1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 17, 2015 for the fiscal year ended May 3, 2015.
The company’s nine months ended January 31, 2016 and February 1, 2015, represent 39 and 40 week periods, respectively.
2. Significant Accounting Policies
As of January 31, 2016, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended May 3, 2015.
Recently Adopted Accounting Pronouncements
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, an amendment to FASB ASC Topic 740, which simplifies the presentation of deferred income taxes on an entity’s classified balance sheet. Currently, entities that are required to issue a classified balance sheet present a net current and net noncurrent deferred income tax asset or liability for each tax jurisdiction. The amendments in this ASU require entities to offset all deferred income tax assets and liabilities for each tax jurisdiction and present a net deferred income tax asset or liability as a single noncurrent amount. The recognition and measurement guidance for deferred income tax assets and liabilities are not affected by this amendment. This amended guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred income tax assets and liabilities.
We early adopted this amendment during the third quarter of fiscal 2016 on a retrospective basis. Accordingly, we reclassified our current deferred income taxes to noncurrent on our February 1, 2015 Consolidated Balance Sheet, which increased noncurrent deferred income taxes $4.5 million and decreased noncurrent deferred tax liabilities $2.5 million. We reclassified our current deferred income taxes to noncurrent on our May 3, 2015 Consolidated Balance Sheet, which increased noncurrent deferred income taxes $4.7 million and decreased noncurrent deferred tax liabilities $68,000.
Recently Issued Accounting Pronouncements
In June 2014, the Financial Accounting Standards Board (“FASB”) amended its authoritative guidance on accounting for certain share-based payment awards. The amended guidance requires that share-based compensation awards with terms of a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The guidance will be effective in our fiscal 2017 first quarter. The guidance will permit an entity to apply the amendments in the update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the consolidated financial statements and to all new or modified awards thereafter. Currently, we do not have any share-based payment awards with terms of a performance target that affects vesting and could be achieved after the requisite service period. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are intended to enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. In April 2015, the FASB issued ASU 2015-24, Revenue from Contracts with Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are therefore required to apply the new revenue guidance in our fiscal 2019 interim and annual financial statements. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changed the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred income taxes on an entity’s classified balance sheet. Currently, entities that are required to issue a classified balance sheet present a net current and net noncurrent deferred tax asset or liability for each tax jurisdiction. The amendments in this ASU require entities to offset all deferred tax assets and liabilities for each tax jurisdiction and present a net deferred tax asset or liability as a single noncurrent amount. This amended guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2016. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
3. Stock-Based Compensation
Equity Incentive Plan Description
On September 16, 2015, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is intended to update and replace our 2007 Equity Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity based awards substantially similar to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.
Incentive Stock Option Awards
We did not grant any incentive stock option awards through the second quarter of fiscal 2016.
At November 1, 2015, options to purchase 99,600 shares of common stock were outstanding and exercisable, had a weighted average exercise price of $7.78 per share, and a weighted average contractual term of 2.0 years. At November 1, 2015, the aggregate intrinsic value for options outstanding and exercisable was $2.2 million.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The aggregate intrinsic value for options exercised for the six months ending November 1, 2015 and November 2, 2014, was $1.0 million and $80,000, respectively.
At November 1, 2015, there were no unvested incentive stock option awards. Therefore, there was no unrecognized compensation cost related to incentive stock option awards at November 1, 2015.
No compensation expense was recorded on incentive stock options for the six months ended November 1, 2015 and November 2, 2014, respectively.
Common Stock Awards
On October 1, 2015, we granted a total of 3,000 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $31.77 per share, which represents the closing price of our common stock at the date of grant.
On October 1, 2014, we granted a total of 3,000 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $17.95 per share, which represents the closing price of our common stock at the date of grant.
We recorded $95,000 and $54,000 of compensation expense within selling, general, and administrative expense for these common stock awards for the six months ending November 1, 2015, and November 2, 2014, respectively.
Time Vested Restricted Stock Awards
We did not grant any time vested restricted stock awards through the second quarter of fiscal 2016.
At November 1, 2015, there were no outstanding and unvested shares of time vested restricted stock. Therefore, there was no unrecognized compensation cost related to time vested restricted stock awards at November 1, 2015.
No compensation expense was recorded on time vested restricted stock awards for the six months ended November 1, 2015. We recorded $4,000 within selling, general, and administrative expense for time vested restricted stock awards for the six months ended November 2, 2014.
During the six month period ending November 2, 2014, 61,667 shares of time vested restricted stock vested and had a weighted average fair value of $257,000 or $4.17 per share.
Performance Based Restricted Stock Units
Fiscal 2016 Grant
On July 15, 2015, certain key members of management were granted performance based restricted stock units which could earn up to 107,554 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $32.23 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On July 15, 2015, a non-employee was granted performance based restricted stock units which could earn up to 10,364 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At November 1, 2015, this grant was unvested and was measured at $30.01 per share, which represents the closing price of our common stock at the end of the reporting period. The vesting of this award is over the requisite service period of three years.
Fiscal 2015 Grant
On June 24, 2014, certain key members of management were granted performance based restricted stock units which could earn up to 102,845 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.70 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On March 3, 2015, a non-employee was granted performance based restricted stock units which could earn up to 28,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At November 1, 2015, this grant was unvested and was measured at $30.01 per share, which represents the closing price of the company’s common stock at the end of the reporting period. The vesting of these awards is over the requisite service periods of 16 months and 28 months for performance based restricted stock units which could earn up to 12,000 and 16,000 shares of common stock, respectively.
Fiscal 2014 Grant
On June 25, 2013, certain key members of management were granted performance based restricted stock units which could earn up to 72,380 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.12 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
Fiscal 2013 Grant
On July 11, 2012, certain key members of management were granted performance based restricted stock units which could earn up to 120,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $10.21 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
During the six month period ending November 1, 2015, 115,855 shares of common stock associated with our fiscal 2013 grant vested and had a weighted average fair value of $1.2 million or $10.21 per share. As of November 1, 2015, our fiscal 2013 grant was fully vested.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Overall
We recorded compensation expense of $1.2 million and $233,000 within selling, general, and administrative expense for performance based restricted stock units for the six month periods ending November 1, 2015 and November 2, 2014, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability if certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, no compensation cost will be recognized and any recognized compensation cost would be reversed.
As of November 1, 2015, the remaining unrecognized compensation cost related to the performance based restricted stock units was $4.9 million, which is expected to be recognized over a weighted average vesting period of 2.3 years.
4. Accounts Receivable
A summary of accounts receivable follows:
| | | | | | | | | | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | | | May 3, 2015 | |
| Customers | | $ | 25,045 | | | $ | 26,082 | | | $ | 30,338 | |
| Allowance for doubtful accounts | | | (826 | ) | | | (442 | ) | | | (851 | ) |
| Reserve for returns and allowances and discounts | | | (905 | ) | | | (595 | ) | | | (738 | ) |
| | | $ | 23,314 | | | $ | 25,045 | | | $ | 28,749 | |
A summary of the activity in the allowance for doubtful accounts follows:| | | | | | | |
| | | Six months ended | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | |
| Beginning balance | | $ | (851 | ) | | $ | (573 | ) |
| Provision for bad debts | | | (81 | ) | | | 57 | |
| Net write-offs, net of recoveries | | | 106 | | | | 74 | |
| Ending balance | | $ | (826 | ) | | $ | (442 | ) |
A summary of the activity in the allowance for returns and allowances and discounts accounts follows:| | | | | | | |
| | | Six months ended | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | |
| Beginning balance | | $ | (738 | ) | | $ | (479 | ) |
| Provision for returns, allowances | | | | | | | | |
| and discounts | | | (1,561 | ) | | | (1,334 | ) |
| Credits issued | | | 1,394 | | | | 1,218 | |
| Ending balance | | $ | (905 | ) | | $ | (595 | ) |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Inventories
Inventories are carried at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method.
A summary of inventories follows:
| | | | | | | | | | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | | | May 3, 2015 | |
| Raw materials | | $ | 6,272 | | | $ | 5,657 | | | $ | 5,374 | |
| Work-in-process | | | 2,779 | | | | 2,190 | | | | 2,766 | |
| Finished goods | | | 37,428 | | | | 30,381 | | | | 34,344 | |
| | | $ | 46,479 | | | $ | 38,228 | | | $ | 42,484 | |
6. Other Assets
A summary of other assets follows:
| | | | | | | | | | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | | | May 3, 2015 | |
| Cash surrender value – life insurance | | $ | 339 | | | $ | 320 | | | $ | 339 | |
| Non-compete agreement, net | | | 941 | | | | 1,017 | | | | 979 | |
| Customer relationships, net | | | 740 | | | | 791 | | | | 766 | |
| Other | | | 474 | | | | 411 | | | | 461 | |
| | | $ | 2,494 | | | $ | 2,539 | | | $ | 2,545 | |
Non-Compete Agreement
We recorded our non-compete agreement at its fair value based on a discounted cash flow valuation model. Our non-compete agreement is amortized on a straight-line basis over the fifteen year life of the respective agreement.
