Culp Announces First Quarter Results for Fiscal 2009

Tag : Woven & Knit Fabric
Culp, Inc. (NYSE: CFI) today reported financial and operatingresults for the first quarter ended August 3, 2008.

Overview

For the three months ended August 3, 2008, net sales were $59.3million compared with $65.2 million a year ago. The companyreported net income of $781,000, or $0.06 per diluted share, forthe first quarter of fiscal 2009, compared with net income of$851,000, or $0.07 per diluted share, for the first quarter offiscal 2008. The financial results for the first quarter of fiscal2009 included $267,000, or $0.02 per diluted share, inrestructuring and related charges, after taxes. Excluding thesecharges, net income for the first fiscal quarter was $1.0 million,or $0.08 per diluted share. The financial results for the firstquarter of fiscal 2008 included $624,000, or $0.05 per dilutedshare, in restructuring and related charges, after taxes. Excludingthese charges, net income for the first fiscal quarter of 2008 was$1.5 million, or $0.12 per diluted share. (A reconciliation of netincome and net income per share has been set forth on Page 6.) Theresults for the first quarter of fiscal 2009 reflect 14 weeks ascompared to 13 weeks for the same period a year ago.

Frank Saxon, chief executive officer of Culp, Inc., said, "Theresults for the first quarter of fiscal 2009 reflect outstandingperformance in our mattress fabrics business and a greater thanexpected loss in our upholstery fabrics business. The retailclimate we are facing so far this year, particularly in thefurniture industry, is as difficult as we have seen in many years.However, during these challenging times we are working diligentlyto strengthen our business models in both divisions and increasethe value we are providing our customers in terms of productinnovation, delivery performance and quality."

Mattress Fabrics Segment

Mattress fabric (known as mattress ticking) sales for the firstquarter were $35.6 million, a 2.7 percent decline compared with$36.5 million for the first quarter of fiscal 2008. On a unitvolume basis, total yards sold decreased by 4.7 percent comparedwith the first quarter of fiscal 2008. The average selling price of$2.49 per yard for the first quarter of fiscal 2009 increased 2.1percent over the same period a year ago due to a shift in productmix. Operating income for this segment was $4.2 million, comparedwith $3.8 million, for the prior-year period.

"Mattress fabrics have been a driving force in Culp's business andaccounted for 60 percent of the company's sales in the firstquarter," added Saxon. "Above all, we are committed to buildingupon our value proposition to customers. We have now completed a$5.0 million capital project to significantly strengthen our wovenmattress fabrics manufacturing operations and provide furtherreactive capacity for our customers. The August 11, 2008,acquisition of the knitted mattress fabrics operation of Bodet& Horst USA, or B&H, will further enhance Culp's strongservice platform with improved supply logistics from patterninception to fabric delivery, allowing accelerated responsivenessand greater stability. With our woven fabrics expansion and thecompletion of the B&H acquisition, Culp is now positioned witha large and modern, vertically integrated manufacturing platform inall major product categories of the mattress fabrics industry. Ourstrategic focus in mattress fabrics continues to be on providingour customers with outstanding delivery performance, quality andinnovative fabrics."

Upholstery Fabrics Segment

Sales for this segment, which include both fabric and cut and sewnkits, were $23.8 million, a 17 percent decline compared with $28.7million in the first quarter of fiscal 2008. Total fabric yardssold, which exclude fabric used in cut and sewn kits, declined by16.9 percent, while average selling prices were up 3.5 percentcompared with the first quarter of fiscal 2008. Upholstery fabricssales reflect substantially lower demand industry wide, as well ascontinued very weak demand for U.S. produced upholstery fabrics,driven by consumer preference for leather and suede furniture andother imported furniture and fabrics. Sales of non-U.S. producedfabrics were $17.4 million in the first quarter, down eight percentover the prior year period, while sales of U.S. produced fabricswere $6.3 million, down 35 percent from the first quarter of fiscal2008. Operating loss for the upholstery fabrics segment for thefirst quarter of fiscal 2009 was $1.4 million compared withoperating income of $450,000 for the same period a year ago.

Saxon added, "While we expected industry conditions for upholsteryfabrics to be extremely challenging for the first quarter of fiscal2009, they have proven to be more severe than we initiallyexpected. The uncertain economy, housing crisis and high energycosts have continued to significantly influence consumer demand forfurniture and have adversely affected Culp's upholstery fabricsales for both U.S.-produced and non U.S.-produced goods. Inresponse to this environment and our first quarter results, we areimmediately putting into operation a profit improvement plan in theupholstery fabrics business, including the following major actions:

-- Implementing a modest price increase on certain upholsteryfabrics during the second fiscal quarter; and wherever possible,obtaining price concessions from suppliers on certain high volumeitems where we could not increase our selling prices.

