| | | | | | | | | | | | | | | CONSOLIDATED STATEMENTS OF NET INCOME | | FOR THE THREE AND NINESIX MONTHS ENDED JANUARY 31,OCTOBER 30, 2016 AND FEBRUARYNOVEMBER 1, 2015 | | UNAUDITED | | (Amounts in Thousands, Except for Per Share Data) | |
| | | | | | THREE MONTHS ENDED | | | | | | | | October 30, | | November 1, | | | 2016 | | 2015 | | | | | | | Net sales | | $ | 75,343 | | | | 76,956 | | Cost of sales | | | 58,442 | | | | 61,223 | | Gross profit | | | 16,901 | | | | 15,733 | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 9,602 | | | | 9,433 | | Income from operations | | | 7,299 | | | | 6,300 | | | | | | | | | | | Interest income | | | (15 | ) | | | (69 | ) | Other expense | | | 155 | | | | 225 | | Income before income taxes | | | 7,159 | | | | 6,144 | | | | | | | | | | | Income taxes | | | 2,684 | | | | 2,373 | | Net income | | $ | 4,475 | | | | 3,771 | | | | | | | | | | | Net income per share, basic | | $ | 0.36 | | | | 0.31 | | Net income per share, diluted | | | 0.36 | | | | 0.30 | | Average shares outstanding, basic | | | 12,308 | | | | 12,343 | | Average shares outstanding, diluted | | | 12,507 | | | | 12,484 | | | | | | | | | | | | SIX MONTHS ENDED | | | | | | | | | | | | | | October 30, | | | | November 1, | | | | | 2016 | | | | 2015 | | | | | | | | | | | Net sales | | $ | 156,026 | | | | 157,141 | | Cost of sales | | | 120,705 | | | | 125,206 | | Gross profit | | | 35,321 | | | | 31,935 | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 19,348 | | | | 18,175 | | Income from operations | | | 15,973 | | | | 13,760 | | | | | | | | | | | Interest income | | | (40 | ) | | | (112 | ) | Other expense | | | 307 | | | | 320 | | Income before income taxes | | | 15,706 | | | | 13,552 | | | | | | | | | | | Income taxes | | | 5,917 | | | | 5,081 | | Net income | | $ | 9,789 | | | | 8,471 | | | | | | | | | | | Net income per share, basic | | $ | 0.80 | | | | 0.69 | | Net income per share, diluted | | | 0.78 | | | | 0.68 | | Average shares outstanding, basic | | | 12,297 | | | | 12,310 | | Average shares outstanding, diluted | | | 12,495 | | | | 12,481 | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | |
| | | | | CULP, INC. | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | FOR THE THREE AND SIX MONTHS ENDED OCTOBER 30, 2016 AND NOVEMBER 1, 2015 | | (UNAUDITED) | | | | | | | (AMOUNTS IN THOUSANDS) | | | | January 31, | | | February 1, | | | | 2016 | | | 2015 | | | | | | | | | Net sales | | $ | 78,466 | | | | 81,269 | | Cost of sales | | | 61,903 | | | | 66,867 | | Gross profit | | | 16,563 | | | | 14,402 | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 9,337 | | | | 8,375 | | Income from operations | | | 7,226 | | | | 6,027 | | | | | | | | | | | Interest income | | | (38 | ) | | | (202 | ) | Other expense | | | 85 | | | | 307 | | Income before income taxes | | | 7,179 | | | | 5,922 | | | | | | | | | | | Income taxes | | | 2,317 | | | | 2,110 | | Net income | | $ | 4,862 | | | | 3,812 | | | | | | | | | | | Net income per share, basic | | $ | 0.39 | | | | 0.31 | | Net income per share, diluted | | | 0.39 | | | | 0.31 | | Average shares outstanding, basic | | | 12,331 | | | | 12,219 | | Average shares outstanding, diluted | | | 12,486 | | | | 12,417 | | | | | | | | | | | | | NINE MONTHS ENDED | | | | | | | | | | | | | January 31, | | | February 1, | | | | 2016 | | | 2015 | | | | | | | | | | | Net sales | | $ | 235,607 | | | | 231,320 | | Cost of sales | | | 187,109 | | | | 191,925 | | Gross profit | | | 48,498 | | | | 39,395 | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 27,512 | | | | 23,173 | | 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 | | | | | | | | | | | Income taxes | | | 7,398 | | | | 6,113 | | Net income | | $ | 13,333 | | | | 10,157 | | | | | | | | | | | Net income per share, basic | | $ | 1.08 | | | | 0.83 | | Net income per share, diluted | | | 1.07 | | | | 0.82 | | Average shares outstanding, basic | | | 12,317 | | | | 12,216 | | Average shares outstanding, diluted | | | 12,488 | | | | 12,410 | |
| | | | | | | | | THREE MONTHS ENDED | | | | | | | | | | | October 30, | | | November 1, | | | | 2016 | | | 2015 | | | | | | | | | Net income | | $ | 4,475 | | | $ | 3,771 | | | | | | | | | | | Other comprehensive income (loss) | | | | | | | | | | | | | | | | | | Unrealized gains (losses) on investments | | | | | | | | | | | | | | | | | | Unrealized holding gains (losses) on investments | | | 4 | | | | (29 | ) | | | | | | | | | | Reclassification adjustment for realized loss included in net income | | | - | | | | 56 | | | | | | | | | | | Total other comprehensive income | | | 4 | | | | 27 | | | | | | | | | | | | | | | | | | | | Comprehensive income | | $ | 4,479 | | | $ | 3,798 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | SIX MONTHS ENDED | | | | | | | | | | | | | | October 30, | | | | November 1, | | | | | 2016 | | | | 2015 | | | | | | | | | | | Net income | | $ | 9,789 | | | $ | 8,471 | | | | | | | | | | | Other comprehensive gain (loss) | | | | | | | | | | | | | | | | | | Unrealized gains (losses) on investments | | | | | | | | | | | | | | | | | | Unrealized holding gains (losses) on investments | | | 88 | | | | (118 | ) | | | | | | | | | | Reclassification adjustment for realized loss included in net income | | | 12 | | | | 56 | | | | | | | | | | | Total other comprehensive gain (loss) | | | 100 | | | | (62 | ) | | | | | | | | | | | | | | | | | | | Comprehensive income | | $ | 9,889 | | | $ | 8,409 | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | |
See accompanying notes to consolidated financial statements.I-2
CULP, INC. | CONSOLIDATED BALANCE SHEETS | OCTOBER 30, 2016, NOVEMBER 1, 2015 AND MAY 1, 2016 | UNAUDITED | (Amounts in Thousands) |
| | | | | | | | | | | | | | October 30, | | | November 1, | | | * May 1, | | | | | 2016 | | | 2015 | | | 2016 | | Current assets: | | | | | | | | | | | Cash and cash equivalents | | $ | 13,910 | | | | 31,176 | | | | 37,787 | | Short-term investments | | | 2,430 | | | | 6,320 | | | | 4,359 | | Accounts receivable, net | | | 19,039 | | | | 23,314 | | | | 23,481 | | Inventories | | | | 45,954 | | | | 46,479 | | | | 46,531 | | Income taxes receivable | | | - | | | | 75 | | | | 155 | | Other current assets | | | 1,675 | | | | 2,614 | | | | 2,477 | | | Total current assets | | | 83,008 | | | | 109,978 | | | | 114,790 | | | | | | | | | | | | | | | | Property, plant and equipment, net | | | 45,537 | | | | 38,319 | | | | 39,973 | | Goodwill | | | | 11,462 | | | | 11,462 | | | | 11,462 | | Deferred income taxes | | | 581 | | | | 3,415 | | | | 2,319 | | Long-term investments - Held-To-Maturity | | | 31,050 | | | | - | | | | - | | Long-term investments - Rabbi Trust | | | 4,994 | | | | 3,279 | | | | 4,025 | | Other assets | | | | 2,495 | | | | 2,494 | | | | 2,573 | | | | | | | | | | | | | | | | | Total assets | | $ | 179,127 | | | | 168,947 | | | | 175,142 | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Accounts payable-trade | | | 20,183 | | | | 25,221 | | | | 23,994 | | Accounts payable - capital expenditures | | | 3,000 | | | | 1,269 | | | | 224 | | Accrued expenses | | | 8,878 | | | | 9,895 | | | | 11,922 | | Income taxes payable - current | | | 513 | | | | 305 | | | | 180 | | | Total current liabilities | | | 32,574 | | | | 36,690 | | | | 36,320 | | | | | | | | | | | | | | | | Income taxes payable - long-term | | | 3,734 | | | | 3,655 | | | | 3,841 | | Deferred income taxes | | | 1,699 | | | | 1,206 | | | | 1,483 | | Deferred compensation | | | 5,171 | | | | 4,421 | | | | 4,686 | | | | | | | | | | | | | | | | | Total liabilities | | | 43,178 | | | | 45,972 | | | | 46,330 | | | | | | | | | | | | | | | | Commitments and Contingencies (Note 15) | | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders' equity | | | | | | | | | | | | | Preferred stock, $0.05 par value, authorized | | | | | | | | | | | | | 10,000,000 | | | | | | | | | | | | | Common stock, $0.05 par value, authorized | | | | | | | | | | | | | 40,000,000 shares, issued and outstanding | | | | | | | | | | | | | 12,311,756 at October 30, 2016; 12,350,265 | | | | | | | | | | | | | at November 1, 2015; and 12,265,489 at | | | | | | | | | | | | | May 1, 2016 | | | 615 | | | | 618 | | | | 614 | | Capital contributed in excess of par value | | | 45,349 | | | | 44,708 | | | | 43,795 | | Accumulated earnings | | | 90,029 | | | | 77,806 | | | | 84,547 | | Accumulated other comprehensive loss | | | (44 | ) | | | (157 | ) | | | (144 | ) | Total shareholders' equity | | | 135,949 | | | | 122,975 | | | | 128,812 | | | | | | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 179,127 | | | | 168,947 | | | | 175,142 | | | | | | | | | | | | | | | | * Derived from audited financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | | |
CULP, INC. | CONSOLIDATED STATEMENTS OF CASH FLOWS | FOR THE SIX MONTHS ENDED OCTOBER 30, 2016 AND NOVEMBER 1, 2015 | UNAUDITED | (Amounts in Thousands) |
| | | | | | | | | SIX MONTHS ENDED | | | | | | | | | | | October 30, | | | November 1, | | | | 2016 | | | 2015 | | | | | | | | | Cash flows from operating activities: | | | | | | | Net income | | $ | 9,789 | | | | 8,471 | | Adjustments to reconcile net income to net cash | | | | | | | | | provided by operating activities: | | | | | | | | | Depreciation | | | 3,511 | | | | 3,184 | | Amortization of other assets | | | 80 | | | | 86 | | Stock-based compensation | | | 1,657 | | | | 1,339 | | Excess tax benefit related to stock-based compensation | | | (167 | ) | | | (838 | ) | Deferred income taxes | | | 2,121 | | | | 2,816 | | Realized loss on sale of short-term investments | | | 12 | | | | 56 | | Loss (gain) on sale of equipment | | | 9 | | | | (60 | ) | Foreign currency exchange gains | | | (53 | ) | | | (13 | ) | Changes in assets and liabilities: | | | | | | | | | Accounts receivable | | | 4,142 | | | | 4,892 | | Inventories | | | 219 | | | | (4,135 | ) | Other current assets | | | 751 | | | | (302 | ) | Other assets | | | - | | | | 8 | | Accounts payable - trade | | | (3,274 | ) | | | (2,921 | ) | Accrued expenses and deferred compensation | | | (2,749 | ) | | | (1,547 | ) | Income taxes | | | 554 | | | | 168 | | Net cash provided by operating activities | | | 16,602 | | | | 11,204 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Capital expenditures | | | (6,308 | ) | | | (5,255 | ) | Proceeds from the sale of equipment | | | - | | | | 225 | | Proceeds from the sale of short-term investments | | | 2,000 | | | | 3,612 | | Purchase of short-term investments | | | (23 | ) | | | (46 | ) | Purchase of long-term investments (Held-To-Maturity) | | | (31,050 | ) | | | - | | Purchase of long-term investments (Rabbi Trust) | | | (929 | ) | | | (864 | ) | Net cash used in investing activities | | | (36,310 | ) | | | (2,328 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from line of credit | | | 7,000 | | | | - | | Payments on line of credit | | | (7,000 | ) | | | - | | Payments on long-term debt | | | - | | | | (2,200 | ) | Excess tax benefit related to stock-based compensation | | | 167 | | | | 838 | | Dividends paid | | | (4,307 | ) | | | (6,417 | ) | Payments on debt issuance costs | | | (2 | ) | | | (43 | ) | Proceeds from common stock issued | | | 11 | | | | 126 | | Net cash used in financing activities | | | (4,131 | ) | | | (7,696 | ) | | | | | | | | | | Effect of exchange rate changes on cash and cash equivalents | | | (38 | ) | | | 271 | | | | | | | | | | | (Decrease) increase in cash and cash equivalents | | | (23,877 | ) | | | 1,451 | | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 37,787 | | | | 29,725 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 13,910 | | | | 31,176 | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | |
CULP, INC. | CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | UNAUDITED | (Dollars in thousands, except share data) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Capital | | | | | | Accumulated | | | | | | | | | | Contributed | | | | | | Other | | | Total | | | | Common Stock | | | in Excess | | | Accumulated | | | Comprehensive | | | Shareholders' | | | | Shares | | | Amount | | | of Par Value | | | Earnings | | | Loss | | | Equity | | Balance, May 3, 2015 | | | 12,219,121 | | | $ | 611 | | | | 43,159 | | | | 75,752 | | | | (95 | ) | | $ | 119,427 | | Net income | | | - | | | | - | | | | - | | | | 16,935 | | | | - | | | | 16,935 | | Stock-based compensation | | | - | | | | - | | | | 2,742 | | | | - | | | | - | | | | 2,742 | | Unrealized loss on investments | | | - | | | | - | | | | - | | | | - | | | | (49 | ) | | | (49 | ) | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 841 | | | | - | | | | - | | | | 841 | | Common stock repurchased | | | (100,776 | ) | | | (5 | ) | | | (2,392 | ) | | | - | | | | - | | | | (2,397 | ) | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | | with performance based units | | | 115,855 | | | | 6 | | | | (6 | ) | | | - | | | | - | | | | - | | Fully vested common stock award | | | 3,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | . | | | | | | with exercise of stock options | | | 54,500 | | | | 3 | | | | 197 | | | | - | | | | - | | | | 200 | | Common stock surrendered for | | | | | | | | | | | | | | | | | | | | | | | | | withholding taxes payable | | | (26,211 | ) | | | (1 | ) | | | (746 | ) | | | - | | | | - | | | | (747 | ) | Dividends paid | | | - | | | | - | | | | - | | | | (8,140 | ) | | | - | | | | (8,140 | ) | Balance, May 1, 2016 * | | | 12,265,489 | | | | 614 | | | | 43,795 | | | | 84,547 | | | | (144 | ) | | | 128,812 | | Net income | | | - | | | | - | | | | - | | | | 9,789 | | | | - | | | | 9,789 | | Stock-based compensation | | | - | | | | - | | | | 1,657 | | | | - | | | | - | | | | 1,657 | | Unrealized gain on investments | | | - | | | | - | | | | - | | | | - | | | | 100 | | | | 100 | | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 167 | | | | - | | | | - | | | | 167 | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | | with performance based units | | | 49,192 | | | | 2 | | | | (2 | ) | | | - | | | | - | | | | - | | Fully vested common stock award | | | 4,800 | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | | with exercise of stock options | | | 2,000 | | | | - | | | | 11 | | | | - | | | | - | | | | 11 | | Common stock surrendered for | | | | | | | | | | | | | | | | | | | | | | | | | withholding taxes payable | | | (9,725 | ) | | | (1 | ) | | | (279 | ) | | | - | | | | - | | | | (280 | ) | Dividends paid | | | - | | | | - | | | | - | | | | (4,307 | ) | | | - | | | | (4,307 | ) | Balance, October 30, 2016 | | | 12,311,756 | | | $ | 615 | | | | 45,349 | | | | 90,029 | | | | (44 | ) | | $ | 135,949 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | * Derived from audited financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | | | | | | | | | | |
| | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2016 AND FEBRUARY 1, 2015 | | (UNAUDITED) | | (Amounts in Thousands) | | | | | | | | | | | THREE MONTHS ENDED | | | | | | | | | | | January 31, | | | February 1, | | | | 2016 | | | 2015 | | | | | | | | | Net income | | $ | 4,862 | | | $ | 3,812 | | | | | | | | | | | Other comprehensive (loss) income | | | | | | | | | | | | | | | | | | Unrealized (losses) gains on investments | | | | | | | | | | | | | | | | | | Unrealized holding (losses) gains on investments | | | (194 | ) | | | 22 | | | | | | | | | | | Reclassification adjustment for realized loss included in net income | | | 71 | | | | - | | | | | | | | | | | Total other comprehensive (loss) income | | | (123 | ) | | | 22 | | | | | | | | | | | | | | | | | | | | | | $ | 4,739 | | | $ | 3,834 | | | | | | | | | | | | | NINE MONTHS ENDED | | | | | | | | | | | | | January 31, | | | February 1, | | | | 2016 | | | 2015 | | | | | | | | | | | Net income | | $ | 13,333 | | | $ | 10,157 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Unrealized (losses) gains on investments | | | | | | | | | | | | | | | | | | Unrealized holding losses on investments | | | (312 | ) | | | (6 | ) | | | | | | | | | | Reclassification adjustment for realized loss included in net income | | | 127 | | | | - | | | | | | | | | | | Total other comprehensive loss | | | (185 | ) | | | (6 | ) | | | | | | | | | | Comprehensive income | | $ | 13,148 | | | $ | 10,151 | |
See accompanying notes to consolidated financial statements.
