrics division, we returned to a more
maintenance level of capital expenditures in fiscal
2019 to support our operations and fund organic
growth in all of our businesses.
In line with our stated objective to use additional
cash for dividend payments and share repurchases,
commencing in the third quarter, we increased our
quarterly cash dividend from $0.09 to $0.10 per
share, or $0.40 per share on an annualized basis.
Importantly, we have raised the quarterly cash
dividend every year since we reinstated dividend
payments in fiscal 2012. Additionally, for fiscal
2019 Culp repurchased approximately 160,000
shares, leaving $1.7 million available under the
share repurchase program approved by the Board
in June 2016. Since June 2011, we have returned
approximately $65.0 million to shareholders in the
form of regular quarterly and special dividends and
share repurchases.
Looking ahead
While the past year was characterized by many
unique challenges for our business, we have worked
tirelessly to adjust to changing market conditions
8
and support our valued customers. We are proud
of our ability to continue to move Culp forward
and maintain our strong competitive position as a
financially stable and trusted leader in today’s global
marketplace. As we begin another year, we will
remain focused on our product-driven strategy in all
of our businesses. We believe our ability to leverage
our creative designs, innovative products, sustainable
global platform, and outstanding service capabilities
will drive our success. Although we expect the
soft retail demand trends for furniture, as well as
the continued uncertainties surrounding tariffs
and the associated geopolitical risks, to continue
at least through the early part of the year, we are
optimistic as we look to the opportunities ahead for
Culp. The dedication and commitment of everyone
associated with Culp, including our loyal associates
around the globe, outstanding management team,
and board of directors, provides us with a solid
foundation and gives us the ability to look confidently
to the future. Importantly, the values and vision of
excellence instilled by our departed co-founder, Rob
Culp, continue to inspire all that we do, and we will
continue to honor his legacy in the management of
Culp in fiscal 2020 and beyond.
Finally, we thank you, our shareholders, for your
continued support.
Sincerely,
Franklin N. Saxon
Chairman and Chief Executive Officer
Robert G. Culp, IV
President and Chief Operating Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 28, 2019
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
Trading Symbol(s)
Name of Each Exchange
On Which Registered
Common Stock, par value $.05/ Share
CULP
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 every Interactive Data File
required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit such files). YES
NO
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 the definitions 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 28, 2019, 12,391,160 shares of common stock were outstanding. As of October 28, 2018, the
aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $245,263,535
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 26, 2019 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 .......................................................................................................... 5
Segments ........................................................................................................................... 5
Overview of Industry and Markets ................................................................................... 9
Overview of Bedding Industry .......................................................................................... 9
Overview of Residential and Commercial Furniture Industry ........................................ 10
Products .......................................................................................................................... 11
Manufacturing and Sourcing........................................................................................... 13
Product Design and Styling ............................................................................................ 15
Distribution ..................................................................................................................... 16
Sources and Availability of Raw Materials .................................................................... 16
Seasonality ...................................................................................................................... 17
Competition .................................................................................................................... 18
Environmental and Other Regulations ............................................................................ 19
Employees ....................................................................................................................... 19
Customers and Sales ....................................................................................................... 20
Net Sales by Geographic Area ........................................................................................ 21
Backlog ........................................................................................................................... 21
Risk Factors ........................................................................................................................ 22
Unresolved Staff Comments ............................................................................................... 28
Properties ............................................................................................................................ 29
Legal Proceedings ............................................................................................................... 30
Mine Safety Disclosure ....................................................................................................... 30
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities ............................................................................... 30
Selected Financial Data ...................................................................................................... 33
Management’s Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................................................................... 34
Item No.
1.
1A.
1B.
2.
3.
4.
5.
6.
7.
7A.
Quantitative and Qualitative Disclosures About Market Risk ............................................ 63
8.
9.
9A.
9B.
Consolidated Financial Statements and Supplementary Data............................................. 64
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ....................................................................................................................... 118
Controls and Procedures ................................................................................................... 118
Other Information ............................................................................................................. 120
Item No.
10.
11.
12.
13.
14.
Page
PART III
Directors, Executive Officers, and Corporate Governance............................................... 120
Executive Compensation .................................................................................................. 121
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ........................................................................................... 121
Certain Relationships, Related Transactions, and Director Independence ....................... 121
Principal Accountant Fees and Services ........................................................................... 121
15.
Exhibits and Financial Statement Schedules .................................................................... 122
PART IV
Documents Filed as Part of this Report ............................................................................ 122
Exhibits ............................................................................................................................. 122
Financial Statement Schedules ......................................................................................... 122
Signatures ......................................................................................................................... 126
Exhibit Index .................................................................................................................... 127
16.
Form 10-K Summary ........................................................................................................ 125
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 21E of the Securities and Exchange Act of 1934). Such statements are
inherently subject to risks and uncertainties that may cause actual events and results to differ materially
from such statements. 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 to reflect any changes
in management’s expectations or any change in the assumptions or circumstances on which such
statements are based, whether 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,” “anticipate,” “estimate,” “plan,” “project,” and their
derivatives, and include but are not limited to statements about expectations for our future operations,
production levels, new project launches, 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 or liquidity measures, as well as any statements regarding potential
acquisitions, future economic or industry trends or future developments. There can be no assurance that
the company will realize these expectations, meet its guidance, or that these beliefs will prove correct.
Factors that could influence the matters discussed in such statements include the level of housing starts
and sales of existing homes, consumer confidence, trends in disposable income, and general economic
conditions. Decreases in these economic indicators could have a negative effect on our business and
prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in
consumer debt or the general rate of inflation, could affect us adversely. The future performance of our
business depends in part on our success in conducting and finalizing acquisition negotiations and
integrating acquired businesses into our existing operations. Changes in consumer tastes or preferences
toward products not produced by us could erode demand for our products. Changes in tariffs or trade
policy, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results
because a significant portion of our operations are located outside the United States. Strengthening of the
U.S. dollar against other currencies could make our products less competitive on the basis of price in
markets outside the United States, and strengthening of currencies in Canada and China can have a
negative impact on our sales of products produced in those places. Also, economic and political
instability in international areas could affect our operations or sources of goods in those areas, as well as
demand for our products in international markets. Finally, increases in market prices for petrochemical
products can significantly affect the prices we pay for raw materials, and in turn, increase our operating
costs and decrease our profitability. 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
As used in this document, the terms “Culp,” the “company,” “we,” “our,” and “us” refer to Culp,
Inc. and its consolidated subsidiaries (unless the context indicates another meaning). The term
“common stock” means the common stock of Culp, Inc., par value $.05 per share. The terms
“Read Window Products” and “Read” refer to our wholly-owned subsidiary, Read Window
Products, LLC. The term “eLuxury” refers to our majority-owned subsidiary, eLuxury, LLC.
Overview
Culp, Inc. manufactures, 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. Our new
home accessories segment is the company’s finished product and global e-commerce business
that manufactures, sources, and markets bedding accessories and home goods directly to
consumers and businesses. The company competes in a fashion-driven business, and we strive
to differentiate ourselves by placing a sustained focus on product innovation and creativity. In
addition, Culp places great emphasis on providing 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, while also developing a new e-commerce platform to support sales of
bedding accessories and specialty home goods to both consumers and business retailers.
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 three operating segments — mattress fabrics, upholstery fabrics, and home
accessories. The mattress fabrics business markets primarily knitted and woven fabrics, as well
as 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, as well as window treatment products and installation services for
customers in the hospitality and commercial industries. The home accessories business markets
a variety of bedding accessories and home goods, including mattress pads and protectors, sheet
sets, pillows, comforters, duvet covers, towels, fabric by the yard, and dog beds, directly to
consumers and businesses through global e-commerce and business-to-business sales channels.
Through our June 22, 2018 investment in eLuxury, LLC (“eLuxury”), we now have a
majority-owned company located in Evansville, Indiana, which operates the global e-commerce
platform for the home accessories segment.
2
Culp markets a variety of fabrics and other products 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 2019, we had active production facilities located in North
Carolina; Tennessee; Quebec, Canada; Shanghai, China; and a joint venture facility in Haiti.
We also source fabrics and cut and sewn kits from other manufacturers located primarily in
China, Turkey, and Vietnam, with almost all of such fabrics and cut and sewn kits produced
specifically for Culp and created by Culp designers. Additionally, our home accessories
segment markets a variety of mattress pad products manufactured at our facility in Indiana, and
also sources other finished bedding accessory and home good products internally from our
other business segments, as well as from other manufacturers located primarily in the United
States, China, and Southeast Asia. We operate distribution centers in North Carolina, Canada,
China, and Haiti to facilitate distribution of our fabric products. Products for our home
accessories segment are available for sale on eLuxury’s own branded website, eLuxury.com,
and through leading online retailers for specialty home goods. These products are primarily
distributed from our facility in Indiana, as well as U.S. fulfillment centers for certain products
and third-party online retailers.
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, following
the closure of our manufacturing facility in Anderson, South Carolina during the second quarter
of fiscal 2019, substantially all of our sales consisted of fabrics produced in Asia. The mattress
fabrics business remains mostly based in North America. For the home accessories segment,
approximately 40% of our sales in fiscal 2019 consisted of products produced outside of the
United States.
Total net sales in fiscal 2019 were $296.7 million. The mattress fabrics segment had net sales of
$145.1 million (49% of total net sales), the upholstery fabrics segment had net sales of $135.6
million (46% of total net sales), and the home accessories segment had net sales of $16.0
million (5% of total net sales).
Sales increased in our upholstery fabrics segment and declined in our mattress fabrics segment
during fiscal 2019 compared to fiscal 2018. The mattress fabrics segment was affected by
significant challenges, primarily associated with low-priced imported mattresses from China,
which disrupted the bedding industry and reduced demand for our mattress fabrics and sewn
covers. The upholstery fabrics segment was affected by uncertainties surrounding international
tariffs and a softer retail environment for furniture, primarily during the second half of fiscal
2019. The decline in mattress fabrics sales reversed a trend of increasing sales over the last
several years, while the increase in upholstery fabrics sales built upon the sales increase for this
segment in fiscal 2018, reversing a multi-year trend of sales declines.
This is our first year of reporting for our new home accessories segment, commencing with the
June 2018 majority investment in eLuxury. This segment experienced challenges during fiscal
2019 related to new product roll-out costs, reduced demand for legacy mattress pad products,
and the overall weaker retail environment during the second half of the year.
3
Overall, Culp faced a difficult business environment during fiscal 2019. Despite these
challenges, both the mattress fabrics segment and upholstery fabrics segment continued to build
upon strategic initiatives and structural changes that were implemented over the last several
years. A number of steps were taken in prior years to consolidate and streamline operations,
while adding capacity where necessary. These initiatives continued in fiscal 2019, with the
mattress fabrics segment consolidating its weaving operations to one facility, our plant in
Quebec, Canada, in order to maximize efficiencies and improve our cost structure. The
mattress fabrics segment also expanded production of our CLASS sewn mattress covers in Haiti
and China to meet customer demand in the growing boxed bedding market. Additionally, the
upholstery fabrics segment closed its manufacturing facility in Anderson, South Carolina due to
a continued decline in demand for the products manufactured at this facility. Late in fiscal
2019, this segment developed strategic supplier relationships in Vietnam for additional sourcing
of our cut and sewn kits, which has allowed us to begin altering our supply chains to meet
customer demands in conjunction with ongoing trade disputes between the U.S. and China. The
flexible manufacturing and sourcing platform created through these changes has allowed Culp
to place a greater emphasis on product innovation and the introduction of new designs to keep
current with industry trends. At the same time, it allows us to differentiate our products and
respond to shifting demand trends.
In addition to internal strategic actions, the company has made recent acquisitions to expand our
product offering and enhance our ability to reach new customers and markets. Late in fiscal
2018, the upholstery segment acquired Read Window Products, a window treatments company
providing expanded capacity and additional capabilities for our growing business in the
hospitality industry. Additionally, in the first quarter of fiscal 2019, we acquired a majority
interest in eLuxury, an e-commerce company offering bedding accessories and home good
products direct to consumers, which has provided a new sales channel and an expanded
addressable market for the company’s finished products in the bedding accessories and home
goods categories. 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 recent years. An increasing percentage of our sales are now
coming from those latest product introductions. The upholstery fabrics segment has experienced
strong demand for its LiveSmart® brand of performance fabrics. In the first quarter of fiscal
2020, we launched an expansion of this performance line to include a sustainable fabric line
utilizing recycled fibers combined with LiveSmart® performance technology. Additionally, our
new home accessories business segment developed and introduced a number of new bedding
accessories and home good items, including dog beds, fabrics by the yard, and a new mattress
pad line, during the second half of fiscal 2019. These new products were developed in
coordination with our other business segments utilizing Culp fabrics.
Additional information about trends and developments in each of our business segments is
provided in the “Segments” discussion below.
4
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.
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 three operating segments are mattress fabrics, upholstery fabrics, and home accessories. The
following table sets forth certain information for each of our segments.
Segment
Mattress Fabrics
Upholstery Fabrics
Non-U.S.-Produced
U.S.-Produced
Total Upholstery
Home Accessories
Total company
Sales by Fiscal Year ($ in Millions) and Percentage of Total Company Sales
Fiscal 2018
Fiscal 2019
Fiscal 2017
$
$
$
$
$
$
145.1
(49%)
121.8
13.8
135.6
16.0
296.7
(41%)
(5%)
(46%)
(5%)
(100%)
$
$
$
$
$
$
192.6
(60%)
122.6
8.5
131.1
--
323.7
(38%)
(2%)
(40%)
--
(100%)
$
$
$
$
$
$
190.8
(62%)
109.0
9.7
118.7
--
309.5
(35%)
(3%)
(38%)
--
(100%)
Additional financial information about our operating segments can be found in Note 21 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 sources products internally from Culp China, as
well as from a supplier in Turkey, based on our own designs and production schedule.
Additionally, Culp Home Fashions has a joint venture mattress cover facility in Haiti and utilizes
the Culp China platform for the production of sewn mattress covers as well. Knitted fabrics are
produced at both the Stokesdale and St. Jerome facilities, while jacquard (damask) fabric is now
produced solely at the St. Jerome facility following consolidation of our weaving operations
during the fourth quarter of fiscal 2019. The majority of our finishing and inspection processes
for mattress fabrics are conducted at the Stokesdale plant, while the St. Jerome plant provides
additional capacity and a second location for these processes. 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.
5
Culp Home Fashions had capital expenditures totaling $74 million during the past ten years,
with especially high spending levels during the four fiscal years spanning fiscal 2015 through
fiscal 2018. 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 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. 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 and owned by Culp, has a
manufacturing plant in High Point, North Carolina. This facility is leased by the company, and
its operation involves a limited capital investment in equipment. The business participates in a
joint marketing arrangement for the production and marketing of sewn mattress covers with
A. Lava & Son Co. of Chicago, a leading provider of mattress covers. The marketing venture is
known as Culp-Lava Applied Sewn Solutions (CLASS). 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 our CLASS operations in Haiti, and that joint-venture facility
began production of mattress covers for our CLASS business during the second quarter of
2018. We also utilize our Culp China platform to manufacture sewn mattress covers for our
CLASS business and to source these products from third-party suppliers in China. These three
manufacturing locations in North Carolina, Haiti, and China give us repetitive production
capabilities and allow us greater flexibility in meeting demand for mattress covers from
bedding producers.
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. In fiscal 2019, we continued these initiatives by consolidating our weaving
operations to one facility, our plant in Quebec, Canada, and also expanding production of our
CLASS sewn mattress covers in Haiti and China to meet customer demand in the growing
boxed bedding market. Additionally, we continued to expand our design capabilities,
launching product software and a new library system for cataloguing creations to drive
marketing and enhance innovation.
After eight consecutive years of growth, sales declined in fiscal 2019, mainly as a result of the
acceleration of low-priced mattress imports from China towards the end of fiscal 2018 and
through the first three quarters of fiscal 2019. This disrupted the U.S. bedding industry and
resulted in a decline in sales for domestic bedding manufacturers, which affected us as a
supplier to those manufacturers. In May of 2019, the U.S. Department of Commerce imposed
punitive anti-dumping measures against Chinese-made mattresses. We believe this action
ultimately will provide some relief for the domestic mattress industry. At the same time,
6
management took action during fiscal 2019 to respond to the challenging business environment
by consolidating our weaving operations into one facility, expanding production of our CLASS
sewn mattress covers in Haiti and China, controlling costs, and maintaining a focus on
providing customers with products that remain in demand and upholding high levels of
customer service.
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.
With the acquisition of Read Window Products at the end of fiscal 2018, this segment also
markets window treatment products and installation services, including roller shades, drapery,
hardware, and top-of-mattress soft goods, for customers in the hospitality and commercial
industries.
Following the closure of our manufacturing facility in Anderson, South Carolina during the
second quarter of fiscal 2019, this segment currently operates two manufacturing facilities in
Shanghai, China. We market cut and sewn fabric kits produced in these locations, as well as a
variety of upholstery fabrics and cut and sewn kits sourced from third party producers, mostly
in China and, toward the end of fiscal 2019, in Vietnam. Following the closure of our South
Carolina facility, sales of non-U.S. produced upholstery accounted for substantially all of our
upholstery fabric sales. Our China facilities in Shanghai include production of cut and sewn
“kits” made to specifications of furniture manufacturing customers using sourced fabrics, as
well as design, finishing, warehousing, quality control and inspection operations. We continue
to expand our marketing efforts to sell our China products in countries other than the U.S.,
including the Chinese local market. Additionally, we fabricate a variety of window treatments,
using mostly customer-supplied fabrics and materials, at our facility in Knoxville, Tennessee.
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 a weaker demand environment for upholstered furniture, before increasing by 10% in
fiscal 2018 and 3.5% in fiscal 2019. Our higher sales over the last two fiscal years 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®. Additionally, fiscal
2019 includes the first full year of sales from Read Window Products, our window treatment
and installation services businesses for customers in the hospitality and commercial industries,
which more than offset the loss of sales from the closure of our Anderson, South Carolina
facility during the second quarter. 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.
7
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 of Read Window Products at the end of fiscal 2018, representing a significant
expansion of our production capabilities in the hospitality market, along with the addition of
window treatment installation services.
Home Accessories. Culp acquired a majority interest in eLuxury, an online retailer of bedding
accessories and home goods, during the first quarter of fiscal 2019, which is now reported
under our new home accessories segment. This strategic investment represents the company’s
first foray into direct to consumer sales, adding a new sales channel and an expanded
addressable market for finished products.
The home accessories segment markets bedding accessories and home goods directly to
consumers and businesses through global e-commerce and business-to-business sales channels.
The primary products for this segment include mattress pads manufactured at eLuxury’s facility
located in Evansville, Indiana, as well as other bedding accessory and home good products,
including mattress protectors, sheet sets, pillows, comforters, duvet covers, towels, fabric by the
yard, and dog beds. Some of these products are sourced internally from Culp’s other business
segments, while others are sourced from other manufacturers located primarily in the United
States, China, and Southeast Asia.
Products for the home accessories segment are available on eLuxury’s own branded website,
eLuxury.com, and through leading online retailers for specialty home goods. Inventory for this
segment primarily is stored at and distributed from eLuxury’s facility in Indiana, as well as U.S.
fulfillment centers for certain products and third-party online retailers.
Our strategic focus for this segment is to develop innovative bedding accessory products and
other specialty home good items through the company’s global manufacturing platform and in
coordination with all of Culp’s other business segments. During the second half of fiscal 2019,
we developed and launched new products featuring Culp mattress fabrics and upholstery
fabrics, including mattress pads and mattress protectors made with Culp mattress fabrics and
dog beds made with LiveSmart® performance fabric. Additionally, we are focused on
expanding our sales channels beyond eLuxury’s global e-commerce platform to reach business
retailers, both in brick and mortar stores and through their online platforms, as well as
customers in the hospitality industry.
8
Overview of Industry and Markets
Culp markets products primarily to manufacturers, as well as business retailers, hospitality
customers, and consumers. The mattress fabrics segment and home accessories segment supply
the bedding industry, which produces mattress sets (mattresses, box springs, foundations and
top of bed components) and bedding accessory products. The upholstery fabrics segment
primarily 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, fabrics, and window treatments market includes fabrics and window
treatment products used in the hospitality industry (primarily hotels and motels); fabrics used
for upholstered office seating and modular office systems sold primarily for use in offices and
other institutional settings, as well as commercial textile wall coverings; and window treatments
for commercial application. The home accessories segment also supplies the home goods
markets, which includes a variety of home décor, housewares, furnishings, and accessory
products. The principal industries into which the company sells products – the bedding
industry and residential and commercial furniture industry – are described in more detail below.
Currently, a great majority of our products for our mattress fabrics and upholstery fabrics
segments are sold to manufacturers for end use in the U.S., and thus the discussions below are
focused on that market.
Overview of Bedding Industry
The bedding industry has contracted and expanded in recent years in accordance with the
general economy, although traditionally the industry has been relatively mature and stable. This
is due in part to the fact that a majority of bedding industry sales are replacement purchases,
which are less volatile than sales based on economic growth and new household formations.
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
significantly accelerated over the past two years, especially for lower-priced bedding. During
this time, China has accounted for the largest share of the imported units. 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.
As a result of the significant influx of low-priced imports from China, a number of domestic
“mattress petitioners” filed an anti-dumping petition with the U.S. International Trade
Commission and the U.S. Department of Commerce in September of 2018. In November of
2018, the U.S. International Trade Commission found a reasonable indication that unfairly
traded imports of mattresses from China caused material injury to the U.S. mattress industry,
and in May of 2019, the Department of Commerce imposed punitive anti-dumping duties
against Chinese-made mattresses. We believe that, in anticipation of this ruling, the level of
mattress imports entering the U.S. from China began to decline substantially in March and
April 2019. We expect this decline will continue as a result of the Department of Commerce
ruling, although mattress imports from Vietnam, as well as other countries, may continue to rise
as China producers move production out of China to avoid the anti-dumping duties.
9
A key trend driving the bedding industry is the increased demand for roll-packed/compressed
mattresses in both online and traditional sales channels, as consumer acceptance of boxed beds
as a delivery mechanism continues to drive growth and increase market share for this product,
increasing potential demand for sewn mattress covers. Another important trend is the increased
awareness among consumers about the health benefits of better sleep, with an increased focus
on the quality of bedding products and an apparent willingness on the part of consumers to
upgrade their bedding. A further 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. Additionally, the growth in non- traditional sources for retail mattress
sales, such as online e-commerce channels and wholesale warehouse clubs, has 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.
Additionally, with the ongoing global trade dispute between the U.S. and China, including the
imposition of tariffs during fiscal 2019 and the possibility for additional tariffs on China
imports, some customers are now beginning to alter supply chains away from China.
10
Products
As described above, our products include mattress fabrics and upholstery fabrics, which are two
of 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. Additionally, with the acquisition of Read Window Products, our
upholstery segment products also include window treatments and related products. Products for
our new home accessories segment include a variety of finished good bedding accessories and
specialty home goods.
Mattress Fabrics Segment
Mattress fabrics segment sales constituted 49% of our total net sales for fiscal 2019, compared
with 60% for fiscal 2018. 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 46% of our sales for fiscal 2019, compared with 40%
of for fiscal 2018. The company has emphasized fabrics that have broad appeal at “good” and
“better” prices, generally ranging from $3.00 to $12.00 per yard.