The gross carrying amount of our non-compete agreement was $2.0 million at November 1, 2015, November 2, 2014 and May 3, 2015, respectively. At November 1, 2015 and May 3, 2015, accumulated amortization for our non-compete agreement was $1.1 million. At November 2, 2014 accumulated amortization for our non-compete agreement was $1.0 million.
Amortization expense for our non-compete agreement was $38,000 for the six month periods ended November 1, 2015 and November 2, 2014. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2016 - $37,000; FY 2017 - $75,000; FY 2018- $75,000; FY 2019 - $75,000; FY 2020 - $75,000 and Thereafter - $604,000.
The weighted average amortization period for our non-compete agreement is 12.5 years as of November 1, 2015.
Customer Relationships
We recorded our customer relationships at their fair value based on a multi-period excess earnings valuation model. Our customer relationships are amortized on a straight-line basis over its seventeen year useful life.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The gross carrying amount of our customer relationships was $868,000 at November 1, 2015, November 2, 2014, and May 3, 2015, respectively. Accumulated amortization for our customer relationships was $128,000, $77,000, and $102,000 at November 1, 2015, November 2, 2014, and May 3, 2015, respectively.
Amortization expense for our customer relationships was $26,000 for the six months ending November 1, 2015 and November 2, 2014. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2016 - $25,000; FY 2017 - $51,000; FY 2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; and Thereafter - $511,000.
The weighted average amortization period for our customer relationships is 14.5 years as of November 1, 2015.
Cash Surrender Value – Life Insurance
At November 1, 2015, November 2, 2014 and May 3, 2015 we had one life insurance contract with a death benefit of $1.4 million.
Our cash surrender value – life insurance balances totaling $339,000, $320,000 and $339,000 at November 1, 2015, November 2, 2014, and May 3, 2015, respectively, are collectible upon death of the respective insured.
On May 16, 2014, we entered into an agreement with a former employee and his irrevocable trust (the “Trust”) dated September 7, 1995. As a result of this agreement, a previous split dollar life insurance agreement in which we purchased a policy on the life of this former employee and his spouse, in which we retained ownership of the policy, paid premiums to support the policy, had the right to receive cash surrender value of the policy upon the second to die of the former employee and his spouse, with the Trust receiving the remainder of the policy’s death benefit ($2.5 million), was terminated. In connection with the termination of the previous split dollar life insurance agreement, we transferred the life insurance policy to the Trust and received cash proceeds in the amount of the cash surrender value policy totaling $320,000 during the second quarter of fiscal 2015.
7. Accrued Expenses
A summary of accrued expenses follows:
| | | | | | | | | | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | | | May 3, 2015 | |
| Compensation, commissions and related benefits | | $ | 6,657 | | | $ | 4,969 | | | $ | 9,081 | |
| Advertising rebates | | | 2,536 | | | | 1,853 | | | | 1,002 | |
| Interest | | | - | | | | 38 | | | | 37 | |
| Other accrued expenses | | | 702 | | | | 863 | | | | 1,009 | |
| | | $ | 9,895 | | | $ | 7,723 | | | $ | 11,129 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Long-Term Debt and Lines of Credit
A summary of long-term debt follows:
| | | | | | | | | | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | | | May 3, 2015 | |
| Unsecured senior term notes | | $ | - | | | $ | 2,200 | | | $ | 2,200 | |
| Current maturities of long-term debt | | | - | | | | (2,200 | ) | | | (2,200 | ) |
| Long-term debt, less current maturities | | | | | | | | | | | | |
| of long-term debt | | $ | - | | | $ | - | | | $ | - | |
Unsecured Senior Term Notes
We entered into a note agreement dated August 11, 2008 that provided for the issuance of $11.0 million of unsecured senior term notes with a fixed interest rate of 8.01% and a term of seven years. Principal payments of $2.2 million per year were due on the notes beginning August 11, 2011. Any principal pre-payments would have been assessed a penalty as defined in the agreement. The agreement contained customary financial and other covenants as defined in the agreement.
On August 11, 2015, we paid our last annual payment of $2.2 million and this agreement has been paid in full.
Revolving Credit Agreement – United States
As of May 3, 2015, we had an unsecured credit agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) that provided for an unsecured revolving loan commitment of $10.0 million to be used to finance working capital and general corporate purposes. Any borrowings that are outstanding under the credit agreement with Culp Europe noted below will decrease the $10.0 million available. Interest is charged at a rate (applicable interest rate of 1.69%, 1.76%, and 1.78% at November 1, 2015, November 2, 2014, and May 3, 2015, respectively) equal to the one-month LIBOR rate plus a spread based on our ratio of debt to EBITDA as defined in the agreement. The Credit Agreement contained customary financial and other covenants as defined in the agreement and was set to expire on August 31, 2015.
Effective July 10, 2015, we amended the Credit Agreement to extend the expiration date to August 31, 2017, and maintain an annual capital expenditure limit of $12 million.
At November 1, 2015 and May 3, 2015 there was a $250,000 outstanding letter of credit (all of which related to workers compensation). At November 2, 2014, there was a $195,000 outstanding letter of credit (all of which related to workers compensation). At November 1, 2015, November 2, 2014, and May 3, 2015, there were no borrowings outstanding under the Credit Agreement.
Revolving Credit Agreement – China
We have an unsecured credit agreement associated with our operations in China that provides for a line of credit of up to 40 million RMB (approximately $6.3 million USD at November 1, 2015), expiring on February 9, 2016. This agreement has an interest rate determined by the Chinese government. There were no borrowings outstanding under the agreement as of November 1, 2015, November 2, 2014, and May 3, 2015.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revolving Credit Agreement – Europe
In connection with the Wells Fargo credit agreement noted above, any outstanding borrowings associated with Culp Europe would decrease the $10 million available under the credit agreement and incur interest at the EURO LIBOR plus 2%.
At November 1, 2015, no borrowings were outstanding under this agreement, as the outstanding balance was paid in full during the second quarter of fiscal 2015.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At November 1, 2015, the company was in compliance with these financial covenants.
The fair value of the company’s long-term debt is estimated by discounting the future cash flows at rates currently offered to the company for similar debt instruments of comparable maturities. At November 2, 2014, the carrying value of the company’s long-term debt was $2.2 million and the fair value was $2.3 million. At May 3, 2015, the carrying value of the company’s long-term debt was $2.2 million and the fair value was $2.3 million.
9. 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.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring basis:
| | | Fair value measurements at November 1, 2015 using: | |
| | | | |
| | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | |
| | | | | | | | | | | | | |
| (amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Premier Money Market Fund | | $ | 2,703 | | | | N/A | | | | N/A | | | $ | 2,703 | |
| Intermediate Term Bond Fund | | | 2,144 | | | | N/A | | | | N/A | | | | 2,144 | |
| Low Duration Bond Fund | | | 2,098 | | | | N/A | | | | N/A | | | | 2,098 | |
| Limited Term Bond Fund | | | 1,094 | | | | N/A | | | | N/A | | | | 1,094 | |
| Strategic Income Fund | | | 984 | | | | N/A | | | | N/A | | | | 984 | |
| Large Blend Fund | | | 279 | | | | N/A | | | | N/A | | | | 279 | |
| Growth Allocation Fund | | | 125 | | | | N/A | | | | N/A | | | | 125 | |
| Mid Cap Value Fund | | | 94 | | | | N/A | | | | N/A | | | | 94 | |
| Other | | | 78 | | | | N/A | | | | N/A | | | | 78 | |
| | | Fair value measurements at November 2, 2014 using: | |
| | | | |
| | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | |
| | | | | | | | | | | | | |
| (amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Limited Term Bond Fund | | $ | 2,576 | | | | N/A | | | | N/A | | | $ | 2,576 | |
| Low Duration Bond Fund | | | 2,081 | | | | N/A | | | | N/A | | | | 2,081 | |
| Premier Money Market Fund | | | 1,818 | | | | N/A | | | | N/A | | | | 1,818 | |
| Intermediate Term Bond Fund | | | 1,661 | | | | N/A | | | | N/A | | | | 1,661 | |
| Other | | | 93 | | | | N/A | | | | N/A | | | | 93 | |
| | | Fair value measurements at May 3, 2015 using: | |
| | | | |
| | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | |
| | | | | | | | | | | | | |
| (amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Limited Term Bond Fund | | $ | 3,107 | | | | N/A | | | | N/A | | | $ | 3,107 | |
| Premier Money Market Fund | | | 2,285 | | | | N/A | | | | N/A | | | | 2,285 | |
| Intermediate Term Bond Fund | | | 2,181 | | | | N/A | | | | N/A | | | | 2,181 | |
| Low Duration Bond Fund | | | 2,096 | | | | N/A | | | | N/A | | | | 2,096 | |
| Strategic Income Fund | | | 1,008 | | | | N/A | | | | N/A | | | | 1,008 | |
| Growth Allocation Fund | | | 85 | | | | N/A | | | | N/A | | | | 85 | |
| Other | | | 45 | | | | N/A | | | | N/A | | | | 45 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
Our short-term investments include short-term bond funds and deposit accounts that have a maturity of more than three months, are classified as available-for-sale, and their unrealized gains or losses are included in other comprehensive income (loss). Our short-term bond funds were recorded at their fair value of $6.3 million, $6.3 million and $10.0 million at November 1, 2015, November 2, 2014, and May 3, 2015, respectively. Our short-term bond funds had an accumulated unrealized loss totaling $171,000, $88,000, and $95,000 at November 1, 2015, November 2, 2014, and May 3, 2015, respectively. At November 1, 2015, November 2, 2014, and May 3, 2015, the fair value of our short-term bond funds approximated its cost basis.