| | CONSOLIDATED BALANCE SHEETS | | JANUARY 31, 2016, FEBRUARY 1, 2015, AND MAY 3, 2015 | | UNAUDITED | | (Amounts in Thousands) | | | | | | | | | | | | | | January 31, | | | February 1, | | | * May 3, | | | | 2016 | | | 2015 | | | 2015 | | Current assets: | | | | | | | | | | Cash and cash equivalents | | $ | 31,713 | | | | 28,772 | | | | 29,725 | | Short-term investments | | | 4,259 | | | | 8,384 | | | | 10,004 | | Accounts receivable, net | | | 26,784 | | | | 30,774 | | | | 28,749 | | Inventories | | | 48,485 | | | | 38,013 | | | | 42,484 | | Income taxes receivable | | | 23 | | | | 104 | | | | 229 | | Other current assets | | | 2,331 | | | | 2,992 | | | | 2,440 | | Total current assets | | | 113,595 | | | | 109,039 | | | | 113,631 | | | | | | | | | | | | | | | Property, plant and equipment, net | | | 38,157 | | | | 35,269 | | | | 36,078 | | Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | | Deferred income taxes | | | 4,312 | | | | 5,020 | | | | 5,169 | | Long-term investments | | | 3,590 | | | | 2,063 | | | | 2,415 | | Other assets | | | 2,435 | | | | 2,505 | | | | 2,545 | | | | | | | | | | | | | | | Total assets | | $ | 173,551 | | | | 165,358 | | | | 171,300 | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Current maturities of long-term debt | | $ | - | | | | 2,200 | | | | 2,200 | | Accounts payable-trade | | | 25,601 | | | | 28,644 | | | | 28,414 | | Accounts payable - capital expenditures | | | 380 | | | | 772 | | | | 990 | | Accrued expenses | | | 12,690 | | | | 9,954 | | | | 11,129 | | Income taxes payable - current | | | 622 | | | | 325 | | | | 325 | | Total current liabilities | | | 39,293 | | | | 41,895 | | | | 43,058 | | | | | | | | | | | | | | | Income taxes payable - long-term | | | 3,480 | | | | 3,630 | | | | 3,792 | | Deferred income taxes | | | 1,209 | | | | 927 | | | | 982 | | Deferred compensation | | | 4,495 | | | | 3,934 | | | | 4,041 | | | | | | | | | | | | | | | Total liabilities | | | 48,477 | | | | 50,386 | | | | 51,873 | | | | | | | | | | | | | | | Commitments and Contingencies (Note 15) | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders' equity | | | | | | | | | | | | | Preferred stock, $0.05 par value, authorized | | | | | | | | | | | | | 10,000,000 | | | - | | | | - | | | | - | | Common stock, $0.05 par value, authorized | | | | | | | | | | | | | 40,000,000 shares, issued and outstanding | | | | | | | | | | | | | 12,250,489 at January 31, 2016; 12,219,121 | | | | | | | | | | | | | at February 1, 2015; and 12,219,121 at | | | | | | | | | | | | | May 3, 2015 | | | 613 | | | | 611 | | | | 611 | | Capital contributed in excess of par value | | | 42,937 | | | | 42,856 | | | | 43,159 | | Accumulated earnings | | | 81,804 | | | | 71,571 | | | | 75,752 | | Accumulated other comprehensive loss | | | (280 | ) | | | (66 | ) | | | (95 | ) | Total shareholders' equity | | | 125,074 | | | | 114,972 | | | | 119,427 | | | | | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 173,551 | | | | 165,358 | | | | 171,300 | |
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
| | CONSOLIDATED STATEMENTS OF CASH FLOWS | | FOR THE NINE MONTHS ENDED JANUARY 31, 2016 AND FEBRUARY 1, 2015 | | UNAUDITED | | (Amounts in Thousands) | | | | | | | | | | | NINE MONTHS ENDED | | | | | | | | | | | January 31, | | | February 1, | | | | 2016 | | | 2015 | | Cash flows from operating activities: | | | | | | | Net income | | $ | 13,333 | | | | 10,157 | | Adjustments to reconcile net income to net cash | | | | | | | | | provided by operating activities: | | | | | | | | | Depreciation | | | 4,888 | | | | 4,244 | | Amortization of other assets | | | 123 | | | | 140 | | Stock-based compensation | | | 1,964 | | | | 482 | | Excess tax benefit related to stock-based compensation | | | (822 | ) | | | (110 | ) | Deferred income taxes | | | 1,906 | | | | 3,274 | | Gain on sale of equipment | | | (66 | ) | | | (74 | ) | Realized loss on sale of short-term investments | | | 127 | | | | - | | Foreign currency gains | | | (85 | ) | | | (6 | ) | Changes in assets and liabilities: | | | | | | | | | Accounts receivable | | | 1,091 | | | | (3,455 | ) | Inventories | | | (6,485 | ) | | | 2,536 | | Other current assets | | | (108 | ) | | | (739 | ) | Other assets | | | 48 | | | | (30 | ) | Accounts payable - trade | | | (1,979 | ) | | | 2,267 | | Accrued expenses and deferred compensation | | | 1,406 | | | | 2,121 | | Income taxes | | | 535 | | | | (108 | ) | Net cash provided by operating activities | | | 15,876 | | | | 20,699 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Capital expenditures | | | (7,686 | ) | | | (8,185 | ) | Proceeds from the sale of equipment | | | 230 | | | | 625 | | Proceeds from the sale of life insurance policies | | | - | | | | 320 | | Payments on life insurance policies | | | (18 | ) | | | (18 | ) | Proceeds from the sale of short-term investments | | | 5,612 | | | | 1,628 | | Purchase of short-term investments | | | (86 | ) | | | (3,719 | ) | Purchase of long-term investments | | | (1,268 | ) | | | (1,298 | ) | Net cash used in investing activities | | | (3,216 | ) | | | (10,647 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from line of credit | | | 7,000 | | | | - | | Payments on line of credt | | | (7,000 | ) | | | (538 | ) | Payments on long-term debt | | | (2,200 | ) | | | (2,200 | ) | Repurchase of common stock | | | (2,397 | ) | | | (745 | ) | Dividends paid | | | (7,281 | ) | | | (6,846 | ) | Payments on debt issuance costs | | | (43 | ) | | | - | | Proceeds from common stock issued | | | 138 | | | | 94 | | Excess tax benefit related to stock-based compensation | | | 822 | | | | 110 | | Net cash used in financing activities | | | (10,961 | ) | | | (10,125 | ) | | | | | | | | | | Effect of exchange rate changes on cash and cash equivalents | | | 289 | | | | (458 | ) | | | | | | | | | | Increase (decrease) in cash and cash equivalents | | | 1,988 | | | | (531 | ) | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 29,725 | | | | 29,303 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 31,713 | | | | 28,772 | |
See accompanying notes to consolidated financial statements.
| | CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | | UNAUDITED | | (Dollars in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital | | | | | | Accumulated | | | | | | | | | | | | | Contributed | | | | | | Other | | | Total | | | | Common Stock | | | in Excess | | | Accumulated | | | Comprehensive | | | Shareholders’ | | | | Shares | | | Amount | | | of Par Value | | | Earnings | | | Loss | | | Equity | | Balance, April 27, 2014 | | | 12,250,030 | | | $ | 612 | | | | 42,932 | | | | 68,260 | | | | (60 | ) | | $ | 111,744 | | Net income | | | - | | | | - | | | | - | | | | 15,071 | | | | - | | | | 15,071 | | Stock-based compensation | | | - | | | | - | | | | 786 | | | | - | | | | - | | | | 786 | | Unrealized loss on investments | | | - | | | | - | | | | - | | | | - | | | | (35 | ) | | | (35 | ) | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 109 | | | | - | | | | - | | | | 109 | | Common stock repurchased | | | (43,014 | ) | | | (2 | ) | | | (743 | ) | | | - | | | | - | | | | (745 | ) | Fully vested common stock award | | | 3,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | . | | | | | | with exercise of stock options | | | 10,100 | | | | 1 | | | | 93 | | | | - | | | | - | | | | 94 | | Common stock surrendered for | | | | | | | | | | | | | | | | | | | | | | | | | withholding taxes payable | | | (995 | ) | | | - | | | | (18 | ) | | | - | | | | - | | | | (18 | ) | Dividends paid | | | - | | | | - | | | | - | | | | (7,579 | ) | | | - | | | | (7,579 | ) | Balance, May 3, 2015 * | | | 12,219,121 | | | | 611 | | | | 43,159 | | | | 75,752 | | | | (95 | ) | | | 119,427 | | Net income | | | - | | | | - | | | | - | | | | 13,333 | | | | - | | | | 13,333 | | Stock-based compensation | | | - | | | | - | | | | 1,964 | | | | - | | | | - | | | | 1,964 | | Unrealized loss on investments | | | - | | | | - | | | | - | | | | - | | | | (185 | ) | | | (185 | ) | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 822 | | | | - | | | | - | | | | 822 | | Common stock repurchased | | | (100,776 | ) | | | (5 | ) | | | (2,392 | ) | | | | | | | | | | | (2,397 | ) | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | | with performance based units | | | 115,855 | | | | 6 | | | | (6 | ) | | | | | | | | | | | - | | Fully vested common stock award | | | 3,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | | | | with exercise of stock options | | | 39,500 | | | | 2 | | | | 136 | | | | | | | | | | | | 138 | | Common stock surrendered for | | | | | | | | | | | | | | | | | | | | | | | | | withholding taxes payable | | | (26,211 | ) | | | (1 | ) | | | (746 | ) | | | - | | | | - | | | | (747 | ) | Dividends paid | | | - | | | | | | | | - | | | | (7,281 | ) | | | - | | | | (7,281 | ) | Balance, January 31, 2016 | | | 12,250,489 | | | $ | 613 | | | | 42,937 | | | | 81,804 | | | | (280 | ) | | $ | 125,074 | |
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiaries (the “company”"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’scompany's annual report on Form 10-K filed with the Securities and Exchange Commission on July 17, 201515, 2016, for the fiscal year ended May 3, 2015.1, 2016.
The company’s ninecompany's six months ended January 31,October 30, 2016, and FebruaryNovember 1, 2015, represent 39 and 4026 week periods, respectively.
2. Significant Accounting Policies
As of January 31,October 30, 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, 2015.1, 2016.
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’sentity'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 FebruaryNovember 1, 2015 Consolidated Balance Sheet, which increased noncurrent deferred income taxes $4.5$3.0 million and decreased noncurrent deferred tax liabilities $2.5$4.7 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”("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.
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,
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) This guidance was effective for the first quarter of fiscal 2017 and did not have any impact on our consolidated financial statements as we currently do not have any share-based payment awards with terms of a performance target that affects vesting and could be achieved after the requisite service period. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, which amends ASC Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are intended to enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. In April 2015, the FASB issued ASU 2015-24, Revenue from Contracts with Customers: Deferral of the Effective Date which proposed a deferral of the effective date by one year, and on July 7, 2015, the FASB decided to delay the effective date by one year. The deferral results in the new revenue standard being effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are therefore required to apply the new revenue guidance in our fiscal 2019 interim and annual financial statements. This ASU can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changed the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. This ASU is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. 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 18,15, 2018. We are therefore required to apply this guidance in our fiscal 2020 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting." ASU 2016-09 is intended to improve the accounting for share-based payment transactions as part of the FASB's simplification initiative. ASU 2016-09 changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years for public companies. We are therefore required to apply this guidance in our fiscal 2018 interim and annual financial statements. We are currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address the diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. This new guidance provides clarity around the cash flow classification for eight specific issues in an effort to reduce the current and potential future diversity in practice. This standard, which is to be applied retrospectively, will be effective for the first interim period within annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We are therefore required to apply this new guidance in our fiscal 2019 interim and annual financial statements. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Than Inventory, to reduce the diversity in practice and complexity associated with accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits recognition of deferred income taxes for an intra-entity transfer until the asset has been sold to an outside party. The new pronouncement stipulates that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This new guidance will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, with early adoption permitted in the first interim period only. We are therefore required to apply this new guidance in our fiscal 2019 interim and annual financial statements. The amendments are to applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We are currently assessing the impact that this guidance will have on our consolidated financial statements.
