EX-99 3 a4772319ex99b.txt CULP, INC. EXHIBIT 99(B) Exhibit 99(b) Page 1 of 13
CULP, INC. FINANCIAL INFORMATION RELEASE CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003 (UNAUDITED) (Amounts in Thousands, Except for Per Share Data) THREE MONTHS ENDED ------------------------------------------------------------- Amounts Percent of Sales ------------------------ ------------------------- October 31, November 2, % Over October 31, November 2, 2004 2003 (Under) 2004 2003 ----------- ----------- --------- ---------- ----------- Net sales $ 75,406 82,731 (8.9)% 100.0 % 100.0 % Cost of sales 65,839 65,993 (0.2)% 87.3 % 79.8 % ----------- ----------- --------- ---------- ----------- Gross profit 9,567 16,738 (42.8)% 12.7 % 20.2 % Selling, general and administrative expenses 8,838 10,296 (14.2)% 11.7 % 12.4 % Goodwill impairment 5,126 0 100.0 % 6.8 % 0.0 % Restructuring expense 1,292 0 100.0 % 1.7 % 0.0 % ----------- ----------- --------- ---------- ----------- Income (loss) from operations (5,689) 6,442 (188.3)% (7.5)% 7.8 % Interest expense 937 1,509 (37.9)% 1.2 % 1.8 % Interest income (29) (121) (76.0)% (0.0)% (0.1)% Other expense 173 62 179.0 % 0.2 % 0.1 % ----------- ----------- --------- ---------- ----------- Income (loss) before income taxes (6,770) 4,992 (235.6)% (9.0)% 6.0 % Income taxes* (2,577) 1,846 (239.6)% 38.1 % 37.0 % ----------- ----------- --------- ---------- ----------- Net income (loss) $ (4,193) 3,146 (233.3)% (5.6)% 3.8 % =========== =========== ========= ========== =========== Net income (loss) per share-basic ($0.36) $ 0.27 (233.3)% Net income (loss) per share-diluted ($0.36) $ 0.27 (233.3)% Net income per share, diluted, excluding restructuring and related charges and goodwill impairment (see proforma statement on page 7) $ 0.04 $ 0.27 (85.2)% Average shares outstanding-basic 11,549 11,524 0.2 % Average shares outstanding-diluted 11,549 11,774 (1.9)% SIX MONTHS ENDED ------------------------------------------------------------- Amounts Percent of Sales ------------------------ ------------------------- October 31, November 2, % Over October 31, November 2, 2004 2003 (Under) 2004 2003 ----------- ----------- --------- ---------- ----------- Net sales $ 143,255 156,407 (8.4)% 100.0 % 100.0 % Cost of sales 125,013 128,191 (2.5)% 87.3 % 82.0 % ----------- ----------- --------- ---------- ----------- Gross profit 18,242 28,216 (35.3)% 12.7 % 18.0 % Selling, general and administrative expenses 18,118 20,812 (12.9)% 12.6 % 13.3 % Goodwill impairment 5,126 0 100.0 % 3.6 % 0.0 % Restructuring expense 1,154 0 100.0 % 0.8 % 0.0 % ----------- ----------- --------- ---------- ----------- Income (loss) from operations (6,156) 7,404 (183.1)% (4.3)% 4.7 % Interest expense 1,877 3,006 (37.6)% 1.3 % 1.9 % Interest income (56) (243) (77.0)% (0.0)% (0.2)% Other expense 387 301 28.6 % 0.3 % 0.2 % ----------- ----------- --------- ---------- ----------- Income (loss) before income taxes (8,364) 4,340 (292.7)% (5.8)% 2.8 % Income taxes* (3,119) 1,605 (294.3)% 37.3 % 37.0 % ----------- ----------- --------- ---------- ----------- Net income (loss) $ (5,245) 2,735 (291.8)% (3.7)% 1.7 % =========== =========== ========= ========== =========== Net income (loss) per share-basic ($0.45) $ 0.24 (287.5)% Net income (loss) per share-diluted ($0.45) $ 0.23 (295.7)% Net income (loss) per share, diluted, excluding restructuring and related charges and goodwill impairment (see proforma statement on page 8) ($0.05) $ 0.23 (121.7)% Average shares outstanding-basic 11,548 11,519 0.3 % Average shares outstanding-diluted 11,548 11,718 (1.5)% * Percent of sales column for income taxes is calculated as a % of income (loss) before income taxes.