Effective, January 1, 2014, we established a Rabbi Trust to set aside funds for participants of our deferred compensation plan (the “Plan”) and enable the participants to credit their contributions to various investment options of the Plan. The investments associated with the Rabbi Trust consist of a money market fund and various mutual funds that are classified as available for sale. Our long-term investments are recorded at its fair value of $3.3 million, $1.9 million, and $2.4 million at November 1, 2015, November 2, 2014, and May 3, 2015, respectively. Our long-term investments had an accumulated unrealized gain of $14,000 at November 1, 2015. At November 2, 2014 and May 3, 2015, our accumulated gains or losses regarding our long-term investments were immaterial. The fair value of our long-term investments approximates its cost basis.
The carrying amount of cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximates fair value because of the short maturity of these financial instruments.
10. Cash Flow Information
Interest and income taxes paid are as follows:
| | | | | | | |
| | | Six months ended | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | |
| Interest | | $ | 86 | | | $ | 180 | |
| Net income tax payments, net | | | 2,088 | | | | 1,943 | |
Interest costs charged to operations and incurred on our long-term debt and lines of credit were $49,000 and $148,000 for the six months ended November 1, 2015 and November 2, 2014, respectively.
Interest costs of $49,000 and $81,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’ useful lives for the six months ended November 1, 2015 and November 2, 2014, respectively.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. 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 follows:
| | | | | | | |
| | | Three months ended | |
| (amounts in thousands) | | November 1, 2015 | | | November 2, 2014 | |
| Weighted average common shares outstanding, basic | | | 12,343 | | | | 12,218 | |
| Dilutive effect of stock-based compensation | | | 141 | | | | 183 | |
| Weighted average common shares outstanding, diluted | | | 12,484 | | | | 12,401 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended November 1, 2015 and November 2, 2014, as the exercise price of the options was less than the average market price of the common shares.
| | | | | | | |
| | | Six months ended | |
| (amounts in thousands) | | November 1, 2015 | | | November 2, 2014 | |
| Weighted average common shares outstanding, basic | | | 12,310 | | | | 12,215 | |
| Dilutive effect of stock-based compensation | | | 171 | | | | 188 | |
| Weighted average common shares outstanding, diluted | | | 12,481 | | | | 12,403 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the six months ended November 1, 2015 and November 2, 2014, as the exercise price of the options was less than the average market price of the common shares.
12. Segment Information
Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment sources, manufactures, and sells fabrics primarily to residential furniture manufacturers.
We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses and other non-recurring items. Cost of sales in both segments include costs to manufacture or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, and property, plant and equipment. The mattress fabrics segment also includes in segment assets, goodwill, a non-compete agreement, and customer relationships associated with an acquisition.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial information for the company’s operating segments follows:
| | | | | | | |
| | | Three months ended | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | |
| Net sales: | | | | | | |
| Mattress Fabrics | | $ | 45,436 | | | $ | 43,038 | |
| Upholstery Fabrics | | | 31,520 | | | | 30,953 | |
| | | $ | 76,956 | | | $ | 73,991 | |
| | | | | | | | | |
| Gross profit: | | | | | | | | |
| Mattress Fabrics | | $ | 9,456 | | | $ | 7,324 | |
| Upholstery Fabrics | | | 6,277 | | | | 4,954 | |
| | | | | | | | | |
| | | $ | 15,733 | | | $ | 12,278 | |
| | | | | | | | | |
| | | | | | | | | |
| Selling, general, and administrative expenses: | | | | | | | | |
| Mattress Fabrics | | $ | 2,989 | | | $ | 2,592 | |
| Upholstery Fabrics | | | 3,813 | | | | 3,285 | |
| Total segment selling, general, and | | | | | | | | |
| administrative expenses | | | 6,802 | | | | 5,877 | |
| Unallocated corporate expenses | | | 2,631 | | | | 1,502 | |
| | | $ | 9,433 | | | $ | 7,379 | |
| | | | | | | | | |
| | | | | | | | | |
| Income from operations: | | | | | | | | |
| Mattress Fabrics | | $ | 6,467 | | | $ | 4,733 | |
| Upholstery Fabrics | | | 2,464 | | | | 1,668 | |
| Total segment income from operations | | | 8,931 | | | | 6,401 | |
| Unallocated corporate expenses | | | (2,631 | ) | | | (1,502 | ) |
| Total income from operations | | | 6,300 | | | | 4,899 | |
| Interest income | | | 69 | | | | 153 | |
| Other expense | | | (225 | ) | | | (162 | ) |
| Income before income taxes | | $ | 6,144 | | | $ | 4,890 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial information for the company’s operating segments follows:
| | | | | | | |
| | | Six months ended | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | |
| Net sales: | | | | | | |
| Mattress Fabrics | | $ | 93,245 | | | $ | 85,860 | |
| Upholstery Fabrics | | | 63,896 | | | | 64,191 | |
| | | $ | 157,141 | | | $ | 150,051 | |
| | | | | | | | | |
| Gross profit: | | | | | | | | |
| Mattress Fabrics | | $ | 19,381 | | | $ | 14,527 | |
| Upholstery Fabrics | | | 12,554 | | | | 10,466 | |
| | | | | | | | | |
| | | $ | 31,935 | | | $ | 24,993 | |
| | | | | | | | | |
| Selling, general, and administrative expenses: | | | | | | | | |
| Mattress Fabrics | | $ | 5,912 | | | $ | 5,166 | |
| Upholstery Fabrics | | | 7,409 | | | | 6,737 | |
| Total segment selling, general, and | | | | | | | | |
| administrative expenses | | | 13,321 | | | | 11,903 | |
| Unallocated corporate expenses | | | 4,854 | | | | 2,895 | |
| | | $ | 18,175 | | | $ | 14,798 | |
| | | | | | | | | |
| Income from operations: | | | | | | | | |
| Mattress Fabrics | | $ | 13,468 | | | $ | 9,361 | |
| Upholstery Fabrics | | | 5,146 | | | | 3,729 | |
| Total segment income from operations | | | 18,614 | | | | 13,090 | |
| Unallocated corporate expenses | | | (4,854 | ) | | | (2,895 | ) |
| Total income from operations | | | 13,760 | | | | 10,195 | |
| Interest expense | | | - | | | | (67 | ) |
| Interest income | | | 112 | | | | 294 | |
| Other expense | | | (320 | ) | | | (73 | ) |
| Income before income taxes | | $ | 13,552 | | | $ | 10,349 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Balance sheet information for the company’s operating segments follow:
| | | | | | | | | | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | | | May 3, 2015 | |
| Segment assets: | | | | | | | | | |
| Mattress Fabrics | | | | | | | | | |
| Current assets (1) | | $ | 40,937 | | | $ | 35,406 | | | $ | 41,328 | |
| Non-compete agreement | | | 941 | | | | 1,017 | | | | 979 | |
| Customer relationships | | | 740 | | | | 791 | | | | 766 | |
| Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | |
| Property, plant and equipment (2) | | | 36,050 | | | | 30,938 | | | | 33,773 | |
| Total mattress fabrics assets | | | 90,130 | | | | 79,614 | | | | 88,308 | |
| Upholstery Fabrics | | | | | | | | | | | | |
| Current assets (1) | | | 28,856 | | | | 27,867 | | | | 29,905 | |
| Property, plant and equipment (3) | | | 1,474 | | | | 1,578 | | | | 1,467 | |
| Total upholstery fabrics assets | | | 30,330 | | | | 29,445 | | | | 31,372 | |
| Total segment assets | | | 120,460 | | | | 109,059 | | | | 119,680 | |
| Non-segment assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | | 31,176 | | | | 28,953 | | | | 29,725 | |
| Short-term investments | | | 6,320 | | | | 6,318 | | | | 10,004 | |
| Deferred income taxes | | | 8,136 | | | | 6,699 | | | | 5,237 | |
| Income taxes receivable | | | 75 | | | | - | | | | 229 | |
| Other current assets | | | 2,614 | | | | 2,303 | | | | 2,440 | |
| Property, plant and equipment (4) | | | 795 | | | | 688 | | | | 838 | |
| Long-term investments | | | 3,279 | | | | 1,911 | | | | 2,415 | |
| Other assets | | | 813 | | | | 731 | | | | 800 | |
| Total assets | | $ | 173,668 | | | $ | 156,662 | | | $ | 171,368 | |
| | | | | | | |
| | | Six months ended | |
| (dollars in thousands) | | November 1, 2015 | | | November 2, 2014 | |
| Capital expenditures (5): | | | | | | |
| Mattress Fabrics | | $ | 5,138 | | | $ | 4,692 | |
| Upholstery Fabrics | | | 254 | | | | 258 | |
| Unallocated Corporate | | | 143 | | | | 38 | |
| Total capital expenditures | | $ | 5,535 | | | $ | 4,988 | |
| Depreciation expense: | | | | | | | | |
| Mattress Fabrics | | $ | 2,783 | | | $ | 2,448 | |
| Upholstery Fabrics | | | 401 | | | | 364 | |