There are no other new accounting pronouncements that are expected to have a significant impact on our consolidated financial statements.
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”"2015 Plan"). The 2015 Plan is intended to updateupdated and replacereplaced our 2007 Equity Incentive Plan (the “2007 Plan”"2007 Plan") as the vehicle for granting new equity based awards substantially similar to those authorized under the 2007 Plan. In general, the 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.
At October 30, 2016, there were 980,486 shares available for future equity based grants under our 2015 plan. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Incentive Stock Option Awards
We did not grant any incentive stock option awards through the thirdsecond quarter of fiscal 2016.2017.
At January 31,October 30, 2016, options to purchase 98,60081,600 shares of common stock were outstanding and exercisable, had a weighted average exercise price of $7.73$8.44 per share, and a weighted average contractual term of 1.70.8 years. At January 31,October 30, 2016, the aggregate intrinsic value for options outstanding and exercisable was $1.7$1.6 million.
The aggregate intrinsic value for options exercised for the ninesix months ending January 31,October 30, 2016 and FebruaryNovember 1, 2015, was $43,000 and $1.0 million, and $87,000, respectively.
At January 31,October 30, 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,October 30, 2016.
No compensation expense was recorded onfor incentive stock options for the ninesix months ended January 31,October 30, 2016 and FebruaryNovember 1, 2015, respectively.
Common Stock Awards
On October 3, 2016, we granted a total of 4,800 shares of common stock to our outside directors. These shares of common stock vest immediately and were measured at $29.80 per share, which represents the closing price of our common stock at the date of grant.
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.
We recorded $143,000 and $95,000 within selling, general, and administrative expense for these common stock awards for the six months ending October 30, 2016, and November 1, 2015, respectively.
Performance Based Restricted Stock Units Fiscal 2017 Grant
On October 1, 2014, weJuly 14, 2016, certain key members of management were granted a total of 3,000performance-based restricted stock units which could earn up to 107,880 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 $28 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 14, 2016, a non-employee was granted performance-based restricted stock units which could earn up to our outside directors. These11,549 shares of common stock vest immediately and wereif certain performance targets are met as defined in the related restricted stock unit agreement. The fair value of this award is measured at $17.95the earlier date of when the performance criteria are met or the end of the reporting period. At October 30, 2016, this grant was unvested and was measured at $28.15 per share, which represents the closing price of our common stock at the dateend of grant. We recorded $95,000 and $54,000the reporting period. The vesting of compensation expense within selling, general, and administrative expense for these common stock awards forthis award is over 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 quarterrequisite service period 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.
three years. 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 basedperformance-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 basedperformance-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,October 30, 2016, this grant was unvested and was measured at $25.32$28.15 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 GrantGrants
On June 24, 2014, certain key members of management were granted performance basedperformance-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 basedperformance-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,October 30, 2016, 16,000 restricted stock units associated with this grant waswere unvested and waswere measured at $25.32$28.15 per share, which represents the closing price of the company’scompany'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 based16,000 restricted stock units which could earn up tovest over their requisite service period of 28 months.
During the first quarter of fiscal 2017, 12,000 and 16,000 shares of common stock respectively.associated with the grant vested and had a weighted average fair value of $345,000 or $28.77 per share.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fiscal 2014 Grant
On June 25, 2013, certain key members of management were granted performance basedperformance-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. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the first quarter of fiscal 2017, 37,192 shares of common stock associated with this grant vested and had a weighted average fair value of $637,000 or $17.12 per share. Our fiscal 2014 grant is fully vested.
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,first quarter of fiscal 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, ourOur fiscal 2013 grant wasis fully vested. Overall
We recorded compensation expense of $1.9$1.5 million and $424,000$1.2 million within selling, general, and administrative expense for our performance based restricted stock unitsunit awards for the ninesix month periods ending January 31,October 30, 2016 and FebruaryNovember 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,October 30, 2016, the remaining unrecognized compensation cost related to theour performance based restricted stock unitsunit awards was $4.2$5.0 million, which is expected to be recognized over a weighted average vesting period of 2.12.0 years.
Time Vested Restricted Stock Units
On July 14, 2016, an employee was granted 1,200 shares of time vested restricted stock units. This award was valued based on the fair market value on the date of grant. The fair value of this award was $28 per share, which represents the closing price of our common stock on the date of grant. The vesting of this award is over the requisite service period of 11 months.
We recorded compensation expense of $11,000 within selling, general, and administrative expense for our time vested restricted stock unit awards for the six months ending October 30, 2016. There were not any time vested restricted stock unit awards granted or unvested during the six months ending November 1, 2015 and, therefore, no compensation expense was recorded.
At October 30, 2016, the remaining unrecognized compensation cost related to unvested time vested restricted stock awards was $23,000, which is expected to be recognized over the next 7.5 months. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Accounts Receivable
A summary of accounts receivable follows: | | | | | | | | | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | May 1, 2016 | | Customers | | $ | 20,580 | | | $ | 25,045 | | | $ | 25,531 | | Allowance for doubtful accounts | | | (420 | ) | | | (826 | ) | | | (1,088 | ) | Reserve for returns and allowances and discounts | | | (1,121 | ) | | | (905 | ) | | | (962 | ) | | | $ | 19,039 | | | $ | 23,314 | | | $ | 23,481 | |
| | | | | | | | | | (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)
A summary of the activity in the allowance for doubtful accounts follows: | | | | | | | | | Six months ended | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | Beginning balance | | $ | (1,088 | ) | | $ | (851 | ) | Provision for bad debts | | | 216 | | | | (81 | ) | Net write-offs, net of recoveries | | | 452 | | | | 106 | | Ending balance | | $ | (420 | ) | | $ | (826 | ) |
| | | | | | | | | 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 | ) |
A summary of the activity in the allowance for returns and allowances and discounts accounts follows: | | | | | | | | | Six months ended | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | Beginning balance | | $ | (962 | ) | | $ | (738 | ) | Provision for returns, allowances | | | | | | | | | and discounts | | | (1,620 | ) | | | (1,561 | ) | Credits issued | | | 1,461 | | | | 1,394 | | Ending balance | | $ | (1,121 | ) | | $ | (905 | ) |
| | | | | | 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 | ) |
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) | | October 30, 2016 | | | November 1, 2015 | | | May 1, 2016 | | Raw materials | | $ | 6,128 | | | $ | 6,272 | | | $ | 5,462 | | Work-in-process | | | 2,518 | | | | 2,779 | | | | 2,972 | | Finished goods | | | 37,308 | | | | 37,428 | | | | 38,097 | | | | $ | 45,954 | | | $ | 46,479 | | | $ | 46,531 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) | | | | | | | | | | (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 | |
6. Other Assets
A summary of other assets follows: | | | | | | | | | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | May 1, 2016 | | Cash surrender value – life insurance | | $ | 358 | | | $ | 339 | | | $ | 357 | | Non-compete agreement, net | | | 866 | | | | 941 | | | | 903 | | Customer relationships, net | | | 689 | | | | 740 | | | | 715 | | Other | | | 582 | | | | 474 | | | | 598 | | | | $ | 2,495 | | | $ | 2,494 | | | $ | 2,573 | |
| | | | | | | | | | (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 | |
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.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The gross carrying amount of our non-compete agreement was $2.0 million at January 31,October 30, 2016, FebruaryNovember 1, 2015 and May 3, 2015,1, 2016, respectively. At January 31,October 30, 2016, November 1, 2015, and May 3, 2015,1, 2016, accumulated amortization for our non-compete agreement was $1.2 million, $1.1 million. At February 1, 2015 accumulated amortization for our non-compete agreement was $1.0 million.million, and $1.1 million, respectively.
Amortization expense for our non-compete agreement was $56,000$38,000 for the ninesix month periods ended January 31,October 30, 2016 and FebruaryNovember 1, 2015. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 20162017 - $18,000;$37,000; FY 20172018 - $75,000; FY 2018-2019- $75,000; FY 20192020 - $75,000; FY 20202021 - $75,000 and Thereafter - $604,000.$529,000.
The weighted average amortization period for our non-compete agreement is 12.311.5 years as of January 31,October 30, 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,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, respectively. Accumulated amortization for our customer relationships was $140,000, $89,000,$179,000, $128,000, and $102,000$153,000 at January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, respectively.
Amortization expense for our customer relationships was $38,000$26,000 for the ninesix months ending January 31,October 30, 2016 and FebruaryNovember 1, 2015. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2016 - $13,000; FY 2017 - $51,000;$25,000; FY 2018 - $51,000; FY 2019 - $51,000; FY 2020 - $51,000; FY 2021 - $51,000; and Thereafter - $511,000.$460,000.
The weighted average amortization period for our customer relationships is 14.313.5 years as of January 31,October 30, 2016.
Cash Surrender Value – Life Insurance
At January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 20151, 2016 we had one life insurance contract with a death benefit of $1.4 million.
Our cash surrender value – life insurance balances totaling $358,000, $339,000 and $357,000 $338,000 and $339,000 at January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, 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) | | October 30, 2016 | | | November 1, 2015 | | | May 1, 2016 | | Compensation, commissions and related benefits | | $ | 7,111 | | | $ | 6,657 | | | $ | 10,011 | | Advertising rebates | | | 734 | | | | 2,536 | | | | 870 | | Interest | | | 5 | | | | - | | | | - | | Other accrued expenses | | | 1,028 | | | | 702 | | | | 1,041 | | | | $ | 8,878 | | | $ | 9,895 | | | $ | 11,922 | |
| | | | | | | | | | (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 | |
8. Long-Term Debt and Lines of Credit
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 agreementOur Credit Agreement with Wells Fargo Bank, N.A. (“("Wells Fargo”Fargo") that provided for an unsecuredprovides a revolving loan commitment of $10 million to be used to finance working capital and general corporate purposes.$30 million. Interest iswas charged at a rate (applicable interest rate of 1.93%, 1.77%, and 1.78%1.98% at January 31, 2016, February 1, 2015, and May 3, 2015, respectively) equal to the one-monthOctober 30, 2016) as a variable spread over LIBOR rate plus a spread based on our ratio of debt to EBITDA as defined in the agreement.EBITDA. The Credit Agreement contained customarycontains certain financial and other covenants as defined in the agreement and wasis set to expire on August 31, 2015.15, 2018.
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 ultimately repatriate earnings and profits from our foreign subsidiaries to the U.S. for various strategic purposes.
At January 31,Outstanding borrowings are secured by a pledge of 65% of the common stock of Culp International Holdings Ltd. (our subsidiary located in the Cayman Islands), as required by the Credit Agreement. There were no borrowings outstanding under the Credit Agreement at October 30, 2016, FebruaryNovember 1, 2015, and May 3,1, 2016, respectively.
At October 30, 2016, November 1, 2015, and May 1, 2016, there was awere $250,000 in outstanding letterletters 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 provided by the Credit Agreement.
Effective August 1, 2016, we entered into a Third Amendment to our Credit Agreement that will allow us to issue letters of credit not to exceed $7.5 million. On August 3, 2016, we issued a $5.0 million letter of credit (all of which is currently outstanding and in addition to the $250,000 letter of credit noted above) for the construction of a new building associated with our mattress fabrics segment (see Note 15 for further details). This $5.0 million letter of credit will be automatically reduced in increments of $1.25 million on August 1, 2017, November 1, 2017, February 1, 2018, and May 15, 2018, respectively. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Revolving Credit Agreement – China
We hadhave an unsecured credit agreement associated with our operations in China that providedprovides for a line of credit of up to 40 million RMBChinese Yuan Renminbi (approximately $6.1$5.9 million USD at January 31,October 30, 2016), that was set to expireexpires on February 9, 2016.March 8, 2017. This agreement hadhas an interest rate determined by the Chinese government. Theregovernment and there were no borrowings outstanding under the agreement as of January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015.1, 2016. 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,October 30, 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’scompany'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’scompany'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: | | | | | | | | Fair value measurements at October 30, 2016 using: | | | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | | | | | | | | | | | | | | | | | | 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 | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | Limited Term Bond Fund | | $ | 3,112 | | | | N/A | | | | N/A | | | $ | 3,112 | | | Cash and Cash Equivalents | | | $ | 23,940 | | | | N/A | | | | N/A | | | $ | 23,940 | | U.S. Corporate Bonds | | | | - | | | | 7,110 | | | | N/A | | | | 7,110 | | Premier Money Market Fund | | | | 4,421 | | | | N/A | | | | N/A | | | | 4,421 | | Low Duration Bond Fund | | | | 1,075 | | | | N/A | | | | N/A | | | | 1,075 | | Intermediate Term Bond Fund | | | 2,188 | | | | N/A | | | | N/A | | | | 2,188 | | | | 750 | | | | N/A | | | | N/A | | | | 750 | | 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 | | | | 605 | | | | N/A | | | | N/A | | | | 605 | | Large Blend Fund | | | | 319 | | | | N/A | | | | N/A | | | | 319 | | Growth Allocation Fund | | | 63 | | | | N/A | | | | N/A | | | | 63 | | | | 102 | | | | N/A | | | | N/A | | | | 102 | | Other | | | 49 | | | | N/A | | | | N/A | | | | 49 | | | | 152 | | | | N/A | | | | N/A | | | | 152 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) | | 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 May 3, 2015 using: | | | Fair value measurements at May 1, 2016 using: | | | | | | | | | | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | | 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 | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | | | | | | | | | Premier Money Market Fund | | | $ | 3,404 | | | | N/A | | | | N/A | | | $ | 3,404 | | Low Duration Bond Fund | | | | 1,604 | | | | N/A | | | | N/A | | | | 1,604 | | Intermediate Term Bond Fund | | | | 1,154 | | | | N/A | | | | N/A | | | | 1,154 | | Strategic Income Fund | | | | 999 | | | | N/A | | | | N/A | | | | 999 | | Limited Term Bond Fund | | $ | 3,107 | | | | N/A | | | | N/A | | | $ | 3,107 | | | | 602 | | | | N/A | | | | N/A | | | | 602 | | 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 | | | Large Blend Fund | | | | 289 | | | | N/A | | | | N/A | | | | 289 | | Growth Allocation Fund | | | 85 | | | | N/A | | | | N/A | | | | 85 | | | | 148 | | | | N/A | | | | N/A | | | | 148 | | Mid Cap Value Fund | | | | 102 | | | | N/A | | | | N/A | | | | 102 | | Other | | | 45 | | | | N/A | | | | N/A | | | | 45 | | | | 82 | | | | N/A | | | | N/A | | | | 82 | |
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,October 30, 2016, and FebruaryNovember 1, 2015, and May 1, 2016, our short-term investments totaled $4.3$2.4 million, $6.3 million, and $8.4$4.4 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,$45,000, $171,000, and $95,000$100,000 at January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, respectively. At January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, the fair value of our short-term bond funds approximated its cost basis. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Long- Term Investments - Held-To-Maturity
During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments will be recorded as either current or noncurrent on the Consolidated Balance Sheet, based on contractual maturity date and stated at amortized cost.