Home Accessories Segment
Sales for our new home accessories segment totaled 5% of our sales for fiscal 2019, with no
prior year sales.
Culp Product Categories by Segment
We market products in most categories of fabric that manufacturers currently use for bedding
and furniture. Additionally, with the acquisition of Read Window Products, we also market
window treatment products to customers in the hospitality and commercial industries. Our
home accessories segment markets a variety of finished bedding accessories and home goods
sold directly to consumers, as well as business retailers in the bedding and home furnishings
industries and customers in the hospitality industry. The following table indicates the product
lines within each segment, and, with respect to the fabric products, a brief description of their
characteristics.
11
Mattress Fabrics
Woven jacquards
Converted
Knitted fabric
Various patterns and intricate designs. Woven on complex looms
using a variety of synthetic and natural yarns.
Suedes, pile and embroidered fabrics, and other specialty type
products are sourced to offer diversity for higher end mattresses.
Various patterns and intricate designs produced on special-width
circular knit machines utilizing a variety of synthetic and natural
yarns. Knitted mattress fabrics have inherent stretching properties
and spongy softness, which conforms well with layered foam
packages.
Sewn mattress covers
Covers for bedding (primarily specialty beds), sewn from mattress
fabrics produced by our facilities or sourced from others.
Upholstery Fabrics
Woven jacquards
Woven dobbies
Velvets
Suedes
Faux leathers
Cut and sewn kits
Elaborate, complex designs such as florals and tapestries i n
traditional, transitional, and contemporary styles. Woven on intricate
looms using a wide variety of synthetic and natural yarns.
Fabrics that use straight lines to produce geometric designs such as
plaids, stripes, and solids in traditional and country styles. Woven on
less complicated looms using a variety of weaving constructions and
primarily synthetic yarns.
Soft fabrics with a plush feel. Woven or knitted in basic designs,
using synthetic yarns that are yarn dyed or piece dyed.
Fabrics woven or knitted using microdenier polyester yarns, which
are piece dyed and finished, usually by sanding. The fabrics are
typically plain or small jacquard designs, with some being printed.
These are sometimes referred to as microdenier suedes.
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.
12
With the acquisition of Read Window Products at the end of fiscal 2019, the upholstery fabrics
business also markets a variety of window treatment products and installation services for
customers in the hospitality and commercial industries. These products include roller & solar
shades, drapery, roman shades and top treatments, hardware products, and soft goods such as
duvet covers, bed skirts, bolsters and pillows.
Home Accessories
The home accessories segment markets a variety of bedding accessory and home good products,
including mattress pads and protectors, sheet sets, pillows, comforters, duvet covers, towels,
fabric by the yard, and dog beds. Our mattress pad products include a variety of styles, including
bamboo pads, cooling pads, pressure relief pads, pillowtop and memory foam pads, at a variety
of price points.
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.
Knitted fabrics are produced at both our Stokesdale facility and our St. Jerome plant, while
production of jacquard mattress fabrics was consolidated into the St. Jerome facility during the
fourth quarter of fiscal 2019. The majority of our finishing and inspection processes for
mattress fabrics are conducted at the Stokesdale plant, with the St. Jerome plant providing
additional capacity and a second location for these processes, along with distribution
capabilities. We produce sewn mattress covers at our manufacturing facility in High Point,
North Carolina, at our joint venture facility in Haiti, and at the manufacturing facilities of our
Culp China platform in China. Our sewn cover business participates in a joint marketing
arrangement for the production and marketing of sewn mattress covers with A. Lava & Son Co.
of Chicago, a leading provider of mattress covers. This marketing venture is known as Culp-
Lava Applied Sewn Solutions (CLASS). Our High Point facility for our sewn cover business is
a leased space with limited capital investment in equipment. In fiscal 2017, we entered into a
50/50 joint venture with A. Lava to construct a second location for our CLASS operations in
Haiti, and this joint venture facility began production of mattress covers for our CLASS
business during the second quarter of fiscal 2018. Additionally, we utilize the company’s Culp
China platform to manufacture sewn mattress covers for our CLASS business. These three
manufacturing locations give us repetitive production capabilities and allow us greater
flexibility in meeting demand for mattress covers from bedding producers.
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In addition to the mattress fabrics and sewn covers we manufacture, we have important supply
arrangements in place that allow us to source mattress fabric and sewn covers from strategic
suppliers. We source some Culp-designed knitted fabrics, certain converted fabric products, and
sewn mattress covers using our Culp China platform. We also source a portion of our woven
jacquard fabric and knitted fabric, which is obtained from a supplier located in Turkey, based
on designs and a production schedule created by Culp.
Upholstery Fabrics Segment
The upholstery fabrics segment currently operates two manufacturing facilities in China.
During the second quarter of fiscal 2019, we closed our U.S. plant located in Anderson, South
Carolina, which mainly produced velvet upholstery fabrics with some production of certain
decorative fabrics. Additionally, we fabricate a variety of window treatments, using mostly
customer-supplied fabrics and materials, at our Read Window Products facility in Knoxville,
Tennessee.
Our upholstery fabrics facilities in China are all located within the same industrial area in
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
located in China to meet the demands of our customers. Beginning in late fiscal 2019, we also
developed strategic supplier relationships in Vietnam for additional sourcing of our cut and
sewn kits, which has allowed us to begin adjusting our supply chains to meet customer demands
in conjunction with ongoing trade disputes between the U.S. and China. The majority of
upholstery fabrics and materials used by our Read Window Products business to fabricate
window treatments are customer-supplied. These materials are generally sourced by customers,
and we also source a portion of other window treatment products such as hardware and roller
shades, from outside suppliers in the U.S., Turkey, and China.
Home Accessories Segment
Through our June 2018 investment in eLuxury, our home accessories segment currently
operates one manufacturing plant in Evansville, Indiana, which primarily produces mattress pad
products. Certain bedding accessory and home good products, such as mattress protectors, dog
beds, and fabric by the yard, are sourced internally from the company’s other business
segments, while other products are sourced from third-party manufacturers located primarily in
the United States, China, and Southeast Asia.
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Product Design and Styling
Consumer tastes and preferences related to bedding, upholstered furniture, window treatment
products, and home goods change over time. The use of new fabrics and creative designs
remains an important consideration for manufacturers and marketers 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 and products 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
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.
15
Home Accessories Segment
The home accessories segment designs primarily finished products packaged for delivery to
consumers. Products incorporate fabrics from Culp’s other operating segments, reflecting the
design innovation of these two segments and optimizing the company’s global supply chain, as
well as finished products supplied from outside vendors. The home accessories segment works
to develop product offerings designed to meet the desires of consumers in the bedding
accessory and home goods markets.
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, China,
and Haiti. 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.” Window
treatment products sold through our Read Window business are done on a “job order” basis,
with manufactured products shipped directly from our manufacturing facility in Knoxville,
Tennessee to the job installation site.
Home Accessories
Inventory for our home accessories business is primarily held at eLuxury’s distribution facility
in Evansville, Indiana, and at U.S. fulfillment centers for certain products and third-party online
retailers.
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.
16
Upholstery Fabrics Segment
Raw materials account for approximately 60%-70% of upholstery fabric manufacturing costs
for products the company manufactures. Prior to closure of the Anderson, South Carolina
facility during the second quarter of fiscal 2019, this segment purchased synthetic yarns
(polyester, acrylic, rayon, and polypropylene), latex adhesives, dyes, and other chemicals from
various suppliers. Following the closure, we ceased purchases of synthetic yarns and dyes,
although these raw materials remain important to our suppliers of finished and unfinished
fabrics.
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.
Home Accessories Segment
The home accessories segment purchases primarily cotton and synthetic fabric, yarns (polyester
and rayon), and polyester fiberfill for products the company manufactures. All 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 home accessories
segment has generally not had significant difficulty in obtaining raw materials.
All 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. We had
a significant escalation of polyester prices due to a global shortage of certain components
during the second and third quarters of fiscal 2019, after which these prices stabilized and
returned to pre-escalation levels.
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 U.S. 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
17
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.
Home Accessories Segment
The home accessories business is subject to seasonal influences relating to traditional and
promotional holidays driven by coupons and discounts from various sales channels, with
generally higher sales during these holiday periods.
Competition
Competition for our products is high and is based primarily on price, design, quality, timing of
delivery, and service.
Mattress Fabrics Segment
The mattress fabrics market is concentrated in a few relatively large suppliers, as well as some
niche producers focusing mainly on knitted products. We believe our principal mattress fabric
competitors are BekaertDeslee Textiles, Global Textile Alliance, and several smaller companies
producing knitted and other fabric, as well as mattress components (sewn covers). In addition,
our bedding customers continue to face 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
converters (companies who buy and re-sell fabrics, but have no manufacturing). 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.
Home Accessories Segment
The home accessories market operates in a highly competitive and fragmented business
environment and competes with other online retailers, as well as national, regional, and local
retail stores, including department stores, specialty stores, and mass merchandise stores, that
may carry similar product lines.
18
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
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 28, 2019, we had 1,440 employees, compared to 1,392 at April 29, 2018. 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 decrease in the number of employees in our
upholstery fabrics segment can be attributed to the closure of our Anderson, SC facility during
the second quarter of fiscal 2019. The number of employees in our home accessories segment
can be attributed to our June 2018 investment in eLuxury, LLC.
The hourly employees at our manufacturing facility in Canada (approximately 11% 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.
19
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
2019
912
140
330
470
53
5
1,440
Mattress Fabrics Segment
Upholstery Fabrics Segment
United States
China
Total Upholstery Fabrics Segment
Home Accessories Segment
Unallocated corporate
Total
Customers and Sales
Mattress Fabrics Segment
Number of Employees
Fiscal
2017
793
Fiscal
2018
847
Fiscal
2016
682
188
353
541
-
4
1,392
148
380
528
-
4
1,325
134
397
531
-
4
1,217
Fiscal
2015
631
129
424
553
-
4
1,188
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 18% of the company’s overall sales in fiscal 2019. The 18% of the
company’s overall sales include sales to customers who are also subcontractors for Serta
Simmons Holdings, LLC. Our mattress fabrics customers also include many small and medium-
size bedding manufacturers.
Upholstery Fabrics Segment
Our major customers for upholstery fabrics are leading manufacturers of upholstered furniture,
including Ashley, 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 HON Industries and Wyndham Destinations. Our largest customer in the upholstery fabrics
segment is La-Z-Boy Incorporated, which accounted for approximately 11% of the company’s
consolidated sales in fiscal 2019.
Home Accessories Segment
Our customers consist primarily of consumers purchasing through our online sales channels, as
well as business retailers in the home goods market and customers in the hospitality industry,
with no major customers. Our online sales channels include our own eLuxury-branded website,
as well as leading online retail channels for specialty home goods, and the loss of one or more of
these leading online retail channels could have a material adverse effect on the company.
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.
20
Net Sales by Geographic Area
(dollars in thousands)
Fiscal 2019
Fiscal 2018
Fiscal 2017
$224,433
75.7%
$249,529 77.0%
$241,236 77.9%
$ 29,247
9.9%
$27,844
8.6%
$ 29,995
9.7%
39,277
3,712
13.2%
1.2%
40,671
5,681
12.6%
1.8%
34,695 11.2%
1.2%
3,618
$ 72,236
24.3%
$74,196
23.0%
$ 68,308 22.1%
$296,669 100%
$323,725
100%
$309,544
100%
United States
North America
(Excluding
USA)(1)
Far East and
Asia(2)
All other areas
Subtotal
(International)
Total
(1) Of this amount, $22.5 million, $21.9 million, and $22.3 million are attributable to shipments
to Mexico in fiscal 2019, 2018, and 2017, respectively.
(2) Of this amount, $29.8 million, $32.6 million, and $26.6 million are attributable to shipments
to China in fiscal 2019, 2018, and 2017, 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 21 in the consolidated financial statements.
Backlog
Mattress Fabrics and Home Accessories Segments
The backlog for the mattress fabric and home accessories segments is not a reliable predictor of
future shipments because the majority of sales for the mattress fabrics segment are on a just-in-
time basis, and the majority of sales for the home accessories segment are shipments from
inventory on a quick turnaround basis.
Upholstery Fabrics Segment
Although it is difficult to predict the amount of backlog that is “firm,” we have reported the
portion of the upholstery fabric backlog from customers with confirmed shipping dates within
five weeks of the end of the fiscal year. On April 28, 2019, the portion of the upholstery fabric
backlog with confirmed shipping dates prior to June 3, 2019 was $10.7 million, all of which are
expected to be filled during the first quarter of fiscal 2020, compared with $9.4 million as of the
end of fiscal 2018 (for confirmed shipping dates prior to June 4, 2018).
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Intellectual Property
We currently hold, or have registration applications pending for, numerous trademarks and
copyrights for various product and trade names, logos, and fabric designs in the United States
and certain foreign countries. We view such intellectual property, along with any unregistered
copyrights, trademarks, service marks, trade names, domain names, trade dress, trade secrets,
and proprietary technologies, as an important part of our business, and we seek to diligently
protect, monitor, and defend, through appropriate action, against their unauthorized use.
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, bedding, and
bedding accessory products, which is subject to variations in the general economy. Because
purchases of furniture, bedding and bedding accessory products 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 and uncertainty 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.
Our business may be adversely affected by increased tariffs or other changes in U.S. policy
related to imported products, as well as violations of existing trade policies.
Many of our products are manufactured or sourced outside of the United States. The U.S.
government has recently compiled a list of products under consideration for potential tariffs on
imports from many countries, including China, where a significant amount of our products is
produced. Certain tariffs have been imposed, and negotiations continue regarding possible
additional tariffs and additional categories of products subject to the already-imposed tariffs.
Any tariffs that result in increased costs of imported products and materials could require us to
increase prices to our domestic customers or, if we are unable to do so, result in lowering our
gross margins on products sold. As a result, the tariffs could have a material adverse effect on
our results of operations.
In addition to recent announcements about tariffs, the U.S. government is considering other
proposals for substantial changes to its trade and tax policies, which could include import
restrictions, increased import tariffs, changes to or withdrawal from existing trade agreements,
and border-adjustment taxes, among other possible measures. Material changes in these policies
22
could increase our tax obligations or require us to increase prices to customers, which could
adversely affect sales. Any significant change in U.S. policy related to imported products could
have a material adverse effect on our business and financial results.
Finally, there are currently a number of trade regulations and duties in place to protect the U.S.
textile industry against competition from low-priced foreign producers, such as those in China
and Vietnam, but violations of these trade regulations and duties has had, and may in the future
have, a material adverse effect on our operations. In May of 2019, the U.S. Department of
Commerce imposed punitive anti-dumping measures against China mattress imports to address
violations of trade regulations. Despite the imposition of these duties, if China producers move
their production out of China, they may continue to engage in unfair competition in violation of
trade regulations between the U.S. and other countries, or there may be a potential risk of illegal
transshipments of mattress products into the United States, which involves circumventing the
imposed duties by falsely claiming that mattresses are products of a particular country of origin
to avoid paying higher duties. If supply chains are moved out of China to countries without anti-
dumping duties and producers continue to supply low-priced imports in violation of U.S. trade
laws, and if illegal transshipments are not monitored and enforcement is not effective to limit
them, these shipments could have a material adverse effect on the company’s business, financial
condition, results of operations or cash flows.
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, with the closure of our Anderson,
South Carolina plant during the first half of fiscal 2019, our domestic manufacturing capacity for
the upholstery fabrics segment continues to decline. 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, shipping rates, potential political unrest and
instability, or other threats that could disrupt or increase the costs of operating in foreign areas or
sourcing products overseas. Changes in the value of the U.S. dollar versus other currencies can
affect our financial results because a significant portion of our operations are located outside the
United States. Strengthening of the U.S. dollar against other currencies can have a negative
impact on our sales of products produced in those countries. Any of the risks associated with
foreign operations and sources could cause unanticipated increases in operating costs or
disruptions in business, which could negatively impact our ultimate financial results.
Our business faces several risks associated with doing business in China
We source a variety of fabrics from a limited number of strategic suppliers in China, and we
operate three upholstery manufacturing facilities in Shanghai, China. The Chinese economy is
characterized by extensive state ownership, control, and regulation. Therefore, our business is
continually subject to the 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
23
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 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 closed
our Anderson, South Carolina upholstery fabrics facility during the second quarter fiscal 2019.
As a result of this plant closure, we recorded inventory markdowns totaling $1.6 million, which
was mostly offset by a gain on the sale of property, plant, and equipment of $1.5 million.
Since April 1, 2018, our goodwill increased $15.7 million in connection with our acquisitions of
Read Window Products, LLC and eLuxury, LLC. As of April 28, 2019, our evaluation resulted
in no impairment losses. Management will continue to carefully review this assessment and
impairment indicators each quarter.
Identifying and assessing whether impairment indicators exist, or if events or changes in
circumstances have occurred, including market conditions, operating results, competition and
general economic conditions, requires significant judgment. Any of such future actions could
result in charges that could have an adverse effect on our financial condition and results of
24
operations, and 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. Beginning in the second quarter and continuing through the third quarter of fiscal
2019, we began to experience higher raw material prices and resulting impacts on our profits,
after which these prices leveled off and returned to pre-escalation levels during the fourth quarter
of fiscal 2019. Higher raw material prices would result in 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 18% of consolidated net sales in fiscal 2019. The 18% of the
company’s overall sales include sales to customers who are also subcontractors for Serta
Simmons Holding, LLC. In the upholstery fabrics segment, La-Z-Boy Incorporated accounted
for approximately 11% of consolidated net sales during fiscal 2019, and several other large
furniture manufacturers comprised a significant portion of sales. A business failure or other
significant financial difficulty by one or more of our major customers, or the loss of one or more
of these customers, could cause a significant loss in sales, an adverse effect on our earnings, and
difficulty in collection of our trade accounts receivable.
25
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 fragmented, 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. Additionally, our e-
commerce business competes with many other online retailers. The highly competitive nature of
our business in each of our 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. Additionally, we rely on third-
party service providers in connection with the maintenance thereof and the execution of certain
business processes. 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 an improper release of confidential information, could damage our business
or subject us to unexpected liabilities. Additionally, the devotion of additional resources to the
security of our information technology systems in the future could significantly increase our
costs of doing business or otherwise adversely impact our financial results.
26
Our home accessories segment could be adversely affected by increased fees from online
sales channels or by the loss of one or more leading online sales channels.
Products for our home accessories segment are sold through our own eLuxury-branded website,
as well as through a number of leading online retailers for specialty home goods. These third-
party platforms charge seller’s fees through a variety of commission, referral, or other fee
structures. Increases in these fees could require us to increase product prices, which could result
in reduced sales if customers are unwilling to pay these increased prices or could result in
lowering our gross margins on products sold if we are unable to fully pass on these increased
fees. As a result, increased fees charged by our third-party online sales channels could have a
material adverse effect on the results of operations for our home accessories segment.
Additionally, the loss of one or more of these leading online retail sales channels would limit our
available sales opportunities and, if we are unable to replace such sales opportunities, could
cause a significant loss in sales and an adverse effect on our earnings.
Our intellectual property rights may not prevent others from using our copyrights or
trademarks in connection with the sale of competitive products. We may be subject to
claims that our products or trademarks infringe intellectual property rights of others.
We currently hold, or have registration applications pending for, numerous trademarks and
copyrights for various product and trade names, logos, and fabric designs in the United States
and certain foreign countries. We view such intellectual property, along with any unregistered
copyrights, trademarks, service marks, trade names, domain names, trade dress, trade secrets,
and proprietary technologies, as an important part of our business. These intellectual property
rights may not provide adequate protection against infringement or piracy, may not prevent
competitors from developing and marketing products that are similar to or competitive with our
fabric designs, mattress pads, or other products, and may be costly and time-consuming to
protect and enforce. In addition, the laws of some foreign countries may not protect our
intellectual property rights and confidential information to the same extent as the laws of the
United States. If we are unable to protect and enforce our intellectual property, we may be unable
to prevent other companies from using our fabric designs or trademarks in connection with
competitive products, which could adversely affect our sales, profitability, cash flows and
financial condition.
We may be subject to claims that our products, advertising, or trademarks infringe the
intellectual property rights of others. The defense of these claims, even if we are ultimately
successful, may result in costly litigation, and if we are not successful in our defense, we could
be subject to injunctions and liability for damages or royalty obligations, and our sales,
profitability, cash flows and financial condition could be adversely affected.
We have made and expect to continue to make acquisitions, which could involve certain
risks and uncertainties.
Acquisitions have been and may continue to be an important element of our business strategy.
Acquisitions involve numerous inherent challenges, such as properly evaluating acquisition
opportunities, properly evaluating risks and other diligence matters, ensuring adequate capital
availability, and balancing other resource constraints. There are risks and uncertainties related to
acquisitions, including difficulties integrating acquired operations, technology, personnel, and
financial and other systems; unrealized sales expectations from the acquired business; unrealized
27
synergies and cost-savings; unknown or underestimated liabilities; diversion of management
attention from running our existing businesses; and potential loss of key management employees
of the acquired business. In addition, internal control over financial reporting of acquired
companies may not be up to required standards. Our integration activities may place substantial
demand on our management, operational resources, and financial and internal control systems.
Customer dissatisfaction or performance problems with an acquired business, technology,
service, or product could also have a material adverse effect on our reputation and business.
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, including the related risk of damage
to our brand and reputation in conjunction with such claims. 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.
28
ITEM 2. PROPERTIES
Our corporate headquarters are located in High Point, North Carolina. As of the end of fiscal 2019 (April
28, 2019), we leased our corporate headquarters and owned or leased sixteen facilities associated with our
mattress and upholstery fabrics and home accessories 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:
Burlington, North Carolina
Burlington, North Carolina
Knoxville, Tennessee
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
Shanghai, China
• Home Accessories:
Evansville, Indiana
Approx.
Total Area
(Sq. Ft.)
Expiration
of Lease (1)
36,643
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
132,000
13,750
36,700
2028
Finished goods distribution
2021
Design center
Manufacturing and offices
2033
Warehouse 27,900 2020
2021
Manufacturing, warehouse, offices
2020
Manufacturing, warehouse, offices
2021
Warehouse and offices
2020
Warehouse
2021
Warehouse
68,677
89,857
89,861
64,583
48,610
Manufacturing, warehouse, offices
63,980
2024
____________________________________________________
(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 9 in the notes to the consolidated financial statements for further details).
We believe that our facilities are in good condition, well-maintained, 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. In the home accessories segment,
management has estimated that it has the ability to meet current and expected demand trends, as well as
further increased demand, for mattress pad products, and it also has the ability to source additional mattress
pads to further increase our ultimate output. The home accessories segment sources its other finished good
products from outside suppliers and we believe its sourcing availability provides the capacity to meet current
and expected demand trends.
29
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 28, 2019, Culp, Inc. had approximately 4,036 shareholders
based on the number of holders of record and an estimate of individual participants represented by
security position listings.