| Total depreciation expense | | $ | 3,184 | | | $ | 2,812 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The guidance will be effective in our fiscal 2017 first quarter. The guidance will permit an entity to apply the amendments in the update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the consolidated financial statements and to all new or modified awards thereafter. Currently, we do not have any share-based payment awards with terms of a performance target that affects vesting and could be achieved after the requisite service period. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are intended to enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. In April 2015, the FASB issued ASU 2015-24, Revenue from Contracts with Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are therefore required to apply the new revenue guidance in our fiscal 2019 interim and annual financial statements. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changed the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which increases transparency and comparability among companies accounting for lease transactions. The most significant change of this update will require the recognition of lease assets and liabilities on the balance sheet for operating lease arrangements with lease terms greater than twelve months for lessees. This update will require a modified retrospective application which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 18, 2018. We are therefore required to apply this guidance in our fiscal 2020 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
3. Stock-Based Compensation
Equity Incentive Plan Description
On September 16, 2015, our shareholders approved an equity incentive plan entitled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan is intended to update and replace our 2007 Equity Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity based awards substantially similar to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Incentive Stock Option Awards
We did not grant any incentive stock option awards through the third quarter of fiscal 2016.
At January 31, 2016, options to purchase 98,600 shares of common stock were outstanding and exercisable, had a weighted average exercise price of $7.73 per share, and a weighted average contractual term of 1.7 years. At January 31, 2016, the aggregate intrinsic value for options outstanding and exercisable was $1.7 million.
The aggregate intrinsic value for options exercised for the nine months ending January 31, 2016 and February 1, 2015, was $1.0 million and $87,000, respectively.
At January 31, 2016, there were no unvested incentive stock option awards. Therefore, there was no unrecognized compensation cost related to incentive stock option awards at January 31, 2016.
No compensation expense was recorded on incentive stock options for the nine months ended January 31, 2016 and February 1, 2015, respectively.
Common Stock Awards
On October 1, 2015, we granted a total of 3,000 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $31.77 per share, which represents the closing price of our common stock at the date of grant.
On October 1, 2014, we granted a total of 3,000 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $17.95 per share, which represents the closing price of our common stock at the date of grant.
We recorded $95,000 and $54,000 of compensation expense within selling, general, and administrative expense for these common stock awards for the nine months ending January 31, 2016, and February 1, 2015, respectively.
Time Vested Restricted Stock Awards
We did not grant any time vested restricted stock awards through the third quarter of fiscal 2016.
At January 31, 2016, there were no outstanding and unvested shares of time vested restricted stock. Therefore, there was no unrecognized compensation cost related to time vested restricted stock awards at January 31, 2016.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
No compensation expense was recorded on time vested restricted stock awards for the nine months ended January 31, 2016. We recorded $4,000 within selling, general, and administrative expense for time vested restricted stock awards for the nine months ended February 1, 2015.
During the nine month period ending February 1, 2015, 61,667 shares of time vested restricted stock vested and had a weighted average fair value of $257,000 or $4.17 per share.
Performance Based Restricted Stock Units
Fiscal 2016 Grant
On July 15, 2015, certain key members of management were granted performance based restricted stock units which could earn up to 107,554 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $32.23 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On July 15, 2015, a non-employee was granted performance based restricted stock units which could earn up to 10,364 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At January 31, 2016, this grant was unvested and was measured at $25.32 per share, which represents the closing price of our common stock at the end of the reporting period. The vesting of this award is over the requisite service period of three years.
Fiscal 2015 Grant
On June 24, 2014, certain key members of management were granted performance based restricted stock units which could earn up to 102,845 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.70 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
On March 3, 2015, a non-employee was granted performance based restricted stock units which could earn up to 28,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. The fair value of this award is measured at the earlier date of when the performance criteria are met or the end of the reporting period. At January 31, 2016, this grant was unvested and was measured at $25.32 per share, which represents the closing price of the company’s common stock at the end of the reporting period. The vesting of these awards is over the requisite service periods of 16 months and 28 months for performance based restricted stock units which could earn up to 12,000 and 16,000 shares of common stock, respectively.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fiscal 2014 Grant
On June 25, 2013, certain key members of management were granted performance based restricted stock units which could earn up to 72,380 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $17.12 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
Fiscal 2013 Grant
On July 11, 2012, certain key members of management were granted performance based restricted stock units which could earn up to 120,000 shares of common stock if certain performance targets are met as defined in the related restricted stock unit agreements. These awards were valued based on the fair market value on the date of grant. The fair value of these awards was $10.21 per share, which represents the closing price of our common stock on the date of grant. The vesting of these awards is over the requisite service period of three years.
During the nine month period ending January 31, 2016, 115,855 shares of common stock associated with our fiscal 2013 grant vested and had a weighted average fair value of $1.2 million or $10.21 per share. As of January 31, 2016, our fiscal 2013 grant was fully vested.
Overall
We recorded compensation expense of $1.9 million and $424,000 within selling, general, and administrative expense for performance based restricted stock units for the nine month periods ending January 31, 2016 and February 1, 2015, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability if certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, no compensation cost will be recognized and any recognized compensation cost would be reversed.
As of January 31, 2016, the remaining unrecognized compensation cost related to the performance based restricted stock units was $4.2 million, which is expected to be recognized over a weighted average vesting period of 2.1 years.
4. Accounts Receivable
A summary of accounts receivable follows:
| | | | | | | | | | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | May 3, 2015 | |
| Customers | | $ | 28,684 | | | $ | 31,952 | | | $ | 30,338 | |
| Allowance for doubtful accounts | | | (814 | ) | | | (449 | ) | | | (851 | ) |
| Reserve for returns and allowances and discounts | | | (1,086 | ) | | | (729 | ) | | | (738 | ) |
| | | $ | 26,784 | | | $ | 30,774 | | | $ | 28,749 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | | | | | |
| | | Nine months ended | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | |
| Beginning balance | | $ | (851 | ) | | $ | (573 | ) |
| Provision for bad debts | | | (93 | ) | | | (20 | ) |
| Net write-offs, net of recoveries | | | 130 | | | | 144 | |
| Ending balance | | $ | (814 | ) | | $ | (449 | ) |
| | | | |
| | | Nine months ended | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | |
| Beginning balance | | $ | (738 | ) | | $ | (479 | ) |
| Provision for returns, allowances | | | | | | | | |
| and discounts | | | (2,389 | ) | | | (2,065 | ) |
| Credits issued | | | 2,041 | | | | 1,815 | |
| Ending balance | | $ | (1,086 | ) | | $ | (729 | ) |
Inventories are carried at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method.
