- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
-------------
Date of Report (Date of earliest event reported) August 20, 1998
CULP, INC.
(Exact name of registrant as specified in its charter)
North Carolina 0-12781 56-1001967
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
101 South Main Street
High Point, North Carolina 27260
(Address of principal executive offices)
(336) 889-5161
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
- --------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events
See attached Press Release (2 pages) and Financial Information Release (10
pages), both dated August 20, 1998, related to the fiscal 1999 first quarter
ended August 2, 1998.
Forward Looking Information. This Report contains statements that could be
deemed "forward-looking statements" within the meaning of the federal
securities laws, which statements are inherently subject to risks and
uncertainties. 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
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives. Factors that could influence the
matters discussed in such statements include the level of housing starts and
sales of existing homes, consumer confidence, trends in disposable income, and
general economic conditions. Decreases in these economic indicators could
have a negative effect on the Company's business and prospects. Likewise,
increases in interest rates, particularly home mortgage rates, and increases
in consumer debt or the general rate of inflation, could affect the Company
adversely. In addition, the value of the U. S. dollar relative to other
currencies can affect the competitiveness of the Company's products in
international markets. Economic and political instability in the
international area could also affect the demand for the Company's products.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CULP, INC.
(Registrant)
By: Phillip W. Wilson
Vice President and
Chief Financial Officer
Dated: August 20, 1998
<PAGE>
CULP Reports First Quarter Results
Aug. 20, 1998
FOR IMMEDIATE RELEASE
CULP REPORTS FIRST QUARTER RESULTS
HIGH POINT, N. C. (Aug. 20, 1998) - Culp, Inc. (NYSE: CFI) today reported
results for the first quarter of its 1999 fiscal year.
For the three months ended August 2, 1998, Culp reported that net sales
were $110.7 million compared with $99.5 million a year ago. The company
reported a net loss for the quarter of $2.6 million, or $0.20 per share,
compared with net income of $2.9 million, or $0.22 per share diluted, in the
year-earlier quarter.
"We had previously indicated our expectation for a net loss for the
first quarter," said Robert G. Culp, III, chief executive officer. "The
principal development that affected our performance was an industry wide
pattern of weakness in international sales of printed flock upholstery
fabrics. We also experienced some pressure on margins on other product lines
that are marketed primarily to U.S.-based manufacturers. We did achieve
higher sales for the quarter; but that gain was due to the contributions from
Phillips Mills and Artee Industries, which were acquired subsequent to the
year-earlier period."
"The first fiscal quarter is historically not the strongest period for
our industry due to vacations and seasonal plant closings. The backdrop of
consumer spending in the U.S. on home furnishings remains favorable, and we
are encouraged about the positive response by manufacturers to our new
patterns and textures that will be introduced to retailers this fall. Our
immediate focus obviously must be restoring Culp's profitability. We have
begun taking actions to reduce costs, especially in those product categories
that typically have been marketed internationally. Although we are optimistic
about the potential for longer term gains in our business outside the United
States, we have moved to bring manufacturing capacity in line with the current
level of demand."
Culp added, "During the first quarter, we significantly strengthened our
management structure. We unified related products and marketing programs,
thereby reducing the number of business units from six to four. We believe
that grouping related business operations will promote better working
communications and lead to more effective customer service and marketing
programs. The initial momentum for this realignment in our management
structure was based on long range planning, but we believe the changes should
also help the near term recovery in our bottom line."
Culp, Inc. is the world's largest manufacturer and marketer of
upholstery fabrics for furniture and is a leading producer of mattress ticking
for bedding. The Company's fabrics are used principally in the production of
residential and commercial furniture and bedding products.
CULP, INC.
Condensed Financial Highlights
(Unaudited)
Three Months Ended
August 2, August 3,
1998 1997
(13 weeks) (14 weeks)
Net sales $ 110,667,000 $ 99,498,000
Net income (loss) $ (2,640,000) $ 2,850,000
Net income (loss) per share:
Basic $ (0.20) $ 0.23
Diluted $ (0.20) $ 0.22
Average shares outstanding:
Basic 13,000,000 12,631,000
Diluted 13,203,000 12,929,000
This release contains statements that could be deemed "forward-looking
statements," within the meaning of the federal securities laws. Such
statements are inherently subject to risks and uncertainties. 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 characterized by qualifying words such as
"expect," "believe," "estimate," "plan" and "project" and their derivatives.