30
Analyst Coverage
These analysts cover Culp, Inc.:
Raymond, James & Associates – Bobby Griffin, CFA
Value Line – Simon R. Shoucair
Stifel Financial Corp - John A. Baugh, CFA
Stonegate Capital Partners, Inc. – Marco Rodriguez, CFA
Dividends and Share Repurchases; Sales of Unregistered Securities
Share Repurchases
ISSUER PURCHASES OF EQUITY SECURITIES
(a)
(b)
Total Number
of Shares
Purchased
400
Average Price
Paid per Share
$ 18.03
(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)
400
$1,677,151
-
$ -
-
$1,677,151
-
$ -
-
$1,677,151
Period
January 28, 2019 to
March 3, 2019
March 4, 2019 to
March 31, 2019
April 1, 2019 to
April 28, 2019
Total
400
$ 18.03
400
$1,677,151
(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 12, 2019, we announced that our board of directors approved a regular quarterly cash dividend
payment of $0.10 per share. These dividend payments are payable on July 16, 2019, to shareholders of
record as of July 5, 2019.
During fiscal 2019, dividend payments totaled $4.7 million, all of which represented our regular quarterly
cash dividend payments ranging from $0.09 to $0.10 per share.
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.
31
Sales of Unregistered Securities
There were no sales of unregistered securities during fiscal 2019, 2018, or 2017.
Performance Comparison
The following graph shows changes over the five fiscal years ending April 28, 2019 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 three companies in the textile industry, and (3) the
Standard & Poor’s 500 Index.
The graph assumes an initial investment of $100 at the end of fiscal 2014 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.
32
ITEM 6. SELECTED FINANCIAL DATA
fiscal
2019
fiscal
2018
fiscal
2017
fiscal
2016
fiscal
2015
percent
change
2019/2018
$
296,669
246,471
323,725
259,092
64,633
37,172
-
309,544
240,309
69,235
39,157
-
312,860
247,749
65,111
36,773
-
310,166
254,599
55,567
32,778
-
27,461
30,078
28,338
22,789
(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
restructuring credit
income from operations
interest expense
interest income
other expense
income before income taxes
income taxes
loss from investment in unconsolidated joint venture
net income
net loss attributable to non-controlling interest
net income attributable to Culp Inc. common shareholders
depreciation
weighted average shares outstanding
weighted average shares outstanding, assuming dilution
PER SHARE DATA
net income attributable to Culp Inc. common shareholders - basic
net income attributable to Culp Inc. common shareholders - diluted
dividends per share
book value
BALANCE SHEET DATA
operating working capital (4)
property, plant and equipment, net
total assets
capital expenditures
dividends paid
subordinated loan payable and current maturities of long-term debt
shareholders' equity attributable to Culp Inc.
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 subordinated loan payable and current maturities of long-term debt.
(2) P/E ratios based on trailing 12-month diluted net income per share.
$
$
$
$
$
$
$
-8.4%
-4.9%
-22.3%
3.3%
100.0%
-54.1%
-55.3%
43.4%
32.2%
-55.4%
11.9%
-57.1%
-73.9%
100.0%
-72.8%
5.8%
0.2%
-0.7%
-72.9%
-72.6%
-30.9%
-1.6%
-0.4%
-6.6%
0.8%
-60.0%
-30.8%
100.0%
-2.1%
9.1%
50,198
38,405
(825)
12,618
42
(766)
1,346
11,996
6,424
114
5,458
218
5,676
8,117
12,462
12,548
0.46
0.45
0.38
94
(534)
1,018
26,883
5,740
266
20,877
-
20,877
7,672
12,431
12,633
1.68
1.65
0.55
-
(299)
681
29,696
7,339
23
22,334
-
22,334
7,085
12,312
12,518
1.81
1.78
0.51
-
(176)
616
27,898
10,963
-
16,935
-
16,935
6,671
12,302
12,475
1.38
1.36
0.66
12.91
13.12
12.03
10.50
49,757
48,389
219,726
2,975
4,732
675
159,933
125,311
16.9%
4.3%
1.8%
53.6%
0.5%
5.8
29
4.6
32.05
17.05
20.74
71
38
33.8
49,939
51,794
40,869
51,651
45,794
39,973
217,984
205,634
175,142
7,439
6,843
-
163,376
114,817
18,771
6,280
-
148,630
98,429
10,708
8,140
-
128,812
90,357
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
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
64
(622)
391
22,956
7,885
-
15,071
-
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
(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), subordinated loan payable, current maturities of long-term debt,
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.
33
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 2019, 2018,
and 2017 each included 52 weeks. Our operations are classified into three business segments: mattress
fabrics, upholstery fabrics, and home accessories. The mattress fabrics segment manufactures, sources,
and sells fabrics and mattress covers primarily to bedding manufacturers. The upholstery fabrics segment
develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture
manufacturers. With the recent acquisition of Read Window Products, the upholstery fabrics segment
also provides window treatments and sourcing of upholstery fabrics and other products, as well as
measuring and installation services for Read’s own products to customers in the hospitality and
commercial industries. The home accessories segment is the company’s new finished products business
that manufactures, sources, and sells bedding accessories and home goods directly to consumers and
businesses through global e-commerce and business-to-business sales channels.
We evaluate the operating performance of our segments based upon income from operations before
certain unallocated corporate expenses, restructuring expense (credit) and related charges, and other non-
recurring items. Cost of sales in all our segments include costs to manufacture, develop, or source our
products, including costs such as raw material and finished good purchases, direct and indirect labor,
overhead and incoming freight charges. Unallocated corporate expenses primarily represent compensation
and benefits for certain executive officers, all costs associated with being a public company, and other
miscellaneous expenses.
Executive Summary
Results of Operations
(dollars in thousands)
April 28, 2019
April 29, 2018
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
296,669
50,198
16.9%
38,405
12,618
4.3%
11,996
6,424
5,458
323,725
64,633
20.0%
37,172
27,461
8.5%
26,883
5,740
20,877
$
34
Change
(8.4)%
(22.3)%
(310)bp
3.3%
(54.1)%
(420)bp
(55.4)%
11.9%
(73.9)%
Net Sales
Overall, our net sales decreased 8.4% in fiscal 2019 compared with a year ago, with mattress fabric net
sales declining 24.7% and upholstery fabric net sales increasing 3.5%. Net sales from our new home
accessories segment were $16.0 million since the June 2018 investment in eLuxury, with no comparable
prior-year sales.
The decrease in mattress fabrics net sales reflects the significant challenges faced by the domestic bedding
industry during fiscal 2019, primarily related to the high volume of low-priced imported mattresses from
China. On May 29, 2019, the U.S. Department of Commerce imposed punitive anti-dumping measures
against Chinese made mattresses, which we believe will ultimately provide some relief for the domestic
mattress industry, but the anticipation of these duties led to an influx of these products at the end of calendar
2018 and continuing through February 2019, and a weaker mattress retail environment towards the end of
fiscal 2019 delayed the sale of this excess inventory. This led to continued disruption in the market and
reduced demand for our mattress fabrics and sewn covers through the end of fiscal 2019.
The increase in upholstery fabrics sales for fiscal 2019 primarily relates to the net sales contribution from
Read, acquired on April 1, 2018, partially offset by a decrease in sales associated with our closed facility
located in Anderson, South Carolina.
The financial results for our new home accessories business segment, which includes our June 2018
majority investment in eLuxury, reflect typical product roll-out, sampling, and marketing challenges in
connection with the start-up and integration of a newly combined platform. These challenges, along with a
weak retail and e-commerce sales environment, unfavorably affected our financial results for fiscal 2019.
Income Before Income Taxes
Income before income taxes decreased 55.4% compared to the same period a year ago. This decrease was
primarily due to the decrease in sales of mattress fabrics noted above. Additionally, income before
income taxes was affected by restructuring and related charges and credits and other non-recurring items
of approximately $2.7 million during fiscal 2019, of which $1.6 million related to the closure of our
upholstery fabrics operation located in Anderson, South Carolina, and non-recurring charges totaling $1.1
million which include $500,000 for a charitable contribution, payable over a period of three years, in
honor of our co-founder and former chairman, Robert G. Culp, III, as well as other non-recurring charges
associated with the mattress fabrics segment.
Income Taxes
We recorded income tax expense of $6.4 million, or 53.6% of income before income tax expense, in fiscal
2019 compared with income tax expense of $5.7 million, or 21.4% of income before income tax expense,
in fiscal 2018. Our income tax expense of $6.4 million and the increase in our income tax rate compared
with fiscal 2018, reflects the mix of our taxable income favoring our foreign tax jurisdictions located in
Canada and China that have higher income tax rates in relation to the U.S., and a significant decline in U.S.
taxable income, which declined more than anticipated during our fourth quarter. This resulted in a
significant increase in our Global Intangible Low Taxed Income (GILTI) Tax, which was mostly incurred
during our fourth quarter. Our income tax expense of $5.7 million in fiscal 2018 included an income tax
benefit totaling $2.1 million associated with the 2017 Tax Cuts and Jobs Act (the “Tax Act”), which
represented an income tax benefit of $4.3 million pertaining 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, compared with a final
provisional income tax benefit of $550,000 that was recorded in the third quarter of fiscal 2019.
See the Segment Analysis section located in the Results of Operations for further details.
35
Liquidity
At April 28, 2019, our cash and cash equivalents, short-term investments (available for sale), and short-
term and long-term investments (held-to-maturity) totaled $45.0 million compared with $54.5 million at
April 29, 2018. The decrease from the end of fiscal 2018 was primarily due to cash payments of $12.1
million for acquisitions that were mostly associated with the purchase of our 80% ownership in eLuxury,
$8.1 million to our shareholders in the form of regular quarterly dividend payments and common stock
repurchases, $4.7 million in capital expenditures (of which $1.4 million was vendor financed) that were
mostly associated with our mattress fabric segment, and $1.3 million in employee withholding tax
payments associated with the vesting of certain stock-based compensation awards, partially offset by net
cash provided by operating activities totaling $13.9 million and proceeds from the sale of property, plant,
and equipment totaling $1.9 million that were associated with the closure of our upholstery fabrics facility
located in Anderson, South Carolina.
Our net cash provided by operating activities of $13.9 million in fiscal 2019 decreased $13.6 million
compared with $27.5 million in fiscal 2018. The decrease is primarily due to the decreased income from
operations noted above.
At April 28, 2019, all of our outstanding borrowings totaling $675,000 pertained to our subordinated
credit agreement between eLuxury and its minority owner.
Dividend Program
On June 12, 2019, we announced that our board of directors approved a regular quarterly cash dividend
payment of $0.10 per share. This payment will be made on or about July 16, 2019, to shareholders of
record as of July 5, 2019.
During fiscal 2019, dividend payments totaled $4.7 million, all of which represented our regular quarterly
cash dividend payments ranging from $0.09 to $0.10 per share. 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.
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 2019, we purchased 160,823 shares of our common stock at a cost of $3.3 million, most of
which was purchased during our second and third quarters. During fiscal 2018 and 2017, there were no
repurchases of our common stock.
At April 28, 2019, we had $1.7 million available for additional repurchases of our common stock
36
Results of Operations
The following table sets forth certain items in our consolidated statements of net income as a percentage
of net sales.
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Restructuring credit
Income from operations
Interest income, net
Other expense
Income before income taxes
Income taxes *
Loss from investment in unconsolidated joint venture
Net income
Net loss from non-controlling interest
Net income attributable to Culp Inc. common shareholders
* Calculated as a percentage of income before income taxes.
Fiscal Fiscal
2018
100.0%
(80.0)
20.0
(11.5)
-
8.5
0.1
(0.3)
8.3
21.4
0.1
6.4
-
6.4%
2019
100.0%
(83.1)
16.9
(12.9)
0.3
4.3
0.3
(0.6)
4.0
53.6
0.0
1.8
0.1
1.9%
Fiscal
2017
100.0%
(77.6)
22.4
(12.7)
-
9.7
0.1
(0.2)
9.6
24.7
0.0
7.2
-
7.2%
2019 compared with 2018
Segment Analysis
Mattress Fabrics Segment
(dollars in thousands)
April 28, 2019
April 29, 2018
Change
Twelve Months Ended
$
$
Net sales
Gross profit
Gross profit margin
SG&A expenses
Income from operations
Operating margin
145,059
22,904
15.8%
11,296
11,608
8.0%
192,597
38,797
20.1%
12,935
25,861
13.4%
(24.7)%
(41.0)%
(430)bp
(12.7)%
(55.1)%
(540)bp
37
Net Sales
Mattress fabrics sales decreased 24.7% in fiscal 2019 compared to the prior year. These results reflected
the more challenging market conditions faced by the domestic bedding industry during fiscal 2019,
primarily related to the high volume of low-priced imported mattresses from China.
During March and April of 2019, import activity began to slow in anticipation of the expected ruling from
the U.S. Department of Commerce. This ruling came in May 2019, with the Department of Commerce
imposing punitive anti-dumping measures from 69 percent to as high as 1,731 percent against Chinese
made mattresses. We believe these duties will ultimately provide relief for the domestic mattress industry,
but the anticipation of this ruling led to an influx of these products at the end of calendar 2018 and
continuing through February 2019, and a weaker mattress retail environment towards the end of fiscal
2019 delayed the sale of this excess inventory. This led to continued disruption in the market and reduced
demand for our mattress fabrics and sewn covers through the end of fiscal 2019.
Our design strengths and efficient manufacturing platform allow us to provide a diverse product mix that
meets the changing demands of our customers across most price points. Our net sales for fiscal 2019
reflected continued growth in our CLASS mattress cover business. 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 excess supply of low-priced imported mattresses will continue during our first
quarter of fiscal 2020, and in turn, will continue to affect short-term demand trends and operating
performance. Despite these continuing challenges, we are beginning to see some recent positive
developments and improvements in retail demand trends, as well as many customers altering their supply
chains away from China, and we believe our design strengths and efficient manufacturing platform are
providing market share gain and improved operating results. Nevertheless, it remains uncertain as to when
demand trends will return to normal levels.
Gross Profit and Operating Income
Overall
The decrease in mattress fabrics profitability was primarily due to the decrease in mattress fabrics sales
noted above, as well as certain non-recurring charges totaling $249,000 for employee termination benefits
and operational reorganization costs associated with our mattress fabrics segment.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant and equipment, and our
investment in unconsolidated joint venture.
(dollars in thousands)
Accounts receivable
April 28, 2019
12,098
$
April 29, 2018
15,195
$
Inventory
Property, plant & equipment
Investment in unconsolidated
joint venture
24,649
44,266
1,508
28,740
48,797
1,501
% Change
(20.4)%
(14.2)%
(9.3)%
0.5%
38
Accounts Receivable
As of April 28, 2019, accounts receivable decreased 20.4% compared with April 29, 2018. This decrease
reflects the decrease in net sales noted above.
Inventory
As of April 28, 2019, inventory decreased 14.2% compared with April 29, 2018. The decrease reflects the
decreased in net sales noted above.
Property, Plant & Equipment
The $44.3 million at April 28, 2019, represents property, plant and equipment of $32.4 million and $11.9
million located in the U.S. and Canada, respectively. 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.
As of April 28, 2019, property, plant, and equipment decreased compared with April 29, 2018. This trend
represents a decrease in capital expenditure requirements and a progression toward a more maintenance
level of spending on machinery and equipment. During fiscal 2019, our mattress fabrics segment
reporting capital expenditures of $2.5 million and depreciation expense of $7.0 million.
Investment in Unconsolidated Joint Venture
Our investment in unconsolidated joint venture represents our fifty percent ownership of Class International
Holdings, Ltd. (see Note 9 to the consolidated financial statements for further details).
Upholstery Fabrics Segment
Net Sales
(dollars in thousands)
April 28, 2019
April 29, 2018
Twelve Months Ended
Non-U.S. Produced
U.S. Produced
Total
$
$
121,818
13,836
135,654
90%
10%
100%
$
$
122,635
8,493
131,128
94%
6%
100%
% Change
(0.7)%
62.9%
3.5%
Although overall upholstery fabrics sales increased in fiscal 2019 compared to the prior year, our sales
decreased 8.3% during the fourth quarter of fiscal 2019 compared to the fourth quarter of fiscal 2018.
Our upholstery fabrics net sales reflected more challenging market conditions with generally weaker
consumer demand for furniture during the fourth quarter, as well as the ongoing trade dispute between the
U.S. and China and continued uncertainties surrounding tariffs. The anticipation of additional tariffs
resulted in more advance customer purchases in previous quarters and inflated inventories heading into
the fourth quarter. This factor, combined with the generally weaker demand for furniture, affected our
sales for the fourth quarter.
The increase in upholstery fabric net sales for the year includes the contribution from Read, acquired on
April 1, 2018 (see below for further details regarding the acquisition of Read), partially offset by the
decline in sales associated with the closure of our Anderson, South Carolina facility during the second
quarter of fiscal 2019. Additionally, these results reflect our product-driven strategy with a sustained
focus on innovation and creative designs. Our ability to provide a diverse product offering has allowed us
to reach new market segments and expand our customer base in both the residential and hospitality
39
markets. Our results reflect the continued success of this strategy, highlighted by expanded sales of
LiveSmart®, our popular “performance” line of highly durable stain-resistant fabric.
Currently, we expect the soft retail demand trends for furniture, as well as the impact of the continued
uncertainties surrounding tariffs and the associated geopolitical risks, to continue at least through the
early part of fiscal 2020.
Gross Profit and Operating Income
(dollars in thousands)
April 28, 2019
April 29, 2018
Change
Twelve Months Ended
Gross profit
$
Gross profit margin
SG&A expenses
Income from operations
Operating margin
25,374
18.7%
14,551
10,823
8.0%
$
25,836
19.7%
14,881
10,956
8.4%
(1.8)%
(100)bp
(2.2)%
(1.2)%
(40)bp
Despite the increase in net sales noted above, our profitability in upholstery fabrics decreased slightly in
fiscal 2019 compared with the same period a year ago. The decrease in profitability was primarily due to
restructuring related charges totaling $2.3 million related to the closure of our upholstery fabrics
operation located in Anderson, South Carolina (see below for further details regarding closure of our
Anderson facility).
Exit and Disposal Activity
On June 12, 2018, our board of directors announced the closure of our upholstery fabrics manufacturing
facility in Anderson, South Carolina. This closure was completed during the second quarter of fiscal 2019
and was due to a continued decline in demand for the products manufactured at this facility, reflecting a
change in consumer style preferences. The following summarizes our restructuring credit and related
charges totaling $1.6 million that were associated with this exit and disposal activity:
(dollars in thousands)
Inventory markdowns
Other operating costs associated with a closed facility
Employee termination benefits
Gain on sale of property, plant, and equipment
Total net charge
2019
$
$
1,564
824
661
(1,486)
1,563
Of this total net charge, a charge of $2.3 million, a charge of $40,000 and a credit of $825,000 was
recorded in cost of sales, selling, general, and administrative expenses, and restructuring credit,
respectively, in the fiscal 2019 Consolidated Statement of Net Income.
40
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, 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
that offers sourcing of upholstery fabrics and other products, as well as measuring and installation
services for Read’s own products. Read’s custom product line includes motorization, shades, upholstered
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 allows 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 was paid in July 2019.
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
Goodwill
Inventory
Accounts receivable
Tradename
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
$
The Agreement contains a contingent consideration arrangement that requires us to pay the former
shareholder of Read an earn-out payment 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 of April 28,
2019, based on actual financial results in relation to the pre-established adjusted EBITDA target, a
contingent payment is not required under the terms of the Agreement, and therefore, no contingent
liability has been recorded.
Acquisition costs totaling $339,000 were included in selling, general, and administrative expenses in our
fiscal 2018 Consolidated Statement of Net Income.
41
Segment Assets
Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.
(dollars in thousands)
April 28, 2019
April 29, 2018
% Change
Accounts receivable
$
Inventory
Property, plant & equipment
11,274
22,915
1,795
$
11,112
24,714
2,445
1.5%
(7.3)%
( 26.7)%
Accounts Receivable
As of April 28, 2019, accounts receivable was comparable with April 29, 2018. This trend reflects a
decrease in net sales of 8.3% for the fourth quarter of fiscal 2019 compared with the fourth quarter of
fiscal 2018 noted above, offset by higher days sales outstanding of 34 days for the fourth quarter of fiscal
2019 compared with 31 days for the fourth quarter of fiscal 2018.
Inventory
As of April 28, 2019, inventory decreased compared with April 29, 2018. The trend primarily represents
the decrease in net sales noted above during the fourth quarter of fiscal 2019 compared with the fourth
quarter of fiscal 2018.
Property, Plant & Equipment
The $1.8 million at April 28, 2019, represents property, plant, and equipment located in the U.S. of $1.2
million and located in China of $591,000. 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.
Home Accessories Segment
(dollars in thousands)
April 28, 2019
April 29, 2018
Twelve Months Ended
Net sales
Gross profit
Gross profit margin
SG&A expenses
Loss from operations
Operating margin
$ 15,956
4,428
27.8%
5,163
(735)
(4.6)%
-
-
-
-
-
-
42
Net Sales, Gross Profit, and Operating Income
This segment, which includes our June 2018 majority investment in eLuxury, represents our e-commerce
and finished products business offering bedding accessories and home goods. The combined platform for
this new segment supports sales of finished products to both consumers and business through global e-
commerce and business-to-business sales channels.
Net sales for our home accessories segment were $16.0 million since the June 2018 investment date in
eLuxury, with no comparable prior year sales. Our home accessories segment financial results for fiscal
2019 reflect typical product roll-out, sampling, and marketing challenges in connection with the start-up
and integration of a newly combined platform. These challenges, along with reduced demand for legacy
products, primarily mattress pads, unfavorably affected our financial results for the year.
Our strategic focus for the segment is to develop innovative bedding accessory products and other home
good items through our global manufacturing platform and in coordination with Culp’s other business
segments. During the second half of fiscal 2019, we developed and launched new products featuring
Culp mattress fabrics and upholstery fabrics, including mattress pads and mattress protectors made with
Culp mattress fabrics and dog beds made with LiveSmart® performance fabric. Additionally, we are
focused on expanding our sales channels beyond eLuxury’s e-commerce platform to reach business
retailers, both in brick and mortar stores and through their online platforms, as well as customers in the
hospitality industry.
Business Combination - eLuxury, LLC
Overview
Effective June 22, 2018, we entered an Equity Purchase Agreement (Equity Agreement”) pursuant to
which we acquired an 80% ownership interest in eLuxury, a company that offers bedding accessories and
home goods directly to consumers. eLuxury’s primary products include a line of mattress pads
manufactured at eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform
beds, cotton bed sheets, as well as 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.
This acquisition brings together eLuxury's experience in e-commerce, online brand building and direct to
consumer shopping and fulfillment with our global production, sourcing and distribution capabilities.
The estimated consideration given for the 80% ownership interest in eLuxury totaled $18.1 million, of
which $12.5 million represents the estimated purchase price and $5.6 million represents the estimated fair
value for contingent consideration associated with an earn-out obligation (see below for further details).
Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018,
$185,000 was paid in August 2018, and $749,000 is to be paid in September 2019, subject to certain
conditions as defined in the Equity Agreement.
43
Assets Acquired and Liabilities Assumed
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)
Goodwill
Tradename
Equipment
Inventory
Accounts receivable and other current assets
Accounts payable
Accrued expenses
Non-controlling interest in eLuxury
$
Fair Value
13,653
6,549
2,179
1,804
108
(1,336)
(295)
(4,532)
18,130
$
As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires
us to pay the seller, who is also the owner of the noncontrolling interest, an earn-out payment based on a
multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending
August 31, 2021, less $12.0 million. We recorded a contingent liability at the acquisition date for this
earn-out obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model.
