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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
-------------
Date of Report (Date of earliest event reported) November 25, 2002
CULP, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-12781 56-1001967
(State or other jurisdiction of (Commission File No.) (IRS Employer
incorporation) Identification No.)
101 South Main Street
High Point, North Carolina 27260
(Address of principal executive offices)
(336) 889-5161
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
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Item 5. Other Events
See attached Press Release (4 pages) and Financial Information Release (13
pages), both dated November 25, 2002, related to the fiscal 2003 second quarter
ended October 27, 2002.
Forward Looking Information. This Report contains statements that may be deemed
"forward-looking statements" within the meaning of the federal securities laws,
including the Private Securities Litigation Reform Act of 1995 (Section 27A of
the Securities Act of 1933 and Section 27A of the Securities and Exchange Act of
1934). Such statements are inherently subject to risks and uncertainties.
Forward-looking statements are statements that include projections, expectations
or beliefs about future events of results or otherwise are not statements of
historical fact. Such statements are often but not always characterized by
qualifying words such as "expect," "believe," "estimate," "plan" and "project"
and their derivatives, and include but are not limited to statements about
expectations for the company's future sales, gross profit margins, SG&A or other
expenses, and earnings, as well as any statements regarding the company's view
of estimates of the company's future results by analysts. 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 the company's business and prospects. Likewise,
increases in interest rates, particularly home mortgage rates, and increases in
consumer debt or the general rate of inflation, could affect the company
adversely. Because of the significant percentage of the company's sales derived
from international shipments, strengthening of the U. S. dollar against other
currencies could make the company's products less competitive on the basis of
price in markets outside the United States. Additionally, economic and political
instability in international areas could affect the demand for the company's
products. Finally, unanticipated delays or costs in executing restructuring
actions could cause the cumulative effect of restructuring actions to fail to
meet the objectives set forth by management. Other factors that could affect the
matters discussed in forward looking statements are included in the company's
periodic reports filed with the Securities and Exchange Commission.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CULP, INC.
(Registrant)
By: Franklin N. Saxon
-----------------------------
Executive Vice President and
Chief Financial Officer
Dated: November 25, 2002
NEWS RELEASE
Investor Contact: Kathy J. Hardy Media Contact: Kenneth M. Ludwig
Corporate Secretary Senior Vice President,
336-888-6209 Human Resources
336-889-5161
FOR IMMEDIATE RELEASE
CULP REPORTS SECOND QUARTER 2003 RESULTS
----------------------
IMPROVED EARNINGS REFLECT BENEFITS
OF RESTRUCTURING ACTIONS AND BALANCE SHEET MANAGEMENT
HIGH POINT, N. C. (November 25, 2002) - Culp, Inc. (NYSE: CFI) today reported
financial and operating results for the second quarter and six months ended
October 27, 2002. The quarter was highlighted by:
o Diluted earnings per share of $0.19 (excluding restructuring and related
charges)
o Improved gross profit margin of 17.8% (excluding restructuring related
charges)
o Chattanooga restructuring substantially complete at the end of the quarter
o Cash position built to $35.0 million from $25.1 million at the end of the
first quarter
For the three months ended October 27, 2002, net sales were $83.6 million
compared with $96.4 million a year ago. The company reported net income,
excluding restructuring and related charges, of $2.3 million, or $0.19 per share
diluted, versus net income of $1.2 million, or $0.11 per share diluted, in the
second quarter of fiscal 2002, excluding restructuring and related charges, and
goodwill amortization. The financial results for the second quarter include a
total of $14.5 million in restructuring and related charges, all of which
reflect previously announced restructuring initiatives. Including restructuring
and related charges, the company reported a net loss of $6.6 million, or $0.57
per share diluted, for the second quarter of fiscal 2003.
For the six months ended October 27, 2002, the company reported net sales
of $169.5 million, compared with $182.9 million for the same period a year ago.
Excluding restructuring and related charges and the cumulative effect of
accounting change, net income for the first six months of fiscal 2003 was $3.2
million, or $0.27 per share diluted, compared with net income of $46,000, or
$0.00 per share diluted, excluding restructuring and related charges, and
goodwill amortization for the prior-year period. Including restructuring charges
and the cumulative effect of accounting change, the company reported a net loss
for the first six months of fiscal 2003 of $29.8 million, or $2.61 per share
diluted.
As previously announced, due to the adoption of a new accounting standard,
"Goodwill and Other Intangible Assets," the company recorded a non-cash goodwill
impairment charge, net of income taxes, of $24.2 million, or $2.11 per share
diluted, in the first quarter of 2003 related to the goodwill associated with
its Culp Decorative Fabrics ("CDF") division. The charge, recorded as
"cumulative effect of accounting change," has no effect on operating income or
cash flow from operations and does not affect the company's compliance with the
terms of its lending agreements.
"In an especially challenging business environment, these results clearly
reflect the benefits of the actions we have taken to improve the efficiency of
our operations, reduce costs and strengthen our balance sheet," remarked Robert
G. Culp, III, chief executive officer of Culp, Inc. "Our top line growth was
affected by the overall industry weakness in demand for furniture and bedding.
In addition, the 13.3% decline in sales is partly attributable to our strategic
initiatives to improve the overall profitability of our sales mix by reducing or
eliminating less profitable products. As previously announced, we discontinued
our unprofitable wet printed flock business at the end of fiscal 2002. Since
that time we have also discontinued a significant number of the finished goods
stock keeping units, or SKUs, within CDF in our continued efforts to eliminate
products that are not generating acceptable profits. However, in spite of the
lower sales volume and the operational disruption resulting from the Chattanooga
restructuring, we still reported a meaningful improvement in profitability.
Gross profit margin was 17.8% in the second fiscal quarter compared with 16.3%
for the same period a year ago, excluding the restructuring related charges in
each quarter. Our strategic focus continues to be on effectively managing the
aspects of our business that we can control, and we believe our ability to
improve profits, excluding restructuring and related charges, in this
environment demonstrates our strong execution.
"Our solid performance with respect to managing our working capital and
strengthening our balance sheet further extended the progress from the first
quarter of this year," said Culp. "Cash flow from operations was $17.8 million
for the first six months of 2003, and we have reduced our funded debt by $12.0
million from the end of fiscal 2002. At the end of the second fiscal quarter, we
had $35.0 million in cash and cash investments, a significant improvement over
$8.6 million a year ago. A key objective for 2003 is to maintain a strong,
liquid balance sheet, and we will continue to focus on opportunities for further
improvement.