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CULP, INC. FINANCIAL INFORMATION RELEASE CONSOLIDATED BALANCE SHEETS OCTOBER 31, 2004, NOVEMBER 2, 2003 AND MAY 2, 2004 Unaudited (Amounts in Thousands) Amounts Increase ------------------------ (Decrease) October 31, November 2, --------------------- * May 2, 2004 2003 Dollars Percent 2004 ----------- ----------- --------- --------- --------- Current Assets Cash and cash equivalents $ 16,505 16,623 (118) (0.7)% 14,568 Short-term investments 0 15,134 (15,134) (100.0)% 0 Accounts receivable 26,590 31,342 (4,752) (15.2)% 30,719 Inventories 48,528 53,848 (5,320) (9.9)% 49,045 Deferred income taxes 4,980 12,303 (7,323) (59.5)% 9,256 Other current assets 3,100 3,211 (111) (3.5)% 1,634 ----------- ----------- --------- --------- --------- Total current assets 99,703 132,461 (32,758) (24.7)% 105,222 Property, plant & equipment, net 76,062 81,219 (5,157) (6.3)% 77,770 Goodwill 4,114 9,240 (5,126) (55.5)% 9,240 Deferred income taxes 834 0 834 100.0 % 0 Other assets 1,327 1,892 (565) (29.9)% 1,496 ----------- ----------- --------- --------- --------- Total assets $ 182,040 224,812 (42,772) (19.0)% 193,728 =========== =========== ========= ========= ========= Current liabilities Current maturities of long-term debt $ 594 539 55 10.2 % 528 Accounts payable 15,192 23,928 (8,736) (36.5)% 15,323 Accrued expenses 11,962 13,522 (1,560) (11.5)% 13,028 Accrued restructuring 5,458 6,712 (1,254) (18.7)% 4,968 Income taxes payable 0 1,578 (1,578) (100.0)% 1,850 ----------- ----------- --------- --------- --------- Total current liabilities 33,206 46,279 (13,073) (28.2)% 35,697 Long-term debt, less current maturities 50,569 76,077 (25,508) (33.5)% 50,502 Deferred income taxes 0 3,851 (3,851) (100.0)% 4,138 ----------- ----------- --------- --------- --------- Total liabilities 83,775 126,207 (42,432) (33.6)% 90,337 Shareholders' equity 98,265 98,605 (340) (0.3)% 103,391 ----------- ----------- --------- --------- --------- Total liabilities and shareholders' equity $ 182,040 224,812 (42,772) (19.0)% 193,728 =========== =========== ========= ========= ========= Shares outstanding 11,550 11,529 21 0.2 % 11,547 =========== =========== ========= ========= ========= * Derived from audited financial statements
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CULP, INC. FINANCIAL INFORMATION RELEASE CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003 Unaudited (Amounts in Thousands) SIX MONTHS ENDED ------------------------- Amounts ------------------------- October 31, November 2, 2004 2003 ----------- ----------- Cash flows from operating activities: Net income (loss) $ (5,245) 2,735 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 6,900 6,883 Amortization of other assets 70 91 Stock-based compensation 104 105 Goodwill impairment 5,126 0 Deferred income taxes (696) 0 Restructuring expense 1,154 0 Changes in assets and liabilities: Accounts receivable 4,129 917 Inventories 517 (4,296) Other current assets (1,466) (7) Other assets 153 252 Accounts payable 1,228 5,121 Accrued expenses (1,066) (549) Accrued restructuring (440) (1,031) Income taxes payable (1,850) 1,229 ----------- ----------- Net cash provided by operating activities 8,618 11,450 ----------- ----------- Cash flows from investing activities: Capital expenditures (5,556) (2,954) Purchases of short-term investments 0 (5,147) ----------- ----------- Net cash used in investing activities (5,556) (8,101) ----------- ----------- Cash flows from financing activities: Payments on vendor-financed capital expenditures (1,273) (1,254) Proceeds from issuance of long-term debt 133 116 Proceeds from common stock issued 15 57 ----------- ----------- Net cash used in financing activities (1,125) (1,081) ----------- ----------- Increase in cash and cash equivalents 1,937 2,268 Cash and cash equivalents at beginning of period 14,568 14,355 ----------- ----------- Cash and cash equivalents at end of period $ 16,505 16,623 =========== =========== Free Cash Flow (1) $ 1,789 7,242 =========== =========== -------------------------------------------------------------------------------------------------------------- (1) Free Cash Flow reconciliation is as follows: 2nd Qtr 2nd Qtr FY 2005 FY 2004 ------------------------- A) Net cash provided by operating activities 8,618 11,450 B) Minus: Capital Expenditures (5,556) (2,954) C) Minus: Payments on vendor-financed capital expenditures (1,273) (1,254) ---------- ----------- 1,789 7,242 ========== =========== --------------------------------------------------------------------------------------------------------------
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CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL ANALYSIS OCTOBER 31, 2004 FISCAL 04 FISCAL 05 --------- ----------------------------------------- Q2 Q1 Q2 Q3 Q4 --------- ----------------------------------------- INVENTORIES Inventory turns 5.1 4.7 5.2 RECEIVABLES Days sales in receivables 34 30 32 WORKING CAPITAL Current ratio 2.9 3.1 3.0 Operating working capital turnover (1) 5.3 5.1 4.9 Operating working capital (1) $ 61,262 $ 61,468 $ 59,926 PROPERTY, PLANT & EQUIPMENT Depreciation rate 6.3% 6.1% 6.1%(4) Percent property, plant & equipment are depreciated 62.9% 64.2% 64.9%(4) Capital expenditures $ 6,747(2) $ 4,543 $ 1,008 LEVERAGE Total liabilities/equity 128.0% 84.2% 85.3% Long-term debt/equity 77.7% 49.9% 52.1% Long-term debt/capital employed (3) 43.7% 33.3% 34.1% Long-term debt $ 76,616 $ 51,064 $ 51,163 OTHER Book value per share $ 8.55 $ 8.87 $ 8.51 Employees at quarter end 2,373 2,235 2,165 Sales per employee (annualized) $139,161 $119,190 $137,102 Capital employed (3) $175,221 $153,462 $149,428 (1) Working capital for this calculation is accounts receivable, inventories and accounts payable. (2) Expenditures for entire year. (3) Capital employed represents long-term debt plus stockholders equity; Long-term debt is long-term debt plus current maturities of of long- term debt. (4) Property, plant & equipment ratios are calculated excluding accelerated depreciation of approximately $215,000.