Consolidation and Non-Controlling Interest
As a result of the acquisition of our 80% controlling interest, we included all the accounts of eLuxury in
our consolidated financial statements and have eliminated all significant intercompany balances and
transactions. Net income (loss) attributable to the noncontrolling interest in eLuxury is excluded from
total consolidated net income (loss) to arrive at net income (loss) attributable to Culp Inc. common
shareholders.
Other
Acquisitions costs totaling $270,000 were included in selling, general, and administrative expenses in our
fiscal 2019 Consolidated Statement of Net Income.
Segment Assets
Segment assets consist of accounts receivable, inventory, and property, plant and equipment.
(dollars in thousands)
April 28, 2019
April 29, 2018
Accounts receivable
$
Inventory
Property, plant & equipment
379
3,296
1,910
$
-
-
-
44
Property, Plant & Equipment
The $1.9 million at April 28, 2019, represents property, plant, and equipment located in the U.S.
Refer to Note 21 located in the notes to the consolidated financial statements for disclosures regarding
determination of our segment assets.
Other Income Statement Categories
(dollars in thousands)
April 28, 2019
April 29,2018
% Change
Twelve Months Ended
SG&A expenses
Interest expense
Interest income
Other expense
$
38,405
42
766
1,346
$
37,172
94
534
1,018
3.3%
(55.3)%
43.4%
32.2%
Selling, General and Administrative Expenses
SG&A expenses during fiscal 2019 increased compared with fiscal 2018. This trend is primarily due to
increased selling expenses associated with our home accessories segment, partially offset by lower
incentive compensation expense reflecting weaker financial results for the company in relation to pre-
established targets, as well as lower professional fees.
Interest Expense
Interest costs incurred were $42,000 during fiscal 2019 compared with $194,000 during fiscal 2018.
No interest costs for the construction of qualifying fixed assets were capitalized during fiscal 2019.
Interest costs of $100,000 were capitalized for the construction of qualifying fixed assets during fiscal
2018. Interest costs that have been capitalized will be amortized over the related assets’ useful lives.
Interest Income
During fiscal 2019 and 2018, our interest income was primarily associated with our investment grade
U.S. corporate bonds located in the Cayman Islands. The increase in our interest income during fiscal
2019 compared with fiscal 2018 stemmed from repatriated earnings and profits from our foreign
subsidiaries that were invested in U.S. money market funds at higher interest rates. Additionally, the
increase is due to higher interest rates and participant account balances held in our Rabbi Trust that are
associated with our deferred compensation plan, during fiscal 2019 compared with fiscal 2018.
Other Expense
Other expenses during fiscal 2019 increased compared with fiscal 2018. This increase is primarily due to
a $500,000 contribution for an endowed scholarship to the University of North Carolina at Chapel Hill in
honor of our Co-Founder and former Chairman of the Board. This charitable contribution will be paid
over a period of three years.
45
Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $6.4 million, or 53.6% of income before income tax expense, in
fiscal 2019 compared with income tax expense of $5.7 million, or 21.4% of income before income tax
expense, in fiscal 2018. 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
undistributed earnings from foreign subsidiaries
valuation allowance
global intangible low taxed income tax (GILTI)
foreign tax rate differential
tax effects of the 2017 Tax Cuts and Jobs Act
tax effects of Chinese foreign exchange gains(losses)
reversal of foreign uncertain income tax position
tax effects of stock-based compensation
other
2019
21.0%
37.2
(37.1)
17.9
13.7
(4.6)
2.3
-
0.6
2.6
53.6%
2018
30.4%
-
0.4
-
3.7
(7.6)
(2.8)
-
(1.8)
(0.9)
21.4%
Our income tax expense of $6.4 million and the increase in our income tax rate compared with fiscal
2018, reflects the mix of our taxable income favoring our foreign tax jurisdictions located in Canada and
China that have higher income tax rates in relation to the U.S., and a significant decline in U.S. taxable
income, which declined more than anticipated during our fourth quarter. This resulted in a significant
increase in our Global Intangible Low Taxed Income (“GILTI”) Tax, which was mostly incurred during
our fourth quarter. Our income tax expense of $5.7 million in fiscal 2018 included an income tax benefit
totaling $2.1 million associated with the Tax Act, which represents an income tax benefit of $4.3 million
pertaining 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, compared with a final provisional income tax benefit of $550,000 that was
recorded in the third quarter of fiscal 2019.
2017 Tax Cuts and Jobs Act
On December 22, 2017 (the “Enactment Date”), 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 the GILTI tax.
The corporate income tax rate reduction was effective as of January 1, 2018. Since we have a fiscal year
rather than a calendar year, we were subject to IRS rules relating to transitional income tax rates for fiscal
2018. As a result, our fiscal 2018 U.S. federal income tax rate was a blended income tax rate of 30.4%
compared with a fully reduced U.S. federal income tax rate of 21.0% during fiscal 2019.
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 were components of the Tax Act that
46
significantly affected our financial statements during fiscal 2019 and 2018. As of April 29, 2018, we had
not yet completed our assessment of the effects of the Tax Act, however, we were able to determine
reasonable estimates for the effects of the components specified above, and thus we reported provisional
amounts for these items under guidance provided by SEC Staff Accounting Bulletin No. 118 (“SAB
118”). As a result, our estimates changed and revisions to these estimates were recorded during the
measurement period allowed by SAB 118, which was 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 changed
due to a variety of factors that included, (i) actual versus estimates of accumulated earnings and profits
associated with our foreign subsidiaries, (ii) utilization of our foreign income tax credits, (iii) the election
of whether or not to apply our existing U.S. federal net operating loss carryforwards against the Transition
Tax, (iv) actual versus estimates regarding the reversal of U.S. deferred income taxes occurring in fiscal
2018 based on our blended U.S. federal income tax rate of 30.4% compared with our fully reduced U.S.
federal income tax rate of 21.0% during fiscal 2019.
In order to determine the effects of the new U.S. federal corporate income tax rate on our U.S. deferred
income tax balances during fiscal 2019 and 2018, 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. As a result, we recorded a provisional income tax charge of $2.2 million for the re-
measurement of our U.S. net deferred income taxes during fiscal 2018. During the third quarter of fiscal
2019, we completed our assessment of the remeasurement of our U.S. deferred income tax balances in
accordance with SAB 118 and recorded a final provisional income tax benefit of $268,000.
The Transition Tax was 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. As a result, we recorded a provisional income tax benefit of $4.3 million
for the income tax effects of the Transition Tax during fiscal 2018. This $4.3 million income tax benefit
related to an income tax benefit of $18.0 million for the release of deferred income tax liabilities related
to E&P and an income tax benefit of $11.7 million related to the reduction in our U.S. Federal income
tax rate pursuant to the Tax Act on the effective settlement of 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. During the third quarter of fiscal 2019, we completed
our assessment of the income tax effects of the Transition Tax and recorded a final provisional income tax
benefit of $282,000. Additionally, we elected to pay the Transition Tax over a period of eight years in
accordance with the Tax Act.
GILTI
In addition to the above components of the Tax Act, GILTI was effective during fiscal 2019. Our policy
to account for GILTI is to expense this tax in the period incurred. As a result, we recorded an income tax
charge of $2.1 million during fiscal 2019.
On June 14, 2019, the U.S. Treasury released proposed regulations regarding the GILTI provisions of the
U.S. income tax code. The proposed regulations contain a provision for an exclusion from treatment as
GILTI if taxable income amounts are subject to a high rate of foreign income tax, as defined in the
proposed regulations. If an entity were to qualify for the high-income tax exception, the high-taxed
income earned that would be subject to GILTI and U.S. income tax may be excluded from U.S. income
tax. However, since these regulations are in proposed form, an entity is not allowed to record an income
tax benefit under these provisions until these regulations have been finalized.
47
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 14 located in the notes to the consolidated financial statements for disclosures regarding our
assessments of our recorded valuation allowance as of April 28, 2019 and April 29, 2018 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. At April
28, 2019, we assessed the financial reporting requirements of our U.S. parent company and determined
that our undistributed earnings from our foreign subsidiaries would not be reinvested indefinitely and
would be 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 14 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 28, 2019 and April 29, 2018, respectively.
Uncertainty in Income Taxes
At April 29, 2018, we had a $903,000 total gross unrecognized income tax benefit that 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 2015 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 2014 and subsequent.
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.
48
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 14 located in the notes to the consolidated financial statements for disclosures and
additional information regarding our uncertain income tax positions.
Income Taxes Paid
Our income tax payments totaled $6.7 million during fiscal 2019 compared with $4.0 million during
fiscal 2018. Our income tax payments were mostly associated with our subsidiaries located in Canada and
China. These payments increased during fiscal 2019 as compared with the same period a year ago,
primarily due to withholding tax payments of $879,000 associated with an earnings and profit distribution
from our subsidiary located in Canada, installment payments totaling $600,000 pertaining to our
Transition Tax in connection with the Tax Act, and higher installment payments associated with our
subsidiary located in Canada as a result of increased taxable income.
As a result of the Tax Act, we started making installment payments associated with the Transition Tax in
fiscal 2019. Additionally, we elected to pay the Transition Tax over a period of eight years in accordance
with the Tax Act. Lastly, at April 28, 2019, we have U.S. federal net operating loss carryforwards totaling
$6.9 million. 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 2020.
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
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
49
Net Sales
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.
Gross Profit and Operating Income
Overall
The decrease in mattress fabrics profitability primarily reflected 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.
• 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. This relocation provided
a more efficient and streamlined production flow and access to a larger labor pool, as well as
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 allows us to ship directly to our
customers in Canada.
Joint Venture
Effective January 1, 2017, Culp International Holdings, Ltd. (Culp International), a wholly-owned
subsidiary of the company, entered into a joint venture agreement, pursuant to which Culp International
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 northeastern border of Haiti,
which borders the Dominican Republic. CLIH commenced production in the second quarter of fiscal
2018 (October 2017) 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 9 located in the notes to the consolidated financial statements for further details).
50
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant and equipment, and our
investment in an unconsolidated joint venture.
(dollars in thousands)
Accounts receivable
April 29, 2018
15,195
$
April 30, 2017
15,512
$
Inventory
Property, plant & equipment
Investment in unconsolidated
joint venture
Accounts Receivable
28,740
48,797
1,501
31,526
48,916
1,106
% Change
(2.0)%
(8.8)%
(0.2)%
35.7%
As of April 29, 2018, accounts receivable were comparable with April 30, 2017. This trend reflects a
decrease in net sales of 4.7% for the fourth quarter of fiscal 2018 compared with the fourth quarter of
fiscal 2017 noted above.
Inventory
As of April 29, 2018, inventory decreased compared with April 30, 2017. The trend primarily represents
the decrease in net sales noted above during the fourth quarter of fiscal 2018 compared with the fourth
quarter of fiscal 2017.
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 comparable 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.
51
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 reflected our focus on innovation and creative designs,
supported by our manufacturing platform located in China. Our ability to provide a diverse product
offering allowed us to reach new market segments. Our results reflected the success of this strategy,
highlighted by expanded sales of LiveSmart®, our popular “performance” line of highly durable stain-
resistant fabric. In response, we 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
during the fourth quarter of fiscal 2018 (see note 2 to the consolidated financial statements 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 fiscal 2017. 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.
52
Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.
(dollars in thousands)
April 29, 2018
April 30, 2017
% Change
Accounts receivable
$
Inventory
Property, plant & equipment
11,112
24,714
2,445
$
9,065
19,956
1,879
22.6%
23.8%
30.1%
Accounts Receivable
As of April 29, 2018, accounts receivable increased by 22.6% compared with April 30, 2017. This
increase was primarily due to an increase in net sales of 11% during the fourth quarter of fiscal 2018
compared with the fourth quarter of fiscal 2018 and accounts receivable acquired from Read.
Inventory
As of April 29, 2018, inventory increased by 23.8% compared with April 30, 2017. This increase was
primarily due to the increase in net sales and inventory acquired from Read.
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.
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 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 related to acquisition activity.
53
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 pertained 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 13 and 15 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.
Interest Income
Interest income increased during fiscal 2018 compared with fiscal 2017. 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
tax effects of stock-based compensation
foreign tax rate differential
reversal of foreign uncertain income tax position
valuation allowance
other
2018
30.4%
(7.6)
(2.8)
(1.8)
3.7
-
0.4
(0.9)
21.4%
2017
34.0%
-
1.6
-
-
(11.6)
(0.2)
0.9
24.7%
54
Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents, 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 of $40.0 million at April 28, 2019, cash flow from
operations, and current availability ($30.9 million at April 28, 2019) under our revolving credit lines will
be sufficient to fund our business needs and our contractual obligations (see commitments table below).
At April 28, 2019, our cash and cash equivalents, and short-term and long-term investments (held-to-
maturity) totaled $45.0 million compared with $54.5 million at April 29, 2018. The decrease from the end
of fiscal 2018 was primarily due to cash payments of $12.1 million for acquisitions that were mostly
associated with the purchase of our 80% ownership in eLuxury, $8.1 million to our shareholders in the
form of regular quarterly dividend payments and common stock repurchases, $4.7 million in capital
expenditures (of which $1.4 million was vendor financed) that were mostly associated with our mattress
fabric segment, and $1.3 million in employee withholding tax payments associated with the vesting of
certain stock-based compensation awards, partially offset by net cash provided by operating activities
totaling $13.9 million and proceeds from the sale of property, plant, and equipment totaling $1.9 million
that were associated with the closure of our upholstery fabrics facility located in Anderson, South
Carolina.
Our net cash provided by operating activities of $13.9 million in fiscal 2019 decreased $13.6 million
compared with $27.5 million in fiscal 2018. The decrease is primarily due to decreased income from
operations.
At April 28, 2019, all of our outstanding borrowings totaling $675,000 pertained to our subordinated
credit agreement between eLuxury and its minority owner.
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.
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.
55
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)
United States
China
Canada
Cayman Islands
April 28,
2019
33,078
9,670
2,196
64
45,008
$
$
April 29,
2018
10,537
9,221
3,715
31,000
54,473
$
$
During the third and fourth quarters of fiscal 2019, we experienced significant shift of cash and
investments held in the Cayman Islands to the U.S. This trend was primarily due to our strategy of taking
advantage of the Tax Act, which allows a U.S. corporation a 100% dividend received deduction on
earnings and profits repatriated to the U.S. from 10% owned foreign corporations.
At April 29, 2018, of the $31.0 million in cash and investments held in the Cayman Islands, almost all
pertained to investment grade U.S. corporate bonds. As our U.S. corporate bonds matured, we repatriated
almost all of our earnings and profits residing in the Cayman Islands to our U.S. parent company. During
fiscal 2019, we received cash proceeds from the sale of our U.S. corporate bonds totaling $25.7 million,
of which $21.7 million was received in the third and fourth quarters. In turn, we repatriated earnings and
profits to our U.S. parent company totaling $31.3 million during fiscal 2019, of which $28.0 million
pertained to our third and fourth quarters.
Dividend Program
On June 12, 2019, we announced that our board of directors approved a regular quarterly cash dividend
payment of $0.10 per share. This payment will be made on or about July 16, 2019, to shareholders of
record as of July 5, 2019.
During fiscal 2019, dividend payments totaled $4.7 million, all of which represented our regular quarterly
cash dividend payments ranging from $0.09 to $0.10 per share.
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.
Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as
business needs or market conditions change.
Common Stock Repurchases
On June 15, 2016, we announced that our board of directors approved an authorization for us to acquire
up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be
purchased from time to time in open market transactions, block trades, through plans established under
the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of
such purchases will be based on working capital requirements, market and general business conditions,
and other factors including alternative investment opportunities.
56
During fiscal 2019, we purchased 160,823 shares of our common stock at a cost of $3.3 million, most of
which was purchased during our second and third quarters. During fiscal 2018 and 2017, there were no
repurchases of our common stock.
At April 28, 2019, we had $1.7 million available for additional repurchases of our common stock
Working Capital
Accounts receivable at April 28, 2019, were $23.8 million, a decrease of $2.6 million or 10%, compared
with $26.3 million at April 29, 2018. The decrease in accounts receivable primarily relates to our decrease
in net sales during the fourth quarter of fiscal 2019 compared with the fourth quarter of fiscal 2018. Net
sales during the fourth quarter of fiscal 2019 were $71.0 million, a decrease of 9%, compared with $78.2
million during the fourth quarter of fiscal 2018. Days’ sales in accounts receivable were 30 days during
both our fourth quarter of fiscal 2019 and 2018.
Inventories at April 28, 2019 were $50.9 million, a decrease of 2.6 million or 5%, compared with
$53.5 million at April 29, 2018. The decrease in inventory primarily relates to our decrease in net sales
during the fourth quarter of fiscal 2019 compared with the fourth quarter of fiscal 2018 noted above,
partially offset by an increase in inventory associated with our new home accessories business segment
totaling $3.3 million. Inventory turns were 4.6 and 4.8 during the fourth quarter of fiscal 2019 and 2018,
respectively.
Accounts payable-trade at April 28, 2019, were $24.4 million, a decrease of $2.9 million or 11%
compared with $27.2 million at April 29, 2018. The decrease in accounts payable is due to the decline in
inventory purchases as a result of the decline in our net sales volume noted above.
Operating working capital (accounts receivable and inventories, less deferred revenue and accounts
payable-trade and capital expenditures) was $49.8 million at April 28, 2019, compared with $49.9 million
at April 29, 2018. Operating working capital turnover was 5.8 in fiscal 2019 compared to 7.1 in fiscal
2018.
Financing Arrangements
Revolving Credit Agreements
Currently, we have revolving credit agreements with banks for our U.S. parent company and our
operations located in China. The purposes of our revolving credit lines of credit are to support
potential short-term cash needs in different jurisdictions, mitigate our risk associated with
foreign currency exchange rate fluctuations, and ultimately repatriate earnings and profits from
our foreign subsidiaries to the U.S. to take advantage of the Tax Act, which allows a U.S.
corporation a 100% dividend received income tax deduction on earnings and profits repatriated
to the U.S. from 10% owned foreign corporations.
Subordinated Loan Payable
On February 17, 2019, eLuxury entered into a subordinated credit agreement with the owner of
its noncontrolling interest which provides a revolving loan commitment of $1.0 million that
expires on June 22, 2023. Interest was charged at a rate (applicable interest rate of 3.93%
April 28, 2019) as a variable spread over LIBOR based on Culp’s ratio of debt to EBITDA. At
April 28, 2019, there were borrowings outstanding under this agreement totaling $675,000.
57
Overall
Our loan agreements require, among other things, that we maintain compliance with certain
financial covenants. As of April 28, 2019, we complied with these financial covenants.
Refer to Note 13 located in the notes to the consolidated financial statements for further details
of our credit agreements.
Commitments
The following table summarizes our contractual payment obligations and commitments for each of the
next five fiscal years (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total
Capital expenditures
Accounts payable -
capital expenditures
Operating leases
Subordinated Loan
Payable
Interest expense
Total (1)
$ 1,428
-
-
78
3,044
-
27
$ 4,577
-
2,120
-
27
2,147
-
1,169
-
27
1,196
-
-
723
-
27
750
-
-
678
675
4
1,357
-
$ 1,428
-
346
78
8,080
-
-
675
112
346 $ 10,373
Note: Payment Obligations by End of Each Fiscal Year
(1) At April 28, 2019, we had $903,000 of total gross unrecognized tax benefits, of which $380,000 and
$523,000 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 $903,000 in total gross unrecognized tax benefits, $380,000 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 $4.7 million (of which $1.4 million was vendor financed) for
fiscal 2019, compared with $11.8 million (of which $3.8 million was vendor financed) for fiscal 2018.
Capital expenditures for fiscal 2019 and 2018 mostly related to our mattress fabrics segment.
Depreciation expense was $8.1 million for fiscal 2019 compared with $7.7 million for fiscal 2018.
Depreciation expense for fiscal 2019 and 2018 mostly related to our mattress fabrics segment.
For fiscal 2020, we are currently projecting capital expenditures to be in the range of $6.5 million to $7.0
million. Depreciation expense for the company as a whole is projected to be $8.0 million for fiscal 2020.
The estimated capital expenditures and depreciation expense for fiscal 2020 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.
58
Accounts Payable – Capital Expenditures
Refer to Note 15 located in the notes to the consolidated financial statements for further details
of our accounts payable – capital expenditures.
Purchase Commitments - Capital Expenditures
Refer to Note 15 located in the notes to the consolidated financial statements for further details
of our purchase commitments – capital expenditures.
Handling Costs
We record warehousing costs in SG&A expenses. These costs were $4.2 million, $4.6 million, and $4.6
million, in fiscal 2019, 2018, and 2017, respectively. Warehousing costs include the operating expenses
of our various finished goods distribution centers, such as personnel costs, utilities, building rent and
material handling equipment, and lease expense. Had these costs been included in cost of sales, gross
profit would have been $46.0 million, or 15.5% of net sales, in fiscal 2019, $60.0 million, or 18.5% of net
sales, in fiscal 2018, and $64.6 million, or 20.9% of net sales, in fiscal 2017.
Inflation
Any significant increase in our raw material costs, utility/energy costs and general economic inflation
could have a material adverse impact on the company, because competitive conditions have limited our
ability to pass significant operating increases on to customers.
Critical Accounting Policies
U.S. generally accepted accounting principles require us to make estimates and assumptions that affect our
reported amounts in the consolidated financial statements and accompanying notes. Some of these
estimates require difficult, subjective and/or complex judgments about matters that are inherently uncertain,
and as a result actual results could differ significantly from those estimates. Due to the estimation processes
involved, management considers the following summarized accounting policies and their application to be
critical to understanding the company’s business operations, financial condition and results of operations.
Accounts Receivable - Allowance for Doubtful Accounts
As of April 28, 2019, accounts receivable totaled $23.8 million of which $12.1 million, $11.3 million, and
$379,000 pertained to our mattress fabrics segment, upholstery fabrics segment, and home accessories
segment, respectively. Additionally, as of April 28, 2019, the aggregate accounts receivable balance of
our ten largest customers was $10.3 million, or 43% of trade accounts receivable. No customers within
any of our business segments accounted for more than 10% of our consolidated accounts receivable
balance as of April 28, 2019.
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 $393,000 and $357,000 at April 28, 2019, and April 29,
2018, respectively.
59
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 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
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.
Goodwill
In accordance with ASC Topic 350, Intangibles – Goodwill and Other, our operations are currently
classified into four reporting units: mattress fabrics, upholstery fabrics, Read Window Products, LLC, and
home accessories.
We assess goodwill for impairment at the end of each fiscal year or between annual tests if we believe
indicators of impairment exist. Such indicators could include but are not limited to (1) deterioration in the
environment of the industry and markets in which we operate, (2) unanticipated competition, and (3) a
deterioration in general economic conditions. We first assess qualitative factors to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, we would conduct a two-step quantitative goodwill impairment test. The first step of the
impairment test involves comparing the fair value of the applicable reporting unit with its carrying value.
We estimate the fair values of our reporting units using a combination of the income or discounted cash
flows approach and the market approach, which utilizes comparable companies’ data. If the carrying
amount of a reporting unit exceeds the reporting unit’s fair value, management performs the second step
of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the
implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The
amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as
an impairment loss.
At April 28, 2019 and April 29, 2018, our goodwill totaled $27.2 million and $13.6 million, respectively.