Factors that could influence the matters discussed in such statements include
the level of housing starts and sales of existing homes, consumer confidence,
trends in disposable income and general economic conditions. Decreases in
these economic indicators could have a negative effect on the company's
business and prospects. Likewise, increases in interest rates, particularly
home mortgage rates, and increases in consumer debt or the general rate of
inflation, could affect the company adversely. Because of the increasing
percentage of the company's sales derived by international shipments,
strengthening of the U.S. dollar against other currencies could make the
company's products less competitive on the basis of price in markets outside
the United States. Additionally, economic and political instability in the
international area could affect the demand for the company's products.
-END-
<PAGE>
CULP, INC. FINANCIAL INFORMATION RELEASE
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
(Amounts in Thousands, Except for Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------
Amounts Percent of Sales
--------------------- --------------------
August 2, August 3, % Over
1998 1997 (Under) 1999 1998
--------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $ 110,667 99,498 11.2 % 100.0 % 100.0 %
Cost of sales 97,056 82,765 17.3 % 87.7 % 83.2 %
--------- ---------- ---------- --------- ---------
Gross profit 13,611 16,733 (18.7) % 12.3 % 16.8 %
Selling, general and
administrative expenses 14,473 10,916 32.6 % 13.1 % 11.0 %
--------- ---------- ---------- --------- ---------
Income (loss) from operations (862) 5,817 (114.8) % (0.8) % 5.8 %
Interest expense 2,361 1,280 84.5 % 2.1 % 1.3 %
Interest income (53) (90) (41.1) % (0.0)% (0.1)%
Other expense (income), net 770 242 218.2 % 0.7 % 0.2 %
--------- ---------- ---------- --------- ---------
Income (loss) before
income taxes (3,940) 4,385 (189.9) % (3.6)% 4.4 %
Income taxes * (1,300) 1,535 (184.7) % 33.0 % 35.0 %
--------- ---------- ---------- --------- ---------
Net income (loss) $ (2,640) 2,850 (192.6) % (2.4)% 2.9 %
========= ========== ========== ========= =========
Net income (loss) per share ($0.20) $0.23 (187.0) %
Net income (loss) per share,
assuming dilution ($0.20) $0.22 (190.9) %
Dividends per share $0.0350 $0.0350 0.0 %
Average shares outstanding 13,000 12,631 2.9 %
Average shares outstanding,
assuming dilution 13,203 12,929 2.1 %
</TABLE>
* Percent of sales column is calculated as a % of income (loss) before income
taxes.
<PAGE>
CULP, INC. FINANCIAL INFORMATION RELEASE
CONSOLIDATED BALANCE SHEETS
AUGUST 2, 1998, AUGUST 3, 1997 AND MAY 3, 1998
Unaudited
(Amounts in Thousands)
<TABLE>
<CAPTION>
Amounts Increase
---------------------------
August 2, August 3, (Decrease) *
---------------------- May 3,
1998 1997 Dollars Percent 1998
------------- ---------- ---------- --------- -------
Current assets
<S> <C> <C> <C> <C> <C>
Cash and cash investments $ 1,520 1,843 (323) (17.5) % 2,312
Accounts receivable 63,833 54,086 9,747 18.0 % 73,773
Inventories 79,358 60,715 18,643 30.7 % 78,594
Other current assets 7,511 6,126 1,385 22.6 % 7,808
------------- ---------- ---------- --------- -------
Total current assets 152,222 122,770 29,452 24.0 % 162,487
Restricted investments 4,074 8,186 (4,112) (50.2) % 4,021
Property, plant & equipment, net 127,287 97,128 30,159 31.1 % 128,805
Goodwill 54,798 22,111 32,687 147.8 % 55,162
Other assets 4,317 3,124 1,193 38.2 % 4,340
------------- ---------- ---------- --------- -------
Total assets $ 342,698 253,319 89,379 35.3 % 354,815
============= ========== ========== ========= =======
Current liabilities
Current maturities of
long-term debt $ 3,250 100 3,150 3,150.0 % 3,325
Accounts payable 31,710 20,154 11,556 57.3 % 37,214
Accrued expenses 13,856 11,972 1,884 15.7 % 17,936
Income taxes payable 0 1,575 (1,575) (100.0)% 1,282
------------- ---------- ---------- --------- -------
Total current liabilities 48,816 33,801 15,015 44.4 % 59,757
Long-term debt 154,383 96,016 58,367 60.8 % 152,312
Deferred income taxes 11,227 9,965 1,262 12.7 % 11,227
------------- ---------- ---------- --------- -------
Total liabilities 214,426 139,782 74,644 53.4 % 223,296
Shareholders' equity 128,272 113,537 14,735 13.0 % 131,519
------------- ---------- ---------- --------- -------
Total liabilities and
shareholders' equity $ 342,698 253,319 89,379 35.3 % 354,815
============= ========== ========== ========= =======
Shares outstanding 12,995 12,650 345 2.7 % 13,007
============= ========== ========== ========= =======
</TABLE>
* Derived from audited financial statements.