At October 30, 2016, our held-to-maturity investments totaling $31.0 million consisted of invested cash and cash equivalents of $23.9 million and U.S. Corporate bonds of $7.1 million. The $23.9 million in invested cash and cash equivalents were used to purchase U.S. Corporate bonds during our third quarter of fiscal 2017 (all U.S. Corporate bond purchases were completed by November 3, 2016). The fair value of our held-to-maturity investments approximates their cost basis.
Long-Term Investments - Rabbi Trust
Effective January 1, 2014, we established a Rabbi Trust to set aside funds for participants of our deferred compensation plan (the “Plan”"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$5.0 million, $2.1$3.3 million, and $2.4$4.0 million at January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, respectively. Our long-term investments had an accumulated unrealized gain of $1,000 and $14,000 at October 1, 2016 and November 1, 2015, respectively, and an accumulated realized loss of $99,000$44,000 at January 31,May 1, 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 associated with our Rabbi Trust 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 | | | Six months ended | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | October 30, 2016 | | | November 1, 2015 | | Interest | | $ | 95 | | | $ | 180 | | | $ | 45 | | | $ | 86 | | Income Taxes | | | 4,921 | | | | 3,005 | | | Income taxes | | | | 3,238 | | | | 2,088 | |
Interest costs charged to operations were $45,000 and incurred on our long-term debt and lines of credit were $58,000 and $191,000$49,000 for the ninesix months ended January 31,October 30, 2016 and FebruaryNovember 1, 2015, respectively. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Interest costs of $58,000$45,000 and $141,000$49,000 for the construction of qualifying fixed assets were capitalized and will be amortized over the related assets’assets' useful lives for the ninesix months ended January 31,October 30, 2016 and FebruaryNovember 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 | | | Three months ended | | (amounts in thousands) | | January 31, 2016 | | | February 1, 2015 | | | October 30, 2016 | | | November 1, 2015 | | Weighted average common shares outstanding, basic | | | 12,331 | | | | 12,219 | | | | 12,308 | | | | 12,343 | | Dilutive effect of stock-based compensation | | | 155 | | | | 198 | | | | 199 | | | | 141 | | Weighted average common shares outstanding, diluted | | | 12,486 | | | | 12,417 | | | | 12,507 | | | | 12,484 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended January 31,October 30, 2016 and FebruaryNovember 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)
| | | | Six months ended | | (amounts in thousands) | October 30, 2016 | | November 1, 2015 | | Weighted average common shares outstanding, basic | | | 12,297 | | | | 12,310 | | Dilutive effect of stock-based compensation | | | 198 | | | | 171 | | Weighted average common shares outstanding, diluted | | | 12,495 | | | | 12,481 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the ninesix months ended January 31,October 30, 2016 and FebruaryNovember 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. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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’scompany's operating segments follows:
| | | | | | Three months ended | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | Net sales: | | | | | | | Mattress Fabrics | | $ | 45,527 | | | $ | 45,436 | | Upholstery Fabrics | | | 29,816 | | | | 31,520 | | | | $ | 75,343 | | | $ | 76,956 | | Gross profit: | | | | | | | | | Mattress Fabrics | | $ | 10,756 | | | $ | 9,456 | | Upholstery Fabrics | | | 6,145 | | | | 6,277 | | | | $ | 16,901 | | | $ | 15,733 | | Selling, general, and administrative expenses: | | | | | | | | | Mattress Fabrics | | $ | 3,296 | | | $ | 2,989 | | Upholstery Fabrics | | | 3,652 | | | | 3,813 | | Total segment selling, general, and | | | | | | | | | administrative expenses | | | 6,948 | | | | 6,802 | | Unallocated corporate expenses | | | 2,654 | | | | 2,631 | | | | $ | 9,602 | | | $ | 9,433 | | Income from operations: | | | | | | | | | Mattress Fabrics | | $ | 7,460 | | | $ | 6,467 | | Upholstery Fabrics | | | 2,493 | | | | 2,464 | | Total segment income from operations | | | 9,953 | | | | 8,931 | | Unallocated corporate expenses | | | (2,654 | ) | | | (2,631 | ) | Total income from operations | | | 7,299 | | | | 6,300 | | Interest income | | | 15 | | | | 69 | | Other expense | | | (155 | ) | | | (225 | ) | Income before income taxes | | $ | 7,159 | | | $ | 6,144 | |
| | | | | | 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 | | | Six months ended | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | October 30, 2016 | | | November 1, 2015 | | Net sales: | | | | | | | | | | | | | Mattress Fabrics | | $ | 137,522 | | | $ | 131,543 | | | $ | 96,057 | | | $ | 93,245 | | Upholstery Fabrics | | | 98,085 | | | | 99,777 | | | | 59,969 | | | | 63,896 | | | | $ | 235,607 | | | $ | 231,320 | | | $ | 156,026 | | | $ | 157,141 | | | | | | | | | | | | Gross profit: | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 28,133 | | | $ | 22,603 | | | $ | 22,657 | | | $ | 19,381 | | Upholstery Fabrics | | | 20,365 | | | | 16,792 | | | | 12,664 | | | | 12,554 | | | | | | | | | | | | | | $ | 48,498 | | | $ | 39,395 | | | | | | | | | | | | | $ | 35,321 | | | $ | 31,935 | | Selling, general, and administrative expenses: | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 8,865 | | | $ | 8,019 | | | $ | 6,795 | | | $ | 5,912 | | Upholstery Fabrics | | | 11,372 | | | | 10,518 | | | | 7,185 | | | | 7,409 | | Total segment selling, general, and | | | | | | | | | | | | | | | | | administrative expenses | | | 20,237 | | | | 18,537 | | | | 13,980 | | | | 13,321 | | Unallocated corporate expenses | | | 7,275 | | | | 4,636 | | | | 5,368 | | | | 4,854 | | | | $ | 27,512 | | | $ | 23,173 | | | $ | 19,348 | | | $ | 18,175 | | | | | | | | | | | | Income from operations: | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 19,267 | | | $ | 14,584 | | | $ | 15,862 | | | $ | 13,468 | | Upholstery Fabrics | | | 8,994 | | | | 6,274 | | | | 5,479 | | | | 5,146 | | Total segment income from operations | | | 28,261 | | | | 20,858 | | | | 21,341 | | | | 18,614 | | Unallocated corporate expenses | | | (7,275 | ) | | | (4,636 | ) | | | (5,368 | ) | | | (4,854 | ) | Total income from operations | | | 20,986 | | | | 16,222 | | | | 15,973 | | | | 13,760 | | Interest expense | | | - | | | | (50 | ) | | Interest income | | | 150 | | | | 478 | | | | 40 | | | | 112 | | Other expense | | | (405 | ) | | | (380 | ) | | | (307 | ) | | | (320 | ) | Income before income taxes | | $ | 20,731 | | | $ | 16,270 | | | $ | 15,706 | | | $ | 13,552 | |
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) Balance sheet information for the company's operating segments follows:
| | | | | | | | | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | May 1, 2016 | | Segment assets: | | | | | | | | | | Mattress Fabrics | | | | | | | | | | Current assets (1) | | $ | 38,062 | | | $ | 40,937 | | | $ | 43,472 | | Non-compete agreement | | | 866 | | | | 941 | | | | 903 | | Customer relationships | | | 689 | | | | 740 | | | | 715 | | Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | | Property, plant and equipment (2) | | | 43,228 | | | | 36,050 | | | | 37,480 | | Total mattress fabrics assets | | | 94,307 | | | | 90,130 | | | | 94,032 | | Upholstery Fabrics | | | | | | | | | | | | | Current assets (1) | | | 26,931 | | | | 28,856 | | | | 26,540 | | Property, plant and equipment (3) | | | 1,480 | | | | 1,474 | | | | 1,564 | | Total upholstery fabrics assets | | | 28,411 | | | | 30,330 | | | | 28,104 | | Total segment assets | | | 122,718 | | | | 120,460 | | | | 122,136 | | Non-segment assets: | | | | | | | | | | | | | Cash and cash equivalents | | | 13,910 | | | | 31,176 | | | | 37,787 | | Short-term investments | | | 2,430 | | | | 6,320 | | | | 4,359 | | Deferred income taxes | | | 581 | | | | 3,415 | | | | 2,319 | | Income taxes receivable | | | - | | | | 75 | | | | 155 | | Other current assets | | | 1,675 | | | | 2,614 | | | | 2,477 | | Property, plant and equipment (4) | | | 829 | | | | 795 | | | | 929 | | Long-term investments (Held-to-Maturity) | | | 31,050 | | | | - | | | | - | | Long-term investments (Rabbi Trust) | | | 4,994 | | | | 3,279 | | | | 4,025 | | Other assets | | | 940 | | | | 813 | | | | 955 | | Total assets | | $ | 179,127 | | | $ | 168,947 | | | $ | 175,142 | |
| | | | | | Six months ended | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | Capital expenditures (5): | | | | | | | Mattress Fabrics | | $ | 8,857 | | | $ | 5,138 | | Upholstery Fabrics | | | 165 | | | | 254 | | Unallocated Corporate | | | 62 | | | | 143 | | Total capital expenditures | | $ | 9,084 | | | $ | 5,535 | | Depreciation expense: | | | | | | | | | Mattress Fabrics | | $ | 3,101 | | | $ | 2,783 | | Upholstery Fabrics | | | 410 | | | | 401 | | Total depreciation expense | | $ | 3,511 | | | $ | 3,184 | |
(1) | Current assets represent accounts receivable and inventory for the respective segment. |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(2) | The $35.6$43.2 million at January 31,October 30, 2016, represents property, plant, and equipment of $23.0$28.5 million and $12.6$14.7 million located in the U.S. and Canada, respectively. The $33.0$36.1 million at FebruaryNovember 1, 2015, represents property, plant, and equipment of $23.5$23.3 million and $9.5$12.8 million located in the U.S. and Canada, respectively. The $33.8$37.5 million at May 3, 2015,1, 2016, represents property, plant, and equipment of $23.8$24.8 million and $10.0$12.7 million located in the U.S. and Canada, respectively. |
(3) | The $1.6$1.5 million at January 31,October 30, 2016, represents property, plant, and equipment of $860$890 and $730$590 located in the U.S. and China, respectively. The $1.5 million at FebruaryNovember 1, 2015, represents property, plant, and equipment of $877$785 and $645$689 located in the U.S. and China, respectively. The $1.5$1.6 million at May 3, 2015,1, 2016, represents property, plant, and equipment of $848$893 and $619$671 located in the U.S. and China, respectively. |
(4) | The $930, $701,$829, $795, and $838$929 at January 31,October 30, 2016, FebruaryNovember 1, 2015 and May 3, 2015,1, 2016, 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 of $7.4$5.9 million, or 35.7%37.7% of income before income tax expense,taxes, for the ninesix month period ended January 31,October 30, 2016, compared to income tax expense of $6.1$5.1 million, or 37.6%37.5% of income before income tax expense,taxes, for the ninesix month period ended FebruaryNovember 1, 2015. Our effective income tax rates for the ninesix month periods ended January 31,October 30, 2016, and FebruaryNovember 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 currenciescurrency exchange rates 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: | | 2017 | | | 2016 | | federal income tax rate | | | 34.0 | % | | | 34.0 | % | U.S state income tax expense | | | 0.6 | | | | 0.7 | | tax effects of Chinese foreign exchange gains | | | 1.6 | | | | 2.3 | | increase in liability for uncertain tax positions | | | 0.3 | | | | 0.3 | | other | | | 1.2 | | | | 0.2 | | | | | 37.7 | % | | | 37.5 | % | | | | | | | | | |
| 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”"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,October 30, 2016, we recorded a partial valuation allowance of $874,000,$603,000, of which $498,000$519,000 pertained to certain U.S. state net operating loss carryforwards and credits and $376,000$84,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at FebruaryNovember 1, 2015, we recorded a partial valuation allowance of $1.0 million,$938,000, of which $596,000$561,000 pertained to certain U.S. state net operating loss carryforwards and credits and $400,000$377,000 pertained to loss carryfowards associated with our Culp Europe operation located in Poland. Based on our assessment at May 3, 2015,1, 2016, we recorded a partial valuation allowance of $922,000,$590,000, of which $561,000$518,000 pertained to certain U.S. state net operating loss carryforwards and credits and $361,000$72,000 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,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, respectively. The recorded valuation allowance of $874,000$603,000 at January 31,October 30, 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,October 30, 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,October 30, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $138.9 million. At the netsame date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $3.3 million,$657,000, which included U.S. income and foreign withholding taxes totaling $37.3$41.4 million, offset by U.S. foreign income tax credits of $34.0$40.7 million. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) At November 1, 2015, we had accumulated earnings and profits from our foreign subsidiaries totaling $93.2 million. At February 1, 2015, the netsame date, the 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$35.7 million, offset by U.S. foreign income tax credits of $29.7$33.3 million. At May 1, 2016, we had accumulated earnings and profits from our foreign subsidiaries totaling $129.6 million. At May 3, 2015, the netsame date, the deferred tax liability associated with our undistributed earnings from our foreign subsidiaries totaled $1.7 million,$604,000, which included U.S. income and foreign withholding taxes totaling $32.4$38.5 million, offset by U.S. foreign income tax credits of $30.7$37.9 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,October 30, 2016, our non-current deferred tax asset of $4.3 million$581,000 represents $3.5 million$109,000 and $773,000$472,000 from our operations located in the U.S. and China, respectively. At FebruaryNovember 1, 2015, our non-current deferred tax asset of $5.0$3.4 million represents $4.2$2.5 million and $776,000$898,000 from our operations located in the U.S. and China, respectively. At May 3, 2015,1, 2016, our non-current deferred tax asset of $5.2$2.3 million represents $4.3$1.7 million and $868,000$572,000 from our operations located in the U.S. and China, respectively. Our non-current deferred tax liability balances of $1.7 million, $1.2 million, $927,000, and $982,000$1.5 million at January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, respectively, pertain to our operations located in Canada.