"Our previously announced Chattanooga restructuring initiatives were
substantially complete at the end of the second quarter. We closed the
manufacturing operations at our facility in Chattanooga, Tennessee, and
successfully transferred these operations to other plants well ahead of
schedule. This restructuring is projected to result in annual cost savings of
$12 to $15 million. We believe these actions will significantly improve gross
margins while allowing us to continue to meet foreseeable customer demand, all
on a substantially lower cost base."
Looking ahead, Culp added, "We believe we have made meaningful progress in
managing our costs and improving our profitability. However, like others in our
industry, our sales volume continues to be affected by the uncertainties in the
economy and decline in overall consumer spending for home furnishings.
Additionally, with the elimination of the wet printed flock business and our
ongoing initiatives to improve the profitability of our sales mix, we expect the
year-over-year decline in consolidated sales for the third fiscal quarter will
be somewhat less than we experienced in the second fiscal quarter. We believe
that we will realize the benefits from the CDF restructuring initiatives sooner
than anticipated, and are confident that we will see further significant
year-over-year earnings improvement and stronger free cash flow in the third
fiscal quarter. Therefore, at this time, we remain comfortable with the range of
published analysts earnings estimates of $0.11 to $0.15 per share diluted for
the third fiscal quarter excluding restructuring and related charges. Our
strategy for fiscal 2003 will continue to focus on improving the profitability
of our sales mix, increasing margins and return on invested capital, and
generating free cash flow."
Culp, Inc. is one of the world's largest marketers of upholstery fabrics
for furniture and is a leading marketer of mattress ticking for bedding. The
Company's fabrics are used principally in the production of residential and
commercial furniture and bedding products.
This release contains statements that may be deemed "forward-looking
statements" within the meaning of the federal securities laws, including the
Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities
Act of 1933 and Section 27A of the Securities and Exchange Act of 1934). Such
statements are inherently subject to risks and uncertainties. Forward-looking
statements are statements that include projections, expectations or beliefs
about future events of results or otherwise are not statements of historical
fact. Such statements are often but not always characterized by qualifying words
such as "expect," "believe," "estimate," "plan" and "project" and their
derivatives, and include but are not limited to statements about expectations
for the company's future sales, gross profit margins, SG&A or other expenses,
and earnings, as well as any statements regarding the company's view of
estimates of the company's future results by analysts. 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 the company's business and prospects. Likewise,
increases in interest rates, particularly home mortgage rates, and increases in
consumer debt or the general rate of inflation, could affect the company
adversely. Because of the significant percentage of the company's sales derived
from international shipments, strengthening of the U. S. dollar against other
currencies could make the company's products less competitive on the basis of
price in markets outside the United States. Additionally, economic and political
instability in international areas could affect the demand for the company's
products. Finally, unanticipated delays or costs in executing restructuring
actions could cause the cumulative effect of restructuring actions to fail to
meet the objectives set forth by management. Other factors that could affect the
matters discussed in forward-looking statements are included in the company's
periodic reports filed with the Securities and Exchange Commission.
CULP, INC.
Condensed Financial Highlights
(Unaudited)
Three Months Ended
-------------------------------
October 27, October 28,
2002 2001
-------------- -------------
Net sales $ 83,573,000 $ 96,400,000
Net income (loss) $ (6,590,000) $ 857,000
Basic and diluted net income (loss) per share $ ($0.57) $0.08
Net income per share, diluted, excluding restructuring
and related charges and goodwill amortization* $ 0.19 $ 0.11
Average shares outstanding:
Basic 11,483,000 11,221,000
Diluted 11,754,000 11,281,000
Six Months Ended
-------------------------------
October 27, October 28,
2002 2001
--------------- --------------
Net sales $ 169,461,000 $ 182,863,000
Net loss $ (5,675,000) $ (2,025,000)
Cumulative effect of accounting change, net
of income taxes (24,151,000) -0-
--------------- --------------
Net loss $ (29,826,000) $ (2,025,000)
=============== ==============
Basic and diluted loss per share:
Loss before cumulative effect of accounting change $ (0.50) $ (0.18)
Cumulative effect of accounting change (2.11) 0.00
--------------- --------------
Net loss $ (2.61) $ (0.18)
=============== ==============
Net income per share, diluted, excluding restructuring
and related charges, goodwill amortization
and cumulative effect of accounting change** $ 0.27 $ 0.00
Average shares outstanding:
Basic 11,433,000 11,221,000
Diluted 11,778,000 11,281,000
* Excludes restructuring and related charges of $14.5 million ($8.9 million or
$0.77 per share diluted after taxes) for the second quarter of fiscal 2003.
Excludes restructuring and related charges of $0.2 million ($0.1 million, or
$0.01 per share diluted, after taxes) and goodwill amortization of $350,000
($230,000, or $0.02 per share diluted, after taxes) for the second quarter of
fiscal 2002.
** Excludes cumulative effect of accounting change, net of income taxes, of
$24.2 million ($2.11 per share diluted) for the first half of fiscal 2003.
Excludes restructuring and related charges of $14.5 million ($8.9 million or
$0.78 per share diluted, after taxes) for the first half of fiscal 2003.
Excludes restructuring and related charges of $2.5 million ($1.6 million, or
$0.15 per share diluted, after taxes) and goodwill amortization of $700,000
($460,000, or $0.04 per share diluted, after taxes) for the first half of
fiscal 2002.