A summary of inventories follows:
| | | | | | | | | | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | May 3, 2015 | |
| Raw materials | | $ | 6,831 | | | $ | 5,787 | | | $ | 5,374 | |
| Work-in-process | | | 3,365 | | | | 2,227 | | | | 2,766 | |
| Finished goods | | | 38,289 | | | | 29,999 | | | | 34,344 | |
| | | $ | 48,485 | | | $ | 38,013 | | | $ | 42,484 | |
A summary of other assets follows:
| | | | | | | | | | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | May 3, 2015 | |
| Cash surrender value – life insurance | | $ | 357 | | | $ | 338 | | | $ | 339 | |
| Non-compete agreement, net | | | 922 | | | | 998 | | | | 979 | |
| Customer relationships, net | | | 728 | | | | 779 | | | | 766 | |
| Other | | | 428 | | | | 390 | | | | 461 | |
| | | $ | 2,435 | | | $ | 2,505 | | | $ | 2,545 | |
We recorded our non-compete agreement at its fair value based on a discounted cash flow valuation model. Our non-compete agreement is amortized on a straight-line basis over the fifteen year life of the respective agreement.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The gross carrying amount of our non-compete agreement was $2.0 million at January 31, 2016, February 1, 2015 and May 3, 2015, respectively. At January 31, 2016 and May 3, 2015, accumulated amortization for our non-compete agreement was $1.1 million. At February 1, 2015 accumulated amortization for our non-compete agreement was $1.0 million.
Amortization expense for our non-compete agreement was $56,000 for the nine month periods ended January 31, 2016 and February 1, 2015. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2016 - $18,000; FY 2017 - $75,000; FY 2018- $75,000; FY 2019 - $75,000; FY 2020 - $75,000 and Thereafter - $604,000.
The weighted average amortization period for our non-compete agreement is 12.3 years as of January 31, 2016.
Customer Relationships
We recorded our customer relationships at their fair value based on a multi-period excess earnings valuation model. Our customer relationships are amortized on a straight-line basis over its seventeen year useful life.
The gross carrying amount of our customer relationships was $868,000 at January 31, 2016, February 1, 2015, and May 3, 2015, respectively. Accumulated amortization for our customer relationships was $140,000, $89,000, and $102,000 at January 31, 2016, February 1, 2015, and May 3, 2015, respectively.
Amortization expense for our customer relationships was $38,000 for the nine months ending January 31, 2016 and February 1, 2015. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2016 - $13,000; FY 2017 - $51,000; FY 2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; and Thereafter - $511,000.
The weighted average amortization period for our customer relationships is 14.3 years as of January 31, 2016.
Cash Surrender Value – Life Insurance
At January 31, 2016, February 1, 2015, and May 3, 2015 we had one life insurance contract with a death benefit of $1.4 million.
Our cash surrender value – life insurance balances totaling $357,000, $338,000 and $339,000 at January 31, 2016, February 1, 2015, and May 3, 2015, respectively, are collectible upon death of the respective insured.
On May 16, 2014, we entered into an agreement with a former employee and his irrevocable trust (the “Trust”) dated September 7, 1995. As a result of this agreement, a previous split dollar life insurance agreement in which we purchased a policy on the life of this former employee and his spouse, in which we retained ownership of the policy, paid premiums to support the policy, had the right to receive cash surrender value of the policy upon the second to die of the former employee and his spouse, with the Trust receiving the remainder of the policy’s death benefit ($2.5 million), was terminated. In connection with the termination of the previous split dollar life insurance agreement, we transferred the life insurance policy to the Trust and received cash proceeds in the amount of the cash surrender value policy totaling $320,000 during the second quarter of fiscal 2015.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Accrued Expenses
A summary of accrued expenses follows:
| | | | | | | | | | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | May 3, 2015 | |
| Compensation, commissions and related benefits | | $ | 8,678 | | | $ | 6,399 | | | $ | 9,081 | |
| Advertising rebates | | | 2,876 | | | | 2,522 | | | | 1,002 | |
| Interest | | | - | | | | 81 | | | | 37 | |
| Other accrued expenses | | | 1,136 | | | | 952 | | | | 1,009 | |
| | | $ | 12,690 | | | $ | 9,954 | | | $ | 11,129 | |
A summary of long-term debt follows:
| | | | | | | | | | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | May 3, 2015 | |
| Unsecured senior term notes | | $ | - | | | $ | 2,200 | | | $ | 2,200 | |
| Current maturities of long-term debt | | | - | | | | (2,200 | ) | | | (2,200 | ) |
| Long-term debt, less current maturities | | | | | | | | | | | | |
| | $ | - | | | $ | - | | | $ | - | |
Unsecured Senior Term Notes
We entered into a note agreement dated August 11, 2008 that provided for the issuance of $11.0 million of unsecured senior term notes with a fixed interest rate of 8.01% and a term of seven years. Principal payments of $2.2 million per year were due on the notes beginning August 11, 2011. Any principal pre-payments would have been assessed a penalty as defined in the agreement. The agreement contained customary financial and other covenants as defined in the agreement.
On August 11, 2015, we paid our last annual payment of $2.2 million and this agreement has been paid in full.
Revolving Credit Agreement – United States
As of May 3, 2015, we had an unsecured credit agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) that provided for an unsecured revolving loan commitment of $10 million to be used to finance working capital and general corporate purposes. Interest is charged at a rate (applicable interest rate of 1.93%, 1.77%, and 1.78% at January 31, 2016, February 1, 2015, and May 3, 2015, respectively) equal to the one-month LIBOR rate plus a spread based on our ratio of debt to EBITDA as defined in the agreement. The Credit Agreement contained customary financial and other covenants as defined in the agreement and was set to expire on August 31, 2015.
Effective July 10, 2015, we amended our Credit Agreement to extend the expiration date to August 31, 2017, and maintain an annual capital expenditure limit of $12 million.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We entered into a Second Amendment to our Credit Agreement dated March 10, 2016, which amends our Credit Agreement with Wells Fargo Bank, National Association. The terms of the Second Amendment include, among other things, provisions that (i) increase our line of credit under the Credit Agreement to $30 million, (ii) increase the annual limit on capital expenditures by the company to $15 million, (iii) add a new financial covenant to establish a minimum level of unencumbered liquid assets, (iv) eliminate certain financial covenants, (v) amend the pricing matrix that provides for interest payable on obligations under the agreement as a variable spread over LIBOR, based upon the company's ratio of debt to EBITDA, and (vi) provide that the obligations under the Credit Agreement are to be secured by a pledge of 65% of the common stock of Culp International Holdings Ltd, our Cayman subsidiary.
The purpose of the increase in our revolving credit line with Wells Fargo is to support potential short term cash needs in different jurisdictions within our global operations, mitigate our risk associated with foreign currency exchange rate fluctuations, and repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes.
At January 31, 2016, February 1, 2015 and May 3, 2015 there was a $250,000 outstanding letter of credit (all of which related to workers compensation). At January 31, 2016, February 1, 2015, and May 3, 2015, there were no borrowings outstanding under the Credit Agreement.
Revolving Credit Agreement – China
We had an unsecured credit agreement associated with our operations in China that provided for a line of credit of up to 40 million RMB (approximately $6.1 million USD at January 31, 2016), that was set to expire on February 9, 2016. This agreement had an interest rate determined by the Chinese government. There were no borrowings outstanding under the agreement as of January 31, 2016, February 1, 2015, and May 3, 2015.
On March 8, 2016, we renewed our unsecured credit agreement associated with our operations located in China. The renewal extended the agreement to March 8, 2017 and maintained the line of credit up to 40 million RMB (approximately $6.1 million USD).
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At January 31, 2016, the company was in compliance with these financial covenants.
The fair value of the company’s long-term debt is estimated by discounting the future cash flows at rates currently offered to the company for similar debt instruments of comparable maturities. At February 1, 2015, the carrying value of the company’s long-term debt was $2.2 million and the fair value was $2.3 million. At May 3, 2015, the carrying value of the company’s long-term debt was $2.2 million and the fair value was $2.3 million.
9. 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:
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Level 1 – Quoted market prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable, and
Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.