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CULP, INC. FINANCIAL INFORMATION RELEASE SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT/DIVISION FOR THE THREE MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003 (Amounts in thousands) THREE MONTHS ENDED (UNAUDITED) ---------------------------------------------------------------- Amounts Percent of Total Sales ------------------------- ------------------------- October 31, November 2, % Over October 31, November 2, Net Sales by Segment 2004 2003 (Under) 2004 2003 ---------------------------------- ----------- ----------- -------- ----------- ----------- Mattress Fabrics Culp Home Fashions $ 26,886 26,788 0.4 % 35.7 % 32.4 % ----------- ----------- -------- ----------- ----------- Upholstery Fabrics Culp Decorative Fabrics 27,278 32,459 (16.0)% 36.2 % 39.2 % Culp Velvets/Prints 21,242 23,484 (9.5)% 28.2 % 28.4 % ----------- ----------- -------- ----------- ----------- 48,520 55,943 (13.3)% 64.3 % 67.6 % ----------- ----------- -------- ----------- ----------- Net Sales $ 75,406 82,731 (8.9)% 100.0 % 100.0 % =========== =========== ======== =========== =========== Gross Profit by Segment Gross Profit Margin ---------------------------------- ------------------------- Mattress Fabrics $ 4,461 6,329 (29.5)% 16.6 % 23.6 % Upholstery Fabrics 6,230 10,409 (40.1)% 12.8 % 18.6 % Restructuring related charges(1) (1,124) 0 100.0 % (2.3)% 0.0 % ----------- ----------- -------- ----------- ----------- Gross Profit $ 9,567 16,738 (42.8)% 12.7 % 20.2 % =========== =========== ======== =========== =========== Operating Income (loss) by Segment Operating Income (Loss) Margin ---------------------------------- ------------------------------ Mattress Fabrics $ 2,676 4,247 (37.0)% 10.0 % 15.9 % Upholstery Fabrics 216 3,452 (93.7)% 0.4 % 6.2 % Unallocated corporate expenses (1,039) (1,257) (17.3)% (1.4)% (1.5)% Goodwill impairment (5,126) 0 (100.0)% (6.8)% 0.0 % Restructuring and related charges and credits (1) (2,416) 0 (100.0)% (5.0)% 0.0 % ----------- ----------- -------- ----------- ----------- Operating income (loss) $ (5,689) 6,442 (188.3)% (7.5)% 7.8 % =========== =========== ======== =========== =========== Depreciation by Segment ---------------------------------- Mattress Fabrics $ 915(2) 942 (2.9)% Upholstery Fabrics 2,408(2) 2,498 (3.6)% ----------- ----------- -------- Total Depreciation $ 3,323 3,440 (3.4)% =========== =========== ======== (1) The $1.1 million represents restructuring related charges for inventory markdowns and accelerated depreciation. The $2.4 million represents the $1.1 million restructuring related charges plus $1.3 million in restructuring charges for fixed asset write-downs and accrued termination benefits. (2) Excludes accelerated depreciation of approximately $215,000 associated with plant and equipment scheduled to be disposed of over the next six months.