CULP, INC. FINANCIAL INFORMATION RELEASE
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------------
Amounts Percent of Sales
----------------------------- ----------------------------
October 27, October 28, % Over
2002 2001 (Under) 2003 2002
-------------- ------------- ------------- ----------------- ---------
Net sales $ 83,573 96,400 (13.3) % 100.0 % 100.0 %
Cost of sales 69,830 80,858 (13.6) % 83.6 % 83.9 %
-------------- ------------- ------------- ----------------- ---------
Gross profit 13,743 15,542 (11.6) % 16.4 % 16.1 %
Selling, general and
administrative expenses 9,481 11,550 (17.9) % 11.3 % 12.0 %
Restructuring expense 13,360 0 100.0 % 16.0 % 0.0 %
-------------- ------------- ------------- ----------------- ---------
Income (loss) from operations (9,098) 3,992 (127.9) % (10.9)% 4.1 %
Interest expense 1,676 1,963 (14.6) % 2.0 % 2.0 %
Interest income (121) (34) 255.9 % (0.1)% (0.0)%
Other expense (income), net 242 765 (68.4) % 0.3 % 0.8 %
-------------- ------------- ------------- ----------------- ---------
Income (loss) before income taxes (10,895) 1,298 (939.4) % (13.0)% 1.3 %
Income taxes * (4,305) 441 (1,076.2) % 39.5 % 34.0 %
-------------- ------------- ------------- ----------------- ---------
Net Income (loss) $ (6,590) 857 (869.0) % (7.9)% 0.9 %
============== ============= ============= ================= =========
Net Income (loss) per share-basic ($0.57) $0.08 (812.5) %
Net Income (loss) per share-diluted ($0.57) $0.08 (812.5) %
Net income per share, diluted,
excluding restructuring and related
charges and goodwill amortization (see $0.19 $0.11 72.7 %
proforma statement on page 7)
Average shares outstanding-basic 11,483 11,221 2.3 %
Average shares outstanding-diluted 11,483 11,281 1.8 %
SIX MONTHS ENDED (UNAUDITED)
-----------------------------------------------------------------------
Amounts Percent of Sales
----------------------------- ----------------------------
October 27, October 28, % Over
2002 2001 (Under) 2003 2002
-------------- ------------- ------------- ----------------- ---------
Net sales $ 169,461 182,863 (7.3) % 100.0 % 100.0 %
Cost of sales 141,864 156,532 (9.4) % 83.7 % 85.6 %
-------------- ------------- ------------- ----------------- ---------
Gross profit 27,597 26,331 4.8 % 16.3 % 14.4 %
Selling, general and
administrative expenses 19,918 22,785 (12.6) % 11.8 % 12.5 %
Restructuring expense 13,360 1,303 925.3 % 7.9 % 0.7 %
-------------- ------------- ------------- ----------------- ---------
Income (loss) from operations (5,681) 2,243 (353.3) % (3.4)% 1.2 %
Interest expense 3,579 4,031 (11.2) % 2.1 % 2.2 %
Interest income (271) (57) 375.4 % (0.2)% (0.0)%
Other expense (income), net 453 1,337 (66.1) % 0.3 % 0.7 %
-------------- ------------- ------------- ----------------- ---------
Loss before income taxes (9,442) (3,068) (207.8) % (5.6)% (1.7)%
Income taxes * (3,767) (1,043) (261.2) % 39.9 % 34.0 %
-------------- ------------- ------------- ----------------- ---------
Loss before cumulative effect of accounting
change (5,675) (2,025) (180.2) % (3.3)% (1.1)%
================= =========
Cumulative effect of accounting change,
net of income taxes (24,151) 0
-------------- -------------
Net loss $ (29,826) (2,025)
============== =============
Basic loss per share:
Loss before cumulative effect of
accounting change $ (0.50) (0.18) (175.1) %
Cumulative effect of accounting change (2.11) 0.00 (100.0) %
-------------- ------------- ----------
Net loss (2.61) (0.18) (1,345.6) %
============== ============= ==========
Diluted loss per share:
Loss before cumulative effect of
accounting change $ (0.50) (0.18) (175.1) %
Cumulative effect of accounting change (2.11) 0.00 (100.0) %
-------------- ------------- ----------
Net loss (2.61) (0.18) (1,345.6) %
============== ============= ==========
Net income per share, diluted, excluding
restructuring and related charges, goodwill
amortization and cumulative effect of
accounting change (see proforma statement on
page 8) $0.27 $0.00 N/A
Average shares outstanding-basic 11,433 11,221 1.9 %
Average shares outstanding-diluted 11,433 11,221 1.9 %
* Percent of sales column for income taxes is calculated as a % of income (loss) before income taxes.
CULP, INC. FINANCIAL INFORMATION RELEASE
CONSOLIDATED BALANCE SHEETS
OCTOBER 27, 2002, OCTOBER 28, 2001, AND APRIL 28, 2002
Unaudited
(Amounts in Thousands)
Amounts Increase
------------------------------- (Decrease)
October 27, October 28, ------------------------- * April 28,
2002 2001 Dollars Percent 2002
--------------- -------------- ---------- ------------- ------------
Current assets
Cash and cash investments $ 35,037 8,590 26,447 307.9 % 31,993
Accounts receivable 32,869 49,402 (16,533) (33.5) % 43,366
Inventories 54,571 60,814 (6,243) (10.3) % 57,899
Other current assets 15,944 9,851 6,093 61.9 % 13,413
--------------- -------------- ---------- ------------- ------------
Total current assets 138,421 128,657 9,764 7.6 % 146,671
Property, plant & equipment, net 85,049 105,697 (20,648) (19.5) % 89,772
Goodwill 9,240 47,781 (38,541) (80.7) % 47,083
Other assets 2,888 1,682 1,206 71.7 % 4,187
--------------- -------------- ---------- ------------- ------------
Total assets $ 235,598 283,817 (48,219) (17.0) % 287,713
=============== ============== ========== ============= ============
Current liabilities
Current maturities of long-term debt $ 462 3,136 (2,674) (85.3) % 1,483
Accounts payable 18,948 25,870 (6,922) (26.8) % 24,327
Accrued expenses 16,199 15,448 751 4.9 % 16,460
Accrued restructuring 10,065 1,748 8,317 475.8 % 2,445
--------------- -------------- ---------- ---------- ------------
Total current liabilities 45,674 46,202 (528) (1.1) % 44,715
Long-term debt 96,096 107,447 (11,351) (10.6) % 107,001
Deferred income taxes 3,502 10,330 (6,828) (66.1) % 16,932
--------------- -------------- ---------- ------------- ------------
Total liabilities 145,272 163,979 (18,707) (11.4) % 168,648
Shareholders' equity 90,326 119,838 (29,512) (24.6) % 119,065
--------------- -------------- ---------- ------------- ------------
Total liabilities and
shareholders' equity $ 235,598 283,817 (48,219) (17.0) % 287,713
=============== ============== ========== ============= ============
Shares outstanding 11,483 11,221 262 2.3 % 11,320
=============== ============== ========== ============= ============
* Derived from audited financial statements.
CULP,INC.