Recurring Basis
The following table presents information about assets and liabilities measured at fair value on a recurring basis:
| | | Fair value measurements at January 31, 2016 using: | |
| | | | |
| | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | |
| (amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Premier Money Market Fund | | $ | 3,071 | | | | N/A | | | | N/A | | | $ | 3,071 | |
| Low Duration Bond Fund | | | 1,592 | | | | N/A | | | | N/A | | | | 1,592 | |
| Intermediate Term Bond Fund | | | 1,116 | | | | N/A | | | | N/A | | | | 1,116 | |
| Strategic Income Fund | | | 957 | | | | N/A | | | | N/A | | | | 957 | |
| Limited Term Bond Fund | | | 594 | | | | N/A | | | | N/A | | | | 594 | |
| Large Blend Fund | | | 254 | | | | N/A | | | | N/A | | | | 254 | |
| Growth Allocation Fund | | | 128 | | | | N/A | | | | N/A | | | | 128 | |
| Mid Cap Value Fund | | | 90 | | | | N/A | | | | N/A | | | | 90 | |
| Other | | | 47 | | | | N/A | | | | N/A | | | | 47 | |
| | | Fair value measurements at February 1, 2015 using: | |
| | | | |
| | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | |
| | | | | | | | | | | | | |
| (amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Limited Term Bond Fund | | $ | 3,112 | | | | N/A | | | | N/A | | | $ | 3,112 | |
| Intermediate Term Bond Fund | | | 2,188 | | | | N/A | | | | N/A | | | | 2,188 | |
| Low Duration Bond Fund | | | 2,084 | | | | N/A | | | | N/A | | | | 2,084 | |
| Premier Money Market Fund | | | 1,951 | | | | N/A | | | | N/A | | | | 1,951 | |
| Strategic Income Fund | | | 1,000 | | | | N/A | | | | N/A | | | | 1,000 | |
| Growth Allocation Fund | | | 63 | | | | N/A | | | | N/A | | | | 63 | |
| Other | | | 49 | | | | N/A | | | | N/A | | | | 49 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | | Fair value measurements at May 3, 2015 using: | |
| | | | |
| | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | |
| | | | | | | | | | | | | |
| (amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | |
| Limited Term Bond Fund | | $ | 3,107 | | | | N/A | | | | N/A | | | $ | 3,107 | |
| Premier Money Market Fund | | | 2,285 | | | | N/A | | | | N/A | | | | 2,285 | |
| Intermediate Term Bond Fund | | | 2,181 | | | | N/A | | | | N/A | | | | 2,181 | |
| Low Duration Bond Fund | | | 2,096 | | | | N/A | | | | N/A | | | | 2,096 | |
| Strategic Income Fund | | | 1,008 | | | | N/A | | | | N/A | | | | 1,008 | |
| Growth Allocation Fund | | | 85 | | | | N/A | | | | N/A | | | | 85 | |
| Other | | | 45 | | | | N/A | | | | N/A | | | | 45 | |
The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.
Short-Term Investments
At January 31, 2016 and February 1, 2015, our short-term investments totaled $4.3 million and $8.4 million, respectively, and consisted of short-term bond funds. At May 3, 2015, our short-term investments totaled $10.0 million and consisted of short-term bonds of $8.4 million and a deposit account that had a maturity of more than three months of $1.6 million.
Our short-term bond funds are recorded at their fair value, are classified as available-for-sale, and their unrealized gains or losses are included in other comprehensive income (loss). Our short-term bond investments had an accumulated unrealized loss totaling $181,000, $66,000, and $95,000 at January 31, 2016, February 1, 2015, and May 3, 2015, respectively. At January 31, 2016, February 1, 2015, and May 3, 2015, the fair value of our short-term bond funds approximated its cost basis.
Long-Term Investments
Effective January 1, 2014, we established a Rabbi Trust to set aside funds for participants of our deferred compensation plan (the “Plan”) and enable the participants to credit their contributions to various investment options of the Plan. The investments associated with the Rabbi Trust consist of a money market fund and various mutual funds that are classified as available for sale.
Our long-term investments are recorded at their fair value of $3.6 million, $2.1 million, and $2.4 million at January 31, 2016, February 1, 2015, and May 3, 2015, respectively. Our long-term investments had an accumulated unrealized loss of $99,000 at January 31, 2016. At February 1, 2015 and May 3, 2015, our accumulated gains or losses regarding our long-term investments were immaterial. The fair value of our long-term investments approximates its cost basis.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other
The carrying amount of cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximates fair value because of the short maturity of these financial instruments.
10. Cash Flow Information
Interest and income taxes paid are as follows:
| | | | |
| | | Nine months ended | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | |
| Interest | | $ | 95 | | | $ | 180 | |
| Income Taxes | | | 4,921 | | | | 3,005 | |
Interest costs charged to operations and incurred on our long-term debt and lines of credit were $58,000 and $191,000 for the nine months ended January 31, 2016 and February 1, 2015, respectively.
Interest costs of $58,000 and $141,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’ useful lives for the nine months ended January 31, 2016 and February 1, 2015, respectively.
11. 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 follows:
| | | | |
| | | Three months ended | |
| (amounts in thousands) | | January 31, 2016 | | | February 1, 2015 | |
| Weighted average common shares outstanding, basic | | | 12,331 | | | | 12,219 | |
| Dilutive effect of stock-based compensation | | | 155 | | | | 198 | |
| Weighted average common shares outstanding, diluted | | | 12,486 | | | | 12,417 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended January 31, 2016 and February 1, 2015, as the exercise price of the options was less than the average market price of the common shares.
| | | | |
| | | Nine months ended | |
| (amounts in thousands) | | January 31, 2016 | | | February 1, 2015 | |
| Weighted average common shares outstanding, basic | | | 12,317 | | | | 12,216 | |
| Dilutive effect of stock-based compensation | | | 171 | | | | 194 | |
| Weighted average common shares outstanding, diluted | | | 12,488 | | | | 12,410 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
All options to purchase shares of common stock were included in the computation of diluted net income for the nine months ended January 31, 2016 and February 1, 2015, as the exercise price of the options was less than the average market price of the common shares.
12. Segment Information
Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers to bedding manufacturers. The upholstery fabrics segment sources, manufactures, and sells fabrics primarily to residential furniture manufacturers.
We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses and other non-recurring items. Cost of sales in both segments include costs to manufacture or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, and property, plant and equipment. The mattress fabrics segment also includes in segment assets, goodwill, a non-compete agreement, and customer relationships associated with an acquisition.
Financial information for the company’s operating segments follows:
| | | | |
| | | Three months ended | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | |
| Net sales: | | | | | | |
| Mattress Fabrics | | $ | 44,277 | | | $ | 45,683 | |
| Upholstery Fabrics | | | 34,189 | | | | 35,586 | |
| | | $ | 78,466 | | | $ | 81,269 | |
| Gross profit: | | | | | | | | |
| Mattress Fabrics | | $ | 8,751 | | | $ | 8,076 | |
| Upholstery Fabrics | | | 7,812 | | | | 6,326 | |
| | | $ | 16,563 | | | $ | 14,402 | |
| Selling, general, and administrative expenses: | | | | | | | | |
| Mattress Fabrics | | $ | 2,953 | | | $ | 2,853 | |
| Upholstery Fabrics | | | 3,963 | | | | 3,781 | |
| Total segment selling, general, and | | | | | | | | |
| administrative expenses | | | 6,916 | | | | 6,634 | |
| Unallocated corporate expenses | | | 2,421 | | | | 1,741 | |
| | | $ | 9,337 | | | $ | 8,375 | |
| Income from operations: | | | | | | | | |
| Mattress Fabrics | | $ | 5,798 | | | $ | 5,223 | |
| Upholstery Fabrics | | | 3,849 | | | | 2,545 | |
| Total segment income from operations | | | 9,647 | | | | 7,768 | |
| Unallocated corporate expenses | | | (2,421 | ) | | | (1,741 | ) |
| Total income from operations | | | 7,226 | | | | 6,027 | |
| Interest income | | | 38 | | | | 202 | |
| Other expense | | | (85 | ) | | | (307 | ) |
| Income before income taxes | | $ | 7,179 | | | $ | 5,922 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial information for the company’s operating segments follows:
| | | | |
| | | Nine months ended | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | |
| Net sales: | | | | | | |
| Mattress Fabrics | | $ | 137,522 | | | $ | 131,543 | |
| Upholstery Fabrics | | | 98,085 | | | | 99,777 | |
| | | $ | 235,607 | | | $ | 231,320 | |
| | | | | | | | | |
| Gross profit: | | | | | | | | |
| Mattress Fabrics | | $ | 28,133 | | | $ | 22,603 | |
| Upholstery Fabrics | | | 20,365 | | | | 16,792 | |
| | | | | | | | | |
| | | $ | 48,498 | | | $ | 39,395 | |
| | | | | | | | | |
| Selling, general, and administrative expenses: | | | | | | | | |
| Mattress Fabrics | | $ | 8,865 | | | $ | 8,019 | |
| Upholstery Fabrics | | | 11,372 | | | | 10,518 | |
| Total segment selling, general, and | | | | | | | | |
| administrative expenses | | | 20,237 | | | | 18,537 | |