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CULP, INC. FINANCIAL INFORMATION RELEASE SALES, GROSS PROFIT AND OPERATING INCOME (LOSS) BY SEGMENT/DIVISION FOR THE SIX MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003 (Amounts in thousands) SIX MONTHS ENDED (UNAUDITED) ---------------------------------------------------------------- Amounts Percent of Total Sales ------------------------- ------------------------- October 31, November 2, % Over October 31, November 2, Net Sales by Segment 2004 2003 (Under) 2004 2003 ---------------------------------- ----------- ----------- -------- ----------- ----------- Mattress Fabrics Culp Home Fashions $ 52,839 54,008 (2.2)% 36.9 % 34.5 % ----------- ----------- -------- ----------- ----------- Upholstery Fabrics Culp Decorative Fabrics 51,197 62,076 (17.5)% 35.7 % 39.7 % Culp Velvets/Prints 39,219 40,323 (2.7)% 27.4 % 25.8 % ----------- ----------- -------- ----------- ----------- 90,416 102,399 (11.7)% 63.1 % 65.5 % ----------- ----------- -------- ----------- ----------- Net Sales $ 143,255 156,407 (8.4)% 100.0 % 100.0 % =========== =========== ======== =========== =========== Gross Profit by Segment Gross Profit Margin ---------------------------------- ------------------------- Mattress Fabrics $ 9,255 12,401 (25.4)% 17.5 % 23.0 % Upholstery Fabrics 10,186 15,815 (35.6)% 11.3 % 15.4 % Restructuring related charges(1) (1,199) 0 100.0 % (1.3)% 0.0 % ----------- ----------- -------- ----------- ----------- Gross Profit $ 18,242 28,216 (35.3)% 12.7 % 18.0 % =========== =========== ======== =========== =========== Operating Income (loss) by Segment Operating Income (Loss) Margin ---------------------------------- ------------------------------ Mattress Fabrics $ 5,575 8,391 (33.6)% 10.6 % 15.5 % Upholstery Fabrics (2,403) 1,733 (238.7)% (2.7)% 1.7 % Unallocated corporate expenses (1,849) (2,720) (32.0)% (1.3)% (1.7)% Goodwill impairment (5,126) 0 (100.0)% (3.6)% 0.0 % Restructuring and related charges and credits (1) (2,353) 0 (100.0)% (2.6)% 0.0 % ----------- ----------- -------- ----------- ----------- Operating income (loss) $ (6,156) 7,404 (183.1)% (4.3)% 4.7 % =========== =========== ======== =========== =========== Depreciation by Segment ---------------------------------- Mattress Fabrics $ 1,844(2) 1,886 (2.2)% Upholstery Fabrics 4,841(2) 4,997 (3.1)% ----------- ----------- -------- Total Depreciation $ 6,685 6,883 (2.9)% =========== =========== ======== (1) The $1.2 million represents restructuring related charges for inventory markdowns and accelerated depreciation. The $2.4 million represents the $1.2 million restructuring related charges plus $1.2 million in restructuring charges for fixed asset write-downs and accrued termination benefits. (2) Excludes accelerated depreciation of approximately $215,000 associated with plant and equipment scheduled to be disposed of over the next six months.
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CULP, INC. PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE THREE MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003 (Amounts in Thousands, Except for Per Share Data) THREE MONTHS ENDED ---------------------------------------------------------------------------------------------------------------- October 31, November 2, 2004 2003 As Proforma As Proforma Reported Net of Reported Net of Proforma October % of Adjust- % of Adjust- % of November % of Adjust- % of Adjust- % of % Over 31, 2004 Sales ments Sales ments Sales 2, 2003 Sales ments Sales ments Sales (Under) ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Net sales $ 75,406 100.0% 0 75,406 100.0% 82,731 100.0% 0 82,731 100.0% -8.9% Cost of sales 65,839 87.3% (1,124) -1.5%(1) 64,715 85.8% 65,993 79.8% 0 0.0% 65,993 79.8% -1.9% ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Gross profit 9,567 12.7% (1,124) -1.5% 10,691 14.2% 16,738 20.2% 0 0.0% 16,738 20.2% -36.1% Selling, general and administrative expenses 8,838 11.7% 0 0.0% 8,838 11.7% 10,296 12.4% 0 0.0% 10,296 12.4% -14.2% Goodwill impairment 5,126 6.8% (5,126) 0.0%(3) 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0.0% Restructuring expense 1,292 1.7% (1,292) -1.7%(2) 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0.0% ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Income (loss) from operations (5,689) -7.5% (7,542) -10.0% 1,853 2.5% 6,442 7.8% 0 0.0% 6,442 7.8% -71.2% Interest expense 937 1.2% 0 0.0% 937 1.2% 1,509 1.8% 0 0.0% 1,509 1.8% -37.9% Interest income (29) 0.0% 0 0.0% (29) 0.0% (121) -0.1% 0 0.0% (121) -0.1% -76.0% Other expense 173 0.2% 0 0.0% 173 0.2% 62 0.1% 0 0.0% 62 0.1% 179.0% ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Income (loss) before income taxes (6,770) -9.0% (7,542) -10.0% 772 1.0% 4,992 6.0% 0 0.0% 4,992 6.0% -84.5% Income taxes (2,577) 38.1% (2,844) 37.7%(4) 267 34.6% 1,846 37.0% 0 0.0% 1,846 37.0% -85.5% ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Net income (loss) $ (4,193) -5.6% (4,698) -6.2% 505 0.7% 3,146 3.8% 0 0.0% 3,146 3.8% -84.0% ================= =============== ================== ================ ============== ================== ======== Net income (loss) per share-basic ($0.36) ($0.41) $0.04 $0.27 $0.00 $0.27 Net income (loss) per share-diluted ($0.36) ($0.41) $0.04 $0.27 $0.00 $0.27 Average shares outstanding-basic 11,549 11,549 11,549 11,524 11,524 11,524 Average shares outstanding-diluted 11,549 11,549 11,722 11,774 11,774 11,774 Notes: (1) The $1.1 million represents restructuring related charges for inventory markdowns and accelerated depreciation. (2) The $1.3 million restructuring charge represents fixed asset write-downs and accrued termination benefits. (3) The $5.1 million represents a goodwill impairment charge related to the Culp Decorative Fabrics division. (4) The percent of net sales column for income taxes is calculated as a % of income (loss) before income taxes.