FINANCIAL INFORMATION RELEASE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001
Unaudited
(Amounts in Thousands)
SIX MONTHS ENDED
--------------------------
Amounts
--------------------------
October 27, October 28,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (29,826) (2,025)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of accounting change, net of income taxes 24,151 0
Depreciation 7,139 8,871
Amortization of intangible assets 219 785
Amortization of stock based compensation 105 39
Restructuring expense 13,360 1,303
Changes in assets and liabilities:
Accounts receivable 10,497 8,447
Inventories 3,328 (817)
Other current assets (2,504) (2,006)
Other assets (202) (17)
Accounts payable (6,894) 2,522
Accrued expenses 2 711
Accrued restructuring (1,546) (1,778)
Income taxes payable 0 (1,268)
------------ ------------
Net cash provided by operating activities 17,829 14,767
------------ ------------
Cash flows from investing activities:
Capital expenditures (5,328) (2,288)
------------ ------------
Net cash used in investing activities (5,328) (2,288)
------------ ------------
Cash flows from financing activities:
Principal payments of long-term debt (11,926) (1,073)
Change in accounts payable-capital expenditures 1,515 (4,023)
Proceeds from common stock issued 954 0
------------ ------------
Net cash used in financing activities (9,457) (5,096)
------------ ------------
Increase in cash and cash investments 3,044 7,383
Cash and cash investments at beginning of period 31,993 1,207
------------ ------------
Cash and cash investments at end of period $ 35,037 8,590
============ ============
Free Cash Flow (1) $ 14,016 8,456
============ ============
(1) Free Cash Flow is defined as net cash provided by operating activities less capital expenditures
plus or minus the change in accounts payable-capital expenditures
CULP, INC. FINANCIAL INFORMATION RELEASE
FINANCIAL ANALYSIS
OCTOBER 27, 2002
FISCAL 02 FISCAL 03
------------------ ------------------------------------------------ ---------------
Q2 Q1 Q2 Q3 Q4 LTM (3)
------------------ ------------------------------------------------ ---------------
INVENTORIES
Inventory turns 5.4 4.9 4.9
RECEIVABLES
Days sales in receivables 47 34 36
WORKING CAPITAL
Current ratio 2.8 3.4 3.0
Operating working capital turnover (2) 4.1 4.7 4.8
Operating working capital (2) $84,346 $70,762 $68,492
PROPERTY, PLANT & EQUIPMENT
Depreciation rate 7.1% 6.4% 6.5%
Percent property, plant &
equipment are depreciated 58.1% 60.6% 61.5%
Capital expenditures $4,729 (1) $3,070 $2,258
PROFITABILITY
Net income (loss) per share (basic) $0.08 $0.08 (5) ($0.57) ($0.61) (5)
Net income (loss) per share (diluted) $0.08 $0.08 (5) ($0.57) ($0.61) (5)
Net income (loss) per share (diluted) $0.11 (6) $0.08 (5) $0.19 (7) $0.69 (8)
Return on average total capital 4.3% (6) 3.6% (5) 6.8% (7) 5.9% (8)
Return on average equity 4.0% (6) 3.1% (5) 9.4% (7) 7.4% (8)
LEVERAGE
Total liabilities/equity 136.8% 143.2% 160.8%
Funded debt/equity 92.3% 99.5% 106.9%
Funded debt/capital employed 48.0% 49.9% 51.7%
Funded debt $110,583 $96,533 $96,558
Funded debt/EBITDA (LTM) (4) 4.26 2.71 2.67
LEVERAGE ( NET OF CASH AND CASH INVESTMENTS) (9)
Total liabilities/equity N/A N/A 122.0%
Funded debt/equity N/A N/A 68.1%
Funded debt/capital employed N/A N/A 40.5%
Funded debt N/A N/A $61,521
Funded debt/EBITDA (LTM) (4) N/A N/A 1.70
OTHER
Book value per share $10.68 $8.45 $7.87
Employees at quarter end 3,000 2,900 2,568
Sales per employee (annualized) $128,000 $116,163 $122,272
Capital employed $230,421 $193,540 $186,884
Effective income tax rate (10) 34.0% 37.0% 37.0%
EBITDA (4) $8,315 $7,356 $8,810 $36,096
EBITDA/net sales (4) 8.6% 8.6% 10.5% 9.8%
(1) Expenditures for entire year
(2) Working capital for this calculation is accounts receivable, inventories and accounts payable
(3) LTM represents "Latest Twelve Months"
(4) EBITDA includes earnings before interest, income taxes, depreciation, amortization, all restructuring and related
charges, certain non-cash charges and cumulative effect of accounting change, as defined by the company's credit agreement
(5) Excludes cumulative effect of accounting change made during first quarter fiscal 2003
(6) Excludes restructuring and related charges of $0.2 million ($0.1 million or $0.01 per share diluted, after taxes). Also
excludes goodwill amortization expense of $350,000 ($230,000 or $.02 per share diluted, after taxes)
(7) Excludes restructuring and related charges of $14.5 million ($8.9 million or $.77 per share diluted, after taxes)
(8) Excludes restructuring and related charges of $9.7 million ($5.8 million or $.51 per share diluted, after taxes) and $14.5
million ($8.9 million or $0.78 per share diluted, after taxes) for the fourth quarter fiscal 2002 and second quarter fiscal
2003, respectively, and $24.2 million cumulative effect of accounting change for the first quarter of fiscal 2003. Also
excludes goodwill amortization expense of $700,000 ($460,000 or $.04 per share diluted, after taxes) for the third and fourth
quarters of fiscal 2002
(9) The cash balance of $35.0 million has been excluded from total liabilities, funded debt and capital employed to arrive at
the ratios in this section
(10) Effective income tax rate excludes restructuring and related charges
CULP, INC. FINANCIAL INFORMATION RELEASE
SALES / GROSS PROFIT BY SEGMENT/DIVISION
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
---------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------------- ------------------------
October 27, October 28, % Over
Segment/Division Sales 2002 2001 (Under) 2003 2002
--------------------------------- --------------- -------------- ---------- ----------- -----------
Upholstery Fabrics
Culp Decorative Fabrics $ 33,859 38,492 (12.0) % 40.5 % 39.9 %
Culp Velvets/Prints 23,305 30,354 (23.2) % 27.9 % 31.5 %
Culp Yarn 1,246 1,532 (18.7) % 1.5 % 1.6 %
--------------- -------------- ---------- ----------- -----------