Our evaluation of goodwill completed as of April 28, 2019, resulted in no impairment losses.
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
income tax rates is recognized in net income (loss) in the period that includes the enactment date.
60
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 14 located in the notes to the consolidated financial statements for disclosures regarding our
assessments of our recorded valuation allowance as of April 28, 2019 and April 29, 2018.
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 14 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 28, 2019 and April 29, 2018, 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.
Refer to Note 14 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.
61
Compensation expense for our time vested restricted stock awards are amortized on a straight-line basis
over the remaining vesting periods. 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. For performance goals that
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, 2019, the remaining compensation cost
related to our performance based restricted stock units was $328,000.
We recorded $130,000, $2.2 million, and $3.4 million of compensation expense within selling, general,
and administrative expense for our equity-based awards in fiscal 2019, 2018, and 2017, 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 aimed 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 was an income tax charge of $77,000 during
fiscal 2019 and an income tax benefit of $497,000, during fiscal 2018. 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 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 for fiscal 2017. 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 for fiscal 2017.
Our equity incentive plans are described more fully in Note 16 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 2019.
Recently Issued Accounting Standards
Refer to Note 1 located in the notes to the consolidated statements for recently issued accounting
pronouncements for fiscal 2020 and beyond.
62
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our revolving credit lines.
At April 28, 2019, our U.S. revolving credit agreement, as well as eLuxury’s subordinated credit
agreement with the owner of its non-controlling interest, require interest to be charged at a rate
(applicable interest rate of 3.36% at April 28, 2019) as a variable spread over LIBOR based on
Culp’s ratio of debt to EBITDA as defined in the U.S. revolving credit agreement. Our revolving
credit line associated with our China subsidiaries bears interest at a rate determined by the
Chinese government. At April 28, 2019, we did not have any borrowings outstanding under our
revolving credit agreement and had $675,000 in borrowings outstanding under the subordinated
credit agreement between eLuxury and the owner of its non-controlling interest.
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 U.S. dollar as their
functional currency. A substantial portion of the company’s imports purchased outside the U.S.
are denominated in U.S. dollars. A 10% change in the above exchange rates at April 28, 2019,
would not have had a significant impact on our results of operations or financial position.
63
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 28, 2019 and April 29, 2018, the related
consolidated statements of net income, comprehensive income, changes in shareholders’ equity, and cash
flows for each of the three years in the period ended April 28, 2019, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the company as of April 28, 2019 and April 29, 2018, and the
results of its operations and its cash flows for each of the three years in the period ended April 28, 2019,
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 28,
2019, 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 12, 2019 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 12, 2019
64
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data and preferred and common stock shares)
April 28, 2019 and April 29, 2018
ASSETS
current assets:
cash and cash equivalents
short-term investments - available for sale
short-term investments - held to maturity
accounts receivable, net
inventories
current income taxes receivable
other current assets
total current assets
property, plant and equipment, net
goodwill
intangible assets
deferred income taxes
long-term investments - held-to-maturity
long-term investments - rabbi trust
noncurrent income taxes receivable
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
accrued restructuring costs
income taxes payable
total current liabilities
accrued expenses - long-term
subordinated loan payable
contingent consideration - earn-out obligation
income taxes payable - long-term
deferred income taxes
deferred compensation
total liabilities
commitments and contingencies (notes 13 and 15)
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 12,391,160 at
April 28, 2019 and 12,450,276 at April 29, 2018
capital contributed in excess of par value
accumulated earnings
accumulated other comprehensive income (loss)
total shareholders' equity attributable to Culp Inc.
non-controlling interest
total equity
total liabilities and equity
The accompanying notes are an integral part of these consolidated financial statements.
65
2019
2018
40,008
-
5,001
23,751
50,860
776
2,849
123,245
48,389
27,222
10,448
457
-
7,081
733
1,508
643
219,726
24,377
78
399
9,192
124
1,022
35,192
333
675
5,856
3,249
3,176
6,998
55,479
$
$
$
21,228
2,451
25,759
26,307
53,454
-
2,870
132,069
51,794
13,569
4,275
1,458
5,035
7,326
-
1,501
957
217,984
27,237
1,776
809
9,325
-
1,437
40,584
763
-
-
3,758
2,150
7,353
54,608
-
-
620
43,694
115,579
40
159,933
4,314
164,247
219,726
623
48,203
114,635
(85)
163,376
-
163,376
217,984
$
$
$
$
$
CONSOLIDATED STATEMENTS OF NET INCOME
For the years ended April 28, 2019, April 29, 2018 and April 30, 2017
(dollars in thousands, except per share data)
2019
2018
2017
net sales
cost of sales
gross profit
selling, general and administrative expenses
restructuring credit
income from operations
interest expense
interest income
other expense
income before income taxes
income tax expense (note 14)
loss from investment in unconsolidated joint venture (note 9)
net income
Plus: net loss attributable to non-controlling interest
net income attributable to Culp Inc. common shareholders
$
$
$
296,669
246,471
50,198
$
323,725
259,092
64,633
309,544
240,309
69,235
38,405
(825)
12,618
42
(766)
1,346
11,996
6,424
114
5,458
218
5,676 $
37,172
-
27,461
94
(534)
1,018
26,883
5,740
266
20,877
-
20,877 $
39,157
-
30,078
-
(299)
681
29,696
7,339
23
22,334
-
22,334
$1.81
$1.78
net income attributable to Culp Inc. common shareholders per share-basic
net income attributable to Culp Inc. common shareholders per share-diluted
$0.46
$0.45
$1.68
$1.65
The accompanying notes are an integral part of these consolidated financial statements.
66
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended April 28, 2019, April 29, 2018 and April 30, 2017
net income
$
5,458
$
20,877
$
22,334
2019
2018
2017
other comprehensive income (loss)
unrealized gain (loss) on foreign currency cash flow hedge, net of tax
unrealized holding loss on foreign currency cash flow hedge
reclassification adjustment for realized loss on foreign currency cash flow hedge
total unrealized gain (loss) on foreign currency cash flow hedge
unrealized gains (losses) on investments, net of tax
unrealized holding (losses) gains on investments
reclassification adjustment for realized loss included in net income
total unrealized gain (loss) on investments
total other comprehensive income (loss)
(9)
64
55
(47)
117
70
125
(55)
-
(55)
(26)
-
(26)
(81)
-
-
-
128
12
140
140
comprehensive income
Plus: comprehensive loss attributable to non-controlling interest
comprehensive income attributable to Culp Inc. common shareholders
$
5,583
218
5,801 $
20,796
-
20,796
$
22,474
-
22,474
The accompanying notes are an integral part of the consolidated financial statements.
67
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Shareholders' equity attributable to Culp Inc.
(dollars in thousands, except common stock shares)
For the years ended April 28, 2019, April 29, 2018
and April 30, 2017
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
unrealized 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 surrendered for withholding taxes payable
dividends paid
Balance, April 29, 2018
net income
acquistion of subsidiary with non-controlling interest
stock-based compensation
unrealized gain on foreign currency cash flow hedge instrument
unrealized gain 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 surrendered for withholding taxes payable
common stock repurchased
dividends paid
Balance, April 28, 2019
Common Stock
Capital
Contributed
in Excess
of Par Value
43,795
$
-
3,358
-
657
Accumulated
Other
Comprehensive
(Loss) Income
(144)
$
-
-
140
-
Accumulated
Earnings
$
84,547
22,334
-
-
-
Total
$
128,812
22,334
3,358
140
657
Non-Controlling
Interest
-
$
-
-
-
-
Total
Equity
$
128,812
22,334
3,358
140
657
(2)
-
585
(978)
-
47,415
-
2,212
-
-
(6)
-
-
110
(1,528)
-
48,203
-
-
130
-
-
(7)
-
-
-
-
-
(6,280)
100,601
20,877
-
-
-
-
-
-
-
-
(6,843)
114,635
5,676
-
-
-
-
-
-
-
-
-
-
-
(4)
-
-
(55)
(26)
-
-
-
-
-
-
(85)
-
-
-
55
70
-
-
-
-
588
(979)
(6,280)
148,630
20,877
2,212
(55)
(26)
-
-
-
111
(1,530)
(6,843)
163,376
5,676
-
130
55
70
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(218)
4,532
-
-
-
-
-
-
-
588
(979)
(6,280)
148,630
20,877
2,212
(55)
(26)
-
-
-
111
(1,530)
(6,843)
163,376
5,458
4,532
130
55
70
-
-
Amount
$
614
-
-
-
-
2
-
3
(1)
-
618
-
-
-
-
6
-
-
1
(2)
-
623
-
-
-
-
-
7
-
-
(2)
(8)
-
620
$
-
(1,317)
(3,315)
-
43,694
$
-
-
-
(4,732)
115,579
$
-
-
-
-
40
$
-
(1,319)
(3,323)
(4,732)
159,933
$
-
-
-
-
4,314
$
-
(1,319)
(3,323)
(4,732)
164,247
$
Shares
12,265,489
-
-
-
-
49,192
4,800
68,000
(30,850)
-
12,356,631
-
-
-
-
118,845
4,800
1,200
15,600
(46,800)
-
12,450,276
-
-
-
-
-
136,996
6,548
1,200
(43,037)
(160,823)
-
12,391,160
See accompanying notes to consolidated financial statements.
68
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended April 28, 2019, April 29, 2018, and April 30, 2017
(dollars in thousands)
2019
2018
2017
$
5,458
$
20,877
$
22,334
cash flows from operating activities:
net income
adjustments to reconcile net income to net cash
provided by operating activities:
depreciation
amortization
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 (gains) losses
changes in assets and liabilities, net of effects of acquisition of assets:
accounts receivable
inventories
other current assets
other assets
accounts payable-trade
accrued expenses and deferred compensation
deferred revenue
accrued restructuring costs
income taxes
net cash provided by operating activities
cash flows from investing activities:
net cash paid for acquisition of assets
capital expenditures
proceeds from the sale of equipment
investment in unconsolidated joint venture
purchase of short-term investments (available for sale)
proceeds from the sale of short-term investments (available for sale)
proceeds from the sale of short-term investments (held to maturity)
purchase of long-term investments (held-to-maturity)
proceeds from the sale of long-term investments (rabbi trust)
purchase of long-term investments (rabbi trust)
proceeds from life insurance policy
payments on life insurance policy
net cash provided by (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
proceeds from subordinated loan payable
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
cash and cash equivalents at beginning of year
8,117
780
130
2,027
(1,452)
114
94
(17)
2,339
3,841
41
(65)
(3,427)
(1,492)
(410)
124
(2,329)
13,873
(12,096)
(3,261)
1,894
(120)
(10)
2,458
25,680
-
1,233
(1,011)
394
-
15,161
12,000
(12,000)
(1,412)
675
(50)
(3,323)
(4,732)
(1,319)
-
(10,161)
(93)
18,780
21,228
7,672
351
2,212
(2,482)
-
266
-
66
(299)
(24)
226
(81)
(4,028)
(1,562)
(94)
-
4,373
27,473
(4,541)
(8,005)
6
(661)
(49)
-
-
-
57
(1,902)
-
(18)
(15,113)
19,000
(19,000)
(3,750)
-
-
-
(6,843)
(1,530)
111
(12,012)
85
433
20,795
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)
141
(1,129)
(44)
2,000
-
(31,020)
-
(1,351)
-
(18)
(43,279)
9,000
(9,000)
(1,050)
-
(2)
-
(6,280)
(429)
37
(7,724)
(56)
(16,992)
37,787
20,795
cash and cash equivalents at end of year
$
40,008
$
21,228
$
The accompanying notes are an integral part of these consolidated financial statements.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home
accessories.
The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to
bedding manufacturers. We have 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.
The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential
and commercial furniture manufacturers. We have 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).
Effective June 22, 2018, we acquired an 80% ownership interest in eLuxury (see Note 2 for further
details), a company that offers bedding accessories and home goods directly to consumers and businesses
through its e-commerce platform. eLuxury’s financial information is included in our home accessories
segment, which is our new finished products business that manufactures, sources, and sells bedding
accessories and home goods directly to consumers and businesses through global e-commerce and
business-to-business sales channels.
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
Overall
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 are 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 2019, 2018, and 2017.
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).
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
70
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.
Non-Controlling Interest
In connection with the acquisition of our 80% ownership interest in eLuxury, we entered into an Equity
Purchase Agreement (Equity Agreement) that contains substantive profit-sharing arrangement provisions
in which it explicitly states the ownership interests at the effective date of this business combination and
the allocation of net income or loss between Culp Inc., the controlling interest, and the noncontrolling
interest. The Equity Agreement states that at the effective date of this acquisition (June 22, 2018), we
acquired an 80% ownership interest in eLuxury with the seller retaining a 20% noncontrolling interest.
Additionally, the Equity Agreement states that eLuxury’s net income or loss will be allocated at a
percentage of 70% and 30% to Culp Inc. and the noncontrolling interest, respectively.
As result of the acquisition of our 80% controlling interest, we included all the accounts of eLuxury in our
consolidated financial statements and have eliminated all significant intercompany balances and
transactions. Net income (loss) attributable to the noncontrolling interest in eLuxury is excluded from
total consolidated net income attributable to Culp, Inc. common shareholders.
Fiscal Year
Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. Fiscal 2019, 2018,
and 2017 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 28, April 29,
(dollars in thousands)
United States
China
Canada
Cayman Islands
2019
28,078
9,670
2,196
64
40,008
$
$
2018
9,452
9,221
2,349
206
21,228
71
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 (Available for Sale)
As of April 29, 2018, our short-term investments consisted of bond funds that were classified as
available-for-sale and had an accumulated unrealized loss totaling $91,000. On April 29, 2018, our short-
term investments were recorded at its fair value of $2.5 million and the fair value of our short-term
investments approximated its cost basis.
A summary of our short-term investments by geographic area follows:
April 28, April 29,
(dollars in thousands)
Canada
United States
Long-Term Investments (Rabbi Trust)
2019
-
-
-
$
$
2018
1,366
1,085
2,451
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 $7.1
million and $7.3 million at April 28, 2019 and April 29, 2018 respectively. Our long-term investments
had an accumulated unrealized gain totaling $40,000 and $61,000 at April 28, 2019, and April 29, 2018,
respectively. The fair value of our long-term investments associated with our Rabbi Trust approximates
its cost basis.
Investments (Held-To-Maturity)
Our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds with
maturities that ranged from 2 to 2.5 years, in which these bonds have since matured during the first
quarter of fiscal 2020. These investments were classified as held-to-maturity as we had the positive intent
and ability to hold these investments until maturity. Our held-to-maturity investments were recorded as
either current or noncurrent on our Consolidated Balance Sheets, based on the maturity date in relation to
the respective reporting period and recorded amortized cost.
At April 28, 2019, the amortized cost and fair value of our held-to-maturity investments were $5.0
million.
At April 29, 2018, the amortized cost of our held-to-maturity investments were $30.8 million and the fair
value was $30.6 million.
Our U.S. corporate bonds were classified as level 2 as they were traded over the counter within a broker
network and not on an active market. The fair value of our U.S. corporate bonds was determined based on
a published source that provided an average bid price. The average bid price was based on various broker
prices that were determined based on market conditions, interest rates, and the rating of the respective
U.S. corporate bond.
72
Accounts Receivable
Substantially all of our accounts receivable are due from manufacturers in the bedding and furniture
industries. We grant credit to customers 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, 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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs totaled $2.2 million in fiscal 2019 and
pertained to our home accessories segment. No advertising costs were incurred during fiscal 2018 and
2017, respectively.
Interest Costs
Interest costs incurred were $42,000, $194,000, and $158,000 in fiscal years 2019, 2018, and 2017,
respectively.
73
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 depreciated over the asset’s
estimated useful life. No interest costs for the construction of qualifying fixed assets were capitalized
during fiscal 2019. Interest costs of $100,000 and $158,000 were capitalized for the construction of
qualifying fixed assets during fiscal 2018 and 2017, 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) 2019
-
China
2
Canada
(64)
Euro foreign exchange contract
(62)
$
$
2018
(298)
(8)
-
(306)
2017
111
(120)
-
(9)
See Note 18 for additional details regarding our Euro foreign exchange contract.
Goodwill
In accordance with ASC Topic 350, Intangibles – Goodwill and Other, our operations are currently
classified into four reporting units: mattress fabrics, upholstery fabrics, Read Window Products, LLC, and
home accessories.
We assess goodwill for impairment at the end of each fiscal year or between annual tests if we believe
indicators of impairment exist. Such indicators could include but are not limited to (1) deterioration in the
environment of the industry and markets in which we operate, (2) unanticipated competition, and (3) a
deterioration in general economic conditions. We first assess qualitative factors to determine whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount, including
goodwill. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its
carrying amount, we would conduct a two-step quantitative goodwill impairment test. The first step of the
impairment test involves comparing the fair value of the applicable reporting unit with its carrying value.
We estimate the fair values of our reporting units using a combination of the income or discounted cash
flows approach and the market approach, which utilizes comparable companies’ data. If the carrying
amount of a reporting unit exceeds the reporting unit’s fair value, management performs the second step
of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the
implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The
amount, by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized
as an impairment loss.
Our evaluation of goodwill completed as of April 28, 2019, resulted in no impairment losses.
74
Income Taxes
Deferred Income Taxes – Overall
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 basis
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 tax expense (benefit) 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, considering 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
deferred tax liability will only be required for withholding taxes that are incurred by our foreign
subsidiaries at the time earnings and profits are 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
On April 30, 2018 (the beginning of fiscal 2019), we adopted ASU 2014-09 “Revenue from Contracts
with Customers” (ASC Topic 606 or the “new standard”). ASC Topic 606 requires us to disclose
significant judgments and changes in judgments in applying the new standard that significantly affect the
determination of the amount and timing of revenue from contracts with customers.
75
The application of the new standard did not materially affect our accounting policies followed in fiscal
years 2018 and 2017 with regards to revenue recognition, determination of transaction prices, and revenue
measurement. However, as required by ASC Topic 606, we recorded a significant reclassification
adjustment from a contra account applied to accounts receivable to accrued expenses for estimated sales
returns and allowances (see Note 4 to the consolidated financial statements for further details).
See below for disclosure of our significant judgements and accounting policies or determining the amount
and timing of revenue from contracts with customers.
Revenue Recognition
Revenue is recognized upon the transfer of control of promised products or services to customers in an
amount that reflects the consideration we expect to receive in exchange for those products or services.
We determined that our customer purchase orders represent contracts. In addition to purchase orders, we
also have supply contracts with certain customers that define standard terms and conditions. Our contracts
generally include promises to sell either upholstery fabric, mattress fabric, or bedding accessories and
home goods products, to provide fabrication, and installation services of our own products associated
with customized window treatments.
Revenue associated with sales of our products are recognized at the point-in-time when control of the
promised goods has been transferred to the customer. The point-in-time when control transfers to the
customer depends on the contractually agreed upon shipping terms, but typically occurs once the product
has been shipped or once it has been delivered to a location specified by the customer. For certain
warehousing arrangements, transfer of control to the customer is deemed to have occurred when the
customer pulls the inventory for use in their production.
Revenue associated with our customized fabrication services, which are performed on various types of
window treatments, is recognized over time once the customized products are deemed to have no
alternative use and for which we have an enforceable right to payment for the services performed.
Revenue for our customized fabrication services is recognized over time using the output method based
on units produced. Revenue associated with our installation services of our own products is also
recognized over time as the customer receives and consumes the benefits of the promised installation
services. Revenue associated with our installation services is recognized over time using the output
method based on units installed.
Transaction Price
The transaction price is typically allocated to performance obligations based upon stand-alone selling
prices. We did not disclose the value of unsatisfied performance obligations as substantially all of any
unsatisfied performance obligations as of April 28, 2019, will be satisfied within one year or less.
Revenue Measurement
Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of
the promised products and services. The amount of consideration we expect to receive changes due to
variable consideration are associated with allowances for sales returns, early payment discounts, and
volume rebates that we offer to customers. The amount of variable consideration which is included in the
transaction price is only included in net sales to the extent that it is probable that a significant reversal in
the amount of cumulative revenue recognized will not occur in a future period.
76
Our mattress fabrics and upholstery fabrics business segments only allow product returns to the extent
that the products or services did not meet the contractually agreed upon specifications at the time of sale.
Customers must receive authorization prior to returning products. Our home accessories business segment
allows returns for any reason provided the product is returned within the stated time frame, generally 30
days, unless the product was customized in which case of a defect must be present in order to return the
product. Estimates of allowances for sales returns are based on historical data, current potential product
return issues, and known sales returns for which customers have been granted return authorization.
Known sales returns for which customers have been granted permission to return products for a refund or
credit, continue to be recorded as a contra account receivable. Estimates for potential future sales returns
and related customer accommodations are recorded within accrued expenses. We record estimates for
sales returns on a gross basis rather than a net basis and an estimate for a right of return asset is recorded
in other current assets and cost of goods sold. Variable consideration associated with early payment cash
discounts are estimated using current payment trends and historical data on a customer-by-customer basis.
The variable consideration associated with volume rebates are based on the portion of the rebate earned
relative to the total amount of rebates the customer is expected to earn over the rebate period as
determined using historical data and projections.
We evaluated the nature of our warranties related to our contracts with customers and determined that any
such warranties are assurance-type warranties that cover only compliance with agreed upon
specifications, and therefore are not considered separate performance obligations.
Shipping and Handling Costs
Revenue received for shipping and handling costs, which is immaterial for all periods presented, is
included in net sales. Shipping costs, principally freight, that comprise payments to third-party shippers
are classified as cost of sales. Handling costs represent finished goods warehousing costs incurred to
store, move, and prepare products for shipment in the company’s various distribution facilities. Handling
costs were $4.2 million, $4.6 million and $4.6 million in fiscal 2019, 2018, and 2017, 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 16. 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 are recorded based on an
assessment each reporting period of the probability if certain performance goals are to be met during the
contingent vesting period. If performance goals are not probable of occurrence, no compensation expense
was recognized. Previously recognized compensation cost, on performance goals that were previously
deemed probable and subsequently, were not or expected to be met, was reversed.
77
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 17.
The carrying amount of cash and cash equivalents, short-term investments, accounts receivable, other
current assets, accounts payable and accrued expenses approximates fair value because of the short
maturity of these financial instruments.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASC Topic 606. ASC Topic 606 was 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 became effective at the
beginning of our fiscal 2019, and therefore, we applied the new revenue guidance in our first quarter of
fiscal 2019 interim financial statements. This guidance did not have a material impact on our results of
operations and financial position but did have a material impact on the disclosures required in our notes to
the consolidated financial statements, which are disclosed in Note 4.
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 new standard, which is to be applied retrospectively, became
effective at the beginning of our fiscal 2019, and therefore, we applied this new guidance in our first
quarter of fiscal 2019 interim financial statements. During the first quarter of fiscal 2019, this new
guidance did not impact our results of operations, balance sheet, or statement of cash flows. Currently, we
do expect that this guidance will be applicable in determining how we classify certain contingent
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. Prior
GAAP prohibited recognition of deferred income taxes for an intra-entity transfer until the asset had 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 standard, which is required to be applied on a modified retrospective basis through a cumulative-
effect adjustment directly to retained earnings, became effective at the beginning of our fiscal 2019.
Therefore, we were required to apply this new guidance in our first quarter fiscal 2019 interim financial
statements. This guidance did not impact our results of operations and financial position.