Uncertainty In Income Taxes
At January 31,October 30, 2016, we had a $13.2$15.1 million total gross unrecognized income 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$11.4 million and $3.5$3.7 million were classified as non-current deferred income taxes and income taxes payable – long-term, respectively, in the accompanying consolidated balance sheets. At FebruaryNovember 1, 2015, we had a $13.9$14.2 million total gross unrecognized income tax benefit, of which $10.3$10.5 million and $3.6$3.7 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, 2015,1, 2016, we had $14.1$14.9 million of total gross unrecognized income tax benefit, of which $10.3$11.1 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 ofAt October 30, 2016, our $15.1 million total gross unrecognized income tax benefit will decrease by approximately $120,000included $3.7 million that, if recognized, would favorably affect the income tax rate in future periods. At November 1, 2015, our $14.2 million total gross unrecognized income tax benefit, included $3.7 million that, if recognized, would favorably affect the income tax rate in future periods. At May 1, 2016, our $14.9 million total gross unrecognized income tax benefit included $3.8 million that, if recognized, would favorably affect the income tax rate in future periods.
Our gross unrecognized income tax benefit of $15.1 million at October 30, 2016, relates to tax positions for which significant change is reasonably possible in fiscal 2016.2017. This decreaseamount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2005 and subsequent due to loss carryforwards. Canadian federal returns remain subject to examination for income tax years 2009 and subsequent, with the statute of limitations for the 2009 income tax year expiring in January 2017. Canadian provincial (Quebec) returns remain subject to examination for income tax years 2009 and subsequent, with the statute of limitations for the 2009 income tax year expiring in April 2017. Income tax returns associated with our operations located in China are subject to examination for income tax year 2011 and subsequent. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Currently, the Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal 2014 and no adjustments have been proposed at this time. We currently expect this examination to be completed by the end of our fiscal year 2017 (April 30, 2017). During the third quarter of fiscal 2017, Revenue Quebec commenced an examination of our Canadian provincial (Quebec) income tax returns for fiscal years 2013 through 2015. We currently expect this examination to be completed by the end of our first quarter of fiscal 2018 (July 30, 2017).
In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statue of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.
14. Statutory Reserves Our subsidiaries located in China are required to transfer 10% of their net income, as determined in accordance with the People’sPeople's Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the company’scompany'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,October 30, 2016, the company’scompany's statutory surplus reserve was $4.7$4.6 million, representing 10% of accumulated earnings and profits determined in accordance with PRC accounting rules and regulations. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’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$4.6 million to assist with debt repayment, capital expenditures, and other expenses of the company’scompany'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. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Purchase Commitments
Overall
At January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $977,000, $3.8$9.8 million, $1.9 million, and $2.3$10.6 million, respectively. The $9.8 million and $10.6 million open purchase commitments as of October 30, 2016 and May 1, 2016, include $6.1 million and $9.3 million associated with the construction of a new building noted below. Construction of New Building
Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that will expand our distribution capabilities and office space at a current estimated cost of $11.2 million. This agreement required an installment payment of $1.9 million in April 2016 and requires additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- $3.8 million; and Fiscal 2019- $1.2 million. Interest will be charged on the required outstanding installment payments in excess of services that have been rendered at a rate of $2.25% plus the current 30 day LIBOR rate.
Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor's bank being the beneficiary. In addition to the interest that will be charged on the outstanding installment payments noted above, there will be a 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month (see Note 8 for further details).
As of October 30, 2016, we have made payments totaling $5.1 million for services rendered on the construction of this building. The remaining $6.1 million on this commitment is required to be paid on an installment basis over the next three fiscal years as follows: Fiscal 2017 - $1.1 million; Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.2 million.
The construction of this new building is currently expected to be completed in December 2016.
16. Common Stock Repurchase Program On February 25, 2014,June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities. During the ninesix months ended January 31,October 30, 2016, and November 1, 2015, we purchased 100,776did not purchase any 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. stock. At January 31,October 30, 2016, we had $1.9$5.0 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) 17. Dividend Program
On December 1, 2016, we announced that our board of directors approved a 14% increase in our quarterly cash dividend from $0.07 to $0.08 per share. This payment will be made on January 17, 2017, to shareholders of record as of January 3, 2017.
During the nine months ended January 31,first half of fiscal 2017, dividend payments totaled $4.3 million, of which $2.5 million represented a special cash dividend payment of $0.21 per share, and $1.8 million represented quarterly dividend payments of $0.07 per share.
During the first half of fiscal 2016, dividend payments totaled $7.3$6.4 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $2.3$1.4 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’sboard's discretion as business needs or market conditions change. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report and the exhibits attached hereto contain “forward-looking statements”"forward-looking statements" within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties. Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update or alter such statements.statements, whether as a result of new information, future events or otherwise. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often but not always characterized by qualifying words such as “expect,” “believe,” “estimate,” “plan” and “project”"expect," "believe," "estimate," "plan," "project," "anticipate," "depend" and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, sales, profit margins, profitability, operating income, capital expenditures, income taxes, SG&A or other expenses, pre-tax income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding future economic or industry trends or future developments. Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in the value of the U.S. dollar versus other currencies can affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. Also, economic and political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. Finally, increases in market prices for petrochemical products can significantly affect the prices we pay for raw materials, and in turn, increase our operating costs and decrease our profitability. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, isare included in Item 1A “Risk Factors”"Risk Factors" section in our Form 10-K filed with the Securities and Exchange Commission on July 17, 2015,15, 2016, for the fiscal year ended May 3, 2015.1, 2016. ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes and other exhibits included elsewhere in this report.
General
Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30. The ninesix months ended January 31,October 30, 2016, and FebruaryNovember 1, 2015, each represent 39 and 40 week periods, respectively.26-week periods. 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 represent primarily compensation and benefits for certain executive officers, all costs related to being a public company, and other miscellaneous expenses.
Executive Summary
Results of Operations
| | Three Months Ended | | | | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | Change | | Net sales | | $ | 75,343 | | | $ | 76,956 | | | | (2.1)% | | Gross profit | | | 16,901 | | | | 15,733 | | | | 7.4% | | Gross profit margin | | | 22.4 | % | | | 20.4 | % | | | 200bp | | SG&A expenses | | | 9,602 | | | | 9,433 | | | | 1.8% | | Income from operations | | | 7,299 | | | | 6,300 | | | | 15.9% | | Operating margin | | | 9.7 | % | | | 8.2 | % | | | 150bp | | Income before income taxes | | | 7,159 | | | | 6,144 | | | | 16.5% | | Income taxes | | | 2,684 | | | | 2,373 | | | | 13.1% | | Net income | | | 4,475 | | | | 3,771 | | | | 18.7% | |
| | Three Months Ended | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | % Change | Net sales | | $ | 78,466 | | | $ | 81,269 | | | (3.4 | )% | Gross profit | | | 16,563 | | | | 14,402 | | | 15.0 | % | Gross profit margin | | | 21.1 | % | | | 17.7 | % | | 340 | bp | SG&A expenses | | | 9,337 | | | | 8,375 | | | 11.5 | % | Income from operations | | | 7,226 | | | | 6,027 | | | 19.9 | % | Operating margin | | | 9.2 | % | | | 7.4 | % | | 180 | bp | Income before income taxes | | | 7,179 | | | | 5,922 | | | 21.2 | % | Income taxes | | | 2,317 | | | | 2,110 | | | 9.8 | % | Net income | | | 4,862 | | | | 3,812 | | | 27.5 | % |
| | Six Months Ended | | | | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | Change | | Net sales | | $ | 156,026 | | | $ | 157,141 | | | | (0.7)% | | Gross profit | | | 35,321 | | | | 31,935 | | | | 10.6% | | Gross profit margin | | | 22.6 | % | | | 20.3 | % | | | 230bp | | SG&A expenses | | | 19,348 | | | | 18,175 | | | | 6.5% | | Income from operations | | | 15,973 | | | | 13,760 | | | | 16.1% | | Operating margin | | | 10.2 | % | | | 8.8 | % | | | 140bp | | Income before income taxes | | | 15,706 | | | | 13,552 | | | | 15.9% | | Income taxes | | | 5,917 | | | | 5,081 | | | | 16.5% | | Net income | | | 9,789 | | | | 8,471 | | | | 15.6% | |
| | Nine Months Ended | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | % Change | Net sales | | $ | 235,607 | | | $ | 231,320 | | | 1.9 | % | Gross profit | | | 48,498 | | | | 39,395 | | | 23.1 | % | Gross profit margin | | | 20.6 | % | | | 17.0 | % | | 360 | bp | SG&A expenses | | | 27,512 | | | | 23,173 | | | 18.7 | % | Income from operations | | | 20,986 | | | | 16,222 | | | 29.4 | % | Operating margin | | | 8.9 | % | | | 7.0 | % | | 190 | bp | Income before income taxes | | | 20,731 | | | | 16,270 | | | 27.4 | % | Income taxes | | | 7,398 | | | | 6,113 | | | 21.0 | % | Net income | | | 13,333 | | | | 10,157 | | | 31.3 | % |
Net Sales
Overall, our net sales were slightly higher fordecreased in the nine month year-to-date periodsecond quarter and the first half of fiscal 20162017 as compared with the same periodperiods a year ago. However, we experienced a slightThe decrease in our net sales reflects primarily softer retail demand for home furnishings. In spite of the third quarter of fiscal 2016 compared with the prior year third quarter, which was an exceptionally strong sales performance for both our business segments. Wesofter retail environment, we have remained focused on our top strategic priorities of product innovation and creativity in order to provide a product mix that meets the demands of our customers.customers in both our business segments. Our scalable and flexible manufacturing platform supports thisour strategy, and we have made significant capital investments (mostly within our mattress fabrics segment) to improve our operating efficiencies and overall capacity.
Currently, we expect both overall net sales and profitability to be negatively affected in the third quarter of fiscal 2017 as compared to the same period a year earlier, due primarily to the timing of the Chinese New Year holiday, with the disruptive impact of the holiday on our upholstery fabrics business occurring in January this year as opposed to February in the prior year. Income Before Income Taxes The increaseDespite the decrease in net sales noted above, income before income taxes primarilyincreased for the second quarter and the first half of fiscal 2017 as compared with the same periods a year ago. The increase reflects the significant improvement in our operating resultsprofitability for both business segments. We continued to realize the benefits of our recent capital investments in our mattress fabrics business, withwhich increased capacity via newer and more efficient equipment, enhanced finishing capabilities and better overall throughput. We also incurredbenefited from lower raw material costs in both business segments and incurred lower operating expenses (primarily due to more favorable currency exchange rates) associated with our operations located in both our business segments during fiscal 2016 compared with fiscal 2015. Partially offsetting the improvement in incomeChina. Income before income taxes for the first half of fiscal 2017 was theaffected by an increase in SG&A expenses, due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets. We also incurred higher inventory warehousing costs and design and sales expenses associated with our mattress fabrics segment. For the second quarter of fiscal 2017, SG&A expenses increased slightly compared with the second quarter of fiscal 2016.
See the Segment Analysis section located in the Results of Operationsbelow for further details.
Liquidity
At January 31,October 30, 2016, our cash and cash equivalents, and short-term investments, and long-term investments (held-to-maturity) totaled $36.0$47.4 million compared with $39.7$42.1 million at May 3, 2015.1, 2016. This decreaseincrease from the end of fiscal 2016 was primarily due to net cash provided by our operating activities of $16.6 million, partially offset by $6.3 million in capital expenditures mostly associated with our mattress fabric segment, of $7.7$4.3 million in dividend payments, of $7.3 million, repurchases of our common stock of $2.4 million, a long-term debt payment of $2.2 million, and $929,000 in long-term investment purchases of $1.3 million associated with our Rabbi Trust. This spending wasTrust that is partially offset byfunding our deferred compensation plan. Our net cash provided by operating activities of $15.9 million.
Net cash provided by operating activities was $15.9$16.6 million increased $5.4 million compared with $11.2 million for the ninesix months ending January 31, 2016, a decrease of $4.8 million compared with $20.7 million for the nine months ending FebruaryNovember 1, 2015. This decrease reflects an increase in inventory purchases, as well as higher annual bonus payments made in fiscal 2016 compared with those made in fiscal 2015. This spending was partially offset by cash flow fromis primarily due to increased earnings and improved cash collections from customers inaccounts receivable and inventory management during the first half of fiscal 20162017 compared with fiscal 2015.to the same period a year ago.
On August 11, 2015, we paid our last annual paymentDuring the second quarter of $2.2fiscal 2017, management decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our unsecured term notes,excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. At October 30, 2016, our held-to-maturity investments totaling $31.0 million consisted of invested cash and cash equivalents of $23.9 million and U.S. Corporate bonds of $7.1 million. The $23.9 million in invested cash and cash equivalents were used to purchase U.S. Corporate bonds during our third quarter of fiscal 2017 (all U.S. Corporate bond purchases were completed by November 3, 2016).
Currently, we currently do not have any long-term debt or balances dueborrowings outstanding under our credit agreements. At the end of our first quarter of fiscal 2017, we had an outstanding balance of $7.0 million on our U.S. revolving credit lines.line of credit. This outstanding balance was repaid during our second quarter of fiscal 2017. On March 10, 2016, we amended our Credit Agreement with Wells Fargo to increase our borrowing capacity from $10 million to $30 million. The purpose ofSee 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.Liquidity section below for various strategic purposes.further details.
Dividend Program
On MarchDecember 1, 2016, we announced that our board of directors approved a 14% increase in our quarterly cash dividend offrom $0.07 to $0.08 per share. This payment will be made on or about April 15, 2016,January 17, 2017, to shareholders of record as of April 1, 2016.January 3, 2017.
During the nine months ended January 31,first half of fiscal 2017, dividend payments totaled $4.3 million, of which $2.5 million represented a special cash dividend payment of $0.21 per share, and $1.8 million represented quarterly dividend payments of $0.07 per share. During the first half of fiscal 2016, dividend payments totaled $7.3$6.4 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $2.3$1.4 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. Common Stock Repurchase Program On February 25, 2014,June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities. During the ninesix months ended January 31,October 30, 2016, and November 1, 2015, we purchased 100,776did not purchase any shares of our common stock at a cost of $2.4 million, all of which were 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. stock. At January 31,October 30, 2016, we had $1.9$5.0 million available for additional repurchases of our common stock.