58,410 70,378 (17.0) % 69.9 % 73.0 %
Mattress Ticking
Culp Home Fashions 25,163 26,022 (3.3) % 30.1 % 27.0 %
--------------- -------------- ---------- ----------- -----------
* $ 83,573 96,400 (13.3) % 100.0 % 100.0 %
=============== ============== ========== =========== ===========
Segment Gross Profit (1) Gross Profit Margin
--------------------------------- ------------------------
Upholstery Fabrics $ 8,810 8,348 5.5 % 15.1 % 11.9 %
Mattress Ticking 6,093 7,350 (17.1) % 24.2 % 28.2 %
--------------- -------------- ---------- ----------- -----------
$ 14,903 15,698 (5.1) % 17.8 % 16.3 %
=============== ============== ========== =========== ===========
SIX MONTHS ENDED (UNAUDITED)
---------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------------- ------------------------
October 27, October 28, % Over
Segment/Division Sales 2002 2001 (Under) 2003 2002
--------------------------------- --------------- -------------- ---------- ----------- -----------
Upholstery Fabrics
Culp Decorative Fabrics $ 68,590 73,652 (6.9) % 40.5 % 40.3 %
Culp Velvets/Prints 46,424 55,875 (16.9) % 27.4 % 30.6 %
Culp Yarn 3,346 2,498 33.9 % 2.0 % 1.4 %
--------------- -------------- ---------- ----------- -----------
118,360 132,025 (10.4) % 69.8 % 72.2 %
Mattress Ticking
Culp Home Fashions 51,101 50,838 0.5 % 30.2 % 27.8 %
--------------- -------------- ---------- ----------- -----------
* $ 169,461 182,863 (7.3) % 100.0 % 100.0 %
=============== ============== ========== =========== ===========
Segment Gross Profit (1) Gross Profit Margin
--------------------------------- ------------------------
Upholstery Fabrics $ 16,811 13,866 21.2 % 14.2 % 10.5 %
Mattress Ticking 11,946 13,599 (12.2) % 23.4 % 26.7 %
--------------- -------------- ---------- ----------- -----------
$ 28,757 27,465 4.7 % 17.0 % 15.0 %
=============== ============== ========== =========== ===========
* U.S. sales were $72,362 and $82,280 for the second quarter of fiscal 2003 and
fiscal 2002, respectively; and $147,827 and $154,079 for the six months of
fiscal 2003 and 2002, respectively. The percentage decrease in U.S. sales was
12.1% for the second quarter and a decrease of 4.1% for the six months.
(1) Excludes restructuring related charges of $1.2 million and $0.2 million for
the second quarter of fiscal 2003 and 2002, respectively; and excludes
$1.2 million for the first six months of fiscal 2003 and 2002.
CULP, INC. FINANCIAL INFORMATION RELEASE
INTERNATIONAL SALES BY GEOGRAPHIC AREA
FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
---------------------------------------------
Amounts
------------------------------
October 27, October 28, % Over
Geographic Area 2002 2001 (Under)
-------------------------------------- -------------- -------------- -----------
North America (Excluding USA) $ 8,424 8,379 0.5 %
Europe 138 938 (85.3) %
Middle East 760 1,311 (42.0) %
Far East & Asia 1,652 2,891 (42.8) %
South America 171 177 (3.7) %
All other areas 66 424 (84.4) %
-------------- -------------- -----------
$ 11,211 14,120 (20.6) %
============== ============== ===========
Percent of total sales 13.4% 14.6%
SIX MONTHS ENDED (UNAUDITED)
---------------------------------------------
Amounts
------------------------------
October 27, October 28, % Over
Geographic Area 2002 2001 (Under)
-------------------------------------- -------------- -------------- -----------
North America (Excluding USA) $ 15,974 16,410 (2.7) %
Europe 261 1,643 (84.1) %
Middle East 1,647 4,214 (60.9) %
Far East & Asia 2,983 5,483 (45.6) %
South America 414 336 23.1 %
All other areas 355 698 (49.1) %
-------------- -------------- -----------
$ 21,634 28,784 (24.8) %
============== ============== ===========
Percent of total sales 12.8% 15.7%
International sales, and the percentage of total sales, for each of the last
three fiscal years follows: fiscal 2000-$111,104 (23%); fiscal 2001 - $77,824
(19%) and fiscal 2002 - $53,501 (14%).
CULP, INC.
PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------------------------------
As Reported October 27, 2002 October 28, 2001
October 27, Reclassification Proforma Net % of Proforma Net % of % Over
2002 & Adjustments of Adjustments Net Sales of Adjustments Net Sales (Under)
------------ ------------- ---------------------- ----------------------- ---------
Net sales $ 83,573 0 83,573 100.0% 96,400 100.0% -13.3%
Cost of sales 69,830 (1,160) (3) 68,670 82.2% 80,702 83.7% (6) -14.9%
------------ ------------- ---------------------- ----------------------- ---------
Gross profit 13,743 (1,160) 14,903 17.8% 15,698 16.3% -5.1%
Selling, general and
administrative expenses 9,481 0 9,481 11.3% 11,550 12.0% -17.9%
Restructuring expense 13,360 (13,360) (4) 0 0.0% 0 0.0% 0.0%
------------ ------------- ---------------------- ----------------------- ---------
Income (loss) from (9,098) (14,520) 5,422 6.5% 4,148 4.3% 30.7%
operations
Interest expense 1,676 0 1,676 2.0% 1,963 2.0% -14.6%
Interest income (121) 0 (121) -0.1% (34) 0.0% 255.9%
Other expense (income), net 242 0 242 0.3% 414 0.4% (7) -41.5%
------------ ------------- ---------------------- ----------------------- ---------
Income (loss) before income (10,895) (14,520) 3,625 4.3% 1,805 1.9% 100.8%
taxes
Income taxes (1) (4,305) (5,646) 1,341 37.0% 614 34.0% (2) 118.6%
------------ ------------- ---------------------- ----------------------- ---------
Net income (loss) $ (6,590) (8,874) 2,284 2.7% 1,191 1.2% 91.7%
============ ============= ====================== ======================= =========
Net income (loss) per share-basic ($0.57) ($0.77) $0.20 $0.11
Net income (loss) per share-diluted ($0.57) ($0.77) $0.19 $0.11
Average shares outstanding-basic 11,483 11,483 11,483 11,221
Average shares outstanding-diluted 11,483 11,483 11,754 (5) 11,281
Notes:
(1) Percent of net sales column for income taxes is calculated as a % of income (loss) before income taxes
(2) Pre-restructuring income tax rate was 37% and 34% for the second quarter of fiscal 2003 and 2002, respectively.