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CULP, INC. PROFORMA CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE SIX MONTHS ENDED OCTOBER 31, 2004 AND NOVEMBER 2, 2003 (Amounts in Thousands, Except for Per Share Data) SIX MONTHS ENDED ---------------------------------------------------------------------------------------------------------------- October 31, November 2, 2004 2003 As Proforma As Proforma Reported Net of Reported Net of Proforma October % of Adjust- % of Adjust- % of November % of Adjust- % of Adjust- % of % Over 31, 2004 Sales ments Sales ments Sales 2, 2003 Sales ments Sales ments Sales (Under) ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Net sales $ 143,255 100.0% 0 143,255 100.0% 156,407 100.0% 0 156,407 100.0% -8.4% Cost of sales 125,013 87.3% (1,199) -0.8%(1) 123,814 86.4% 128,191 82.0% 0 0.0% 128,191 82.0% -3.4% ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Gross profit 18,242 12.7% (1,199) -0.8% 19,441 13.6% 28,216 18.0% 0 0.0% 28,216 18.0% -31.1% Selling, general and administrative expenses 18,118 12.6% 0 0.0% 18,118 12.6% 20,812 13.3% 0 0.0% 20,812 13.3% -12.9% Goodwill impairment 5,126 3.6% (5,126) 0.0% 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0.0% Restructuring expense 1,154 0.8% (1,154) -0.8%(2) 0 0.0% 0 0.0% 0 0.0% 0 0.0% 0.0% ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Income (loss) from operations (6,156) -4.3% (7,479) -5.2% 1,323 0.9% 7,404 4.7% 0 0.0% 7,404 4.7% -82.1% Interest expense 1,877 1.3% 0 0.0% 1,877 1.3% 3,006 1.9% 0 0.0% 3,006 1.9% -37.6% Interest income (56) 0.0% 0 0.0% (56) 0.0% (243) -0.2% 0 0.0% (243) -0.2% -77.0% Other expense 387 0.3% 0 0.0% 387 0.3% 301 0.2% 0 0.0% 301 0.2% 28.6% ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Income (loss) before income taxes (8,364) -5.8% (7,479) -5.2% (885) -0.6% 4,340 2.8% 0 0.0% 4,340 2.8% -120.4% Income taxes (3,119) 37.3% (2,823) 37.7%(4) (296) 33.5% 1,605 37.0% 0 0.0% 1,605 37.0% -118.5% ----------------- --------------- ------------------ ---------------- -------------- ------------------ -------- Net income (loss) $ (5,245) -3.7% (4,656) -3.3% (589) -0.4% 2,735 1.7% 0 0.0% 2,735 1.7% -121.5% ================= =============== ================== ================ ============== ================== ======== Net income (loss) per share-basic ($0.45) ($0.40) ($0.05) $0.24 $0.00 $0.24 Net income (loss) per share-diluted ($0.45) ($0.40) ($0.05) $0.23 $0.00 $0.23 Average shares outstanding-basic 11,548 11,548 11,548 11,519 11,519 11,524 Average shares outstanding-diluted 11,548 11,548 11,548 11,718 11,718 11,774 Notes: (1) The $1.2 million represents restructuring related charges for inventory markdowns and accelerated depreciation. (2) The $1.2 million restructuring charge represents fixed asset write-downs and accrued termination benefits. (3) The $5.1 million represents a goodwill impairment charge related to the Culp Decorative Fabrics division. (4) The percent of net sales column for income taxes is calculated as a % of income (loss) before income taxes.