Segment Analysis
Mattress Fabrics Segment
| | Three Months Ended | | | | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | Change | | | | | | | | | | | | Net sales | | $ | 45,527 | | | $ | 45,346 | | | | 0.2% | | Gross profit | | | 10,756 | | | | 9,456 | | | | 13.7% | | Gross profit margin | | | 23.6 | % | | | 20.8 | % | | | 280bp | | SG&A expenses | | | 3,296 | | | | 2,989 | | | | 10.3% | | Income from operations | | | 7,460 | | | | 6,467 | | | | 15.4% | | Operating margin | | | 16.4 | % | | | 14.2 | % | | | 220bp | |
| | Three Months Ended | | | | | | Six Months Ended | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | % Change | | October 30, 2016 | | | November 1, 2015 | | | Change | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 44,277 | | | $ | 45,683 | | | (3.1 | )% | | $ | 96,057 | | | $ | 93,245 | | | | 3.0% | | Gross profit | | | 8,751 | | | | 8,076 | | | 8.4 | % | | | 22,657 | | | | 19,381 | | | | 16.9% | | Gross profit margin | | | 19.8 | % | | | 17.7 | % | | 210 | bp | | | 23.6 | % | | | 20.8 | % | | | 280bp | | SG&A expenses | | | 2,953 | | | | 2,853 | | | 3.5 | % | | | 6,795 | | | | 5,912 | | | | 14.9% | | Income from operations | | | 5,798 | | | | 5,223 | | | 11.0 | % | | | 15,862 | | | | 13,468 | | | | 17.8% | | Operating margin | | | 13.1 | % | | | 11.4 | % | | 170 | bp | | | 16.5 | % | | | 14.4 | % | | | 210bp | |
| | Nine Months Ended | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | % Change | | | | | | | | | | | Net sales | | $ | 137,522 | | | $ | 131,543 | | | 4.5 | % | Gross profit | | | 28,133 | | | | 22,603 | | | 24.5 | % | Gross profit margin | | | 20.5 | % | | | 17.2 | % | | 330 | bp | SG&A expenses | | | 8,865 | | | | 8,019 | | | 10.5 | % | Income from operations | | | 19,267 | | | | 14,584 | | | 32.1 | % | Operating margin | | | 14.0 | % | | | 11.1 | % | | 290 | bp |
I-32
Net Sales
OurMattress fabric net sales for mattress fabrics were slightly higheralmost the same for the nine month year-to-date periodsecond quarter of fiscal 20162017 compared with the same period a year ago.second quarter of fiscal 2016. However, we experienced a slight decrease in our net sales increased 3% for the third quarterfirst half of fiscal 20162017 compared with the prior year third quarter. Our net sales for the third quarter were affected by several factors, including a significant weather event at the end of the quarter, which affected our production and shipment schedules. In addition, we experienced a timing difference related to customer roll-outs of new product lines that typically occur in our third quarter as they did the previous year. We expect to recognize this business in our fourth quarterfirst half of fiscal 2016 following the Presidents Day holiday mattress promotional events.
Design2016. Our focus on design and innovation remainhas allowed us to offer a diverse product line across all price points and style trends. Our mattress cover business, known as CLASS, continued to perform well. CLASS allows us to design our top strategic prioritiesproduct offerings from fabric to meet customer style preferencesfinished cover and demand trends. As such, we are inexpand our business with our traditional customers and also reach new market segments, especially the process of enhancing our design servicesfast growing Internet bedding space. Our scalable and facilities. In addition, our mirroredflexible manufacturing platform technical expertise,supports this strategy, and expanded reactive capacity supportwe have made significant capital investments to improve our strategic priorities that focus on customer demand trendsoperating efficiencies and style preferences.
Our mattress fabric net sales also were affected by increased customer pricing pressures and the fact that the nine month year-to-date period of fiscal 2016 contained one less week compared with the same period a year ago.overall capacity.
Gross Profit and Operating Income Our mattress fabric gross profit and operating income increased in the thirdsecond quarter and the nine month year-to-date periodfirst half of fiscal 20162017 compared with the same periods a year ago. These results reflect the benefits of our recent capital investments, which includewith increased production capacity, via newer and more efficient equipment, enhanced finishing capabilities, and improved overall efficiency and throughput. As planned,Also, we completed the initial phase of our expansion project at our facility located in Canada during the third quarter, and we plan to install additional new equipment and make other technological improvements to our manufacturing platform during the fourth quarter. This project is expected to improve our production capacity and operating efficiency at this location. We also experiencedbenefited from lower raw material costs and operating expenses due to more favorable exchange rates in Canada for fiscal 2016 compared with fiscal 2015. Partially offsetting the improvement in operatingcosts. Operating income was affected by an increase in SG&A expenses, due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets, design and increased customer pricing pressures as noted above.sales expenses, and higher inventory warehousing costs that were primarily incurred during the first quarter.
During the first half of fiscal 2017, we continued to make capital investments to enhance our operations and improve product delivery performance. We are near completion with the latest project associated with our facilities located in North Carolina that will expand our production capacity and make major improvements to our distribution capabilities. We are planning more facility consolidation and equipment relocation to further streamline our production platform to support our continuous improvement initiatives and long-term growth strategy. This consolidation will involve relocating the knit fabric operation from our facility in High Point, NC to our expanded facility in Stokesdale, NC, approximately thirty miles away. The benefits of this move include savings in the areas of freight, labor and lease costs. Additionally, the move will improve our reactive capacity and provide our ability to substantially increase knit production. We expect this consolidation to begin in February 2017 and take approximately five months to complete. We are also making progress on our expansion project at our facility located in Canada, which includes new equipment installations, enhanced finishing capabilities, and a new distribution platform that will allow us to ship directly to customers located in Canada. The new distribution platform is expected to commence operations in the fourth quarter of fiscal 2017.
We are also in the final planning stages to expand our production capacity for mattress covers through a new production facility located in Haiti. This cut and sew facility, which will be a joint venture with our existing marketing joint venture partner for mattress covers, will be located in a modern industrial park on the northeast border of Haiti, which borders the Dominican Republic. This new operation, which is expected to commence production in the first half of next fiscal year, will complement our existing production capabilities with a mirrored platform and enhance our ability to meet customer demand while remaining cost competitive. Other benefits of this strategic move include the lowest labor cost in Central America and the Caribbean, and the most favorable tariff and duty rules in this hemisphere. Segment assets
Segment assets consist of accounts receivable, inventory, property, plant and equipment, goodwill, a non-compete agreement and customer relationships associated with an acquisition.
(dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | May 3, 2015 | | | October 30, 2016 | | | November 1, 2015 | | | May 1, 2016 | | Accounts receivable and inventory | | $ | 44,309 | | | $ | 36,658 | | | $ | 41,328 | | | $ | 38,062 | | | $ | 40,937 | | | $ | 43,472 | | Property, plant & equipment | | | 35,637 | | | | 33,046 | | | | 33,773 | | | | 43,228 | | | | 36,050 | | | | 37,480 | | Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | | | | 11,462 | | | | 11,462 | | | | 11,462 | | Non-compete agreement | | | 922 | | | | 998 | | | | 979 | | | | 866 | | | | 941 | | | | 903 | | Customer Relationships | | | 728 | | | | 779 | | | | 766 | | | | 689 | | | | 740 | | | | 715 | |
Accounts Receivable & Inventory
As of January 31,October 30, 2016, accounts receivable and inventory increased $7.7decreased $2.9 million, or 21%7%, compared with FebruaryNovember 1, 2015. This increasedecrease is primarily due to an increase in inventory of $9.8 million, as a result of customers requiring us to hold higher inventory levels of key products. This increase in inventory was partially offset by a decrease in accounts receivable of $2.1 million, due to lower net sales and improved cash collections on accounts receivable as customers were taking more advantage of sales discounts in the thirdsecond quarter of fiscal 20162017 compared towith the thirdsecond quarter of fiscal 2015.2016.
As of January 31,October 30, 2016, accounts receivable and inventory increased $3.0decreased $5.4 million, or 7%12%, compared with May 3, 2015.1, 2016. This increasedecrease is due to an increaseimproved inventory management in inventorythe first half of $4.4 million, as a result of customers requiring us to hold higher inventory levels of key products. This was partially offset by a decrease in accounts receivable of $1.4 million due tofiscal 2017 and improved cash collections on accounts receivable as customers were taking more advantage of sales discounts in the thirdsecond quarter of fiscal 20162017 compared with the fourth quarter of fiscal 2015.2016.
Property, Plant & Equipment
The $35.6$43.2 million at January 31,October 30, 2016, represents property, plant and equipment of $23.0$28.5 million and $12.6$14.7 million located in the U.S. and Canada, respectively. The $33.0$36.1 million at FebruaryNovember 1, 2015, represents property, plant, and equipment of $23.5$23.3 million and $9.5$12.8 million located in the U.S. and Canada, respectively. The $33.8$37.5 million at May 3, 2015,1, 2016, represents property, plant, and equipment of $23.8$24.8 million and $10.0$12.7 million located in the U.S. and Canada, respectively.
As of January 31,October 30, 2016, property, plant, and equipment increased $2.6$7.1 million, or 8%20%, compared with FebruaryNovember 1, 2015. This increase is primarily due to the capital investments noted above, partially offset by depreciation expense.
As of January 31,October 30, 2016, property, plant, and equipment increased $1.9$5.7 million, or 6%15%, compared with May 3, 2015.1, 2016. This increase is due to capital expenditures of $6.2$8.8 million that primarily relate to the construction of a new building (see Note 15 to the Consolidated Financial Statements for further details) and purchases and installation of machinery and equipment, associated with our operation located in Canada, partially offset by depreciation expense of $4.3$3.1 million for the nine month year-to-date periodfirst half of fiscal 2016.2017. Upholstery Fabrics Segment
Net Sales
| | | | | Three Months Ended | | | | | | | | (dollars in thousands) | | October 30, 2016 | | | | | | November 1, 2015 | | | | | | % Change | | | | | | | | | | | | | | | | | | Non U.S. Produced | | $ | 27,738 | | | | 93 | % | | $ | 28,568 | | | | 91 | % | | | (2.9 | )% | U.S. Produced | | | 2,078 | | | | 7 | % | | | 2,952 | | | | 9 | % | | | (29.6 | )% | Total | | $ | 29,816 | | | | 100 | % | | $ | 31,520 | | | | 100 | % | | | (5.4 | )% |
| | Three Months Ended | | (dollars in thousands) | | January 31, 2016 | | | | | | February 1, 2015 | | | | | | % Change | | | | | | | | | | | | | | | | | Non U.S. Produced | | $ | 31,515 | | | 92 | % | | $ | 32,584 | | | 92 | % | | (3.3 | )% | U.S. Produced | | | 2,674 | | | 8 | % | | | 3,002 | | | 8 | % | | (10.9 | )% | Total | | $ | 34,189 | | | 100 | % | | $ | 35,586 | | | 100 | % | | (3.9 | )% |
| | | | | Six Months Ended | | | | | | | | (dollars in thousands) | | October 30, 2016 | | | | | | November 1, 2015 | | | | | | % Change | | | | | | | | | | | | | | | | | | Non U.S. Produced | | $ | 55,583 | | | | 93 | % | | $ | 58,522 | | | | 92 | % | | | (5.0 | )% | U.S. Produced | | | 4,386 | | | | 7 | % | | | 5,374 | | | | 8 | % | | | (18.4 | )% | Total | | $ | 59,969 | | | | 100 | % | | $ | 63,896 | | | | 100 | % | | | (6.1 | )% |
| | Nine Months Ended | | (dollars in thousands) | | January 31, 2016 | | | | | February 1, 2015 | | | | | % Change | | | | | | | | | | | | | | | | | Non U.S. Produced | | $ | 90,037 | | | 92 | % | | $ | 91,603 | | | 92 | % | | (1.7 | )% | U.S. Produced | | | 8,048 | | | 8 | % | | | 8,174 | | | 8 | % | | (1.5 | )% | Total | | $ | 98,085 | | | 100 | % | | $ | 99,777 | | | 100 | % | | (1.7 | )% |
Our net sales for upholstery fabrics were lower for the third quarter and nearly flat for the nine month year-to-date period of fiscal 2016 compared with the same periods a year ago. The third quarter of fiscal 2015 was an exceptionally strong quarterly performance for upholstery fabric sales.
Ourdecrease in upholstery fabric net sales also were affected by the fact that the nine month year-to-date period of fiscal 2016 contained one less week compared with the same period a year ago, the closure ofreflects softer retail demand for residential furniture and our finished goods warehousestrategy to enhance both our customer and distribution facility located in Poznan, Poland, in the third quarter of fiscal 2015, and some pricing pressures from key customers. product mix to improve our profitability.
DesignWe have continued to focus on design and product innovation remain our top strategic priorities. This strategy has allowed usand to offer a diverse range of products that meet changing market trends and style preferences. As a result, we have extendedFor example, the recent launch of our latest performance line of highly durable and stain-resistant fabrics has been well received in the market reach to a more diverse customer base, enhanced our product mix with profitable results, and increased our net sales with the hospitality and lifestyle retail markets.place. Our 100% owned China platform supports our marketing efforts with the manufacturing flexibility to adapt to changing furniture market trends and consumer style preferences. This platform has allowed us
Currently, we expect both net sales and profitability in this segment to more effectively reach new customers,be negatively affected in the third quarter of fiscal 2017 as compared to the same period a year earlier, due primarily to the timing of the Chinese New Year holiday, with the abilitydisruptive impact of the holiday on this segment's business occurring in January this year as opposed to offer a diverse product mix of fabric styles and price points. February in the prior year.
