Company Quick10K Filing
Quick10K
Culp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$19.72 12 $244
10-K 2019-04-28 Annual: 2019-04-28
10-Q 2019-01-27 Quarter: 2019-01-27
10-Q 2018-10-28 Quarter: 2018-10-28
10-Q 2018-07-29 Quarter: 2018-07-29
10-K 2018-04-29 Annual: 2018-04-29
10-Q 2018-01-28 Quarter: 2018-01-28
10-Q 2017-10-29 Quarter: 2017-10-29
10-Q 2017-07-30 Quarter: 2017-07-30
10-K 2017-04-30 Annual: 2017-04-30
10-Q 2017-01-29 Quarter: 2017-01-29
10-Q 2016-10-30 Quarter: 2016-10-30
10-Q 2016-07-31 Quarter: 2016-07-31
10-K 2016-05-01 Annual: 2016-05-01
10-Q 2016-01-31 Quarter: 2016-01-31
10-Q 2015-11-01 Quarter: 2015-11-01
10-Q 2015-08-02 Quarter: 2015-08-02
10-K 2015-05-03 Annual: 2015-05-03
10-Q 2015-02-01 Quarter: 2015-02-01
10-Q 2014-11-02 Quarter: 2014-11-02
10-Q 2014-08-03 Quarter: 2014-08-03
10-K 2014-04-27 Annual: 2014-04-27
10-Q 2014-01-26 Quarter: 2014-01-26
8-K 2019-06-24 Officers, Exhibits
8-K 2019-06-11 Earnings, Officers, Exhibits
8-K 2019-05-01 Earnings, Exhibits
8-K 2019-03-06 Officers, Exhibits
8-K 2018-12-08 Other Events, Exhibits
8-K 2018-11-29 Earnings, Exhibits
8-K 2018-09-20 Officers, Shareholder Vote, Exhibits
8-K 2018-08-29 Earnings, Exhibits
8-K 2018-08-13 Enter Agreement
8-K 2018-06-26 Regulation FD, Exhibits
8-K 2018-06-13 Earnings, Exit Costs, Exhibits
8-K 2018-03-08 Regulation FD, Exhibits
8-K 2018-02-28 Earnings, Exhibits
CAT Caterpillar 75,030
HUN Huntsman 4,650
FOMX Foamix Pharmaceuticals 163
SQNS Sequans Communications 95
FRD Friedman Industries 53
SNMP Sanchez Midstream Partners 43
DTII Defense Technologies International 0
LFER Life On Earth 0
SN Sanchez Energy 0
ENO Enodis 0
CULP 2019-04-28
Part 1
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosure
Part II
Item 5. Market for The Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures
Item 8. Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
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Culp Earnings 2019-04-28

CULP 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 a52010021.htm CULP, INC. 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 1O-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended April 28, 2019

Commission File No. 1-12597

CULP, INC.
(Exact name of registrant as specified in its charter)

NORTH CAROLINA
(State or other jurisdiction of
incorporation or other organization)
56-1001967
(I.R.S. Employer Identification No.)
   
 1823 Eastchester Drive, High Point, North Carolina
(Address of principal executive offices)
27265
(zip code)
   
(336) 889-5161
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Trading Symbol(s)
Name of Each Exchange
On Which Registered
     
Common Stock, par value $.05/ Share
CULP
New York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act:   None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   YES  ☐   NO  ☒
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.   YES  ☐   NO  ☒
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to the filing requirements for at least the past 90 days.   YES  ☒   NO  ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES  ☒   NO  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company” in Rule 12b-2 of the Exchange Act.   (Check one):
 
 
Large Accelerated Filer  ☐
Accelerated Filer  ☒
Non-Accelerated Filer  ☐
 
 
Smaller Reporting Company  ☐
Emerging Growth Company  ☐
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   YES  ☐   NO  ☒
 
As of April 28, 2019, 12,391,160 shares of common stock were outstanding.  As of October 28, 2018, the aggregate market value of the voting stock held by non-affiliates of the registrant on that date was $245,263,535 based on the closing sales price of such stock as quoted on the New York Stock Exchange (NYSE), assuming, for purposes of this report, that all executive officers and directors of the registrant are affiliates.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s Proxy Statement to be filed pursuant to Regulation 14A of the Securities and Exchange Commission in connection with its Annual Meeting of Shareholders to be held on September 26, 2019 are incorporated by reference into Part III of this Form 10-K.

CULP, INC.
FORM 10-K REPORT
TABLE OF CONTENTS

Item No.
 