Page 9 of 13 CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL NARRATIVE for the three and six months ended October 31 , 2004 and November 2, 2003 OVERVIEW -------- Highlights for the second quarter ended October 31, 2004, include: o Announced strategic plan expected to realize over $14 million in annual savings o Restructuring initiatives underway to consolidate domestic capacity o Continued expansion of offshore manufacturing and sourcing capabilities, with sales of these upholstery fabrics up 143 percent over the same period last year o Long-term debt-to-capital ratio of 34.1 percent compared with 43.7 percent a year ago GENERAL -- The financial results for the second quarter reflect weak demand for upholstery fabrics and industry wide pricing pressure impacting the mattress fabrics segment. While the company anticipated the normal seasonal pick-up in demand that occurs in the fall, sales in the upholstery segment were approximately 13% lower than the same period last year. Overall, the retail furniture business has not demonstrated signs of a meaningful recovery from the summer slowdown. For the second quarter of fiscal 2005, consolidated net sales decreased 8.9% to $75.4 million; and the company reported a net loss of $4.2 million, or $0.36 per share diluted, compared with net income of $3.1 million, or $0.27 per diluted share, for the second quarter of fiscal 2004. The financial results for this quarter reflect a total of $2.4 million in restructuring and related charges, and $5.1 million in goodwill impairment. Excluding these charges, net income for the second quarter of fiscal 2005 was $505,000, or $0.04 per share (see reconciliation on page 7). For the first six months of fiscal 2005, net sales decreased 8.4% to $143.3 million; and the company reported a net loss of $5.2 million, or $0.45 per share diluted, compared with net income of $2.7 million or $0.23 per share diluted, for the same period last year. Excluding restructuring and related charges and goodwill impairment, net loss for the first six months of fiscal 2005 was $589,000, or $0.05 per share diluted (see reconciliation on page 8). Year-to-date for fiscal 2005 included 26 weeks versus 27 weeks for the same period of fiscal 2004. RESTRUCTURING AND RELATED CHARGES -- The financial results for the second quarter include a total of $7.5 million in restructuring and related charges and goodwill impairment. The charges are made up of the following: (1) $5.1 million of goodwill impairment , which is the result of an evaluation of all of the remaining goodwill associated with the upholstery fabrics segment; (2) $1.3 million in restructuring expenses related to the Culp Decorative Fabrics ("CDF") and Culp Velvets/Prints ("CVP") divisions, which includes approximately $1.0 million in personnel costs and approximately $300,000 in write-downs of equipment; and (3) $1.1 million of restructuring related costs for the CDF division, which include inventory mark-downs and accelerated depreciation associated with plant and equipment scheduled to be disposed of, either by sale or by abandonment, over the next six months. As reflected in the financial statements, restructuring and related expenses were recorded as $1.3 million in the line item "restructuring expense" and $1.1 million in "cost of sales." The goodwill impairment charge and restructuring and related expenses have reduced net income per share by $0.41 for the second quarter of fiscal 2005. The goodwill impairment was accounted for in accordance with SFAS 142, "Goodwill and Other Intangible Assets." The write-down of equipment and accelerated depreciation was accounted for in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Personnel costs were accounted for in accordance with SFAS No. 112, "Accounting for Employers' Accounting for Postemployment Benefits." Upholstery Fabrics Segment The restructuring and related charges for the upholstery fabrics segment reflect the restructuring initiative announced in October 2004. The restructuring plan is designed to reduce costs, increase asset utilization and improve profitability within the upholstery fabrics segment. The company has made substantial progress over the past several years with previous restructuring initiatives. However, with continued pressure on demand in this segment, management has decided to move forward with plans to further adjust the company's cost structure and bring U.S. manufacturing capacity in line with current and expected demand. The restructuring plan principally involves consolidation of the company's decorative fabrics weaving operations by closing Culp's facility in Pageland, South Carolina, and consolidating those operations into the Graham, North Carolina facility. Additionally, the company will be consolidating its yarn operations by integrating the production of the Cherryville, North Carolina plant into the company's Shelby, North Carolina facility. Another important element of the restructuring plan will be a substantial reduction in certain raw material and finished goods stock keeping units, or SKUs, to reduce manufacturing complexities and lower costs, with the ongoing objective of identifying and eliminating products that are not generating acceptable volumes or margins. Finally, the company is making significant reductions in selling, general and administrative expenses. Overall, these restructuring actions will reduce the number of associates by approximately 250 people, representing approximately 14 percent of those in Culp's upholstery fabrics segment. The implementation of these restructuring initiatives has already begun and is expected to be completed by May 1, 2005, the end of the current fiscal year. The company expects the restructuring actions to result in total pre-tax charges of approximately $20 million ($13 million on an after-tax basis). Approximately $15 million of the pre-tax amount is expected to be non-cash items, including $5.1 million for goodwill impairment. As described above, of the total charges expected, $7.5 million ($4.7 million, net of taxes, or $0.41 per diluted share) was incurred in the second fiscal quarter. The remaining charges are expected to be recorded in the third and fourth quarters of fiscal 2005, as incurred. Page 10 of 13 CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL NARRATIVE for the three and six months ended October 31 , 2004 and November 2, 2003 As a result of these plant consolidations and other cost-reduction initiatives, the company expects to realize annual savings of approximately $9.5 million, of which approximately $4.0 million will be in fixed manufacturing costs, an estimated $2.0 million in variable manufacturing costs, and approximately $3.5 million in selling, general and administrative costs. Once these initiatives are completed, the company will have seven manufacturing facilities operating in the upholstery fabrics segment, including one facility in China. Management believes this configuration will allow the company to utilize its domestic operations more efficiently, especially for promotional, commercial fabric and make-to-order businesses. At the same time, the company intends to continue aggressively pursuing its strategy to source upholstery fabrics that are not manufactured in the U.S. As described in more detail below, sales of upholstery fabrics produced outside of the company's U.S. manufacturing plants are accounting for an increasing percentage of the company's overall upholstery fabric sales. Management believes that blending efficient domestic manufacturing with an aggressive offshore manufacturing and sourcing strategy allows the company to offer a compelling value proposition and better meet customer demands. Mattress Fabrics Segment In order to reduce manufacturing costs, the company will be consolidating its mattress fabric manufacturing into two plants located in Quebec, Canada, and Stokesdale, North Carolina. This project will involve relocation of ticking looms from an upholstery fabric plant and the purchase of new looms that are faster and more efficient than the equipment they will replace. The capital expenditure amount budgeted for this project is approximately $7.0 million over the current and next fiscal year. This project will begin in November 2004 and is expected to be completed by August 2005. The company anticipates approximately $4.5 million in annualized savings to be achieved as a result of this capital project. STATEMENT OF OPERATIONS COMMENTS -------------------------------- MATTRESS FABRICS SEGMENT (See page 5 - Sales, Gross Profit and Operating Income (Loss) by Segment) Net Sales -- Mattress fabric (known as mattress ticking) sales of $26.9 million for the second quarter of fiscal 2005 were up slightly from the same period a year ago. Mattress ticking yards sold during the second quarter of fiscal 2005 were 11.3 million compared with 10.9 million yards in the second quarter of last year, an increase of 3.7%. This increase in yards sold is noteworthy because it occurred as the bedding industry nears the completion of the transition to selling predominantly one-sided mattresses, which utilize about one-third less mattress ticking. The average selling price was $2.35 per yard for the second quarter, compared to $2.43 per yard in the same quarter last year, a decrease of 3.3%. Page 11 of 13 CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL NARRATIVE for the three and six months ended October 31 , 2004 and November 2, 2003 Operating income -- For the second quarter of fiscal 2005, the mattress fabrics segment reported operating income of $2.7 million, or 10.0% of sales, compared with $4.2 million, or 15.9% of sales, for the prior year period. Operating income was primarily impacted by industry wide pricing pressure and inventory markdowns related to certain customer programs. Additionally, operating income was negatively impacted by increased raw material costs due primarily to the increased cost of petroleum based products. Also, mattress manufacturers are currently incurring higher costs for other mattress components, such as steel, as well as costs associated with flame retardant requirements. As a result of these increased costs, mattress manufacturers are placing additional pressure on mattress ticking prices, and in some instances manufacturers are moving to lower priced ticking. UPHOLSTERY FABRICS SEGMENT (See page 5-Sales, Gross Profit and Operating Income (Loss) by Segment) Net Sales -- Upholstery fabric sales for the second quarter of fiscal 2005 decreased 13.3% to $48.5 million when compared to the second quarter of fiscal 2004. The lower sales primarily reflect soft demand by furniture retailers, as well as current consumer preference for leather furniture and increased competition from imported fabrics, including cut and sewn kits, primarily from Asia. With the company's offshore sourcing efforts, including the China platform, the company is experiencing higher sales of upholstery fabric products produced outside of the company's U.S. manufacturing plants. These sales increased 143% over the prior year period and accounted for approximately $7.0 million or 14.4% of upholstery fabric sales for the quarter. Offshore sourced fabrics of $2.9 million accounted for approximately 5.1% of upholstery fabric sales for the same period last year. Upholstery fabric yards sold during the second quarter were 10.7 million versus 13.1million in the second quarter of fiscal 2004, a decline of 18.3%. Average selling price was $4.23 per yard for the second quarter compared with $4.13 per yard in the same quarter of last year, an increase of 2.4 %, due to higher average selling prices in both the CDF and CVP divisions. Operating income (loss) -- Operating income for the second quarter of fiscal 2005 was $216,000, or .4% of sales, compared with operating income of $3.5 million, or 6.2% of sales, for the same period last year. The significant decrease in segment income as compared to last year was primarily due to further underutilization of the company's U.S. manufacturing capacity. Additionally, the upholstery fabrics segment has been experiencing higher raw material costs due mainly to the increase in cost of petroleum based products. SG&A EXPENSES -- SG&A expenses of $8.8 million for the second quarter of fiscal 2005 decreased approximately $1.5 million, or 14.2%, from the prior year amount. As a percent of net sales, SG&A expenses decreased to 11.7% from 12.4% the previous year, due mostly to lower incentive compensation expense and lower professional fees. Unallocated