Gross Profit, Selling, General & Administrative Expenses, and Operating Income
| | Three Months Ended | | | | | | Three Months Ended | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | % Change | | October 30, 2016 | | | November 1, 2015 | | | Change | | | | | | | | | | | | | | | | | | | | | Gross profit | | $ | 7,812 | | | $ | 6,326 | | | 23.5 | % | | $ | 6,145 | | | $ | 6,277 | | | | (2.1 | )% | Gross profit margin | | | 22.8 | % | | | 17.8 | % | | 500 | bp | | | 20.6 | % | | | 19.9 | % | | | 70 | bp | SG&A expenses | | | 3,963 | | | | 3,781 | | | 4.8 | % | | | 3,652 | | | | 3,813 | | | | (4.2 | )% | Income from operations | | | 3,849 | | | | 2,545 | | | 51.2 | % | | | 2,493 | | | | 2,464 | | | | 1.2 | % | Operating margin | | | 11.3 | % | | | 7.2 | % | | 410 | bp | | | 8.4 | % | | | 7.8 | % | | | 60 | bp |
| | Six Months Ended | | | | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | Change | | | | | | | | | | | | Gross profit | | $ | 12,664 | | | $ | 12,554 | | | | 0.9 | % | Gross profit margin | | | 21.1 | % | | | 19.6 | % | | | 150 | bp | SG&A expenses | | | 7,185 | | | | 7,409 | | | | (3.0 | )% | Income from operations | | | 5,479 | | | | 5,146 | | | | 6.5 | % | Operating margin | | | 9.1 | % | | | 8.1 | % | | | 100 | bp |
| | Nine Months Ended | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | % Change | | | | | | | | | | | Gross profit | | $ | 20,365 | | | $ | 16,792 | | | 21.3 | % | Gross profit margin | | | 20.8 | % | | | 16.8 | % | | 400 | bp | SG&A expenses | | | 11,372 | | | | 10,518 | | | 8.1 | % | Income from operations | | | 8,994 | | | | 6,274 | | | 43.4 | % | Operating margin | | | 9.2 | % | | | 6.3 | % | | 290 | bp |
Our upholstery fabricIn spite of the softer demand for residential furniture, our gross profit and operating income increased inremained relatively flat for the thirdsecond quarter and the nine month year-to-date periodfirst half of fiscal 2016 compared with2017 in comparison to the same periods a year ago. These results reflectThis trend reflects the benefits from our strategic focus on product innovation anddecline in net sales diversification. The benefits include an enhanced product mix that has resulted in greater operating efficiency and capacity utilization in our cut and sew operation located in China. We also experiencednoted above, offset by lower raw material costs and operating expenses due to more favorable currency exchange rates in China for fiscal 2016 compared with fiscal 2015. Partially offsetting the improvement in income from operations was an increase in SG&A expenses due primarily to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets, and some pricing pressures from key customers as noted above.China.
Also, our profitability for the nine month year-to-date period of fiscal 2015 was affected by non-recurring charges of approximately $200,000 during the second quarter that related to the closure of our Culp Europe operation. No corresponding charge was recorded during the nine month year-to-date period of fiscal 2016.
Culp Europe As previously announced atAt the end of the third quarter of fiscal 2015, we closed our finished goods warehouse and distribution facility located in Poznan, Poland, primarily as a result of ongoing economic weakness in Europe. We remain very interested in developing business in Europe, and we are assessing the bestpursuing a strategy for selling upholstery fabric into this market as business conditions improve.market.
Segment Assets Segment assets consist of accounts receivable, inventory, and property, plant, and equipment. | | | | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | May 3, 2015 | | | October 30, 2016 | | | November 1, 2015 | | | May 1, 2016 | | Accounts receivable and inventory | | $ | 30,960 | | | $ | 32,129 | | | $ | 29,905 | | | $ | 26,931 | | | $ | 28,856 | | | $ | 26,540 | | Property, plant & equipment | | | 1,590 | | | | 1,522 | | | | 1,467 | | | | 1,480 | | | | 1,474 | | | | 1,564 | |
Accounts Receivable & Inventory
As of January 31,October 30, 2016, accounts receivable and inventory for this segment decreased $1.2$1.9 million, or 4%7%, compared with FebruaryNovember 1, 2015. This decrease wasis primarily due to a decrease inimproved cash collections on accounts receivable as a resultcustomers were taking more advantage of lower net sales and improved cash collectionsdiscounts in the thirdsecond quarter of fiscal 20162017 compared with the thirdsecond quarter of fiscal 2015.2016.
As of January 31,October 30, 2016, accounts receivable and inventory increased $1.0 million, or 4%,modestly compared with May 3, 2015. This increase was1, 2016, primarily due to an increase in inventory ($1.7 million) as a result of holding higher inventory levels to better service our customers. This increase was mostly offset by a decrease in accounts receivable ($1.3 million) as a result of improved cash collections as customers were taking more advantage of sales discounts in the second quarter of fiscal 2017 compared with the fourth quarter of fiscal 2016. Property, Plant & Equipment
The $1.6$1.5 million at January 31,October 30, 2016, represents property, plant, and equipment of $860,000$890,000 and $730,000$590,000 located in the U.S. and China, respectively. The $1.5 million at FebruaryNovember 1, 2015, represents property, plant, and equipment of $877,000$785,000 and $645,000$689,000 located in the U.S. and China, respectively. The $1.5$1.6 million at May 3, 2015,1, 2016, represents property, plant, and equipment of $848,000$893,000 and $619,000$671,000 located in the U.S. and China, respectively.
Other Income Statement Categories
| | Three Months Ended | | | | | (dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | % Change | | SG&A expenses | | $ | 9,602 | | | $ | 9,433 | | | | 1.8 | % | Interest expense | | | - | | | | - | | | | - | | Interest income | | | 15 | | | | 69 | | | | (78.3 | )% | Other expense | | | 155 | | | | 225 | | | | (31.1 | )% |
| | Three Months Ended | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | % Change | | | | | | | | | | | SG&A expenses | | $ | 9,337 | | | $ | 8,375 | | | 11.5 | % | Interest income | | | 38 | | | | 202 | | | (81.2 | )% | Other expense | | | 85 | | | | 307 | | | (72.3 | )% |
| | Nine Months Ended | | | | | | Six Months Ended | | | | | (dollars in thousands) | | January 31, 2016 | | | February 1, 2015 | | | % Change | | October 30, 2016 | | | November 1, 2015 | | | % Change | | | | | | | | | | | | | SG&A expenses | | $ | 27,512 | | | $ | 23,173 | | | 18.7 | % | | $ | 19,348 | | | $ | 18,175 | | | | 6.5 | % | Interest expense | | | - | | | | 50 | | | (100.0 | )% | | | - | | | | - | | | | - | | Interest income | | | 150 | | | | 478 | | | (68.6 | )% | | | 40 | | | | 112 | | | | (64.3 | )% | Other expense | | | 405 | | | | 380 | | | 6.6 | % | | | 307 | | | | 320 | | | | (4.1 | )% |
Selling, General and Administrative Expenses The increase in SG&A expenses have increased infor the third quarter andfirst half of fiscal 2017 compared with the nine month year-to-date periodfirst half of fiscal 2016 compared with the same periods a year ago. This trend iswas due primarily due to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets.targets, higher inventory warehousing costs and design and sales expenses associated with our mattress fabrics segment. For the second quarter of fiscal 2017, SG&A expenses increased slightly compared with the second quarter of fiscal 2016.
Interest Expense
Interest expense decreased for the nine month year-to-date period of fiscal 2016 compared with the same period a year ago. This trend primarily reflects lower outstanding balances of long-term debt, and interest costs that were capitalized in connection with our capital investments associated with our mattress fabrics segment. Interest costs charged to operations were $36,000 and incurred on our long-term debt and lines of credit were $58,000 and $191,000$5,000 for the nine month year-to-date periods of fiscalthree months ended October 30, 2016 and November 1, 2015, respectively. Interest costs charged to operations were reduced$45,000 and $49,000 for the six months ended October 30, 2016 and November 1, 2015, respectively. The interest costs charged to operations were fully offset by of $58,000 and $141,000 for capitalized interest costs for the nine month year-to-date periodsconstruction of fiscal 2016qualifying fixed assets that were capitalized and 2015, respectively. These capitalized interest costs will be amortized over the related assets’ useful lives.
Interest Income
Interest income decreased in the thirdsecond quarter and the nine month year-to-date periodfirst half of fiscal 20162017 compared with the same periods a year ago. This trend reflects higher cash and cash equivalentequivalents and short-term investment balances held in U.S. dollar denominated account balances during fiscal 20162017 compared with fiscal 2015.2016. Cash and cash equivalents and short-term investment balances held in U.S. dollar denominated account balances earnwere earning lower interest rates as compared to our cash and cash equivalents and short-term investment balances denominated in the local currency of our foreign subsidiaries.
During fiscal 2016, we implemented a strategy of substantially reducing the amount of cash we hold in Chinese Yuan Renminbi. Although this action has resulted in lower interest income, as compared to last year, thethis strategy has significantly mitigated our foreign currency exchange rate exposure in China. See discussion in “Other Expense” noted below.
Currently, we expect to earn more interest income starting in the third quarter of fiscal 2017. At the end of the second quarter and beginning of the third quarter of fiscal 2017, we invested approximately $31.0 million in investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. See the Liquidity section below for further details.
Other Expense
The decrease in other expense forin the thirdsecond quarter of fiscal 2017 compared with the second quarter of fiscal 2016 is primarily due to a realized loss on the sale of short-term investments in the second quarter of fiscal 2016 that did not recur in the second quarter of fiscal 2017. Other expenses were flat in the first half of fiscal 2017 compared with the third quarterfirst half of fiscal 2015 resulted from our ability to better mitigate2016.
During the effectsfirst half of fiscal 2017, we did not have a foreign currency exchange rate fluctuationsgain or loss associated with our operations located in China. This was achieved by transferring the amount of cash held in Chinese Yuan Renminbi to U.S. dollars as noted above. As a result, we were able to mitigate the effects of foreign currency exchange rate fluctuations associatedCanada and China compared with our China operations by acheiving a balance of assets and liabilities denominated in Chinese Yuan Renminbi. Our operations located in China reported a foreign exchange gain of $48,000 for$5,000 in the third quarterfirst half of fiscal 2016 compared with a foreign exchange loss of $136,000 for the same period a year ago.
Other expenses remained flat for the nine month year-to-date period of fiscal 2016 compared with the same period a year ago. This result reflects2016. These results reflect our ability to mitigate the effects of foreign currency exchange rate fluctuations associated with our subsidiaries domiciled in Canada and China through the maintenance of a natural hedge by keeping a balance of assets and liabilities denominated in foreign currencies other than the U.S. dollar. AlthoughAs noted above, we will continuemade a concerted effort starting in fiscal 2016 to try and maintain this natural hedge, there is no assurance thattransfer significant amounts of cash we will be ablehold in Chinese Yuan Renminbi to continue to do soaccounts denominated in future reporting periods.U.S. dollars.
Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $7.4$5.9 million, or 35.7%37.7% of income before income tax expense,taxes, for the ninesix month period ended January 31,October 30, 2016, compared to income tax expense of $6.1$5.1 million, or 37.6%37.5% of income before income tax expense,taxes, for the ninesix month period ended FebruaryNovember 1, 2015. Our effective income tax rates for the ninesix month periods ended January 31,October 30, 2016, and FebruaryNovember 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 currenciescurrency exchange rates 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: | | 2017 | | | 2016 | | federal income tax rate | | | 34.0 | % | | | 34.0 | % | U.S state income tax expense | | | 0.6 | | | | 0.7 | | tax effects of Chinese foreign exchange gains | | | 1.6 | | | | 2.3 | | increase in liability for uncertain tax positions | | | 0.3 | | | | 0.3 | | other | | | 1.2 | | | | 0.2 | | | | | 37.7 | % | | | 37.5 | % |
| 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% |
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 Refer to Note 13 located in the notes to the consolidated financial statements for disclosures regarding our assessment at January 31, 2016, weassessments of our recorded a partial valuation allowance as 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,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, 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,Refer to Note 13 located in the netnotes to the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with our undistributed earnings from our foreign subsidiaries totaled $3.3 million, which included U.S. income and foreign withholding taxes totaling $37.3 million, offset by U.S. foreign income tax creditsas 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.
We had accumulated earnings from our foreign subsidiaries totaling $100.9 million, $82.4 million, and $85.2 million at January 31,October 30, 2016, FebruaryNovember 1, 2015, and May 3, 2015,1, 2016, respectively.
I-39 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,October 30, 2016, we had a $13.2$15.1 million total gross unrecognized tax benefit, of which $3.5 million represents the amount of gross unrecognizedincome tax benefit that included $3.7 million, if recognized, would favorably affect the income tax rate in future periods. At February 1, 2015, we had a $13.9 million totalOur 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 period.
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 benefits will decrease by approximately $120,000 for fiscal 2016. This decrease primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2005 and subsequent due to loss carryforwards. Canadian federal returns remain subject to examination for income tax years 2009 and subsequent, with the statute of limitations for the 2009 income tax year expiring in January 2017. Canadian provincial (Quebec) returns remain subject to examination for income tax years 2009 and subsequent, with the statute of limitations for the 2009 income tax year expiring in April 2017. Income tax returns associated with our operations located in China are subject to examination for income tax year 2011 and subsequent.
Currently, the Internal Revenue Service is examining our U.S. Federal income tax returns for fiscal 2014, and no adjustments have been proposed at this time. We currently expect this examination to be completed by the end of our fiscal year 2017 (April 30, 2017). During the third quarter of fiscal 2017, Revenue Quebec commenced an examination of our Canadian provincial (Quebec) income tax returns for fiscal years 2013 through 2015. We currently expect this examination to be completed by the end of our first quarter of fiscal 2018 (July 30, 2017).
In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statue of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.
Income Taxes Paid
We reported income tax expense of $7.4$5.9 million and $6.1$5.1 million for the nine month periods ending January 31,first half of fiscal 2017 and 2016, and February 1, 2015, respectively. Currently, we are not paying income taxes in the United States nor doas we expect to for a few more years, due to ourhave an estimated $18.0 million in operating loss carryforwards that totaled $33.3 million as of May 3, 2015. As a result,1, 2016. However, we haddid have income tax payments of $4.9$3.2 million and $3.0$2.1 million for the nine month periods ending January 31,first half of fiscal 2017 and 2016, and February 1, 2015, respectively. OurThese income tax payments are associated with our subsidiaries located in China and Canada.
Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents, short-term investments, cash flow from operations, and amounts available under our revolving credit lines. These sources have been adequate for day-to-day operations, capital expenditures, debt payments, common stock repurchases, and dividend payments. We believe our present cash and cash equivalents and short-term investment balance of $36.0$16.3 million at January 31,October 30, 2016, cash flow from operations, and the current availability ($35.9 million as of October 30, 2016) under our revolving credit lines will be sufficient to fund our foreseeable business needs and contractual obligations. Our cash and cash equivalents and short-term investment balance may be adversely affected by factors beyond our control, such as lower net sales due to weakening industry demand and delays in receipt of payment on accounts receivable.
On August 11, 2015,At October 30, 2016, our cash and cash equivalents, short-term investments, and long-term investments (held-to-maturity) totaled $47.4 million compared with $42.1 million at May 1, 2016. This increase from the end of fiscal 2016 was primarily due to net cash provided by our operating activities of $16.6 million, partially offset by $6.3 million in capital expenditures mostly associated with our mattress fabric segment, $4.3 million in dividend payments, and $929,000 in long-term investment purchases associated with our Rabbi Trust that is partially funding our deferred compensation plan. Our net cash provided by operating activities of $16.6 million increased $5.4 million compared with $11.2 million for the six months ending November 1, 2015. This increase is primarily due to increased earnings and improved accounts receivable and inventory management during the first half of fiscal 2017 compared to the same period a year ago.