(3) The $1.2 million represents restructuring related charges for inventory markdowns and movement of equipment
(4) The $13.4 million represents restructuring charges for the shut down of the Chattanooga operation, $12.1 million, and the
additional write-down of wet printed assets held for sale, $1.3 million
(5) Incremental shares of 271,000 for fiscal 2003 included in fully diluted calculation
(6) Excludes CDF and CYN restructuring related charges of $.2 million ($0.01 million or $.01 per share diluted, after taxes)
(7) Excludes $350,000 ($230,000 or $0.02 per share diluted, after taxes) of goodwill amortization
PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE SIX MONTHS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001
(Amounts in Thousands, Except for Per Share Data)
SIX MONTHS ENDED
--------------------------------------------------------------------------------------------
As Reported October 27, 2002 October 28, 2001
October 27, Reclassification Proforma Net % of Proforma Net % of % Over
2002 & Adjustments of Restructuring Net Sales of Restructuring Net Sales (Under)
------------ ------------- ---------------------- ----------------------- ---------
Net sales $ 169,461 0 169,461 100.0% 182,862 100.0% -7.3%
Cost of sales 141,864 (1,160) (3) 140,704 83.0% 155,397 85.0% (6) -9.5%
------------ ------------- ---------------------- ----------------------- ---------
Gross profit 27,597 (1,160) 28,757 17.0% 27,465 15.0% 4.7%
Selling, general and
administrative expenses 19,918 0 19,918 11.8% 22,785 12.5% -12.6%
Restructuring expense 13,360 (13,360) (4) 0 0.0% 0 0.0% (6) 0.0%
------------ ------------- ---------------------- ----------------------- ---------
Income (loss) from (5,681) (14,520) 8,839 5.2% 4,680 2.6% 88.9%
operations
Interest expense 3,579 0 3,579 2.1% 4,031 2.2% -11.2%
Interest income (271) 0 (271) -0.2% (57) 0.0% 375.4%
Other expense (income), net 453 0 453 0.3% 637 0.3% (7) -28.9%
------------ ------------- ---------------------- ----------------------- --------
Income (loss) before income (9,442) (14,520) 5,078 3.0% 69 0.0% N/A
taxes
Income taxes (1) (3,767) (5,646) 1,879 37.0% 23 34.0% (2) N/A
------------ ------------- ---------------------- ----------------------- ---------
Income (loss) before cumulative
effect of accounting change $ (5,675) (8,874) 3,199 1.9% 46 0.0% N/A
============ ============= ====================== ======================= =========
Net income (loss) per share-basic ($0.50) ($0.78) $0.28 $0.00
Net income (loss) per share-diluted ($0.50) ($0.78) $0.27 $0.00
Average shares outstanding-basic 11,433 11,433 11,433 11,221
Average shares outstanding-diluted 11,433 11,433 11,778 (5) 11,281
Notes:
(1) Percent of net sales column for income taxes is calculated as a % of income (loss) before income taxes.
(2) Pre-restructuring income tax rate was 37% and 34% for the first six months of fiscal 2003 and 2002, respectively.
(3) The $1.2 million represents restructuring related charges for inventory markdowns and movement of equipment
(4) The $13.4 million represents restructuring charges for the shut down of the Chattanooga operation, $12.1 million, and the
additional write-down of wet printed assets held for sale, $1.3 million
(5) Incremental shares of 345,000 included in fully diluted calculation
(6) $1.2 million ($.8 million or $0.07 per share diluted, after taxes)of CDF and CYN restructuring related charges are excluded
from the cost of sales total; and $1.3 million ($.9 million or $0.07 per share diluted, after taxes) in CDF and CYN
restructuring charges are excluded to arrive at the proforma amounts
(7) Excludes $700,000 ($460,000 or $0.04 per share diluted, after taxes) of goodwill amortization
CULP, INC. FINANCIAL INFORMATION RELEASE
FINANCIAL NARRATIVE
for the three and six months ended October 27, 2002 and October 28, 2001
OVERVIEW
GENERAL - For the second quarter, net sales decreased 13.3% to $83.6
million; and the company reported net income, excluding restructuring and
related charges, of $2.3 million, or $0.19 per share diluted versus net income
of $1.2 million, or $0.11 per share diluted in the second quarter of fiscal
2002, excluding restructuring and related charges, and goodwill amortization.
The company reported further improvement in its balance sheet by reducing funded
debt by $12.0 million during the first half of fiscal 2003 and ending the
quarter with $35.0 million in cash and cash investments.
ADOPTION OF SFAS No. 142 - As of April 29, 2002, Culp adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." As a result the company recorded during
the first quarter of fiscal 2003 a non-operating, non-cash goodwill impairment
charge of $37.6 million ($24.2 million net of taxes of $13.4), or $2.11 per
share diluted, related to the goodwill associated with the Culp Decorative
Fabrics division.
PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS) -- The company has
included, within this financial information release, proforma income statements
which reconcile the reported income statements with proforma results, which
exclude restructuring and related charges, goodwill amortization and cumulative
effect of accounting change. See PROFORMA CONSOLIDATED STATEMENTS OF INCOME
(LOSS) on pages 7 and 8 of this financial information release.
RESTRUCTURING AND RELATED CHARGES-- The financial results for the second
quarter include a total of $14.5 million in restructuring and related charges,
all of which reflect previously announced restructuring initiatives. The charges
are made up of the following: (1) $12.1 million of restructuring expenses
related to the Culp Decorative Fabrics ("CDF") division, the largest items of
which are lease termination expenses and personnel costs; (2) $1.2 million of
'restructuring related" costs for CDF, which include inventory mark-downs and
equipment moving expense; and (3) $1.3 million of restructuring expenses related
to further write-downs of equipment in connection with the exit from the wet
printed flock business by the Culp Velvets/Prints ("CVP") division. The
additional write down, which is a non cash item, was recorded to more closely
estimate the current market value of this equipment, which has continued to
deteriorate since April 2002. Of the charges related to CDF, approximately $3.9
million are non-cash items, while the remaining $9.4 million relates to cash
expenditures. As reflected in the financial statements, restructuring and
related charges were recorded as $13.4 million in the line item "restructuring
expense" and $1.2 million in "cost of sales" and have reduced net income per
share by $0.77 for the second quarter of fiscal 2003.