-- Implementing a 20 percent reduction in selling, general andadministrative expenses, totaling approximately $2.0 million on anannual basis. This initiative was completed by the end of August2008.

-- Consolidating our China operations into fewer facilities andreducing excess manufacturing capacity, which will lower costs byabout $2.0 million on an annual basis. These actions, which will beimplemented over the next five months, are expected to result in apre-tax charge during the second and third quarters ofapproximately $3.9 million, of which $3.5 million reflects non-cashcharges for fixed assets.

"As difficult as these decisions are, we remain cautiouslyoptimistic about our longer term prospects in the upholsteryfabrics business because of the following: a) we have beenreceiving significantly higher fabric placements, including cut andsewn kits, with a broader base of customers; b) a declining base ofcompetitors due to the challenging economic environment; c) theimproving value we are providing to customers from our China andU.S. operations; d) the benefits realized through the operationalimprovements being made in our Anderson, South Carolina velvetfacility; and e) the expected results from our profit improvementplan. These are all favorable indicators for improving results overthe long term as the eventual recovery in consumer demand forfurniture takes place. We are committed to taking the necessarysteps to achieve profitability in upholstery fabrics regardless ofprevailing economic and business conditions," added Saxon.

Balance Sheet

"Maintaining a strong balance sheet provides a solid foundation andthe ability to execute our strategy in fiscal 2009," added Saxon."At the end of the first fiscal quarter, our balance sheetreflected $6.4 million in cash and cash equivalents, compared with$4.9 million at the end of fiscal 2008. Total debt was $21.4million compared with $38.6 million at the end of the first quarterof fiscal 2008. Debt to capital was 20 percent compared with 32percent a year ago. The B&H acquisition was financed by $11.0million in unsecured senior notes with no principal payments duefor three years."

Outlook

Commenting on the outlook for the second quarter of fiscal 2009,Saxon remarked, "We believe our mattress fabrics segment willcontinue to perform well, but we do not expect any meaningfulchange in the demand trends in our upholstery fabrics segment.

"We expect sales in our mattress fabrics segment to be downapproximately 6 to 10 percent for the second quarter due to lowerdemand as a result of the slowdown in the bedding industry, and theplanned discontinuation of certain products from the ITGacquisition. However, operating income in this segment is expectedto improve slightly compared with the prior year period dueprimarily to the B&H acquisition.

"In our upholstery fabrics segment, we expect sales to be downapproximately 20 to 25 percent for the second quarter, dueprimarily to very weak demand in the retail furniture business. Webelieve the upholstery fabric segment's results will reflect anoperating loss, but will show measurable improvement over the firstquarter of fiscal 2009. We are estimating approximately $3.2million of pre-tax restructuring and related charges, of which $2.9million are non-cash charges, during the second fiscal quarterprimarily for the cost reduction actions being taken in our Chinaoperations.

"Considering these factors, we expect net income in the secondquarter in the range of $0.06 to $0.10 per diluted share, excludingrestructuring and related charges. The expected tax rate for thesecond quarter will be significantly higher compared with the taxbenefit reflected in the results for the second quarter of lastyear. This is management's best estimate at present, recognizingthat future financial results are difficult to predict because theupholstery fabrics industry is undergoing a dramatic transition andmany internal changes are still underway within the company. Theactual results will depend primarily upon the level of demandthroughout the quarter," said Saxon.

The company estimates that restructuring and related charges ofapproximately $3.2 million ($1.9 million net of taxes, or $0.15 perdiluted share) will be incurred during the second fiscal quarter.Including the restructuring and related charges, the companyexpects to report a net loss for the second fiscal quarter in therange of ($0.09) to ($0.05) per diluted share. (A reconciliation ofthe projected net income (loss) per share calculation has been setforth on Page 6.)

In closing, Saxon remarked, "Looking ahead, our mattress fabricsbusiness will be the key contributor to our profitability in fiscal2009. We believe there are opportunities to continue to develop ourmattress fabrics business with our improved manufacturing platformin both woven and knit product categories and our strong focus ondelivering exceptional customer service. However, the challengingconditions in the retail furniture industry will continue toinfluence our results in the upholstery fabrics business. We willcontinue to make the changes necessary to align our cost structurewith expected demand, strengthen our competitive position, and takeadvantage of the retail furniture industry's recovery when itoccurs."

About the Company

Culp, Inc. is one of the world's largest marketers of mattressfabrics for bedding and upholstery fabrics for furniture. Thecompany's fabrics are used principally in the production of beddingproducts and residential and commercial upholstered furniture.