<PAGE>
CULP, INC.
FINANCIAL INFORMATION RELEASE
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
Unaudited
(Amounts in Thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
Amounts
----------------------
August 2, August 3,
1998 1997
----------- ----------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (2,640) 2,850
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 4,376 3,256
Amortization of intangible assets 398 181
Changes in assets and liabilities:
Accounts receivable 9,940 2,605
Inventories (764) (7,252)
Other current assets 297 (676)
Other assets (11) (147)
Accounts payable (3,017) (5,852)
Accrued expenses (4,080) (2,923)
Income taxes payable (1,282) (5)
--------- ----------
Net cash provided by (used in) operating activities 3,217 (7,963)
--------- ----------
Cash flows from investing activities:
Capital expenditures (2,858) (9,153)
Purchases of restricted investments (53) (8,590)
Sale of restricted investments 0 11,422
----------- ----------
Net cash used in investing activities (2,911) (6,321)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,071 19,500
Principal payments on long-term debt (75) (25)
Change in accounts payable-capital expenditures (2,487) (3,897)
Dividends paid (455) (443)
Common stock issued (purchased) (152) 162
----------- ----------
Net cash provided by (used in)financing activities (1,098) 15,297
----------- ----------
Increase (decrease) in cash and cash investments (792) 1,013
Cash and cash investments at beginning of period 2,312 830
----------- ----------
Cash and cash investments at end of period $ 1,520 1,843
=========== ==========
</TABLE>
<PAGE>
CULP, INC. FINANCIAL INFORMATION RELEASE
FINANCIAL ANALYSIS
AUGUST 2, 1998
<TABLE>
<CAPTION>
FISCAL 98 FISCAL 99
-------- --------------------------------------- ---------
Q1 Q1 Q2 Q3 Q4 LTM
-------- --------------------------------------- ---------
<S> <C> <C> <C>
INVENTORIES
Inventory turns 5.8 4.9
RECEIVABLES
Days sales in receivables 50 48
Percent current & less than
30 days past due 95.0% 93.8%
WORKING CAPITAL
Current ratio 3.6 3.1
Working capital turnover (4) 5.1 4.5
Operating working capital (4) $94,647 $111,481
PROPERTY, PLANT & EQUIPMENT
Depreciation rate 7.1% 7.7%
Percent property, plant &
equipment are depreciated 46.8% 43.8%
Capital expenditures $35,879 (1) $2,858
PROFITABILITY
Return on average total capital 7.6% (1.6%) 6.1%
Return on average equity 10.2% (8.1%) 8.2%
Net income (loss) per share $0.23 ($0.20) $0.79
Net income (loss) per share
(diluted) $0.22 ($0.20) $0.77
LEVERAGE (3)
Total liabilities/equity 123.1% 167.2%
Funded debt/equity 77.4% 119.7%
Funded debt/capital employed 43.6% 54.5%
Funded debt $87,930 $153,559
Funded debt/EBITDA (LTM) (6) 2.18 3.75
EBITDA/Interest expense,
net (LTM) 9.1 4.9
OTHER
Book value per share $8.98 $9.87
Employees at quarter end 3,180 4,230
Sales per employee (annualized) $125,000 $103,000
Capital employed (3) $201,467 $281,831
Effective income tax rate 35.0% 33.0%
EBITDA (2) $9,012 $3,142 $38,971
EBITDA/net sales 9.1% 2.8% 8.0%
</TABLE>
(1) Expenditures for entire year
(2) Earnings before interest, income taxes, and depreciation & amortization.