Page
 
 
 
 
 
 
 
 
 
 
 
1.
 
 
 
2
 
 
5
 
 
5
 
 
9
 
 
9
 
 
10
 
 
11
 
 
13
 
 
15
 
 
16
 
 
16
 
 
17
 
 
18
 
 
19
 
 
19
 
 
20
 
 
21
 
  21  
       
 1A. Risk Factors 22  
       
 1B. Unresolved Staff Comments 28  
       
 2. Properties 29  
       
3.
Legal Proceedings 30  
       
4.
Mine Safety Disclosure 30  
       
  PART II    
       
 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
30  
       
 6. Selected Financial Data 33  
       
 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34  
       
7A.
Quantitative and Qualitative Disclosures About Market Risk 63  
       
 8. Consolidated Financial Statements and Supplementary Data 64  
       
 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 118  
       
 9A. Controls and Procedures 118  
       
 9B. Other Information 120  



Item No.
  Page 
       
  PART III    
       
 10. Directors, Executive Officers, and Corporate Governance 120  
       
 11. Executive Compensation 121
 
       
 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 121  
       
 13. Certain Relationships, Related Transactions, and Director Independence 121  
       
14.
Principal Accountant Fees and Services 121  
       
  PART IV    
       
 15. Exhibits and Financial Statement Schedules 122  
       
  Documents Filed as Part of this Report 122  
       
  Exhibits 122  
       
  Financial Statement Schedules 122  
       
  Signatures 126  
       
  Exhibit Index 127  
       
 16. Form 10-K Summary 125  


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
 
Parts I and II of this report contain “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 that may cause actual events and results to differ materially from such statements. 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 to reflect any changes in management’s expectations or any change in the assumptions or circumstances on which such statements are based, whether due to 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,” “anticipate,” “estimate,” “plan,” “project,” and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, new project launches, sales, profit margins, profitability, operating income, capital expenditures, working capital levels, 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 potential acquisitions, future economic or industry trends or future developments.  There can be no assurance that the company will realize these expectations, meet its guidance, or that these beliefs will prove correct.
 
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.  The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses into our existing operations.  Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in tariffs or trade policy, or changes in the value of the U.S. dollar versus other currencies, could 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, are included in the “Risk Factors” section of this report in Item 1A. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.


PART 1

ITEM 1.  BUSINESS

As used in this document, the terms “Culp,” the “company,” “we,” “our,” and “us” refer to Culp, Inc. and its consolidated subsidiaries (unless the context indicates another meaning). The term “common stock” means the common stock of Culp, Inc., par value $.05 per share. The terms “Read Window Products” and “Read” refer to our wholly-owned subsidiary, Read Window Products, LLC. The term “eLuxury” refers to our majority-owned subsidiary, eLuxury, LLC.

Overview
 
Culp, Inc. manufactures, sources, and markets mattress fabrics and sewn covers used for covering mattresses and foundations and other bedding products; and upholstery fabrics, including cut and sewn kits, primarily used in production of upholstered furniture. Our new home accessories segment is the company’s finished product and global e-commerce business that manufactures, sources, and markets bedding accessories and home goods directly to consumers and businesses. The company competes in a fashion-driven business, and we strive to differentiate ourselves by placing a sustained focus on product innovation and creativity. In addition, Culp places great emphasis on providing excellent and dependable service to our customers. Our focused efforts to protect our financial strength have allowed us to maintain our position as a financially stable and trusted supplier of innovative fabrics to bedding and furniture manufacturers, while also developing a new e-commerce platform to support sales of bedding accessories and specialty home goods to both consumers and business retailers.
 
We believe Culp is the largest producer of mattress fabrics in North America and one of the largest marketers of upholstery fabrics for furniture in North America, measured by total sales. We have three operating segments — mattress fabrics, upholstery fabrics, and home accessories. The mattress fabrics business markets primarily knitted and woven fabrics, as well as sewn covers made from those fabrics, which are used in the production of bedding products, including mattresses, foundations, and mattress sets. The upholstery fabrics business markets a variety of fabric products that are used principally in the production of residential and commercial upholstered furniture, including sofas, recliners, chairs, loveseats, sectionals, sofa-beds, and office seating, as well as window treatment products and installation services for customers in the hospitality and commercial industries. The home accessories business markets a variety of bedding accessories and home goods, including mattress pads and protectors, sheet sets, pillows, comforters, duvet covers, towels, fabric by the yard, and dog beds, directly to consumers and businesses through global e-commerce and business-to-business sales channels. Through our June 22, 2018 investment in eLuxury, LLC (“eLuxury”), we now have a majority-owned company located in Evansville, Indiana, which operates the global e-commerce platform for the home accessories segment.
 