78
Recently Issued Accounting Pronouncements
Leases
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.
The FASB recently issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which
allows entities to apply the transition provisions of the new standard at its adoption date instead of the
earliest comparative period presented in the consolidated financial statements. This ASU allows entities to
continue to use Topic 840, Leases, including its disclosure requirements, in the comparative years
presented in the year the new leases standard is adopted. Entities that elect this option would still adopt
the new leases standard using a modified retrospective transition method but would recognize a
cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather
than the earliest years presented.
We are required to apply this guidance in our fiscal 2020 interim and annual financial statements. We
expect this guidance upon adoption to increase our lease liability by approximately $7.2 million with a
corresponding increase to recognize our right-of-use assets by approximately $7.2 million, with no
material impact to our statements of net income. Additionally, Topic 842 is expected to significantly
impact the extensiveness of our disclosures required in our notes to the consolidated financial statements.
There are no other new accounting pronouncements that are expected to have a significant impact on our
consolidated financial statements.
2. BUSINESS COMBINATIONS
eLuxury, LLC (eLuxury)
Overview
Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement) in which we
acquired an 80% ownership interest in eLuxury, a company that offers bedding accessories and home
goods directly to consumers. eLuxury’s primary products include a line of mattress pads manufactured at
eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform beds, cotton bed
sheets, as well as 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.
This acquisition will provide a new sales channel for eLuxury’s bedding accessories and will expand our
opportunity to participate in the 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, and home products, as well as other
finished products that we may develop, through this e-commerce platform.
79
The estimated consideration given for the 80% ownership interest in eLuxury totaled $18.1 million, of
which $12.5 million represents the estimated purchase price and $5.6 million represents the estimated fair
value for contingent consideration associated with an earn-out obligation (see below for further details).
Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018,
$185,000 was paid in August 2018, and $749,000 is to be paid in September 2019, subject to certain
conditions as defined in the Equity Agreement.
Assets Acquired and Liabilities Assumed
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)
Goodwill
Tradename
Equipment
Inventory
Accounts receivable and other current assets
Accounts payable
Accrued expenses
Non-controlling interest in eLuxury
$
Fair Value
13,653
6,549
2,179
1,804
108
(1,336)
(295)
(4,532)
18,130
$
We recorded the tradename at fair market value 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 five to ten years.
The goodwill related to this acquisition is attributable to eLuxury’s reputation with the products they offer
and management’s experience in e-commerce, online brand building, and direct-to-consumer shopping
and fulfillment expertise. Goodwill is deductible for income tax purposes over the statutory period of
fifteen years.
As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires
us to pay the seller, who is also the owner of the noncontrolling interest, an earn-out payment based on a
multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending
August 31, 2021, less $12.0 million. We recorded a contingent liability at the acquisition date for this
earn-out obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model.
Non-Controlling Interest
The Equity Agreement contains substantive profit-sharing arrangement provisions in which it explicitly
states the ownership interests at the effective date of this business combination and the allocation of net
income or loss between Culp Inc., the controlling interest, and the noncontrolling interest. The Equity
Agreement states that at the effective date of this acquisition (June 22, 2018), we acquired an 80%
ownership interest in eLuxury with the seller retaining a 20% noncontrolling interest. Additionally, the
Equity Agreement states that eLuxury’s net income or loss will be allocated at a percentage of 70% and
30% to Culp Inc. and the noncontrolling interest, respectively.
80
Based on the terms of the Equity Agreement, we believe the related risks associated with the ownership
interests are aligned and therefore, the total consideration of $18.1 million for the 80% controlling interest
provides information for the equity value of eLuxury as a whole, and therefore, is useful in estimating fair
value of the 20% noncontrolling interest. In order to determine the carrying value of our noncontrolling
interest in eLuxury, we applied the Hypothetical-Liquidation-At-Book-Value method (HLBV). HLBV is
an approach that is used in practice to determine the carrying value of a noncontrolling interest if it is
consistent with an existing profit-sharing arrangement such as the Equity Agreement. Therefore, the
carrying amount of the noncontrolling interest of $4.3 million represents the $4.5 million fair value
determined at the acquisition date minus its allocation of net loss totaling $218,000 subsequent to the
acquisition date through the end of fiscal 2019.
Other
Acquisitions costs totaling $270,000 were in included in selling, general, and administrative expenses in
our fiscal 2019 Consolidated Statement of Net Income.
Actual revenue and net loss for the period June 22, 2018 through April 28, 2019 were included in our
fiscal 2019 Consolidated Statement of Net Income and totaled $16.0 million and $726,000, respectively.
Read Window Products, LLC (Read)
Overview
Effective April 1, 2018, we entered into an Asset Purchase Agreement (Asset Agreement) to acquire
certain assets and assume certain liabilities of 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 that offers sourcing of upholstery fabrics and other products, measuring, and
installation services of their own products. Read’s custom product line includes motorization, shades,
upholstered 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
allows us to be a more complete source of fabrics for the hospitality market.
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 was paid in July 2019.
Assets Acquired and Liabilities Assumed
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
Goodwill
Inventory
Accounts receivable
Tradename
Property, plant & equipment
Other assets
Deferred revenue
Accounts payable
Accrued expenses
81
$
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.
The Asset Agreement contains a contingent consideration arrangement that requires us to pay a former
shareholder of Read an earn-out payment based on adjusted EBITDA, as defined in the Asset Agreement,
for calendar year 2018 in excess of fifty percent of a pre-established adjusted EBITDA. As of April 28,
2019, based on actual financial results in relation to the pre-established adjusted EBITDA target, a
contingent payment is not required under the terms of the Asset Agreement, and therefore, no contingent
liability has been recorded.
Other
Acquisition costs totaling $339,000 were included in selling, general, and administrative expenses in our
fiscal 2018 Consolidated Statement of Net Income.
Actual revenue and net income for the month of April 2018 were included in our fiscal 2018 Consolidated
Statement of Net Income and totaled $880,000 and $5,000, respectively.
Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the years ending April 28, 2019,
April 29, 2018, and April 30, 2017, have been prepared as if the acquisitions of eLuxury had occurred on
May 1, 2017 and Read had occurred on May 2, 2016.
April 28, April 29, April 30,
2017
(dollars in thousands, except per share data)
2019
321,398
Net Sales $ 299,599
$
30,441
Income from operations 12,616
22,552
Net income 5,432
Net loss - noncontrolling interest (226)
-
22,552
Net income – Culp Inc. common shareholders 5,658
2018
354,509
$
26,948
20,299
(48)
20,347
Net income per share (basic) –
Culp Inc. common shareholders 0.45
Net income per share (diluted) –
Culp Inc. common shareholders 0.45
1.64
1.61
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 would have been achieved had the acquisition been
consummated as of that time, nor is it intended to be a projection of future results.
82
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
(dollars in thousands)
customers
allowance for doubtful accounts
allowance for cash discounts
reserve for returns and allowances and discounts (1)
April 28, April 29,
2018
28,097
(357)
(245)
(1,188)
26,307
2019
24,370
(393)
(186)
(40)
23,751
$
$
(1) Due to the adoption of ASC Topic 606, Revenue from Contracts with Customers,
certain balance sheet reclassifications were required regarding our allowance for sales
returns and allowances for the current year’s presentation only. See Note 4 to the
consolidated financial statements for required balance sheet disclosures associated with
the adoption of ASC Topic 606.
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands) 2019
(357)
beginning balance
(84)
provision for bad debts
48
write-offs, net of recoveries
(393)
ending balance
$
$
2018
(414)
57
-
(357)
2017
(1,088)
222
452
(414)
A summary of the activity in the allowance for returns and allowances and discounts follows:
(dollars in thousands) 2019
(1,433)
beginning balance
adoption of ASC Topic 606 (1)
1,145
provision for returns and allowances
and discounts
credits issued
ending balance
(2,180)
2,242
(226)
$
$
2018
(1,220)
-
(3,295)
3,082
(1,433)
2017
(962)
-
(3,061)
2,803
(1,220)
83
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
On April 30, 2018, we adopted ASC Topic 606 using the modified retrospective method. The modified
retrospective method requires an adjustment to the opening balance of retained earnings for the
cumulative effect of initially applying the new revenue standard. As permitted by the transition guidance,
we elected to apply the new standard only to contracts that were not completed at the date of initial
application, and therefore, we only evaluated those contracts that were in-process and not completed
before April 30, 2018.
The application of the new standard did not result in a material impact to the opening balance of retained
earnings, and therefore no adjustment to retained earnings was recorded. The largest impact of applying
the new standard are the required qualitative and quantitative disclosures and the presentation and
classification related to estimates of allowances for sales returns. The cumulative effect of the
classification changes related to our allowances for sales returns on our April 30, 2018, balance sheet are
as follows:
(dollars in thousands) April 29, 2018
Balance at
Adjustments Due to
ASC 606 Adoption (1)
Balance at
April 30, 2018
Balance Sheet
Assets:
Accounts Receivable $ 26,307 $ 1,145 $ 27,452
Other Current Assets 2,870
27 2,897
Liabilities:
Accrued Expenses 9,325 1,172 10,497
(1) The adjustments associated with the adoption of the new standard are related to classifying
allowances for estimated sales returns as a liability rather than as a contra account to accounts
receivable on the consolidated balance sheet for the current year’s presentation only. As required
under the new standard, we also recorded the estimated allowance for sales returns on a gross
basis rather than a net basis by separately reflecting a return goods asset within other current
assets rather than netting such amounts with the estimated sales returns liability.
84
Currently, we expect the adoption of this new standard to be immaterial to our net income on an ongoing
basis. The effect of adopting ASC 606 on our Consolidated Statements of Net Income for fiscal 2019, are
as follows:
(dollars in thousands) Fiscal 2019
Adjustments Due to
ASC 606 Adoption (1) ASC 606 Adoption
Balances Without
Statements of Net Income
Net Sales
Cost of Sales
$ 296,669
246,471
$ (28)
(28)
$ 296,641
246,443
The effect of adopting ASC 606 on our Consolidated Balance Sheets at April 28, 2019 is as follows:
(dollars in thousands) April 28, 2019
Adjustments Due to
ASC 606 Adoption (1) ASC 606 Adoption
Balances Without
Balance Sheet
Assets:
Accounts Receivable $ 23,751 $ (854) $ 22,897
(28) 2,821
Other Current Assets 2,849
Liabilities:
Accrued Expenses 9,192 (882) 8,310
Nature of Performance Obligations
Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home
accessories. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers
primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources, and
sells fabrics primarily to residential and commercial furniture manufacturers. Effective April 1, 2018, we
acquired Read (see Note 2 for further details), a turn-key provider of window treatments that offers
sourcing of upholstery fabrics and other products, measuring, and installation services of their own
products for the hospitality and commercial industries. In addition, Read supplies soft goods such as
decorative top sheets, coverlets, duvet covers, bed skirts, bolsters and pillows. The home accessories
segment is our new finished products business that manufactures, sources, and sells bedding accessories
and home goods directly to consumers and businesses through global e-commerce, business-to-business
and other sales channels.
Our primary performance obligations include the sale of mattress fabrics, upholstery fabrics, bedding and
home accessories products, as well as the performance of customized fabrication and installation services
of our own products associated with window treatments.
Significant Judgments
See Note 1 for disclosure of our accounting policies regarding our significant judgements associated with
revenue recognition, determining our transaction prices, and revenue measurement.
85
Contract Assets & Liabilities
Certain contracts, primarily those for customized fabrication and installation services, require upfront
customer deposits that result in a contract liability which is recorded on the Consolidated Balance Sheet
as deferred revenue. If upfront deposits or prepayment are not required, customers may be granted credit
terms which generally range from 15 – 45 days. Such terms are common within the industries in which
we are associated and are not considered financing arrangements. There were no contract assets
recognized as of April 28, 2019.
A summary of the activity of deferred revenue for fiscal 2019 follows:
(dollars in thousands)
Balance as of April 29, 2018
Revenue recognized on contract liabilities during the period (2,725)
Payments received for services not yet rendered during the period
Balance as of April 28, 2019
$ 809
2,315
$ 399
Fiscal 2019
Disaggregation of Revenue
The following table presents our disaggregated revenue by segment, timing of revenue
recognition, and product sales versus services rendered for fiscal 2019:
Mattress Upholstery Home
Fabrics Fabrics Accessories Total
(dollars in thousands)
Products transferred at a point in time $ 145,059 $ 125,294 $ 15,956 $ 286,309
Services transferred over time - 10,360
- 10,360
Total Net Sales $ 145,059 $ 135,654 $ 15,956 $ 296,669
5.
INVENTORIES
A summary of inventories follows:
(dollars in thousands)
raw materials
work-in-process
finished goods
April 28, April 29,
2018
6,024
3,264
44,166
53,454
2019
5,617
2,289
42,954
50,860
$
$
86
6. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
(dollars in thousands)
land and improvements
buildings and improvements
leasehold improvements
machinery and equipment
office furniture and equipment
capital projects in progress
accumulated depreciation
depreciable lives
(in years)
0-10
7-40
**
3-12
3-10
April 28,
2019
838
30,712
2,180
72,641
9,834
1,263
117,468
(69,079)
48,389
$
$
April 29,
2018
963
31,022
1,993
72,924
9,514
2,086
118,502
(66,708)
51,794
** Shorter of life of lease or useful life.
7. INTANGIBLE ASSETS
A summary of intangible assets follows:
(dollars in thousands)
Tradenames
Customer relationships, net
Non-compete agreement, net
Tradename
April 28, 2019
7,232
$
2,538
678
10,448
$
$
April 29, 2018
683
2,839
753
4,275
$
A summary of the carrying amount of our tradenames from our recent acquisitions (see Note 2) follow:
(dollars in thousands)
Read
eLuxury
April 28, 2019
683
$
6,549
7,232
$
$
April 29, 2018
683
-
683
$
Our tradenames were recorded at their fair market values at the effective date of their acquisitions (see
Note 2) and were based on the relief from royalty method. These tradenames were determined to have an
indefinite useful life and therefore, are not being amortized. However, these tradenames will be assessed
annually for impairment.
87
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
2019
2,839
-
(301)
-
2,538
$
$
2018
664
2,247
(72)
-
2,839
2017
715
-
(51)
-
664
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 $562,000
at April 28, 2019. 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 at April 28, 2019 and April 29,
2018, respectively. Accumulated amortization for these customer relationships were $577,000 and
$276,000 at April 28, 2019 and April 29, 2018, respectively.
The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2020 -
$301,000; FY 2021 - $301,000; FY 2022 - $301,000; FY 2023 - $301,000; FY 2024 - $301,000; and
Thereafter - $1,033,000.
The weighted average amortization period for our customer relationships is 8.6 years as of April 28, 2019.
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
2019
753
(75)
-
678
$
$
2018
828
(75)
-
753
2017
903
(75)
-
828
We have a non-compete agreement from a prior acquisition that is being amortized on a straight-line basis
over its fifteen-year useful life.
The gross carrying amount of this non-compete agreement was $2.0 million at April 28, 2019 and
April 29, 2018, respectively. Accumulated amortization for this non-compete agreement was $1.4 million
and $1.3 million at April 28, 2019 and April 29, 2018, respectively.
The remaining amortization expense for the next five years and thereafter follows: FY 2020 - $75,000;
FY 2021 - $75,000; FY 2022 - $75,000; FY 2023 - $75,000; FY 2024 - $75,000, and Thereafter -
$303,000.
The weighted average amortization period for the non-compete agreement is 9.0 years as of April 28,
2019.
88
8. 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
2019
$ 13,569
13,653
-
$ 27,222
2018
11,462
2,107
-
13,569
2017
11,462
-
-
11,462
9.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Culp International Holdings, Ltd. (Culp), a wholly-owned subsidiary of the company, 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 northeastern border of Haiti, which borders the Dominican Republic. CLIH
commenced production in the second quarter of fiscal 2018 (October 2017) 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 $227,000, $532,000 and $46,000 in fiscal 2019, 2018 and 2017, respectively.
CLIH’s net loss in fiscal 2018 and fiscal 2017 included a significant amount of initial start- up operating
expenses. Culp’s equity interests in these net losses were $114,000, $266,000 and $23,000 in fiscal 2019,
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
April 28,
2019
3,126
111
3,015
$
$
$
April 29,
2018
3,130
128
3,002
$
$
$
At April 28, 2019 and April 29, 2018, our investment in CLIH totaled $1.5 million, which represents the
company’s fifty percent ownership in CLIH.
10. ACCRUED EXPENSES
A summary of accrued expenses follows:
(dollars in thousands)
compensation, commissions and related benefits
interest
other
April 28,
2019
4,229
4
5,292
9,525
$
$
April 29,
2018
6,918
20
3,150
10,088
At April 28, 2019, we had accrued expenses totaling $9.5 million, of which $9.2 million and $333,000
were classified as current accrued expenses and long-term accrued expenses, respectively, in the
accompanying Consolidated Balance Sheets. As of April 29, 2018, we had accrued expense 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.
89
11. EXIT AND DISPOSAL ACTIVITY
On June 12, 2018, our board of directors announced the closure of our upholstery fabrics manufacturing
facility in Anderson, South Carolina. This closure was completed during the second quarter of fiscal 2019
and was due to a continued decline in demand for the products manufactured at this facility, reflecting a
change in consumer style preferences.
The following summarizes our restructuring credit and related charges totaling $1.6 million that were
associated with the above exit and disposal activity:
(dollars in thousands)
Inventory markdowns
Other operating costs associated with a closed facility
Employee termination benefits
Gain on sale of property, plant, and equipment
2019
$
$
1,564
824
661
(1,486)
1,563
Of this total net charge, a charge of $2.3 million, a charge of $40,000 and a credit of $825,000 was
recorded in cost of sales, selling, general, and administrative expenses, and restructuring credit,
respectively, in the fiscal 2019 Consolidated Statement of Net Income.
The following summarizes the activity in the restructuring accrual:
(dollars in thousands)
Accrual established in fiscal 2019
Paid in fiscal 2019
Adjustments in fiscal 2019
$
2019
451
(538)
211
124
$
The above restructuring accrual pertains to employee termination benefits that were associated with the
above exit and disposal activity.
12. ASSETS HELD FOR SALE
In connection with our exit and disposal activity noted above, property, plant, and equipment with a
carrying value totaling $393,000 were classified as held for sale during our second quarter of fiscal 2019.
We determined that the fair value of the property, plant, and equipment exceeded their carrying value and
therefore, no impairment was recorded.
During the second and third quarters of fiscal 2019, we received cash proceeds totaling $1.9 million for
all property, plant, and equipment that were classified as held for sale and recorded a corresponding gain
on sale totaling $1.5 million.
As of April 28, 2019, there were no assets held for sale associated with the exit and disposal activity
noted above.
90
13. LINES OF CREDIT AND SUBORDINATED LOAN PAYABLE
Revolving Credit Agreement – United States
At April 29, 2018, our Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) provided for a
revolving loan commitment of $30 million. Effective August 13, 2018, we entered into a Fifth
Amendment to our Credit Agreement which reduced the amount of our line of credit from $30 million to
$25 million, reduced the amount of the Unencumbered Liquid Assets maintenance covenant from $20
million to $15 million, and set the expiration date to August 15, 2020. Additionally, this amendment
reduced the limit of outstanding letters to $1.0 million, which includes the $250,000 workers
compensation letter of credit noted below.
Interest was charged at a rate (applicable interest rate of 3.93% and 3.36% at April 28, 2019 and April 29,
2018, respectively) as a variable spread over LIBOR based on our ratio of debt to EBITDA.
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 28, 2019 and April 29, 2018,
respectively.
At April 28, 2019 and April 29, 2018, there were $250,000 in outstanding letters of credit (all of which
related to workers compensation) provided by the Credit Agreement.
Effective August 1, 2016, we entered into a Third Amendment to our Credit Agreement which allowed 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, 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 15 for further details). The terms of this $5.0
million letter credit expired on May 15, 2018.
Revolving Credit Agreement – China
At April 28, 2019, we had an unsecured credit agreement associated with our operations in China that
provides for a line of credit up to 40 million RMB ($5.9 million USD at April 28, 2019). This agreement
has an interest rate determined by the Chinese government and is set to expire on January 31, 2020. There
were no outstanding borrowings as of April 28, 2019 and April 29, 2018, respectively.
Subordinated Loan Payable
On February 17, 2019, eLuxury entered into a subordinated credit agreement with the owner of its
noncontrolling interest which provides a revolving loan commitment of $1.0 million that expires on
June 22, 2023. Interest was charged at a rate (applicable interest rate of 3.93% April 28, 2019) as a
variable spread over LIBOR based on Culp’s ratio of debt to EBITDA. At April 28, 2019, there were
borrowings outstanding under this agreement totaling $675,000.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial
covenants. As of April 28, 2019, we complied with these financial covenants.
Interest paid during fiscal years 2019, 2018, and 2017 were $54,000, $181,000, and $114,000,
respectively.
91
14. 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
2019
$ 6,424
2018
5,740
-
-
$ 6,424
5,740
2017
7,339
(657)
6,682
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)
2019
2018
2017
$ (1,492)
27
(1,367)
9
(282) 4,854
4,726
-
8,222
6,144
-
4,397
3,123
(96)
(268)
3,735
74
(85)
(4,456)
2,027
$ 6,424
4,295
112
(6,903)
(195)
-
93
116
(2,482)
5,740
109
13
-
5,981
(3,431)
2,672
404
54
-
(101)
3,630
734
(54)
4,667
7,339
(1) The income tax benefit of $6,903 recorded during fiscal 2018 included a charge of $4,550 for the
establishment of a valuation allowance against U.S. foreign tax credits that were not more-likely-than
not to be realized as a result of the 2017 Tax Cuts and Jobs Act. During fiscal 2019, we recorded an
income tax charge of $4.5 million for the write-off of certain U.S. foreign tax credits, and in turn, we
recorded an income tax benefit of $4.5 million for the reduction in our valuation allowance. The $4.5
million income charge for the write-off of certain U.S. foreign tax credits is included in the
undistributed earnings – foreign subsidiaries income tax expense amount of $3.8 million.
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
2019
2018
2017
$ 9,899
5,488
-
280
15,667
(3,671)
$11,996
92
11,036
5,985
-
339
17,360
9,523
26,883
13,650
4,918
(19)
154
18,703
10,993
29,696
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
undistributed earnings from foreign subsidiaries
valuation allowance
global intangible low taxed income tax (GILTI)
foreign tax rate differential
tax effects of the 2017 Tax Cuts and Jobs Act
tax effects of Chinese foreign exchange gains(losses)
reversal of foreign uncertain income tax position
tax effects of stock-based compensation
other
2019
21.0%
37.2
(37.1)
17.9
13.7
(4.6)
2.3
-
0.6
2.6
53.6%
2018
30.4%
-
0.4
-
3.7
(7.6)
(2.8)
-
(1.8)
(0.9)
21.4%
2017
34.0%
-
(0.2)
-
-
-
1.6
(11.6)
-
0.9
24.7%
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.
property, plant and equipment (1)
loss carryforwards – U.S.
loss carryforwards – foreign
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
2019
2018
$
$
282
1,591
1,973
284
1,252
193
2,360
-
(748)
7,187
(3,523)
(380)
(4,710)
(1,203)
(90)
(9,906)
(2,719)
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)
(1) Pertains to the company’s operations located in China.