(3) Long-term debt, funded debt and capital employed are all net of restricted
investments.
(4) Working capital for this calculation is accounts receivable,inventories
and accounts payable.
(5) LTM represents"Latest Twelve Months"
(6) EBITDA includes capitalized interest and pro forma amounts for Wetumpka
and Artee acquisitions.
<PAGE>
CULP, INC. FINANCIAL INFORMATION RELEASE
SALES BY PRODUCT CATEGORY/BUSINESS UNIT
FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
<TABLE>
<CAPTION>
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
---------------------------------------------------
Amounts Percent of Total
Sales
------------------ -------------------
August 2, August 3, % Over
1998 1997 (Under) 1999 1998
Product Category/Business Unit
- ------------------------- -------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Upholstery Fabrics
Culp Decorative Fabrics $ 51,445 39,814 29.2 % 46.5 % 40.0 %
Culp Velvets/Prints 29,994 38,397 (21.9)% 27.1 % 38.6 %
-------- -------- ---------- -------- ---------
81,439 78,211 4.1 % 73.6 % 78.6 %
Mattress Ticking
Culp Home Fashions 22,632 21,287 6.3 % 20.5 % 21.4 %
Yarn
Culp Yarn 6,596 0 100.0 % 6.0 % 0.0 %
-------- -------- ---------- -------- ---------
* $ 110,667 99,498 11.2 % 100.0% 100.0 %
======== ======== ========== ======== =========
* U.S. sales were $84,310 and $74,407 for the three months of fiscal 1999 and
fiscal 1998, respectively. The percentage increase in U.S. sales was 13.3% for
the three months.
</TABLE>
<PAGE>
CULP, INC. FINANCIAL INFORMATION RELEASE
INTERNATIONAL SALES BY GEOGRAPHIC AREA
FOR THREE MONTHS ENDED AUGUST 2, 1998 AND AUGUST 3, 1997
<TABLE>
<CAPTION>
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------------------
Amounts Percent of Total
Sales
--------------------- ---------------------
August 2, August % Over
3,
Geographic Area 1998 1997 (Under) 1999 1998
- ----------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
North America
(Excluding USA) $ 7,253 7,044 3.0 % 27.5 % 28.1 %
Europe 3,683 4,440 (17.0)% 14.0 % 17.7 %
Middle East 8,300 6,564 26.4 % 31.5 % 26.2 %
Far East & Asia 4,868 5,464 (10.9)% 18.5 % 21.8 %
South America 1,000 339 195.0 % 3.8 % 1.4 %
All other areas 1,253 1,240 1.0 % 4.8 % 4.9 %
---------- --------- --------- --------- ---------
$ 26,357 25,091 5.0 % 100.0 % 100.0 %
========== ========= ========= ========= =========
</TABLE>
International sales, and the percentage of total sales, for each of the last
seven fiscal years follows: fiscal 1992-$ 37,913 (20%); fiscal 1993-$ 41,471
(21%); fiscal 1994-$ 44,038 (18%); fiscal 1995-$ 57,971 (19%); fiscal 1996-
$77,397 (22%); fiscal 1997-$ 101,571 (25%); and fiscal 1998-$ 137,223 (29%).
International sales for the current quarter represented 23.8% and 25.2% for 1999
and 1998, respectively.
Certain amounts for fiscal year 1998 have been reclassified to conform with the
fiscal year 1999 presentation.
<PAGE>
Culp, Inc.