The restructuring and related charges for CDF reflect the restructuring
initiative announced in August 2002. This initiative was substantially completed
by the end of the second quarter. In fact, the company is well ahead of schedule
in completing the most important elements of the plan as announced. The company
continues to expect that the CDF restructuring actions will significantly
improve gross margins within the division, while allowing the ability to meet
foreseeable levels of demand, all on a substantially lower cost base. The
initiative is projected to result in annual cost savings of approximately $12 to
$15 million. Approximately $8 million of these savings relate to fixed
manufacturing costs and the remaining $4 to $7 million relate to variable
manufacturing costs.
Specifically, the company completed the shut down of its operations at CDF's
Chattanooga, Tennessee facility at the end of the second quarter, while it was
originally contemplated that this process could take until the end of the third
quarter. All of the operations have been successfully transferred to CDF's
Pageland, South Carolina and Graham, North Carolina plants. In addition, the
consolidation of the finishing, yarn-making and distribution operations from the
Chattanooga facility to other CDF plants has been completed, with each of those
transitions taking place ahead of the targeted completion dates. There are no
manufacturing operations remaining at the Chattanooga plant as of the end of the
second quarter.
The remaining elements from the CDF restructuring initiative to be completed are
as follows: (1) achieve targeted levels of operating efficiency for the looms
transferred into Pageland, which is projected to take until the end of the
fourth quarter; (2) transfer certain equipment to other CDF plants by the end of
this fiscal year; and (3) complete the capital expenditure projects related to
the restructuring.
The announced addition to the Pageland plant is currently under construction and
is expected to be ready for occupancy in early 2003. The company plans to
install ten new high speed weaving machines in the building during the third
quarter. These new machines will replace lower speed equipment that is now in
place at the Pageland plant, thereby further increasing the efficiency and
output of that facility's operations.
Another important element of the CDF restructuring initiative is a major
reduction in the complexity of the dobby upholstery product line, which has led
to the elimination of approximately 1,500 low volume stock keeping units (SKUs)
representing about 70% of the finished goods SKUs (but only 10% of sales) in
that product category. This initiative is substantially complete and has been
accomplished without significant disruptions of customer relationships.
In line with previous estimates, the CDF restructuring is expected to result in
total restructuring and related charges of approximately $15 million. The
company currently estimates that this restructuring will result in additional
charges of approximately $1.3 million during the second half of the fiscal year,
most of which will relate to equipment moving costs.
INCOME STATEMENT COMMENTS
UPHOLSTERY FABRIC SEGMENT
NET SALES - Upholstery fabric sales for the second quarter of fiscal 2003
decreased 17.0% to $58.4 million (see sales by Segment/Division on page 5).
Domestic upholstery fabric sales decreased 13.9% to $51.4 million, due primarily
to overall weakness in consumer demand for upholstered furniture. International
sales decreased 34.3% to $7.0 million, due primarily to the exiting of the wet
printed flock fabric business in April 2002.
In addition to significant overall softness in demand during the quarter, the
sales decrease in upholstery fabrics is partially attributable to the company's
strategy to focus on improving the profitability of its sales mix by reducing or
eliminating products generating little or no profit. In the Culp Velvets/Prints
division, the company discontinued its unprofitable wet printed flock business
at the end of last fiscal year. This product line reported annual sales last
year of approximately $17 million with approximately $2 million in operating
losses. In the CDF division, the company discontinued about half of its finished
goods SKUs (or approximately 10,000) over the last year, most of which were
small volume items and were very costly to produce. These discontinued SKUs
include the dobby product line SKUs that were recently eliminated as part of the
Chattanooga restructuring. The company expects this process of identifying and
dropping its low profit items to continue through the balance of this fiscal
year.
The company believes additional factors that are likely impacting upholstery
fabric sales are (1) the increasing market share of leather furniture being sold
in the U.S.; and (2) the increase in imported fabrics, both in "piece goods" and
"cut and sewn kits".
GROSS PROFIT - In spite of weak furniture demand and the significant
operational disruption in connection with the Chattanooga restructuring, the
upholstery fabric segment improved its gross profit dollars and margins.
Excluding restructuring related charges of $1.2 million and $0.2 million for the
second quarter of fiscal 2003 and 2002, respectively, gross profit dollars and
margin increased in the second quarter of fiscal 2003 to $8.8 million and 15.1%,
respectively, from $8.3 million and 11.9% in the second quarter of last year.
The key factors behind these gains were: (1) a more profitable sales mix; (2)
the elimination of losses related to the wet printed flock business; (3) the
increasing productivity benefits from the CDF 2001 restructuring; and (4) some
cost reduction benefits from the Chattanooga closure.
With the earlier-than-expected cost reduction benefits as a result of the
Chattanooga closure being completed by the end of the second quarter, the
company is optimistic that gross profit dollars and margins in CDF will continue
to improve over the next few quarters. Additionally within CDF, the company is
focused on (1) creating and selling products with better margins; (2) continuing
to reduce low profit SKUs; and (3) improving manufacturing performance in CDF,
in terms of productivity and inventory obsolescence.
MATTRESS TICKING SEGMENT
NET SALES - Mattress fabric sales for the second quarter of fiscal 2003
decreased 3.3% to $25.2 million. Sales to U.S. bedding manufacturers fell 7.1%
to $21.0 million, while sales to international customers increased by 21.4% to
$4.2 million. The sales decrease is due to the overall weakness in consumer
demand for mattresses.
GROSS PROFIT--Culp Home Fashions (CHF) reported for the second quarter of
fiscal 2003 lower gross profit dollars and margins of $6.1 million and 24.2%,
respectively, both down from $7.3 million and 28.2% during the corresponding
quarter of the prior year. The key factors impacting gross profit were a high
cost European sourcing agreement and lower sales. CHF entered into an agreement
with a European supplier last fall as part of the termination of a long-term
supply relationship. The agreement provided, among other things, that the
company maintain a certain level of weekly purchases through October 31, 2002.
Therefore, for the first and second quarters of this year, the company has been
required to source products from this supplier that are significantly more
expensive than products manufactured at the company's U.S. and Canadian plants
in order to meet the agreement's minimum purchase levels. The company had
planned during the last fiscal year for the termination of this supply agreement
by initiating a plan to increase capacity in the U.S. and Canadian plants
beginning in the first quarter and ending by December 2002. This capacity
expansion project accounts for approximately $4.5 million of the company's
fiscal 2003 capital spending plan. This supply agreement was concluded on
October 31, 2002 and only a few additional containers of product will arrive
during the third quarter. There is potential for some residual effect on profits
during the third quarter from the supply agreement as the division works down
its inventory position of these products.