Corporate Expenses - The unallocated corporate expense category includes certain items that have not been allocated to the company's segments (see Page 5 - Sales and Gross Profit/Operating Income (Loss) by Segment). The major components of unallocated corporate expenses include compensation and benefits for certain executive officers and all costs related to being a public company. For the second quarter of fiscal 2005, unallocated corporate expenses totaled $1.0 million compared with $1.3 million for the same period last year, reflecting a decrease in incentive compensation expense and professional fees. INTEREST EXPENSE AND INTEREST INCOME -- Interest expense for the second quarter declined to $937,000 from $1.5 million the previous year due to lower borrowings outstanding. Interest income decreased to $29,000 from $121,000 the previous year due to lower invested balances in fiscal 2005. Page 12 of 13 CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL NARRATIVE for the three and six months ended October 31 , 2004 and November 2, 2003 INCOME TAXES - The effective tax rate (taxes as a percentage of pretax income (loss)) for the first six months of fiscal 2005 was 37.3% compared with 37.0% for the first six months of fiscal 2004. Excluding restructuring and related charges and goodwill impairment, the effective tax rate for the first half of fiscal 2005 was 33.5% BALANCE SHEET COMMENTS ---------------------- CASH AND CASH EQUIVALENTS -- Cash and cash equivalents as of October 31, 2004 increased to $16.5 million from $14.6 million at the end of fiscal 2004, primarily reflecting cash flow from operations of $8.6 million and capital expenditures and payments on vendor financed capital expenditures of $6.9 million. WORKING CAPITAL -- Accounts receivable as of October 31, 2004 decreased 15.2% from the year-earlier level. Days sales outstanding totaled 32 days at October 31, 2004 compared with 34 days a year ago. Inventories at the close of the second quarter decreased 9.9% from a year ago. Inventory turns for the second quarter were 5.2 versus 5.1 for the year-earlier period. Operating working capital (comprised of accounts receivable and inventories, less trade accounts payable) was $59.9 million at October 31, 2004, down from $ 61.3 million a year ago. PROPERTY, PLANT AND EQUIPMENT -- Capital spending for the first six months of fiscal 2005 was $5.5 million, including approximately $4.3 million for the purchase of a building that will serve as the company's new corporate offices and as new space for the company's showrooms. The company expects the annual operating costs of the new building to be significantly lower than the lease and related costs associated with the current facilities. Depreciation for the second quarter was $3.5 million, of which approximately $215,000 was related to accelerated depreciation associated with plant and equipment scheduled to be disposed of over the next six months. As part of the fiscal 2005 restructuring plan, the company increased the capital budget by $6.1 million to approximately $15.6 million, of which $4.9 million relates to the mattress ticking plant consolidation. INTANGIBLE ASSETS -- As of October 31, 2004, $4.1 million in goodwill, which relates to the mattress fabrics segment, is the company's only intangible asset. In the second quarter of fiscal 2005, the company's $5.1 million in remaining goodwill associated with the upholstery fabrics segment was written off based on an evaluation of this segment in accordance with SFAS 142, "Goodwill and Other Intangible Assets." LONG-TERM DEBT -- The company's long-term debt of $51.2 million is unsecured and is comprised of $50.0 million in outstanding senior notes, with a fixed interest rate of 7.76%, and a $1.2 million, non-interest bearing term loan with the Canadian government. Additionally, the company has a $15.0 million revolving credit line with a bank, of which no balance is outstanding at October 31, 2004. The current bank agreement, which was due to expire in August 2004, has been extended to August 2005. The first scheduled principal payment on the $50.0 million senior notes is due March 2006 in the amount of $7.5 million. The Canadian government loan is repaid in annual installments of approximately $500,000 per year. The company was in compliance with all financial covenants in its loan agreements as of October 31, 2004. Page 13 of 13 CULP, INC. FINANCIAL INFORMATION RELEASE FINANCIAL NARRATIVE for the three and six months ended October 31 , 2004 and November 2, 2003 CASH FLOW FROM OPERATIONS COMMENTS ---------------------------------- Cash flow from operations was $8.6 million for the first six months of fiscal 2005, compared with $11.5 million for the same period last year. This decrease was due primarily to lower profitability. BUSINESS OUTLOOK ---------------- The third quarter is typically a slower period for the company's overall business as a result of traditional holiday plant shutdowns. For the current quarter, the company expects mattress ticking sales to approximate the third quarter sales from last year and expects the operating income margin in this segment to approximate the margin of 10.0 percent reported for the second quarter of this year. With respect to the upholstery fabrics segment, the outlook still remains uncertain for a recovery in demand for domestically produced upholstery fabrics. For the third quarter, upholstery fabrics segment sales are expected to decrease slightly more than the second quarter decline of 13.3 percent. The company expects this sales decline, combined with the raw material price increases the company is currently experiencing, will result in an operating loss for this segment. During the third fiscal quarter, the company estimates that previously announced restructuring and related charges of approximately $7.0 million ($4.4 million, net of taxes, or $0.38 per diluted share) will be incurred. Including these charges, the company expects to report a net loss in the range of $0.44 to $0.48 per share diluted. Excluding the restructuring and related charges, the company expects to report a net loss for the third fiscal quarter of $0.06 to $0.10 per diluted share, with the actual results depending primarily on the level of demand throughout the quarter.