SALES BY BUSINESS UNIT - TREND ANALYSIS
1997 vs 1998 vs 1999
Unaudited
(Amounts in thousands)
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1998
---------------------------------------------- ----------------------------------------------
Product Category/Business Units Q1 Q2 Q3 Q4 TOTAL Q1 Q2 Q3 Q4 TOTAL
---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Upholstery Fabrics
Culp Decorative Fabrics 38,966 45,723 39,342 43,699 167,730 39,814 56,781 53,415 60,155 210,165
Culp Velvets/Prints 34,867 40,233 40,387 40,980 156,467 38,397 43,928 44,020 45,044 171,389
---------------------------------------------- ----------------------------------------------
73,833 85,956 79,729 84,679 324,197 78,211 100,709 97,435 105,199 381,554
Mattress Ticking
Culp Home Fashions 16,696 19,248 17,739 20,999 74,682 21,287 22,217 20,261 23,520 87,285
Yarn
Culp Yarn
- - - - - - - 761 7,115 7,876
---------------------------------------------- ----------------------------------------------
90,529 105,204 97,468 105,678 398,879 99,498 122,926 118,457 135,834 476,715
============================================== ==============================================
Culp, Inc.
SALES BY BUSINESS UNIT - TREND ANALYSIS
1997 vs 1998 vs 1999
Unaudited
(Amounts in thousands)
Fiscal 1999
-----------------------------------------------
Product Category/Business Units Q1 Q2 Q3 Q4 TOTAL
---------------------------
Upholstery Fabrics
Culp Decorative Fabrics 51,445
Culp Velvets/Prints 29,994
-----------------------------------------------
81,439
Mattress Ticking
Culp Home Fashions 22,632
Yarn
Culp Yarn
6,596
-----------------------------------------------
110,667
===============================================
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
Percent increase(decrease) from prior year:
----------------------------------------------------------------------------------------------------------------------------
Fiscal 1997 Fiscal 1998
---------------------------------------------- ----------------------------------------------
Product Category/Business Units Q1 Q2 Q3 Q4 TOTAL Q1 Q2 Q3 Q4 TOTAL
---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Upholstery Fabrics
Culp Decorative Fabrics 18.3 12.4 0.2 (4.4) 5.8 2.2 24.2 35.8 37.7 25.3
Culp Velvets/Prints 48.2 25.4 26.9 7.1 24.5 10.1 9.2 9.0 9.9 9.5
---------------------------------------------- ----------------------------------------------
30.8 18.1 12.2 0.8 14.0 5.9 17.2 22.2 24.2 17.7
Mattress Ticking
Culp Home Fashions 5.1 7.4 15.3 15.5 10.8 27.5 15.4 14.2 12.0 16.9
Yarn
Culp Yarn
- - - - - - - 100.0 100.0 100.0
---------------------------------------------- ----------------------------------------------
25.1 16.0 12.7 3.4 13.4 9.9 16.8 21.5 28.5 19.5
============================================== ==============================================
Overall Growth Rate
Internal(without acquisitions) 25.1 16.0 12.7 3.4 13.4 9.9 6.6 9.2 11.6 9.3
External - - - - - - 10.2 12.3 16.9 10.2
---------------------------------------------- ----------------------------------------------
25.1 16.0 12.7 3.4 13.4 9.9 16.8 21.5 28.5 19.5
============================================== ==============================================
Percent increase(decrease) from prior year:
- ----------------------------------------------------------------------------
Fiscal 1999
-----------------------------------------------
Product Category/Business Units Q1 Q2 Q3 Q4 TOTAL
---------------------------
Upholstery Fabrics
Culp Decorative Fabrics 29.2
Culp Velvets/Prints (21.9)
----------------------------------------------
4.1
Mattress Ticking
Culp Home Fashions 6.3
Yarn
Culp Yarn
100.0
----------------------------------------------
11.2
==============================================
Overall Growth Rate
Internal(without acquisitions) (4.6)
External 15.8
===============================================
11.2
===============================================
</TABLE>
<PAGE>
CULP, INC. FINANCIAL INFORMATION RELEASE
FINANCIAL NARRATIVE
for the three month periods ended August 2, 1998 and August 3, 1997
INCOME STATEMENT COMMENTS
GENERAL - Net sales increased 11.2% to $110.7 million, and the
company reported a net loss of $2.6 million compared with net income of $2.9
million for the first quarter of last year. The first quarter included 13
weeks versus 14 weeks in the year-earlier period.