| Unallocated corporate expenses | | | 7,275 | | | | 4,636 | |
| | | $ | 27,512 | | | $ | 23,173 | |
| | | | | | | | | |
| Income from operations: | | | | | | | | |
| Mattress Fabrics | | $ | 19,267 | | | $ | 14,584 | |
| Upholstery Fabrics | | | 8,994 | | | | 6,274 | |
| Total segment income from operations | | | 28,261 | | | | 20,858 | |
| Unallocated corporate expenses | | | (7,275 | ) | | | (4,636 | ) |
| Total income from operations | | | 20,986 | | | | 16,222 | |
| Interest expense | | | - | | | | (50 | ) |
| Interest income | | | 150 | | | | 478 | |
| Other expense | | | (405 | ) | | | (380 | ) |
| Income before income taxes | | $ | 20,731 | | | $ | 16,270 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Balance sheet information for the company’s operating segments follow:
| | | | | | | | | | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | May 3, 2015 | |
| Segment assets: | | | | | | | | | |
| Mattress Fabrics | | | | | | | | | |
| Current assets (1) | | $ | 44,309 | | | $ | 36,658 | | | $ | 41,328 | |
| Non-compete agreement | | | 922 | | | | 998 | | | | 979 | |
| Customer relationships | | | 728 | | | | 779 | | | | 766 | |
| Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | |
| Property, plant and equipment (2) | | | 35,637 | | | | 33,046 | | | | 33,773 | |
| Total mattress fabrics assets | | | 93,058 | | | | 82,943 | | | | 88,308 | |
| Upholstery Fabrics | | | | | | | | | | | | |
| Current assets (1) | | | 30,960 | | | | 32,129 | | | | 29,905 | |
| Property, plant and equipment (3) | | | 1,590 | | | | 1,522 | | | | 1,467 | |
| Total upholstery fabrics assets | | | 32,550 | | | | 33,651 | | | | 31,372 | |
| Total segment assets | | | 125,608 | | | | 116,594 | | | | 119,680 | |
| Non-segment assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | | 31,713 | | | | 28,772 | | | | 29,725 | |
| Short-term investments | | | 4,259 | | | | 8,384 | | | | 10,004 | |
| Deferred income taxes | | | 4,312 | | | | 5,020 | | | | 5,169 | |
| Income taxes receivable | | | 23 | | | | 104 | | | | 229 | |
| Other current assets | | | 2,331 | | | | 2,992 | | | | 2,440 | |
| Property, plant and equipment (4) | | | 930 | | | | 701 | | | | 838 | |
| Long-term investments | | | 3,590 | | | | 2,063 | | | | 2,415 | |
| Other assets | | | 785 | | | | 728 | | | | 800 | |
| Total assets | | $ | 173,551 | | | $ | 165,358 | | | $ | 171,300 | |
| | | | |
| | | Nine months ended | |
| (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | |
| Capital expenditures (5): | | | | | | |
| Mattress Fabrics | | $ | 6,215 | | | $ | 8,232 | |
| Upholstery Fabrics | | | 481 | | | | 390 | |
| Unallocated Corporate | | | 381 | | | | 62 | |
| Total capital expenditures | | $ | 7,077 | | | $ | 8,684 | |
| Depreciation expense: | | | | | | | | |
| Mattress Fabrics | | $ | 4,273 | | | $ | 3,692 | |
| Upholstery Fabrics | | | 615 | | | | 552 | |
| Total depreciation expense | | $ | 4,888 | | | $ | 4,244 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| (1) | Current assets represent accounts receivable and inventory for the respective segment. |
(2) | The $36.1 million at November 1, 2015, represents property, plant, and equipment of $23.3 million and $12.8 million located in the U.S. and Canada, respectively. The $30.9 million at November 2, 2014, represents property, plant, and equipment of $22.2 million and $8.7 million located in the U.S. and Canada, respectively. The $33.8 million at May 3, 2015, represents property, plant, and equipment of $23.8 million and $10.0 million located in the U.S. and Canada, respectively. |
(3) | The $1.5 million at November 1, 2015, represents property, plant, and equipment of $785 and $689 located in the U.S. and China, respectively. The $1.6 million at November 2, 2014, represents property, plant, and equipment of $977 and $601 located in the U.S. and China, respectively. The $1.5 million at May 3, 2015, represents property, plant, and equipment of $848 and $619 located in the U.S. and China, respectively. |
(4) | The $795, $688, and $838 at November 1, 2015, November 2, 2014 and May 3, 2015, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by both the mattress and upholstery fabric segments. Property, plant, and equipment associated with corporate are located in the U.S. |
(5) | Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis. |
13. Income Taxes
Effective Income Tax Rate
We recorded income tax expense| (2) | The $35.6 million at January 31, 2016, represents property, plant, and equipment of $5.1$23.0 million or 37.5% of income before income tax expense, forand $12.6 million located in the six month period ended NovemberU.S. and Canada, respectively. The $33.0 million at February 1, 2015, compared to income tax expenserepresents property, plant, and equipment of $4.0$23.5 million or 38.7% of income before income tax expense, for the six month period ended November 2, 2014. Our effective income tax rates for the six month periods ended November 1, 2015 and November 2, 2014, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes$9.5 million located in foreign currencies in relation to the U.S. dollar.and Canada, respectively. The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements: | | | 2016 | | 2015 | | federal income tax rate | | | 34.0 | % | | | 34.0 | % | | foreign tax rate differential | | | (4.9 | ) | | | (5.6 | ) | | undistributed earnings from foreign subsidiaries | | | 4.5 | | | | 3.7 | | | increase in liability for uncertain tax positions | | | 3.1 | | | | 4.1 | | | other | | | 0.8 | | | | 2.5 | | | | | | 37.5 | % | | | 38.7 | % |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at November 1, 2015, we recorded a partial valuation allowance of $938,000, of which $561,000 pertained to certain U.S. state net operating loss carryforwards and credits and $377,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at November 2, 2014, we recorded a partial valuation allowance of $1.1$33.8 million of which $666,000 pertained to certain U.S. state net operating loss carryforwards and credits and $456,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at May 3, 2015, we recorded a partial valuation allowancerepresents property, plant, and equipment of $922,000, of which $561,000 pertained to certain U.S. state net operating loss carryforwards$23.8 million and credits and $361,000 pertained to loss carryfowards associated with our Culp Europe operation$10.0 million located in Poland.
No valuation allowance was recorded against our net deferred tax assets associated with our operations located in Chinathe U.S. and Canada, at November 1, 2015, November 2, 2014, and May 3, 2015, respectively.
|
| (3) | The recorded valuation allowance of $938,000 at November 1, 2015, has no effect on our operations, loan covenant compliance, or the possible realization of certain U.S. state net operating loss carryforwards and credits and our loss carryforwards associated with our Culp Europe operation located in Poland. If it is determined that it is more-likely-than-not that we will realize any of these deferred tax assets, an income tax benefit will be recognized at that time.Undistributed Earnings
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. Based on our assessment as of November 1, 2015, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.
At November 1, 2015, the net deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $2.4 million, which included U.S. income and foreign withholding taxes totaling $35.7 million, offset by U.S. foreign income tax credits of $33.3 million. At November 2, 2014, the net deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $2.2 million, which included U.S. income and foreign withholding taxes totaling $30.6 million, offset by U.S. foreign income tax credits of $28.4 million. At May 3, 2015, the net deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $1.7 million, which included U.S. income and foreign withholding taxes totaling $32.4 million, offset by U.S. foreign income tax credits of $30.7 million.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We had accumulated earnings from our foreign subsidiaries totaling $93.2 million, $78.9 million, and $85.2$1.6 million at November 1, 2015, November 2, 2014,January 31, 2016, represents property, plant, and May 3, 2015, respectively.
Overall
At November 1, 2015, the current deferred tax assetequipment of $7.7 million represents $7.2 million$860 and $516,000 from our operations$730 located in the U.S. and China, respectively. At NovemberThe $1.5 million at February 1, 2015, the non-current deferred tax assetrepresents property, plant, and equipment of $382,000 pertains to our operations located in China. At November 1, 2015, the non-current deferred tax liability of $5.9 million represents $4.7 million$877 and $1.2 million from our operations located in the U.S. and Canada, respectively.
At November 2, 2014, the current deferred tax asset of $6.2 million represents $5.8 million and $428,000 from our operations$645 located in the U.S. and China, respectively. At November 2, 2014, the non-current deferred tax asset of $508,000 pertained to our operations located in China. At November 2, 2014, the non-current deferred tax liability of $1.4The $1.5 million represented $886,000 and $509,000 from our operations located in Canada and the U.S., respectively.