Culp markets a variety of fabrics and other products in different categories to a global customer base, including fabrics produced at our manufacturing facilities and fabrics produced by other suppliers. As of the end of fiscal 2019, we had active production facilities located in North Carolina; Tennessee; Quebec, Canada; Shanghai, China; and a joint venture facility in Haiti. We also source fabrics and cut and sewn kits from other manufacturers, located primarily in China, Turkey, and Vietnam, with almost all of such fabrics and cut and sewn kits produced specifically for Culp and created by Culp designers. Additionally, our home accessories segment markets a variety of mattress pad products manufactured at our facility in Indiana, and also sources other finished bedding accessory and home good products internally from our other business segments, as well as from other manufacturers located primarily in the United States, China, and Southeast Asia.  We operate distribution centers in North Carolina, Canada, China, and Haiti to facilitate distribution of our fabric products. Products for our home accessories segment are available for sale on eLuxury’s own branded website, eLuxury.com, and through leading online retailers for specialty home goods. These products are primarily distributed from our facility in Indiana, as well as U.S. fulfillment centers for certain products and third-party online retailers.
2

Over the past decade, the portion of total company sales represented by fabrics produced outside of the U.S. and Canada has increased, while sales of goods produced in the U.S. have decreased. This trend is related primarily to the upholstery fabrics segment, where, following the closure of our manufacturing facility in Anderson, South Carolina during the second quarter of fiscal 2019, substantially all of our sales consisted of fabrics produced in Asia. The mattress fabrics business remains mostly based in North America. For the home accessories segment, approximately 40% of our sales in fiscal 2019 consisted of products produced outside of the United States.
 
Total net sales in fiscal 2019 were $296.7 million. The mattress fabrics segment had net sales of $145.1 million (49% of total net sales), the upholstery fabrics segment had net sales of $135.6 million (46% of total net sales), and the home accessories segment had net sales of 16.0 million (5% of total net sales).
 
Sales increased in our upholstery fabrics segment and declined in our mattress fabrics segment during fiscal 2019 compared to fiscal 2018. The mattress fabrics segment was affected by significant challenges, primarily associated with low-priced imported mattresses from China, which disrupted the bedding industry and reduced demand for our mattress fabrics and sewn covers. The upholstery fabrics segment was affected by uncertainties surrounding international tariffs and a softer retail environment for furniture, primarily during the second half of fiscal 2019. The decline in mattress fabrics sales reversed a trend of increasing sales over the last several years, while the increase in upholstery fabrics sales built upon the sales increase for this segment in fiscal 2018, reversing a multi-year trend of sales declines.
 
This is our first year of reporting for our new home accessories segment, commencing with the June 2018 majority investment in eLuxury. This segment experienced challenges during fiscal 2019 related to new product roll-out costs, reduced demand for legacy mattress pad products, and the overall weaker retail environment during the second half of the year.
 
Overall, Culp faced a difficult business environment during fiscal 2019. Despite these challenges, both the mattress fabrics segment and upholstery fabrics segment continued to build upon strategic initiatives and structural changes that were implemented over the last several years. A number of steps were taken in prior years to consolidate and streamline operations, while adding capacity where necessary. These initiatives continued in fiscal 2019, with the mattress fabrics segment consolidating its weaving operations to one facility, our plant in Quebec, Canada, in order to maximize efficiencies and improve our cost structure. The mattress fabrics segment also expanded production of our CLASS sewn mattress covers in Haiti and China to meet customer demand in the growing boxed bedding market. Additionally, the upholstery fabrics segment closed its manufacturing facility in Anderson, South Carolina due to a continued decline in demand for the products manufactured at this facility. Late in fiscal 2019, this segment developed strategic supplier relationships in Vietnam for additional sourcing of our cut and sewn kits, which has allowed us to begin altering our supply chains to meet customer demands in conjunction with ongoing trade disputes between the U.S. and China. The flexible manufacturing and sourcing platform created through these changes has allowed Culp to place a greater emphasis on product innovation and the introduction of new designs to keep current with industry trends. At the same time, it allows us to differentiate our products and respond to shifting demand trends.
3

In addition to internal strategic actions, the company has made recent acquisitions to expand our product offering and enhance our ability to reach new customers and markets. Late in fiscal 2018, the upholstery segment acquired Read Window Products, a window treatments company providing expanded capacity and additional capabilities for our growing business in the hospitality industry. Additionally, in the first quarter of fiscal 2019, we acquired a majority interest in eLuxury, an e-commerce company offering bedding accessories and home good products direct to consumers, which has provided a new sales channel and an expanded addressable market for the company’s finished products in the bedding accessories and home goods categories. These acquisitions represent a continuation of our efforts to diversify our product offerings and expand the markets into which we sell those products, as industry demand from our traditional markets has been inconsistent during the past several years.
 