(2) Pertains to the company’s operations located in the U.S. and Canada.
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At April 28, 2019, our U.S. federal net operating loss carryforwards totaled $6.9 million with related
future income tax benefits of $1.6 million. U.S. federal net operating loss carryforwards that were
generated prior to fiscal 2018 totaled $5.4 million and have expiration dates ranging from fiscal years
2028 through 2038. In accordance with the 2017 Tax Cuts and Jobs Act, our U.S. federal net operating
loss carryforward generated in fiscal 2019 totaling $1.6 million does not expire. At April 28, 2019, our
U.S. state net operating loss carryforwards totaled $22.2 million with related future income tax benefits of
$797,000. Our U.S. state net operating loss carryforwards totaling $22.2 million have expiration dates
ranging from fiscal years 2021 through 2039. Our U.S. foreign income tax credits of $1.3 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 the Global Intangible Low Taxed Income (“GILTI”) tax.
The corporate income tax rate reduction was effective as of January 1, 2018. Since we have a fiscal year
rather than a calendar year, we were subject to IRS rules relating to transitional income tax rates for fiscal
2018. As a result, our fiscal 2018 U.S. federal income tax rate was a blended income tax rate of 30.4%
compared with a fully reduced U.S. federal income tax rate of 21.0% during fiscal 2019.
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 were components of the Tax Act that significantly affected
our financial statements during fiscal 2019 and 2018. As of April 29, 2018, we had not yet completed our
assessment of the effects of the Tax Act, however, we were able to determine reasonable estimates for the
effects of the components specified above, and thus we reported provisional amounts for these items under
guidance provided by SEC Staff Accounting Bulletin No. 118 (“SAB 118”). As a result, our estimates
changed and revisions to these estimates were recorded during the measurement period allowed by SAB
118, which was 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 changed
due to a variety of factors that included, (i) actual versus estimates of accumulated earnings and profits
associated with our foreign subsidiaries, (ii) utilization of our foreign income tax credits, (iii) the election
of whether or not to apply our existing U.S. federal net operating loss carryforwards against the Transition
Tax, (iv) actual versus estimates regarding the reversal of U.S. deferred income taxes occurring in fiscal
2018 based on our blended U.S. federal income tax rate of 30.4% compared with our fully reduced U.S.
federal income tax rate of 21.0% during fiscal 2019.
In order to determine the effects of the new U.S. federal corporate income tax rate on our U.S. deferred
income tax balances during fiscal 2019 and 2018, 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. As a result, we recorded a provisional income tax charge of $2.2 million for the re-
measurement of our U.S. net deferred income taxes during fiscal 2018. During the third quarter of fiscal
2019, we completed our assessment of the remeasurement of our U.S. deferred income tax balances in
accordance with SAB 118 and recorded a final provisional income tax benefit of $268,000.
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The Transition Tax was 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. As a result, we recorded a provisional income tax benefit of $4.3 million
for the income tax effects of the Transition Tax during fiscal 2018. This $4.3 million income tax benefit
related 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 related to the reduction in our U.S. Federal income tax
rate pursuant to the Tax Act on the effective settlement of 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. During the third quarter of fiscal 2019, we completed our
assessment of the income tax effects of the Transition Tax and recorded a final provisional income tax
benefit of $282,000. Additionally, we elected to pay the Transition Tax over a period of eight years in
accordance with the Tax Act.
GILTI
In addition to the above components of the Tax Act, GILTI was effective during fiscal 2019. Our policy
to account for GILTI is to expense this tax in the period incurred. As a result, we recorded an income tax
charge of $2.1 million during fiscal 2019.
On June 14, 2019, the U.S. Treasury released proposed regulations regarding the GILTI provisions of the
U.S. income tax code. The proposed regulations contain a provision for an exclusion from treatment as
GILTI if taxable income amounts are subject to a high rate of foreign income tax, as defined in the
proposed regulations. If an entity were to qualify for the high-income tax exception, the high-taxed
income earned that would be subject to GILTI and U.S. income tax may be excluded from U.S. income
tax. However, since these regulations are in proposed form, an entity is not allowed to record an income
tax benefit under these provisions until these regulations have been finalized.
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.
95
Based on our assessments at April 28, 2019 and April 29, 2018, 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 28,
2019
82
666
-
748
$
$
April 29,
2018
4,550
578
76
5,204
A summary of the change in the valuation allowances against our deferred income taxes follows:
(dollars in thousands)
beginning balance
write off of deferred income taxes
establishment of valuation allowance (1)
change in estimate (2)
ending balance
$
$
2019
5,204
(4,544)
-
88
748
2018
536
-
4,550
118
5,204
2017
590
-
-
(54)
536
(1) The establishment of this valuation allowance pertains to U.S. foreign tax credits that were not
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.
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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. At
April 28, 2019, we assessed the financial reporting requirements of our U.S. parent company and
determined that our undistributed earnings from our foreign subsidiaries would not be reinvested
indefinitely and would be 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 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 E&P prior to participation exemption totaling
$157.1 million subject to the Transition Tax and $43.2 million of 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, we recorded a deferred tax liability for withholding taxes on undistributed E&P from our foreign
subsidiaries totaling $3.5 million and $4.3 million at April 28, 2019 and April 29, 2018, respectively.
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) 2019
beginning balance
increases from prior period tax positions
decreases from prior period tax positions (1)
increases from current period tax positions
ending balance
$ 844
135
(76)
-
903
$
2018
12,245
350
2017
14,897
854
(11,751) (3,506)
-
12,245
-
844
(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 of an IRS exam. The $3.5 million reduction in our unrecognized income tax benefits during
fiscal 2017 was due to a lapse of applicable statute of limitations in a foreign jurisdiction.
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At April 28, 2019, we had $903,000 of total gross unrecognized tax benefits, of which $523,000 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 $464,000 would favorably affect the income tax rate in future periods.
At April 28, 2019, we had $903,000 of total gross unrecognized tax benefits, of which $380,000 and
$523,000 were classified as net non-current deferred income taxes and income taxes payable-long-term,
respectively, in the accompanying Consolidated Balance Sheets. At April 29, 2018 we had $844,000 of
total gross unrecognized tax benefits, of which $380,000 and $464,000 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 28, 2019 and April
29, 2018, the gross amount of interest and penalties due to unrecognized tax benefits was $97,000 and
$40,000, respectively.
Our gross unrecognized income tax benefit of $903,000 at April 28, 2019, 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 2015 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 2014 and subsequent.
Income Tax Exams
Currently, we are not under examination for any open income tax years in any of our income tax paying
jurisdictions located in the United States, China, and Canada.
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 $6.7 million, $4.0 million, and $5.5 million during
fiscal years 2019, 2018, and 2017, respectively.
15. 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 six years with renewal
options for additional periods ranging up to ten years. The leases generally require the company to pay real
estate taxes, maintenance, insurance and other expenses. Rental expense for operating leases was $3.7
million in fiscal 2019, $3.0 million in fiscal 2018, and $2.9 million in fiscal 2017. Future minimum rental
commitments for noncancellable operating leases are $3.0 million in fiscal 2020; $2.1 million in fiscal 2021;
$1.2 million in fiscal 2022; $723,000 in fiscal 2023; $678,000 in fiscal 2024; and $346,000 thereafter.
Management expects that in the normal course of business, these leases will be renewed or replaced by other
operating leases.
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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 $216,000 and $18,000 during fiscal 2019 and 2018, respectively.
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 $13,100 per month. Rents paid to entities
owned by certain shareholders and officers of the company and their immediate families totaled $158,000
in fiscal 2019 and $156,000 in fiscal 2018 and 2017, 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 28, 2019, we had total amounts due regarding capital expenditures totaling $78,000, which
pertained to outstanding vendor invoices, none of which were financed.
At April 29, 2018, we had total amounts due regarding capital expenditures totaling $1.8 million, of which
$1.4 million was financed and pertained to completed work for the construction of a new building (see
below). The total $1.8 million amount was paid in full in fiscal 2019.
Purchase Commitments - Capital Expenditures
At April 28, 2019, we had open purchase commitments to acquire equipment for our mattress fabrics
segment totaling $1.4 million.
Mattress Fabrics Building
Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located
in North Carolina to expand our distribution capabilities and office space at a cost of $11.3 million. This
agreement required an installment payment of $1.9 million that was made in April 2016, with additional
installment payments of $4.3 million that were made in fiscal 2017, $3.7 million that were made in fiscal
2018, and a final installment payment of $1.4 million made in May 2018 (first quarter of fiscal 2019).
Interest was charged on the required outstanding installment payments for services that were previously
rendered at a rate of $2.25% plus the current 30-day LIBOR rate.
99
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 noted
above, 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 13 for further details).
This new building was placed into service July 2017 (our first quarter of fiscal 2018).
16. STOCK-BASED COMPENSATION
Equity Incentive Plan Description
On September 16, 2015, our shareholders approved an equity incentive plan titled 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 28, 2019, there were 995,094 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.
The following tables summarize stock option activity during fiscal 2019, 2018, and 2017:
2019
2018
2017
Shares
Weighted-
Weighted-
Average
Average
Exercise
Exercise
Price
Price
$ 8.37
- $ -
outstanding at beginning of year
-
-
-
granted
8.65
-
-
exercised
-
-
-
canceled/expired
outstanding at end of year
7.14
-
-
At April 28, 2019, 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 28, 2019.
No compensation expense was recorded for incentive or non-qualified stock options in fiscal 2019, 2018,
and 2017 as all stock option awards were fully vested prior to fiscal 2016.
Weighted-
Average
Exercise
Price
$ 7.14
-
7.14
-
-
Shares
83,600
-
(68,000)
-
15,600
Shares
15,600
-
(15,600)
-
-
The aggregate intrinsic value for options exercised was $393,000 and $1.7 million during fiscal 2018 and
2017, respectively.
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Time-Based Restricted Stock Awards
The following table summarizes the time-based restricted stock activity during fiscal years 2019, 2018,
and 2017:
outstanding at beginning of year
granted
vested
outstanding at end of year
2019
Shares
1,200
10,000
(1,200)
10,000
2018
Shares
1,200
1,200
(1,200)
1,200
2017
Shares
-
1,200
-
1,200
The following table summarizes information related to our grants of time-based restricted stock awards
associated with certain key members of management during fiscal years 2019, 2018 and 2017:
Restricted Stock
Awarded
(1)
Price Per
Vesting
Share Period
10,000 $24.35
1,200 $32.50
1,200
$28.00
59 months
11 months
11 months
Date of Grant
August 2, 2018
July 13, 2017
June 14, 2016
(1) Price per share represents closing price of our common stock on the date the respective award was
granted.
The following table summarizes information related to our time-based restricted stock units that vested
during the fiscal 2019, 2018, and 2017:
Fiscal Year
Fiscal 2019
Fiscal 2018
Fiscal 2017
Common Stock
Shares Vested
1,200
1,200
-
(1)
Weighted Average
Fair Value
(2)
Price
Per Share
$21 $17.36
$37 $30.90
-
-
(1) Dollar amounts are in thousands.
(2) Price per share represents closing price of our common stock on the date the respective award vested.
Overall
We recorded compensation expense of $43,000, $38,000 and $29,000 within selling, general, and
administrative expense for time vested restricted stock units in fiscal 2019, 2018 and 2017, respectively.
At April 28, 2019, the remaining unrecognized compensation cost related to our time vested restricted
stock units were $206,000, which is expected to be recognized over a weighted average vesting period of
4.1 years. At April 28, 2019, our time vested restricted stock awards that were expected to vest had a fair
value totaling $207,000.
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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 executives and 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 (NEOs)
On August 2, 2018 (fiscal 2019) and July 13, 2017 (fiscal 2018), 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 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 (August 2, 2018 and
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 grant dates of
August 2, 2018 and 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
Fiscal 2017
August 2,
July 13,
2018
$ 24.35
33.5%
16.0%
2.74%
1.35%
0.47
2017
$ 32.50
31.0%
16.5%
1.56%
1.66%
0.46
On July 14, 2016, 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.
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Key Employees (non-NEOs) and a Non-Employee
Fiscal 2019, 2018, and 2017
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 key employees (other than NEOs) 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 (fiscal 2017 only) 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.
Overall
The following table summarizes information related to our grants of performance based restricted stock
units associated with NEOs and key employees that were unvested at April 28, 2019:
Date of Grant
August 2, 2018 (1)
August 2, 2018 (2)
July 13, 2017 (1)
July 13, 2017 (2)
July 14, 2016 (1) (2)
(3)
Restricted Stock
Units Awarded
86,599
47,800
78,195
44,000
107,880
Price Per
Share
$18.51 (4)
$24.35 (6)
$31.85 (5)
$32.50 (6)
$28.00 (6)
Vesting
Period
3 years
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 ($0.76 per $1 or a reduction of $5.84 to the
closing price of 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 ($24.35) for the
performance-based components of the performance-based restricted stock units granted to our NEOs on
August 2, 2018.
(5) 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 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.
(6) Price per share represents the closing price of our common stock on the date of grant.
103
The following table summarizes information related to our grants of performance-based restricted stock
units associated with a non-employee that were unvested at April 28, 2019:
Date of Grant
July 14, 2016
(1)
Restricted Stock
Units Awarded
Price Per
Share
11,549
$20.74 (2)
Vesting
Period
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 agreement.
(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 28, 2019, the end of our reporting period.
The following table summarizes information related to our performance based restricted stock units that
vested during the fiscal 2019, 2018, and 2017:
Common Stock
Shares Vested
128,632
10,364
102,845
16,000
37,192
12,000
(3)
Weighted Average
Fair Value
$3,754
$320
$3,342
$520
$1,066
$344
Weighted
Average
Price
Per Share
$29.19 (4)
$30.90 (4)
$32.50 (4)
$32.50 (4)
$28.66 (4)
$28.66 (4)
Fiscal Year
Fiscal 2019 (1)
Fiscal 2019 (2)
Fiscal 2018 (1)
Fiscal 2018 (2)
Fiscal 2017 (1)
Fiscal 2017 (2)
(1) NEOs and key employees.
(2) Non-employee
(3) Dollar amounts are in thousands.
(4) The weighted average price per share is derived from the closing prices of our common stock on the
dates the respective performance based restricted stock units vested.
Overall
We recorded a (credit) or a charge to compensation expense totaling $(53,000), $2.0 million, and $3.2
million within selling, general, and administrative expense associated with our performance based
restricted stock units for fiscal years 2019, 2018, and 2017, 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, compensation cost will
not be recorded and any previously recognized compensation cost would be reversed.
At April 28, 2019, the remaining unrecognized compensation cost related to the performance based
restricted stock units was $328,000, which is expected to be recognized over a weighted average vesting
period of 1.9 years. At April 28, 2019, our performance based restricted stock units that are expected to
vest had a fair value totaling $712,000.
104
Common Stock Awards
The following table summarizes information related to our grants of common stock to our outside
directors during fiscal 2019, 2018, and 2017:
Date of Grant
April 1, 2019
October 1, 2018
October 2, 2017
October 3, 2016
Common Stock
Awarded
2,948
3,600
4,800
4,800
(1)
Price Per
Share
$19.18
$23.45
$33.20
$29.80
Vesting
Period
Immediate
Immediate
Immediate
Immediate
(1) Price per share represents closing price of our common stock on the date of grant.
We recorded $140,000, $159,000, and $143,000, of compensation expense within selling, general, and
administrative expense for these common stock awards for fiscal 2019, 2018, and 2017, respectively.
17. 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.
105
Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring basis:
Fair value measurements at April 28, 2019 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
Growth Allocation Fund
Moderate Allocation Fund
Other
$ 6,639
203
127
112
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 6,639
203
127
112
Liabilities:
None
N/A
N/A
N/A
N/A
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
106
Our EURO foreign exchange contract was recorded at a fair value provided by our bank and was
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 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 28, 2019, we had no assets that were required to be measured at fair value on a nonrecurring
basis other than the assets acquired from eLuxury (see note 2) that were acquired at fair value:
Fair value measurements at April 28, 2019 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:
Goodwill
Tradename
Equipment
Inventory
Liabilities:
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$13,653
6,549
2,179
1,804
$ 13,653
6,549
2,179
1,804
Contingent Consideration –
Earn-Out Obligation
N/A
N/A
$ 5,856
$ 5,856
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. The contingent consideration – earn-out
obligation was recorded at fair market value using Black Sholes pricing model.
Additionally, we acquired certain current assets such as accounts receivable and prepaid expenses and
assumed certain liabilities such as 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 final allocation of the acquisition cost to the assets acquired and liabilities assumed based on
their fair values.
107
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
$2,247
2,107
1,128
683
379
$ 2,247
2,107
1,128
683
379
N/A
N/A
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.
18. DERIVATIVES
During the fourth quarter of fiscal 2018, 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. This contract expired in August 2018.
108
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 accrued expenses and changes in fair value recorded in accumulated other comprehensive
income (loss). 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 28, 2019
April 29, 2018
Derivatives designated as hedging instruments
under ASC Topic 815
Balance
Sheet
Location
Fair
Value
Euro Foreign Exchange Contract
N/A
$-
Balance
Sheet
Location
Accrued
Expense
Fair
Value
$55
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)
2019
2018
2017
2019
2018
2017
2019
2018
2017
EURO Foreign
Exchange Contract
$55
$(55)
$-
Other Exp
$(64)
$-
$-
Other Exp
$-
$-
$-
19. 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
2019
2018
2017
12,462
86
12,431
202
12,312
206
12,548
12,633
12,518
At April 28, 2019 and April 29, 2018, there were no options to purchase shares of our common stock.
Therefore, options to purchase shares of our common stock were not included in the computation of
diluted net income for fiscal 2019. All options to purchase shares of common stock were included in the
computation of diluted net income for fiscal years 2018 and 2017, as the exercise price of the options was
less than the average market price of common shares.
109
20. BENEFIT PLANS
Defined Contribution Plans
The company has defined contribution plans which cover substantially all employees and provide 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 $1.2 million, $1.1 million, and $924,000 during
fiscal years 2019, 2018, and 2017, 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 $189,000, $192,000 and $185,000 in fiscal years 2019, 2018, and
2017, respectively. Our nonqualified deferred compensation plan liability was $7.0 million and $7.4
million at April 28, 2019 and April 29, 2018, 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 $7.1 million and $7.3 million at April
28, 2019 and April 29, 2018, 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).
21. SEGMENT INFORMATION
Overall
Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home
accessories. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers
primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources,
and sells fabrics primarily to residential and commercial furniture manufacturers. The home accessories
segment is our new finished products business that manufactures, sources, and sells bedding accessories
and home goods directly to consumers and businesses through global e-commerce and business-to-
business sales channels.
Effective April 1, 2018, we acquired Read (see Note 2 for further details), a turn-key provider of window
treatments that offers the sourcing of upholstery fabrics and other products, measuring, and installation
services of their own products for the hospitality and commercial industries. Read’s financial information
is aggregated with our upholstery fabrics segment.
Effective June 22, 2018, we acquired an 80% ownership interest in eLuxury (see Note 2 for further
details), a company that offers bedding accessories and home goods directly to consumers and businesses
through its e-commerce platform. eLuxury’s financial information is included in our home accessories
segment.
110
Net Sales Geographic Concentration
Net sales denominated in U.S. dollars accounted for 90%, 90% and 92% of total consolidated net sales in
fiscal 2019, 2018, and 2017, respectively. International sales accounted for 24%, 23%, and 22% of net
sales during fiscal 2019, 2018, and 2017, respectively, and are summarized by geographic area as follows:
(dollars in thousands)
north america (excluding USA) (1)
far east and asia (2)
all other areas
2019
$ 29,247
39,277
3,712
$ 72,236
2018
2017
27,844
40,671
5,681
74,196
29,995
34,695
3,618
68,308
(1) Of this amount, $22.5 million, $21.9 million, and $22.3 million are attributable to shipments to
Mexico in fiscal 2019, 2018, and 2017, respectively.
(2) Of this amount $29.8 million, $32.6 million, and $26.6 million are attributable to shipments to
China in fiscal 2019, 2018, and 2017, respectively.
Sales are attributed to individual countries based upon location that the company ships its products to for
delivery to customers.
Customer Concentration
One customer within the upholstery fabrics segment represented 11%, 12%, and 11% of consolidated net
sales in fiscal 2019, 2018 and 2017, respectively. No customers within the upholstery fabrics segment
accounted for greater than 10% of the consolidated net accounts receivable balance as of April 28, 2019.
One customer within the upholstery fabrics segment accounted for 13% of the consolidated net accounts
receivable balance as of April 29, 2018.
No customers within the mattress fabrics segment represented greater than 10% of consolidated net sales
during fiscal 2019. One customer within the mattress fabrics segment represented 13% of consolidated
net sales during 2018, and 2017, respectively. No customers within the mattress fabrics segment
accounted for greater than 10% of the consolidated net accounts receivable balance as of April 28, 2019.
Two customers within the mattress fabrics segment accounted for 20% of the consolidated net accounts
receivable balance as of April 29, 2018.
No customers within the home accessories segment represented greater than 10% of consolidated net
sales during fiscal 2019. No customers within the home accessories segment accounted for greater than
10% of the consolidated net accounts receivable balance as of April 28, 2019.
Employee Workforce Concentration
The hourly employees at our manufacturing facility in Canada (approximately 11% 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.
111
Financial Information
We evaluate the operating performance of our segments based upon income from operations before
certain unallocated corporate expenses, restructuring expense (credit) and related charges, and other non-
recurring items. Cost of sales in all of our segments include costs to manufacture, develop, 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 with 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 their investment in an unconsolidated joint venture. During
fiscal 2019, we elected to no longer include goodwill and intangible assets in segment assets, as these
assets are not used by the Chief Operating Decision Maker to evaluate the respective segment’s operating
performance, to allocate resources to the individual segments, or determine executive compensation.
Statements of operations for the company’s operating segments are as follows:
(dollars in thousands)
net sales:
upholstery fabrics
mattress fabrics
home accessories
gross profit:
upholstery fabrics
mattress fabrics
home accessories
total segment gross profit
other non-recurring charges (1)
restructuring related charges (2)
total gross profit
selling, general, and administrative expenses:
upholstery fabrics
mattress fabrics
home accessories
unallocated corporate
total segment selling, general, and administrative expenses
other non-recurring charges (3)
restructuring related charges (4)
total selling, general, and administrative expenses
Income (loss) from operations:
upholstery fabrics
mattress fabrics
home accessories
unallocated corporate expenses
total segment income from operations
other non-recurring charges (1) (3)
restructuring credit and related charges (5) (6)
total income from operations
interest expense
interest income
other expense
income before income taxes
112
2019
2018
2017
$ 135,654
145,059
15,956
$ 296,669
$
25,374
22,904
4,428
52,706
(159)
(2,349)
$ 50,198
$
$
$
$
14,551
11,296
5,163
6,837
37,847
518
40
38,405
10,823
11,608
(735)
(6,837)
14,859
(678)
(1,563)
12,618
(42)
766
(1,346)
11,996
131,128
192,597
-
323,725
25,836
38,797
-
64,633
-
-
64,633
118,739
190,805
-
309,544
26,170
43,065
-
69,235
-
-
69,235
14,881
12,935
-
9,356
37,172
-
-
15,079
13,685
-
10,393
39,157
-
-
37,172 39,157
10,956
25,861
-
(9,356)
27,461
-
-
27,461
(94)
534
(1,018)
26,883
11,091
29,380
-
(10,393)
30,078
-
-
30,078
-
299
(681)
29,696
(1) The $159 represents employee termination benefits and other operational reorganization costs
associated with our mattress fabrics segment.