This release contains statements that may be deemed"forward-looking statements" within the meaning of the federalsecurities laws, including the Private Securities Litigation ReformAct of 1995 (Section 27A of the Securities Act of 1933 and Section27A of the Securities and Exchange Act of 1934). Such statementsare inherently subject to risks and uncertainties. Further,forward-looking statements are intended to speak only as of thedate on which they are made. Forward-looking statements arestatements that include projections, expectations or beliefs aboutfuture events or results or otherwise are not statements ofhistorical fact. Such statements are often but not alwayscharacterized by qualifying words such as "expect," "believe,""estimate," "plan" and "project" and their derivatives, and includebut are not limited to statements about the Company's futureoperations, production levels, sales, SG&A or other expenses,margins, gross profit, operating income, earnings or otherperformance measures. Factors that could influence the mattersdiscussed in such statements include the level of housing startsand sales of existing homes, consumer confidence, trends indisposable income, and general economic conditions. Decreases inthese economic indicators could have a negative effect on theCompany's business and prospects. Likewise, increases in interestrates, particularly home mortgage rates, and increases in consumerdebt or the general rate of inflation, could affect the Companyadversely. Changes in consumer tastes or preferences towardproducts not produced by the Company could erode demand for theCompany's products. Strengthening of the U.S. dollar against othercurrencies could make the Company's products less competitive onthe basis of price in markets outside the United States, andstrengthening of currencies in Canada and China can have a negativeimpact on the Company's sales in the U.S. of products produced inthose countries. Also, economic and political instability ininternational areas could affect the Company's operations orsources of goods in those areas, as well as demand for theCompany's products in international markets. Also, the level ofsuccess in integrating the acquisition of assets from Bodet &Horst will affect the Company's ability to meet its profitabilitygoals. Finally, unanticipated delays or costs in executingrestructuring actions could cause the cumulative effect ofrestructuring actions to fail to meet the objectives set forth bymanagement. Other factors that could affect the matters discussedin forward-looking statements are included in the Company'speriodic reports filed with the Securities and Exchange Commission,including the "Risk Factors" section in the Company's most recentannual report of Form 10-K filed with the Securities and ExchangeCommission on July 9, 2008, for the fiscal year ended April 27,2008. -0- *T CULP, INC. Condensed Financial Highlights (Unaudited)Three Months Ended --------------------------- August 3, July 29,2008 2007 ------------ ------------- Net sales $59,321,000 $65,230,000 Income before income taxes $ 1,205,000 $ 1,311,000 Netincome $ 781,000 $ 851,000 Net income per share: Basic $ 0.06 $0.07 Diluted $ 0.06 $ 0.07 Income before income taxes, excludingrestructuring and related charges(a) $ 1,621,000 $ 2,286,000 Netincome, excluding restructuring and related charges $ 1,048,000 $1,475,000 Net income per share, diluted, excluding restructuringand related charges(a) $ 0.08 $ 0.12 Average shares outstanding:Basic 12,648,000 12,583,000 Diluted 12,736,000 12,728,000 (a)Excludes restructuring and related charges of $416,000 ($267,000 or$0.02 per diluted share, after taxes) for the first quarter offiscal 2009. Excludes restructuring and related charges of $975,000($624,000 or $0.05 per diluted share, after taxes) for the firstquarter of fiscal 2008. *T -0- *T CULP, INC. Reconciliation ofIncome before income taxes as Reported to Pro Forma Income beforeincome taxes (Unaudited) Three Months Ended ---------------------August 3, July 29, 2008 2007 ---------- ---------- Income beforeincome taxes, as reported $1,205,000 $1,311,000 Restructuring andrelated charges 416,000 975,000 ---------- ---------- Pro formaincome before income taxes $1,621,000 $2,286,000 ==================== Reconciliation of Net Income as Reported to Pro FormaNet Income (Unaudited) Three Months Ended ---------------------August 3, July 29, 2008 2007 ---------- ---------- Net income, asreported $ 781,000 $ 851,000 Restructuring and related charges, netof income taxes 267,000 624,000 ---------- ---------- Pro forma netincome $1,048,000 $1,475,000 ========== ========== Reconciliationof Net Income Per Share as Reported to Pro Forma Net Income PerShare (Unaudited) Three Months Ended --------------------- August3, July 29, 2008 2007 ---------- ---------- Net income per dilutedshare $ 0.06 $ 0.07 Restructuring and related charges, net ofincome taxes 0.02 0.05 ---------- ---------- Pro forma net incomeper diluted share $ 0.08 $ 0.12 ========== ==========Reconciliation of Projected Range of Net loss Per Share toProjected Range of Pro Forma Net Income Per Share (Unaudited) ThreeMonths Ending November 2, 2008 --------------------- Projectedrange of net loss per diluted share $(0.09) - $(0.05) Projectedrestructuring and related charges, net of income taxes 0.15--------------------- Projected range of pro forma net income perdiluted share $0.06 - $0.10 ===================== *T