SG&A EXPENSES - SG&A expenses for the second quarter declined $2.1 million,
or 17.9%, from the prior year, and as a percent of net sales, SG&A expenses
declined to 11.3% from 12.0%. SG&A expenses in the second quarter included a net
reduction of $424,000 in the allowance for doubtful accounts, due to a reduction
in past due balances. This compares with bad debt expense of $1.4 million in the
year-earlier period.
INTEREST EXPENSE (INCOME)- Interest expense for the second quarter declined
to $1.7 million from $2.0 million due to significantly lower borrowings
outstanding, offset somewhat by an increase in the interest rate on the private
placement debt. Interest income increased to $121,000 from $34,000 due to
significantly higher invested cash as compared with the prior year.
OTHER EXPENSE (INCOME), NET - Other expense (income) for the second quarter
of fiscal 2003 totaled $242,000 compared with $765,000 in the prior year. The
decrease was principally due to the adoption of SFAS No. 142, which discontinued
the amortization of goodwill. Goodwill amortization during second quarter fiscal
2002 was $350,000.
INCOME TAXES - Excluding the cumulative effect of accounting change and
restructuring and related charges, the effective tax rate for the first half of
fiscal 2003 was 37% compared with 34% for the year earlier period.
EBITDA - EBITDA for the second quarter of fiscal 2003 was $8.8 million
compared with $8.3 million in the prior year. EBITDA includes earnings before
interest, income taxes, depreciation, amortization, all restructuring and
related charges, certain non-cash charges and cumulative effect of accounting
change, as defined by the company's credit agreement.
BALANCE SHEET COMMENTS
CASH AND CASH INVESTMENTS - Cash and cash investments as of October 27,
2002 increased to $35.0 million from $32.0 million at the end of fiscal 2002,
reflecting cash flow from operations of $17.8 million for the first half of
fiscal 2003, capital expenditures of $5.3 million, debt repayment of $12.0
million, stock issuance of $1.0 million and an increase in accounts payable for
capital expenditures of $1.5 million.
WORKING CAPITAL - Accounts receivable as of October 27, 2002 decreased
33.5% from the year-earlier level, due principally to the decline in
international sales with their related longer credit terms, and an increase in
the number of customers taking the cash discount for shorter payment terms. Days
sales outstanding totaled 36 days at October 27, 2002 compared with 47 a year
ago and 36 at last fiscal year end. Inventories at the close of the second
quarter decreased 10.3% from a year ago. Inventory turns for the second quarter
were 4.9 versus 5.4 for the year-earlier period. Operating working capital
(comprised of accounts receivable, inventory and accounts payable) was $68.5
million at October 27, 2002, down from $84.3 million a year ago.
PROPERTY, PLANT AND EQUIPMENT - Capital spending for the first half of
fiscal 2003 was $5.3 million. The company's original budget for capital spending
for all of fiscal 2003 was $8.5 million, compared with $4.7 million in fiscal
2002. As part of the fiscal 2003 restructuring plan in CDF, the company
increased the budget by $4.5 million to $13.0 million. Depreciation for the
second quarter of fiscal 2003 totaled $3.5 million, and is estimated at $14.0
million for the full fiscal year.
INTANGIBLE ASSETS - As of October 27, 2002 goodwill in the amount of $9.2
million is the company's only intangible asset. The company adopted SFAS No. 142
on April 29, 2002. During the first quarter of fiscal 2003 the company
recognized an impairment charge of $37.6 ($24.2 million net of taxes of $13.4
million) in accordance with SFAS No. 142.
LONG-TERM DEBT - As of the end of the second quarter, the company had
reduced funded debt by $12.0 million from last fiscal year end. Funded debt
equals long-term debt plus current maturities. Funded debt was $96.6 million at
October 27, 2002, compared with $108.5 million at fiscal 2002 year end. The
company's funded debt-to-capital ratio was 51.7% at October 27, 2002.
The company also reports it leverage statistics in terms of funded debt,
net of cash and cash investments, under the assumption it could use the cash to
repay debt at any time. Therefore, funded debt, net of cash and cash
investments, is $61.5 million at October 27, 2002 compared with $76.5 million at
fiscal 2002 year end. In addition, the company's funded debt (net of cash and
cash investments) to capital employed ratio was 40.5% and funded debt (net of
cash and cash investments) to EBITDA was 1.70. Since the end of fiscal 2000 (two
and one half years), the company has substantially reduced its funded debt (net
of cash and cash investments) to $61.5 million from $136.5 million, a total of
$75 million or 55%.
The company entered into a new loan agreement during August 2002 with its
principal bank lender that provides, among other things, for: (1) a two year
$34.7 million credit facility, which includes a $15.0 million revolving credit
line and $19.7 million for letters of credit for the company's industrial
revenue bonds (IRB's), (2) lower interest rates based upon a pricing matrix, and
(3) improved financial covenants. The company was in compliance with all
convenants contained in its loan agreements as of October 27, 2002.
FREE CASH FLOW COMMENTS
Free cash flow, defined as cash from operations, less capital expenditures,
plus or minus the change in accounts payable capital expenditure, was $14.0
million for the first six months of fiscal 2003 compared with $8.5 million for
the same period of the prior year. The key reasons for this improvement were
continued improvement in accounts receivable collections, lower inventory
levels, higher profits and the benefit from deferred payment terms for capital
expenditures.
BUSINESS OUTLOOK
For the third quarter of fiscal 2003, the company believes consolidated
sales will decline somewhat less than the second quarter decrease of 13.3% while
gross profit margins are expected to improve significantly over last year's
third quarter gross margin of 14.9%, due primarily to the substantial progress
being made in the Culp Decorative Fabrics division. Additionally, total SG&A,
interest and other expenses are expected to decline over $1.2 million, absent
any large unusual items, in the third quarter from a total of $13.3 million in
the last year's third quarter. Therefore, with gross profit margin improvement
and lower costs, the company is comfortable with the range of published analysts
earnings estimates of $0.11 to $0.15 per share for the third quarter of fiscal
2003, excluding any restructuring and related charges. The net earnings for the
third quarter of last year were $400,000, or $0.04 per share, excluding goodwill
amortization.
The company's financial results over the last few quarters and its business
outlook clearly demonstrate the company's strategic focus on: (1) improving the
profitability of its sales mix; (2) increasing margins and return on capital
employed; and (3) generating free cash flow.