(2) The $2.3 million represents a restructuring related charge of $1.6 million for inventory
markdowns and $784 for other operating costs associated with our closed Anderson, SC
upholstery fabrics plant facility.
(3) The $518 represents a non-recurring charge of $429 for the accelerated vesting of certain stock-
based compensation agreements associated with a key executive and was recorded in unallocated
corporate expenses. Additionally, the $518 includes $89 for employee termination benefits and
operational reorganizational costs associated with our mattress fabrics segment.
(4) The $40 represents a restructuring related charge for the accelerated vesting for certain stock-
based compensation agreements associated with an employee that was located at our closed
Anderson, SC upholstery fabrics plant facility.
(5) The $1.6 million represents charges and credits that were associated our closed Anderson, SC
upholstery fabrics plant facility and include $1.6 million for inventory markdowns, $784 for
other operating costs, $661 for employee termination benefits, and $40 for the accelerated
vesting of certain stock-based compensation agreements associated an employee, partially offset
by a $1.5 million gain on the sale of property, plant, and equipment.
(6) Of this total net charge, a charge of $2.3 million, a charge of $40, and a credit of $825 were
recorded in cost of sales, selling, general, and administrative expenses, and restructuring credit,
respectively, in the fiscal 2019 Consolidated Statement of Net Income.
113
Balance sheet information for the company’s operating segments follow:
(dollars in thousands)
segment assets
mattress fabrics
accounts receivable
inventory
property, plant, and equipment
investment in unconsolidated joint venture
total mattress fabrics assets
upholstery fabrics
accounts receivable
inventory
property, plant, and equipment
total upholstery fabrics assets
home accessories
accounts receivable
inventory
property, plant, and equipment
total home accessories assets
total segment assets
non-segment assets
cash and cash equivalents
short-term investments – available for sale
short-term investments – held-to-maturity
current income taxes receivable
deferred income taxes
other current assets
property, plant, and equipment (6)
goodwill
intangible assets
long-term investments - held-to-maturity
long-term investments - rabbi trust
noncurrent income taxes receivable
other assets
total assets
April 28
2019
April 29,
2018
$
12,098
24,649
44,266 (1)
1,508
82,521
15,195
28,740
48,797 (2)
1,501
94,233
11,274
22,915
1,795 (3)
35,984
11,112
24,714
2,445 (4)
38,271
379
3,296
1,910 (5)
5,585
124,090
40,008
-
5,001
776
457
2,849
418
27,222
10,448
-
7,081
733
643
219,726
-
-
-
-
132,504
21,228
2,451
25,759
-
1,458
2,870
552
13,569
4,275
5,035
7,326
-
957
217,984
$
114
(dollars in thousands)
capital expenditures (7):
mattress fabrics
upholstery fabrics
home accessories
unallocated corporate
depreciation expense
mattress fabrics
upholstery fabrics
home accessories
total segment depreciation expense
2019 2018 2017
$
$
$
$
2,526
382
53
14
2,975
7,008
787
322
8,117
6,713
488
-
238
7,439
6,850
822
-
7,672
17,689
822
-
260
18,771
6,245
840
-
7,085
(1) The $44.3 million at April 28, 2019, represents property, plant, and equipment located in the
U.S. of $32.4 million and located in Canada of $11.9 million.
(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 $1.8 million at April 28, 2019, represents property, plant, and equipment located in the U.S.
of $1.2 million and located in China of $591.
(4) 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.
(5) The $1.9 million at April 28, 2019, represents property, plant, and equipment located in the U.S.
(6) The $418 and $552 at April 28, 2019, and April 29, 2018, represent property, plant, and
equipment associated with unallocated corporate departments and corporate departments shared
by both the mattress fabrics, upholstery fabrics, and home accessories segments located in the
U.S.
(7) Capital expenditure amounts are stated on an accrual basis. See the Consolidated Statement of
Cash Flows for capital expenditure amounts on a cash basis.
22. STATUTORY RESERVES
The company’s subsidiaries located in China are required to transfer 10% of their net income, as
determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to
a statutory surplus reserve fund until such reserve balance reaches 50% of the company’s registered
capital.
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of
April 28, 2019, the company’s statutory surplus reserve was $4.3 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 $4.3 million to assist with debt repayment, capital expenditures, and
other expenses of the company’s business.
115
23. 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 2019, we purchased 160,823 shares of our common stock at a cost of $3.3 million. During
fiscal 2018 and 2017, we did not purchase any shares of our common stock.
At April 28, 2019, we had $1.7 million available for additional repurchases of our common stock.
24. DIVIDEND PROGRAM
On June 12, 2019, we announced that our board of directors approved a regular quarterly cash dividend
payment of $0.10 per share. This payment will be made on or about July 16, 2019, to shareholders of
record as of July 5, 2019.
During fiscal 2019, dividend payments totaled $4.7 million, all of which represented quarterly dividend
payments ranging from $0.09 to $0.10 per share.
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.
Future dividend payments are subject to Board approval and may be adjusted at the Board’s discretion as
business needs or market conditions change.
116
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
restructuring (credit) expense
income from operations
interest expense
interest income
other expense
income before income taxes
income taxes
loss (income) from investment in unconsolidated joint venture
net (loss) income
net loss (income) attributable to non-controlling interest
net (loss) income attributable to Culp Inc. common shareholders
depreciation
weighted average shares outstanding
weighted average shares outstanding,
assuming dilution
PER SHARE DATA
net (loss) income attributable to Culp Inc. common shareholders - basic
net (loss) income attributable to Culp Inc. common shareholders - diluted
dividends per share
book value
BALANCE SHEET DATA
operating working capital (3)
property, plant and equipment, net
total assets
capital expenditures
dividends paid
subordinated loan payable and line of credit (1)
shareholders' equity attributable to Culp Inc.
capital employed (2)
RATIOS & OTHER DATA
gross profit margin
operating income margin
net (loss) income 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
2019
4th quarter
fiscal
2019
3rd quarter
fiscal
2019
2nd quarter
fiscal
2019
1st quarter
fiscal
2018
4th quarter
fiscal
2018
3rd quarter
fiscal
2018
2nd quarter
fiscal
2018
1st quarter
$
$
$
$
$
$
70,963
58,774
12,189
10,230
-
1,959
4
(214)
658
1,511
3,017
5
(1,511)
143
(1,368)
2,030
12,384
77,226
63,103
14,123
10,038
(214)
4,299
-
(251)
288
4,262
1,225
(23)
3,060
94
3,154
2,031
12,438
77,006
63,680
13,326
10,103
(1,061)
4,284
18
(151)
142
4,275
1,276
55
2,944
(11)
2,933
2,041
12,515
71,473
60,914
10,559
8,033
451
2,075
20
(150)
257
1,948
906
77
965
(8)
957
2,015
12,510
78,184
63,424
14,760
8,296
-
6,464
26
(143)
115
6,466
(6,217)
17
12,666
-
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)
-
(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
-
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
-
4,984
1,807
12,399
12,384
12,465
12,551
12,600
12,611
12,436
12,580
12,590
(0.11)
(0.11)
0.10
12.91
49,757
48,389
219,726
295
1,239
675
159,933
125,311
17.2%
2.8
(2.1)
199.7
0.5
5.8
30
4.6
21.06
17.05
20.74
35.6
0.25
0.25
0.10
13.16
52,573
50,129
224,908
835
1,240
-
162,775
130,155
18.3%
5.6
4.0
28.7
0.0
6.0
30
4.6
23.84
18.06
18.47
43.3
0.23
0.23
0.09
13.04
50,193
51,325
222,211
590
1,126
-
162,918
129,853
17.3%
5.6
3.8
29.8
0.0
6.3
28
5.0
27.78
21.04
22.31
29.8
0.08
0.08
0.09
12.90
51,648
53,178
226,372
1,255
1,127
4,000
161,490
134,095
14.8%
2.9
1.4
46.5
3.0
6.6
29
4.5
32.05
23.90
24.75
27.0
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
(1) Debt represents outstanding borrowings on our long-term subordinated loan payable and 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, subordinated loan payable, 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.
117
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 28, 2019, there were no disagreements on any matters of accounting
principles or practices or financial statement disclosures.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of April 28,
2019. 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 28, 2019. Consistent with guidance issued by the Securities and Exchange
Commission regarding the exclusion of an acquired entity from management’s assessment of internal control
over financial reporting, management has excluded from its assessment the company’s acquisition of an 80%
interest in eLuxury, LLC, completed on June 22, 2019, as further described in Note 2 to consolidated financial
statements in Part II, Item 8, “Financial Statements” of this Form 10-K. eLuxury accounted for approximately
12% of the consolidated total assets and 5% of consolidated net sales as of and for the year ended April 28, 2019.
Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial
statements as of and for the years ended April 28, 2019, April 29, 2018 and April 30, 2017 and has audited the
company’s effectiveness of internal controls over financial reporting as of April 28, 2019, as stated in their
report, which is included in Item 8 hereof.
During the quarter ended April 28, 2019, 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.
118
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Culp, Inc.:
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Culp, Inc. (a North Carolina corporation) and
subsidiaries (the “Company”) as of April 28, 2019, 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 28, 2019, 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 28,
2019, and our report dated July 12, 2019 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
Management’s Annual Report on Internal Control over Financial Reporting (“Management’s Report”). 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.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal
control over financial reporting of eLuxury, LLC (“eLuxury”), whose financial statements reflect total assets and
revenues constituting 12% and 5%, respectively, of the related consolidated financial statement amounts as of and
for the year ended April 28, 2019. As indicated in Management’s Report, eLuxury was acquired during the year
ended April 28, 2019. Management’s assertion on the effectiveness of the Company’s internal control over financial
reporting excluded internal control over financial reporting of eLuxury.
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 12, 2019
119
ITEM 9B. OTHER INFORMATION
On July 10, 2019, the company’s board of directors adopted amendments to the Restated and Amended
Bylaws of the company. The material amendments to the bylaws are described below. A full copy of the
Amended and Restated Bylaws, as amended to date, is filed as Exhibit 3.1 hereto.
The amendments adopted by the board:
• Changed the numbering scheme for all sections of the bylaws to include the article in which each
section is contained;
• Updated the principal office address to the current address and provided that the board may
designate a different location in the future;
• Changed various sections of the bylaws to substitute “Chief Executive Officer” for “President” as
the officer designated to make executive decisions;
• Added a new section providing for Inspectors of Election at annual meetings;
• Provided that members of the Nominating Committee must be directors;
• Removed provisions providing for cumulative voting in the election of directors, as the company
does not have cumulative voting as a public company pursuant to North Carolina law;
• Provided that directors may be removed by the shareholders with or without cause;
• Added language consistent with North Carolina law to clarify the procedures for the directors
taking action without a formal meeting; and
• Provided that the Chief Executive Officer may appoint another officer or director to preside at the
annual meeting of shareholders.
The foregoing summary description is qualified in its entirety by reference to the Amended and Restated
Bylaws filed as Exhibit 3.1 hereto.
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,” and “Board Committees and Attendance – Audit
Committee,” which information is herein incorporated by reference.
120
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
is herein
incorporated by reference.
information
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.
The following table sets forth information as of the end of fiscal 2019 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)
-
-
-
$-
-
$-
995,094
-
995,094
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.
121
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 .................................................................. 64
Consolidated Balance Sheets – April 28, 2019 and
April 29, 2018 ..................................................................................................................................... 65
Consolidated Statements of Net Income -
for the years ended April 28, 2019,
April 29, 2018 and April 30, 2017 ...................................................................................................... 66
Consolidated Statements of Comprehensive Income -
for the years ended April 28, 2019,
April 29, 2018 and April 30, 2017………………………………………………………………… ... 67
Consolidated Statements of Shareholders’ Equity -
for the years ended April 28, 2019,
April 29, 2019 and April 30, 2017 ...................................................................................................... 68
Consolidated Statements of Cash Flows -
for the years ended April 28, 2019,
April 29, 2018 and April 30, 2017 ...................................................................................................... 69
Notes to Consolidated Financial Statements.......................................................................................... 70
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)
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.
3(ii)
Restated and Amended Bylaws of the company, as amended July 10, 2019.
10.1
Written description of Annual Incentive Plan. (*)
122
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
10.15
Form of Annual Incentive Award Agreement was filed as Exhibit 10.1 to the company’s Form 10-Q
dated March 8, 2019 (Commission File No. 001-12597), and incorporated herein by reference. (*)
Written description of Non-Employee Director Compensation was filed as Exhibit 10.2 to the
company’s Form 10-Q dated March 8, 2019 (Commission File No. 001-12597), and incorporated
herein by reference.
Credit Agreement by and between Culp, Inc. and Wells Fargo Bank, N.A., dated August 3, 2013,
along with amendments thereto, including the Fifth Amendment to Credit Agreement dated as of
August 13, 2018, was filed as Exhibit 10.1 to the company’s Form 10-Q for the quarter ended July
29, 2018, filed September 7, 2018 (Commission File No. 001-12597), and incorporated herein by
reference.
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. (*)
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. (*)
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. (*)
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. (*)
123
21
23
List of subsidiaries of the company
Consent of Independent Registered Public Accounting Firm in connection with the registration
statements of Culp, Inc. on Form S-8 (File Nos. 333-207195, 333-101805, 33-13310, 33-37027,
33-80206, 333-147663).
24(a)
Power of Attorney of Sharon Decker, dated July 12, 2019
24(b)
Power of Attorney of Perry E. Davis, dated July 12, 2019
24(c)
Power of Attorney of Kenneth R. Larson, dated July 12, 2019
24(d)
Power of Attorney of Fred A. Jackson, dated July 12, 2019
24(e)
Power of Attorney of Kenneth W. McAllister, dated July 12, 2019
31(a)
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31(b)
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 127 under the subheading “Exhibit Index.”
124
c)
Financial Statement Schedules:
None
None
ITEM 16. FORM 10-K SUMMARY
125
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, CULP, INC.
has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 12th day of July 2019.
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
12th day of July 2019.
/s/
/s/
/s/
/s/
Franklin N. Saxon
Franklin N. Saxon
Chief Executive Officer
(principal executive officer)
(Chairman of the Board of Directors)
/s/ Kenneth R. Larson *
Kenneth R. Larson
(Director)
Kenneth W. McAllister*
Kenneth W. McAllister
(Lead Independent Director)
/s/ Fred A. Jackson*
Fred A. Jackson
(Director)
Perry E. Davis *
Perry E. Davis
(Director)
Sharon A. Decker*
Sharon A. Decker
(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.
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RECONCILIATION OF SELECTED INCOME STATEMENT INFORMATION TO ADJUSTED RESULTS
FOR THE TWELVE MONTHS ENDED APRIL 28, 2019 AND APRIL 29, 2018*
(UNAUDITED)
Gross profit
Selling, general and administrative expenses
Restructuring credit
Income from operations
Other expense
Income before income taxes
Income Taxes
Net income
Plus: Net loss attributable to non-controlling interest
Net income attributable to Culp Inc. common shareholders
TWELVE MONTHS ENDED
As Reported
April 28,
2019
$ 50,198 (1)
38,405 (3)
(825) (2)
12,618
1,346 (4)
11,996
6,424 (5)
5,458
218
$
5,676
Adjustments
2,508
(558)
825
2,241
(500)
2,741
550
(550)
-
(550)
Adjusted
April 28,
2019
52,706
37,847
-
14,859
846
14,737
6,974
4,908
218
5,126
As Reported
April 29,
2018
64,633
37,172
-
27,461
1,018
26,883
5,740 (5)
20,877
-
20,877
Adjusted
April 29,
2018
Adjustments
-
-
-
-
-
-
2,049
(2,049)
-
(2,049)
64,633
37,172
-
27,461
1,018
26,883
7,789
18,828
-
18,828
(1) The $2.5 million represents a restructuring related charge of $1.6 million for inventory markdowns, $784 for other operating costs associated with our closed Anderson, SC plant facility, and $159 for employee termination
benefits and other operational reorganization costs associated with our mattress fabrics segment.
(2) The $825 restructuring credit represents a $1.5 million gain on the sale of property, plant, and equipment associated with our closed Anderson, SC upholstery fabrics plant facility, partially offset by a charge of $661 for employee
termination benefits.
(3) The $558 consists of a non-recurring charge totaling $469 that was associated with the accelerated vesting of certain stock-based compensation agreements. Of this $469 non-recurring charge, $429 and $40 pertain to
unallocated corporate expenses and a restructuring related charge associated with our closed Anderson, SC upholstery fabrics plant facility. Additionally, the $558 consists of a non-recurring charge of $89 for employee
termination benefits and operational reorganization costs associated with our mattress fabrics segment.
(4) Other expense for the year ending Apri 28, 2019, included a $500 non-recurring charge for an endowed scholarship to the University of North Carolina at Chapel Hill in honor of our Co-Founder and former Chairman of the Board.
This charitable contribution will be paid over a period of three years.
(5) Amounts represent provisional adjustments associated with the TCJA enacted on December 22, 2017.
* There is no reconciliation of selected income statement information to adjusted results included for fiscal years 2017, 2016, or 2015 as there were no adjustments to income before income taxes for these periods.
FREE CASH FLOW RECONCILIATION
Net cash provided by operating activities
Minus: Cash capital expenditures
Plus: Proceeds from the sale of property, plant and equipment
Minus: Investment in unconsolidated joint venture
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)
Plus: Proceeds from life insurance policy
Minus: Premium payment on life insurance policy
Effects of exchange rate changes on cash and cash equivalents
Free Cash Flow
FY 2019
FY 2018
FY 2017
FY 2016
FY 2015
$ 13,873
(3,261)
1,894
(120)
(1,412)
1,233
(1,011)
394
-
(93)
$ 11,497
$ 27,473
(8,005)
6
(661)
(3,750)
57
(1,902)
-
(18)
85
$ 13,285
$ 34,067
(11,858)
141
(1,129)
(1,050)
-
(1,351)
-
(18)
(56)
$ 18,746
$ 28,383
(11,475)
233
-
-
-
(1,649)
-
(18)
498
$ 15,972
$ 26,111
(10,461)
727
-
-
-
(1,650)
320
(18)
(21)
$ 15,008
SUMMARY OF CASH AND INVESTMENTS
APRIL 28, 2019, APRIL 29, 2018 AND APRIL 30, 2017
(Amounts in Thousands)
Amounts
April 29,
2018*
$ 21,228
2,451
25,759
5,035
$ 54,473
April 28,
2019*
$ 40,008
-
5,001
-
$ 45,009
April 30,
2017*
$ 20,795
2,443
-
30,945
$ 54,183
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 contains “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of
1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks
and uncertainties that may cause actual events and results to differ materially from such statements. 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 to reflect any changes in management’s expectations
or any change in the assumptions or circumstances on which such statements are based, whether 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,” “anticipate,” “estimate,” “plan,” “project,” and their
derivatives, and include but are not limited to statements about expectations for our future operations, production levels, new project launches, 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 or liquidity measures, as well as any statements regarding potential acquisitions, future economic or industry trends or future
developments. There can be no assurance that the company will realize these expectations, meet its guidance, or that these beliefs will prove correct.
Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends
in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects.
Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely.
The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses
into our existing operations. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes
in tariffs or trade policy, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results because a significant portion of our
operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the
basis of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales of products
produced in those places. Also, economic and political instability in international areas could affect our operations or sources of goods in those areas, as well
as demand for our products in international markets. Finally, increases in market prices for petrochemical products can significantly affect the prices we pay for
raw materials, and in turn, increase our operating costs and decrease our profitability. 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 in our Form 10-K filed with the Securities and Exchange Commission on July 12, 2019 for the fiscal year ended April 28, 2019, 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 adjusted income statement information, a non-GAAP performance measure that reconciles reported and projected income statement
information with adjusted results, which exclude restructuring and related charges and credits, other non-recurring charges, and provisional income tax
adjustments associated with the Tax Cuts and Jobs Act (the Tax Act) enacted on December 22, 2017. The company has included this adjusted information in
order to show operational performance excluding the effects of restructuring and related charges and credits, other non-recurring charges, and the provisional
income tax adjustments associated with 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 aids in the comparison of financial results
among comparable financial periods. In addition, this information is used by management to make operational decisions about the company’s business and
is used by the company as a financial goal for purposes of determining management incentive compensation. We note, however, that this adjusted income
statement information should not be viewed in isolation or as a substitute for income calculated in accordance with GAAP, as restructuring and related charges
and credits, other non-recurring charges, and the provisional income tax adjustments associated with the Tax Act, do have an effect on our financial performance.
This document contain 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 property, plant, and equipment, plus proceeds from our
life insurance policy, 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 now define return on capital
as adjusted operating income (measured on a trailing twelve months basis and excluding certain non-recurring charges and credits) divided by average capital
employed (excluding goodwill and intangibles and obligations related to acquisitions at the divisional level only). Operating income excludes certain non-
recurring charges, and average capital employed is calculated over rolling 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, operating income
on a trailing twelve months basis does not necessarily indicate results that would be expected for the full fiscal year or for the following twelve months. 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.
Culp, Inc.
1823 Eastchester Drive
High Point, NC 27265
(336) 889-5161
www.culp.com
Corporate Directory
Franklin N. Saxon
Chairman of the Board and Chief
Executive Officer
Director (E)
Thomas B. Gallagher, Jr.
Corporate Controller, Assistant
Treasurer and Assistant Corporate
Secretary
Robert G. Culp, IV
President and Chief Operating
Officer and President, Culp Home
Fashions division
Boyd B. Chumbley
President, Culp Upholstery
Fabrics division
Kenneth R. Bowling
Executive Vice President, Chief
Financial Officer and Treasurer
Ashley C. Durbin
Vice President, General Counsel and
Corporate Secretary
Shareholder Information
Corporate Address
1823 Eastchester Drive
High Point, NC 27265
Telephone: (336) 889-5161
Fax: (336) 887-7089
www.culp.com
Registrar and Transfer Agent
Computershare Trust Company, N.A.
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
Perry E. Davis
Executive Vice President, President –
Residential and Industrial
Product Segments,
Leggett & Platt, Incorporated
Carthage, MO
Director (A,C,N)
Sharon A. Decker
Chief Operating Officer of Tryon
Equestrian Partners, Carolina
Operations
Mill Spring, NC
Director (A,C,N)
Fred A. Jackson
Retired Chief Executive Officer,
American & Efird LLC
Mt. Holly, NC
Director (A,C,N)
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 –
Bobby Griffin, CFA
Stifel Financial Corp –
John Baugh, CFA
Stonegate Capital Markets –
Marco Rodriguez, CFA
Value Line –
Simon R. Shoucair
Kenneth R. Larson
Owner and Founder,
Slumberland Furniture
Little Canada, MN
Director (A,C,N)
Kenneth W. McAllister
Member/Manager,
McAllister, Aldridge &
Kreinbrink, PLLC
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 26, 2019,
Culp, Inc. had approximately 4,036
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 2019 annual meeting of
shareholders to be held at 9:00 a.m.
on Thursday, September 26, 2019, at
the company’s corporate offices, 1823
Eastchester Drive, High Point, North
Carolina.