We have continued to experience positive responses from customers to our innovative designs and new products introduced during recent years. An increasing percentage of our sales are now coming from those latest product introductions. The upholstery fabrics segment has experienced strong demand for its LiveSmart® brand of performance fabrics. In the first quarter of fiscal 2020, we launched an expansion of this performance line to include a sustainable fabric line utilizing recycled fibers combined with LiveSmart® performance technology. Additionally, our new home accessories business segment developed and introduced a number of new bedding accessories and home good items, including dog beds, fabrics by the yard, and a new mattress pad line, during the second half of fiscal 2019. These new products were developed in coordination with our other business segments utilizing Culp fabrics.

4

 
Additional information about trends and developments in each of our business segments is provided in the “Segments” discussion below.
 
General Information
 
Culp, Inc. was organized as a North Carolina corporation in 1972 and made its initial public offering in 1983. Since 1997, our stock has been listed on the New York Stock Exchange and traded under the symbol “CFI” until July 13, 2017, at which time the Company’s ticker symbol changed to “CULP.” Our fiscal year is the 52- or 53-week period ending on the Sunday closest to April 30. Our executive offices are located in High Point, North Carolina.
 
Culp maintains an internet website at www.culp.com. We will make this annual report and our other annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports available free of charge on our internet site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Information included on our website is not incorporated by reference into this annual report.
 
Segments
 
Our three operating segments are mattress fabrics, upholstery fabrics, and home accessories. The following table sets forth certain information for each of our segments.
 
   
Sales by Fiscal Year ($ in Millions) and Percentage of Total Company Sales
 
       
Segment
 
Fiscal 2019
   
Fiscal 2018
   
Fiscal 2017
 
Mattress Fabrics
  $
145.1
     
(49
%)
  $
192.6
     
(60
%)
 
$
190.8
     
(62
%)
Upholstery Fabrics
                                               
Non-U.S.-Produced
  $
121.8
     
(41
%)
  $
122.6
     
(38
%)
 
$
109.0
     
(35
%)
U.S.-Produced
  $
13.8
     
(5
%)
  $
8.5
     
(2
%)
 
$
9.7
     
(3
%)
Total Upholstery
  $
135.6
     
(46
%)
  $
131.1
     
(40
%)
 
$
118.7
     
(38
%)
Home Accessories
  $
16.0
     
(5
%)
  $
--
     
--
     
--
     
--
 
Total company
  $
296.7
     
(100
%)
  $
323.7
     
(100
%)
 
$
309.5
     
(100
%)

5

Additional financial information about our operating segments can be found in Note 21 to the Consolidated Financial Statements included in Item 8 of this report.
 
Mattress Fabrics. The mattress fabrics segment, also known as Culp Home Fashions, manufactures and markets mattress fabrics and mattress covers to bedding manufacturers. These products include woven jacquard fabrics, knitted fabrics, and some converted fabrics. Culp Home Fashions has manufacturing facilities located in Stokesdale and High Point, North Carolina, and St. Jerome, Quebec, Canada. The division also sources products internally from Culp China, as well as from a supplier in Turkey, based on our own designs and production schedule. Additionally, Culp Home Fashions has a joint venture mattress cover facility in Haiti and utilizes the Culp China platform for the production of sewn mattress covers as well. Knitted fabrics are produced at both the Stokesdale and St. Jerome facilities, while jacquard (damask) fabric is now produced solely at the St. Jerome facility following consolidation of our weaving operations during the fourth quarter of fiscal 2019. The majority of our finishing and inspection processes for mattress fabrics are conducted at the Stokesdale plant, while the St. Jerome plant provides additional capacity and a second location for these processes. Both of these facilities now offer finished goods distribution capabilities, with a new distribution facility in Canada added during fiscal 2017. The Stokesdale plant continues to house the division offices.
 
Culp Home Fashions had capital expenditures totaling $74 million during the past ten years, with especially high spending levels during the four fiscal years spanning fiscal 2015 through fiscal 2018.  These expenditures provided for increased knit machine capacity, faster and more efficient weaving machines, and the initial capital required for our sewn cover business, while also allowing us to maintain our leading-edge technology through modernization and expansion projects. These capital expenditures also provided high technology finishing equipment for woven and knitted fabric and a much-improved U.S. platform for warehousing and distribution, along with the new distribution facility in Canada noted above.
 