Atat May 3, 2015, the current deferred tax assetrepresents property, plant, and equipment of $4.8 million represents $4.4 million$848 and $421,000 from our operations$619 located in the U.S. and China, respectively. At May 3, 2015, the non-current deferred tax asset of $447,000 pertained to our operations located in China. At May 3, 2015, the non-current deferred tax liability of $1.1 million represents $896,000 and $154,000 from our operations located in Canada and the U.S., respectively.
|
Uncertainty In Income Taxes
At November| (4) | The $930, $701, and $838 at January 31, 2016, February 1, 2015 we had a $14.2 million total gross unrecognized tax benefit, of which $3.7 million represents the amount of gross unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. At November 2, 2014, we had a $14.1 million total gross unrecognized tax benefit, of which $4.0 million represents the amount of gross unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods. At May 3, 2015, we had a $14.1 million total gross unrecognized tax benefit, of which $3.8 million represents the amount of gross unrecognized tax benefits that, if recognized, would favorably affect the income tax rate in future periods.
At November 1, 2015, we had a $14.2 million total gross unrecognized tax benefit, of which $10.5 million and $3.7 million were classified as net non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At November 2, 2014, we had a $14.1 million total gross unrecognized tax benefit, of which $10.1 million and $4.0 million were classified as net non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At May 3, 2015, we had $14.1 million of total gross unrecognized tax benefit, of which $10.3 million and $3.8 million were classified as net non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We estimate that the amount of gross unrecognized tax benefits will increase by approximately $846,000 for fiscal 2016. This increase primarily relates to double taxation under applicable tax treaties with foreign tax jurisdictions.
14. Statutory Reserves
Our 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 November 1, 2015, the company’s statutory surplus reserve was $5.0 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.
Our subsidiaries located in China can transfer funds to the parent company with the exception of the statutory surplus reserve of $5.0 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.
15. Commitments and Contingencies
Litigation
The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
Purchase Commitments
At November 1, 2015, November 2, 2014, and May 3, 2015, we had open purchase commitments to acquirerespectively, represent property, plant, and equipment for ourassociated with unallocated corporate departments and corporate departments shared by both the mattress fabrics segment totaling $1.9 million, $3.0 million, and $2.3 million, respectively.upholstery fabric segments. Property, plant, and equipment associated with corporate are located in the U.S.
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16. Common Stock Repurchase Program
On February 25, 2014, we announced that our board| (5) | Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of directors approved an authorizationCash Flows 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 basedcapital expenditure amounts on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities.a cash basis. |
13. Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $7.4 million, or 35.7% of income before income tax expense, for the nine month period ended January 31, 2016, compared to income tax expense of $6.1 million or 37.6% of income before income tax expense, for the nine month period ended February 1, 2015. Our effective income tax rates for the nine month periods ended January 31, 2016 and February 1, 2015, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currencies in relation to the U.S. dollar.
The following schedule summarizes the factors that are attributable to the difference between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:
| | 2016 | 2015 |
| federal income tax rate | 34.0% | 34.0% |
| foreign tax rate differential | (6.6) | (6.0) |
| undistributed earnings from foreign subsidiaries | 1.4 | 4.1 |
| increase in liability for uncertain tax positions | 2.9 | 3.5 |
| tax effects of Chinese foreign exchange gains | 3.5 | 0.2 |
| other | 0.5 | 1.8 |
| | 35.7% | 37.6% |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessment at January 31, 2016, we recorded a partial valuation allowance of $874,000, of which $498,000 pertained to certain U.S. state net operating loss carryforwards and credits and $376,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at February 1, 2015, we recorded a partial valuation allowance of $1.0 million, of which $596,000 pertained to certain U.S. state net operating loss carryforwards and credits and $400,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at May 3, 2015, we recorded a partial valuation allowance of $922,000, of which $561,000 pertained to certain U.S. state net operating loss carryforwards and credits and $361,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland.
No valuation allowance was recorded against our net deferred tax assets associated with our operations located in China and Canada at January 31, 2016, February 1, 2015, and May 3, 2015, respectively.
The recorded valuation allowance of $874,000 at January 31, 2016, has no effect on our operations, loan covenant compliance, or the possible realization of certain U.S. state net operating loss carryforwards and credits and our loss carryforwards associated with our Culp Europe operation located in Poland. If it is determined that it is more-likely-than-not that we will realize any of these deferred tax assets, an income tax benefit will be recognized at that time.
Undistributed Earnings
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. Based on our assessment as of January 31, 2016, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.
At January 31, 2016, the net deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $3.3 million, which included U.S. income and foreign withholding taxes totaling $37.3 million, offset by U.S. foreign income tax credits of $34.0 million. At February 1, 2015, the net deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $2.4 million, which included U.S. income and foreign withholding taxes totaling $32.1 million, offset by U.S. foreign income tax credits of $29.7 million. At May 3, 2015, the net deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $1.7 million, which included U.S. income and foreign withholding taxes totaling $32.4 million, offset by U.S. foreign income tax credits of $30.7 million.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We had accumulated earnings from our foreign subsidiaries totaling $100.9 million, $82.4 million, and $85.2 million at January 31, 2016, February 1, 2015, and May 3, 2015, respectively.
Overall
At January 31, 2016, our non-current deferred tax asset of $4.3 million represents $3.5 million and $773,000 from our operations located in the U.S. and China, respectively. At February 1, 2015, our non-current deferred tax asset of $5.0 million represents $4.2 million and $776,000 from our operations located in the U.S. and China, respectively. At May 3, 2015, our non-current deferred tax asset of $5.2 million represents $4.3 million and $868,000 from our operations located in the U.S. and China, respectively.
Our non-current deferred tax liability balances of $1.2 million, $927,000, and $982,000 at January 31, 2016, February 1, 2015, and May 3, 2015, respectively, pertain to our operations located in Canada.
Uncertainty In Income Taxes
At January 31, 2016, we had a $13.2 million total gross unrecognized tax benefit, of which $3.5 million represents the amount of gross unrecognized tax benefit that, if recognized, would favorably affect the income tax rate in future periods. At February 1, 2015, we had a $13.9 million total gross unrecognized tax benefit, of which $3.6 million represents the amount of gross unrecognized tax benefit that, if recognized, would favorably affect the income tax rate in future periods. At May 3, 2015, we had a $14.1 million total gross unrecognized tax benefit, of which $3.8 million represents the amount of gross unrecognized tax benefit that, if recognized, would favorably affect the income tax rate in future periods.
At January 31, 2016, we had a $13.2 million total gross unrecognized tax benefit, of which $9.7 million and $3.5 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At February 1, 2015, we had a $13.9 million total gross unrecognized tax benefit, of which $10.3 million and $3.6 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At May 3, 2015, we had $14.1 million of total gross unrecognized tax benefit, of which $10.3 million and $3.8 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets.
We estimate that the amount of gross unrecognized tax benefit will decrease by approximately $120,000 for fiscal 2016. This decrease primarily relates to double taxation under applicable tax treaties with foreign tax jurisdictions.
14. Statutory Reserves
Our 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.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of January 31, 2016, the company’s statutory surplus reserve was $4.7 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.
Our subsidiaries located in China can transfer funds to the parent company with the exception of the statutory surplus reserve of $4.7 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.
15. Commitments and Contingencies
Litigation
The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
Purchase Commitments
At January 31, 2016, February 1, 2015, and May 3, 2015, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $977,000, $3.8 million, and $2.3 million, respectively.
16. Common Stock Repurchase Program
On February 25, 2014, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities.
During the nine months ended January 31, 2016, we purchased 100,776 shares of our common stock at a cost of $2.4 million, all of which was purchased during the third quarter. During fiscal 2015, we purchased 43,014 shares of our common stock at a cost of $745,000, all of which were purchased in the first and second quarters.
At January 31, 2016, we had $1.9 million available for additional repurchases of our common stock.
17. Dividend Program
On March 1, 2016, we announced that our board of directors approved a quarterly cash dividend of $0.07 per share. This payment will be made on or about April 15, 2016, to shareholders of record as of April 1, 2016.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the nine months ended January 31, 2016, dividend payments totaled $7.3 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $2.3 million represented our regular quarterly cash dividend payments ranging from $0.06 to $0.07 per share.
During the nine months ended February 1, 2015, dividend payments totaled $6.8 million, of which $4.9 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $1.9 million represented our regular quarterly cash dividend payments ranging from $0.05 to $0.06 per share.
Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.