The company has compiled a longer term record of growth based on
several key competitive strengths:
Broad Product Offering - marketing one of the broadest product lines in the
upholstery fabrics and mattress ticking industry. Through its extensive
manufacturing capabilities, the company competes in every major category
of the industry except leather;
Diverse Global Customer Base - penetrating other end-use markets in addition
to U. S. residential furniture, such as bedding, international, commercial
furniture and juvenile furniture; sales to these other markets accounted
for approximately 53% of net sales during the first quarter;
additionally, no one customer accounted for more than 7% of sales during
the first quarter of fiscal 1999;
Design Innovation - investing in the design of new patterns and textures.
The company has significantly increased resources (both designers and
computer-aided design (CAD) systems) in the design and product development
areas in each business unit. In January 1998, the company opened its
state-of-the-art design center in Burlington, North Carolina. The facility
has consolidated most of the company's design resources in one facility
which offers advanced CAD systems for the design process;
Vertical Integration - realizing additional manufacturing integration by
producing various raw material components that are used in the manufacture
of its products; and
Ability to Integrate Acquisitions - investing in selective acquisitions that
strengthen existing marketing positions.
NET SALES - Compared with the first quarter of last year, upholstery
fabric sales increased 4.1% to $81.4 million; mattress ticking sales
increased 6.3% to $22.6 million; and yarn sales contributed $6.6 million for
the quarter (See Sales by Business Unit schedule on Page 5 and Sales by
Business Unit - Trend Analysis on Page 7). The growth in upholstery fabric
sales for the first quarter was due to the contribution of $9.1 million from
Phillips Mills which was acquired after the close of the quarter a year ago.
Excluding that incremental volume, upholstery fabric sales were down 7.5%
from a year ago. International sales were up 5.0% for the quarter. A
significant decline in sales to Europe and the Far East/Asia (principally
Russia) was offset by higher shipments to the Middle East.
<PAGE>
CULP, INC. FINANCIAL INFORMATION RELEASE
FINANCIAL NARRATIVE
for the three month periods ended August 2, 1998 and August 3, 1997
The decline in sales of upholstery fabrics was due principally to a
pronounced slowdown in international sales of wet and heat-transfer printed
flock fabrics. This trend, which the company believes has affected other
manufacturers of upholstery fabrics, became apparent after the close of
fiscal 1998 and has been persistent thus far in fiscal 1999. A large
percentage of the company's sales of this product line were being shipped
directly or indirectly to customers in the emerging markets of Russia and
other former Soviet countries, India and Eastern Europe. All of these areas
are generally experiencing very weak economic conditions which, in turn, have
affected demand for furniture and other home furnishings. The company has
significantly curtailed production schedules for these fabrics and has
shifted its marketing focus for this product category to geographic areas
where demand remains favorable. The company is seeking to build a
diversified geographic base of customers internationally to minimize the
exposure to economic uncertainties in any single geographic area.
Lower international sales also affected the company's sales of other
upholstery fabrics during the first quarter. The year-to-year comparisons
were also influenced by the fact that there was one less week in the period
(13) versus a year ago (14). Because of industry wide vacations and
scheduled plant shutdowns, the first quarter is historically the lowest
period of the year for net sales.
The increased sales by Culp Home Fashions during the first quarter
marks a continuation of the expansion that this business unit has experienced
in recent years. Sales are benefiting from the introduction of new designs
and fabric constructions as well as the company's vertical integration.
Culp's ability to manufacture the jacquard greige, or unfinished, goods that
are then printed to produce mattress ticking has aided the company in meeting
faster delivery schedules and providing improved overall customer service.
GROSS PROFIT - Gross profit declined 18.7% for the quarter versus a
year ago. The decline was due principally to lower margins at the Culp
Decorative Fabrics and Culp Velvets/Prints units. Culp Decorative Fabrics
experienced considerable unfavorable manufacturing variances during the
quarter. Factors contributing to these variances included lower than
expected sales and competitive pressure on pricing, especially in the
jacquard product category. The lower gross profit at Culp Velvets/Prints was
due to the unexpectedly sharp decline in international sales of printed flock
fabrics. The lower sales led to excess manufacturing capacity and lower
absorption of fixed costs.