Currently, we paid our last annual payment of $2.2 million on our unsecured senior term notes, and we currently do not have any long-term debt or balancesborrowings outstanding under our credit agreements. At the end of our first quarter of fiscal 2017, we had an outstanding balance due of $7.0 million on our U.S. revolving credit lines.line of credit. This outstanding balance was repaid during our second quarter of fiscal 2017.
On March 10, 2016, we amended our Credit Agreement with Wells Fargo to increase our borrowing capacity from $10 million to $30 million. 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.By Geographic Area
We currently hold cash and cash equivalents, and short-term investments, and long-term investments (held-to-maturity) in the U.S. and our foreign jurisdictions to support theour operational requirements, ofmitigate our risk to foreign operationsexchange rate fluctuations, and for U.S. and foreign income tax planning purposes.
A summary of our cash and cash equivalents, and short-term investments, and long-term investments (held-to-maturity) by geographic area follows: | | January 31, | | | May 3, | | (dollars in thousands) | | 2016 | | | 2015 | | Cayman Islands | | $ | 20,077 | | | $ | 8,591 | | Canada | | | 6,570 | | | | 12,511 | | China | | | 6,479 | | | | 14,630 | | United States | | | 2,846 | | | | 3,977 | | Poland | | | - | | | | 20 | | | | $ | 35,972 | | | $ | 39,729 | |
At January 31, 2016, our cash and cash equivalents and short-term investments totaled $36.0 million compared with $39.7 million at May 3, 2015. This decrease was primarily due to capital expenditures mostly associated with our mattress fabric segment of $7.7 million, dividend payments of $7.3 million, repurchases of our common stock of $2.4 million, a long-term debt payment of $2.2 million, and long-term investment purchases of $1.3 million associated with our Rabbi Trust. This spending was partially offset by net cash provided by operating activities of $15.9 million.(dollars in thousands) | | October 30, 2016 | | | November 1, 2015 | | | May 1, 2016 | | Cayman Islands | | $ | 36,100 | | | $ | 8,591 | | | $ | 25,762 | | China | | | 6,766 | | | | 18,690 | | | | 8,454 | | Canada | | | 4,513 | | | | 8,856 | | | | 6,844 | | United States | | | 11 | | | | 1,359 | | | | 1,086 | | | | $ | 47,390 | | | $ | 37,496 | | | $ | 42,146 | |
Our net cash provided by operating activities was $15.9 million for the nine months ending January 31, 2016, a decrease of $4.8 million compared with $20.7 million for the nine months ending February 1, 2015. This decrease reflects an increase in inventory purchases, as well as higher annual bonus payments made in fiscal 2016 compared with those made in fiscal 2015. This spending was partially offset by cash flow from earnings and improved cash collections in fiscal 2016 compared with fiscal 2015.
We have had a significant shift infrom cash and cash equivalents and short-term investments held in China andto the Cayman Islands. DuringSince April 2016 through the thirdend of our second quarter of fiscal 2016,2017, we distributed earnings and profits totaling $13.6$39.2 million from our subsidiaries located in China to our international holding company located in the Cayman Islands. This shift iswas primarily due to our strategy of ultimately repatriating earnings and profits from our subsidiaries located in China to the U.S. and mitigating our risk to foreign exchange rate fluctuations for assets and liabilities denominated in Chinese Yuan Renminbi. By reducing the amount of cash and cash equivalents held in Chinese Yuan Renminbi, we are able to obtain a better balance of assets and liabilities denominated in Chinese Yuan Renminbi, and therefore mitigate the risk againstof foreign currency exchange rate fluctuations in China. In addition, by transferring earnings and profits from China to the Cayman Islands, it provides increased flexibility to ultimately repatriate these earnings and profits to the U.S. for various strategic purposes. Currently, we do not intend to repatriate any earnings and profits to the U.S. until after our U.S. loss carryforwards are fully utilized, which we expect in two to three more years. During the second quarter of fiscal 2017, management decided to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities primarily ranging from 2 to 2.5 years. The purpose of this investment was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. At October 30, 2016, our held-to-maturity investments totaling $31.0 million consisted of invested cash and cash equivalents of $23.9 million and short-term investment balance may be adversely affectedU.S. Corporate bonds of $7.1 million. The $23.9 million in invested cash and cash equivalents were used to purchase U.S. Corporate bonds during our third quarter of fiscal 2017 (all U.S. Corporate bond purchases were completed by factors beyondNovember 3, 2016). The fair value of our control, such as lower net sales due to weakening industry demand and delays in receipt of payment on accounts receivable.held-to-maturity investments approximates their cost basis.
Dividend Program
On MarchDecember 1, 2016, we announced that our board of directors approved a 14% increase in our quarterly cash dividend offrom $0.07 to $0.08 per share. This payment will be made on or about April 15, 2016,January 17, 2017 to shareholders of record as of April 1, 2016.January 3, 2017.
During the nine months ended January 31,first half of fiscal 2017, dividend payments totaled $4.3 million, of which $2.5 million represented a special cash dividend payment of $0.21 per share, and $1.8 million represented quarterly dividend payments of $0.07 per share. During the first half of fiscal 2016, dividend payments totaled $7.3$6.4 million, of which $5.0 million represented a special cash dividend payment in the first quarter of $0.40 per share, and $2.3$1.4 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. Common Stock Repurchase Program On February 25, 2014,June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities. During the ninesix months ended January 31,October 30, 2016, and November 1, 2015, we purchased 100,776did not purchase any shares of our common stock at a cost of $2.4 million, all of which were 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. stock. At January 31,October 30, 2016, we had $1.9$5.0 million available for additional repurchases of our common stock. Working Capital
Accounts receivable at January 31,October 30, 2016, were $26.8$19.0 million, a decrease of $4.0$4.3 million, or 13%18%, compared with $30.8$23.3 million at FebruaryNovember 1, 2015. This decrease is primarily due to lower net sales and improved cash collections withas customers associated with both our business segmentswere taking more advantage of sales discounts in the thirdsecond quarter of fiscal 20162017 compared towith the thirdsecond quarter of fiscal 2015.2016. Days’ sales outstanding were 3123 days for the thirdsecond quarter of fiscal 20162017 compared with 3428 days for the thirdsecond quarter of fiscal 2015.2016.
Inventories as of January 31,October 30, 2016, were $48.5$46.0 million an increase of $10.5 million, or 28%, compared with $38.0$46.5 million at FebruaryNovember 1, 2015. This increase is primarily due to customers requiring us to hold higher inventory levels of key products. Inventory turns were 5.15.2 for the thirdsecond quarter of fiscal 20162017 compared with 7.05.3 for the thirdsecond quarter of fiscal 2015.2016.
Accounts payable-trade as of January 31,October 30, 2016, were $25.6$20.2 million, a decrease of $3.0$5.0 million, or 11%20%, compared with $28.6$25.2 million at FebruaryNovember 1, 2015. This decrease is primarily due to the decrease in net sales and the timing of payments to suppliers associatedduring the second quarter of fiscal 2017 compared with operations located in China as a resultthe second quarter of the Chinese New Year holiday.fiscal 2016.
Operating working capital (accounts receivable and inventories, less accounts payable-trade and accounts payable-capital expenditures) was $49.3$41.8 million at January 31,October 30, 2016, compared with $39.4$43.3 million at FebruaryNovember 1, 2015. Operating working capital turnover was 7.27.0 during the thirdsecond quarter of fiscal 2016,2017 compared with 7.57.7 during the thirdsecond quarter of fiscal 2015.2016.
Financing Arrangements
Unsecured Senior Term Notes
We entered into a note agreement dated August 11, 2008 that providedCurrently, we have revolving credit agreements with banks for the issuance of $11.0 million of unsecured senior term notes with a fixed interest rate of 8.01%our U.S parent company 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 definedour operations located 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.
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.
China. The purpose of the increase in our revolving lines of credit line with Wells Fargo isare 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 ultimately 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 Our revolving 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 weus to maintain compliance with certain financial covenants.covenants as defined in the respective agreements. At January 31,October 30, 2016, the company waswe were in compliance with theseall our financial covenants.
Refer to Note 8 located in the notes to the consolidated financial statements for further details of our revolving credit agreements.
Capital Expenditures and Depreciation
Overall
Capital expenditures on a cash basis were $7.7$6.3 million for the nine month year-to-date periodfirst half for fiscal 20162017 compared with $8.2$5.3 million for the same period a year ago. Capital expenditures for the nine month year-to-date periodsfirst half of fiscal 2017 and 2016 and 2015 were primarilymostly related to our mattress fabrics segment.
Depreciation expense was $4.9$3.5 million for the nine month year-to-date periodfirst half of fiscal 20162017 compared with $4.2$3.2 million for the same period a year ago.first half of fiscal 2016. Depreciation expense for the nine month year-to-date periodsfirst half of fiscal 2017 and 2016 and 2015 primarilymostly related to the mattress fabrics segment. For fiscal 2016,2017, we are projecting capital expenditures for the company as a whole to be approximately $12.0 million. Depreciation expense for the company as a whole is projected to be approximately $7.0 million in fiscal 2016.2017. The estimated capital expenditures and depreciation expense primarilymostly relate to the mattress fabrics segment. For fiscal 2017, our preliminary estimate for capital expenditures is in the range of $11 million to $12 million, as we continue to invest in our mattress fabrics business. These are management’s current expectations only, and changes in our business needs could cause changes in plans for capital expenditures and expectations for related depreciation expense.
Accounts Payable – Capital Expenditures I-43
At October 30, 2016, we had total amounts due regarding capital expenditures totaling $3.0 million, in which $1.5 million is financed and pertains to the construction of a new building (see below). The total amount due of $3.0 million is required to be paid within one year from the end of our second quarter of fiscal 2017.Purchase Commitments – Capital Expenditures At October 30, 2016, we had open purchase commitments to acquire a building and equipment for our mattress fabrics segment totaling $9.8 million. The $9.8 million as of October 30, 2016, includes $6.1 million associated with the construction of a new building noted below.
Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina that will expand our distribution capabilities and office space at a current estimated cost of $11.2 million. This agreement required an installment payment of $1.9 million in April 2016 and requires additional installment payments to be made in the following fiscal years: Fiscal 2017- $4.3 million; Fiscal 2018- $3.8 million; and Fiscal 2019- $1.2 million. Interest will be charged on the required outstanding installment payments in excess of services that have been rendered at a rate of $2.25% plus the current 30 day LIBOR rate.
Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor’s bank being the beneficiary. In addition to the interest that will be charged on the outstanding installment payments noted above, there will be a 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month (see Note 8 for further details).
As of October 30, 2016, we have made payments totaling $5.1 million for services rendered on the construction of this building. The remaining $6.1 million on this commitment is required to be paid on an installment basis over the next three fiscal years as follows: Fiscal 2017 - $1.1 million; Fiscal 2018 - $3.8 million; and Fiscal 2019 - $1.2 million.
The construction of this new building is currently expected to be completed in December 2016.
Critical Accounting Policies and Recent Accounting Developments
At January 31,October 30, 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 ended May 3, 2015.1, 2016. Refer to Note 2 located in the notes to the consolidated financial statements for recently adopted and issued accounting pronouncements since the filing of our Form 10-K for the year ended May 3, 2015.1, 2016.
Contractual Obligations As of January 31,October 30, 2016, there were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended May 3, 2015.1, 2016.
Inflation
Any significant increase in our raw material costs, utility/energy costs and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating increases on to customers. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our revolving credit lines.
At January 31,October 30, 2016, our U.S. revolving credit agreement had anrequires interest to be charged at a rate (applicable interest rate equal to the one-monthof 1.98% at October 30, 2016) as a variable spread over LIBOR rate plus a spread based on our ratio of debt to EBITDA as defined in the agreement. Our revolving credit line associated with our China subsidiaries bears interest at a rate determined by the Chinese government. At January 31,October 30, 2016, there were no borrowings outstanding under any of our revolving credit lines. We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in Canada and China. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currency of our subsidiaries domiciled in Canada and China, although there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the United States dollar as their functional currency. A substantial portion of the company’s imports purchased outside the United States are denominated in U.S. dollars. A 10% change in the above exchange rates at January 31,October 30, 2016, would not have had a significant impact on our results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of January 31,October 30, 2016, the end of the period covered by this report. This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, we have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports filed by us and submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported as and when required. Further, we concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosures.
There has been no change in our internal control over financial reporting that occurred during the quarter ended January 31,October 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Part II – Other Information
Item 1. Legal Proceedings
There have not been any material changes to our legal proceedings during the ninesix months ended January 31,October 30, 2016. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 17, 201515, 2016 for the fiscal year ended May 3, 2015.1, 2016.
There have not been any material changes to our risk factors during the ninesix months ended January 31,October 30, 2016. Our risk factors are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 17, 201515, 2016 for the fiscal year ended May 3, 2015.1, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period | | (a) Total Number of Shares Purchased | | | (b) Average Price Paid per Share | | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | | November 2, 2015 to December 6, 2015 | | | - | | | | - | | | | - | | | $ | 4,256,235 | | December 7, 2015 to January 3, 2016 | | | - | | | | - | | | | - | | | $ | 4,256,235 | | January 4, 2016 to January 31, 2016 | | | 100,776 | | | $ | 23.79 | | | | 100,776 | | | $ | 1,859,274 | | Total | | | 100,776 | | | $ | 23.79 | | | | 100,776 | | | $ | 1,859,274 | |
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | August 1, 2016 to September 4, 2016 | - | - | - | $ 5,000,000 | September 5, 2016 to October 2, 2016 | - | - | - | $ 5,000,000 | October 3, 2016 to October 30, 2016 | - | - | - | $ 5,000,000 | Total | - | - | - | $ 5,000,000 |
(1) | On February 25, 2014,June 15, 2016, we announced that our board of directors approved anincreased the authorization for us to acquire up to $5.0 million of our common stock. |
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. This description of the Second Amendment is qualified in its entirety by reference to the terms of the Second Amendment, a copy of which is filed as Exhibit 10.1 hereto.
The following exhibits are submitted as part of this report. | The following exhibits are submitted as part of this report. | | | | | 3(i) | Articles of Incorporation of the company, as amended, were filed as Exhibit 3(i) to the company’s Form 10-Q for the quarter ended July 28, 2002, filed September 11, 2002 (Commission File No. 001-12597), and incorporated herein by reference. |
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