The gross margins are expected to remain under pressure, but the
company has instituted a number of actions to improve profitability. A
reorganization from six to four business units during the first quarter has
grouped related operations together and has been accompanied by several
changes in managerial positions. Steps underway related to this realignment
include a significant reduction in the capacity for manufacturing printed
flock fabrics, comprehensive programs to reduce inventories and an intense
effort to reduce operating expenses and raise productivity.
S,G&A EXPENSES - S,G&A expenses for the first quarter rose as a
percentage of sales to 13.1% from 11.0 % for the same period of last year.
The higher proportion of SG&A expenses was also affected by the lower than
expected sales. The increase in absolute dollars from a year ago resulted
from the Phillips Mills and Artee acquisitions, investment in additional
design resources, increased costs in sampling new product and higher costs
for marketing programs.
<PAGE>
CULP, INC. FINANCIAL INFORMATION RELEASE
FINANCIAL NARRATIVE
for the three month periods ended August 2, 1998 and August 3, 1997
INTEREST EXPENSE - Interest expense increased 85% compared with the
year-earlier period due to higher average borrowings outstanding. The
increased borrowings related principally to the acquisitions during fiscal
1998 of Phillips Mills and Artee Industries and the relatively high level of
capital expenditures in fiscal 1998.
OTHER EXPENSE (INCOME), NET - Other expense (income) increased to
$770,000 from $242,000 in the year-earlier quarter. A major factor
contributing to the increase was amortization of goodwill due to the
acquisitions during fiscal 1998. Additionally, a non-recurring charge of
$311,000 was incurred to writeoff certain fixed assets.
INCOME TAXES - The effective tax rate for the quarter was 33.0%
compared with 35.0% for the prior year.
EBITDA - EBITDA for the quarter decreased to $3.1 million from $9.0
million for last year's first quarter and represented 2.8% of net sales
compared with 9.1% of net sales for the same period of last year.
BALANCE SHEET COMMENTS
WORKING CAPITAL - Accounts receivable increased 18.0 % from August 3,
1997, while sales increased 11.2 % for the first quarter. Days sales
outstanding represented 48 days, down from 50 days at August 3, 1997, and 49
days at May 3, 1998. Accounts receivable increased at a faster rate than
sales because of the increasing mix of international sales and mattress
ticking sales, which carry longer payment terms than U.S. upholstery fabric
sales. Additionally, the aging of accounts receivable was 93.8 % current and
less than 30 days past due versus 95.0% at August 3, 1997. Inventories
increased 30.7 % from August 3, 1997, and inventory turns were 4.9 versus 5.8
for last year's first quarter. The inventory increase is partly due to the
prior year acquisitions and a build up of yarn in the Culp Decorative Fabrics
business unit. Operating working capital (comprised of accounts receivable,
inventory and accounts payable) increased to $111.5 million at August 2,
1998, for the reasons mentioned above, from $94.6 million at August 3, 1997.
The balance at May 3, 1998 was $115.2 million.
PROPERTY, PLANT AND EQUIPMENT - For fiscal 1999, the company is
planning to significantly reduce its capital spending to $10-$15 million, and
concentrate its efforts on improving the results of the investments made
during fiscal 1997 and fiscal 1998. The two largest projects that are
currently planned for fiscal 1999 are: (a) completion of the polypropylene
yarn extrusion expansion, which began in early fiscal 1998; and (b) building
expansions in the Culp Home Fashions business unit to accommodate the
significant growth in the company's sales of mattress ticking over the last
several years. Depreciation for fiscal 1999 is currently estimated to be
approximately $19 million.
LONG-TERM DEBT - The company's funded debt-to-capital ratio
was 54.5% at August 2, 1998, up from 43.6% at August 3, 1997, and up from
53.5% at May 3, 1998. Funded debt was $153.6 million at August 2, 1998, up
from $87.9 million at August 3, 1997 and up from $151.6 million at May 3,
1998. (Funded debt equals long-term debt, including current maturities, less
restricted investments, which represent unspent IRB funds). The increase in
funded debt from May 3, 1998 resulted primarily from capital expenditures of
$2.9 million and a decrease in accounts payable related to capital
expenditures of $2.5 million, which were partially offset by operating cash
flow of $3.2 million.