Asset acquisition transactions in fiscal 2009 and fiscal 2014 allowed us to enhance and secure our competitive position and to expand our mattress fabrics business. Taken together, the two transactions allowed us to secure our supply for knitted mattress fabrics, an important and growing product category, while also gaining control of product development and improving customer service. In addition to these transactions, we have continued to make further investments in knitting machines and finishing equipment, increasing our internal production capacity.
 
Our sewn mattress cover business, established during fiscal 2013 and owned by Culp, has a manufacturing plant in High Point, North Carolina. This facility is leased by the company, and its operation involves a limited capital investment in equipment. The business participates in a joint marketing arrangement for the production and marketing of sewn mattress covers with A. Lava & Son Co. of Chicago, a leading provider of mattress covers. The marketing venture is known as Culp-Lava Applied Sewn Solutions (CLASS). In fiscal 2017, in response to continued growth in mattress cover demand, we entered into a joint venture with A Lava to construct a second location for our CLASS operations in Haiti, and that joint-venture facility began production of mattress covers for our CLASS business during the second quarter of 2018. We also utilize our Culp China platform to manufacture sewn mattress covers for our CLASS business and to source these products from third-party suppliers in China. These three manufacturing locations in North Carolina, Haiti, and China give us repetitive production capabilities and allow us greater flexibility in meeting demand for mattress covers from bedding producers.
6

As noted above, fiscal 2018 marked the completion of several multi-year capital projects for the mattress fabrics business, including consolidating certain operations, expanding capacity, improving efficiency and customer service, and maintaining our flexible approach to fabric sourcing.  In fiscal 2019, we continued these initiatives by consolidating our weaving operations to one facility, our plant in Quebec, Canada, and also expanding production of our CLASS sewn mattress covers in Haiti and China to meet customer demand in the growing boxed bedding market.  Additionally, we continued to expand our design capabilities, launching product software and a new library system for cataloguing creations to drive marketing and enhance innovation.
 
After eight consecutive years of growth, sales declined in fiscal 2019, mainly as a result of the acceleration of low-priced mattress imports from China towards the end of fiscal 2018 and through the first three quarters of fiscal 2019. This disrupted the U.S. bedding industry and resulted in a decline in sales for domestic bedding manufacturers, which affected us as a supplier to those manufacturers. In May of 2019, the U.S. Department of Commerce imposed punitive anti-dumping measures against Chinese-made mattresses. We believe this action ultimately will provide some relief for the domestic mattress industry. At the same time, management took action during fiscal 2019 to respond to the challenging business environment by consolidating our weaving operations into one facility, expanding production of our CLASS sewn mattress covers in Haiti and China, controlling costs, and maintaining a focus on providing customers with products that remain in demand and upholding high levels of customer service.
 
Upholstery Fabrics. The upholstery fabrics segment markets fabrics for residential and commercial furniture, including jacquard woven fabrics, velvets, micro denier suedes, woven dobbies, knitted fabrics, piece-dyed woven products, and polyurethane “leather look” fabrics. With the acquisition of Read Window Products at the end of fiscal 2018, this segment also markets window treatment products and installation services, including roller shades, drapery, hardware, and top-of-mattress soft goods, for customers in the hospitality and commercial industries.
 
Following the closure of our manufacturing facility in Anderson, South Carolina during the second quarter of fiscal 2019, this segment currently operates two manufacturing facilities in Shanghai, China. We market cut and sewn fabric kits produced in these locations, as well as a variety of upholstery fabrics and cut and sewn kits sourced from third party producers, mostly in China and, toward the end of fiscal 2019, in Vietnam. Following the closure of our South Carolina facility, sales of non-U.S. produced upholstery accounted for substantially all of our upholstery fabric sales. Our China facilities in Shanghai include production of cut and sewn “kits” made to specifications of furniture manufacturing customers using sourced fabrics, as well as design, finishing, warehousing, quality control and inspection operations. We continue to expand our marketing efforts to sell our China products in countries other than the U.S., including the Chinese local market. Additionally, we fabricate a variety of window treatments, using mostly customer-supplied fabrics and materials, at our facility in Knoxville, Tennessee.
 
Our upholstery fabrics business has moved from one that relied on a large fixed capital base that is difficult to adjust to a more flexible and scalable marketer of upholstery fabrics that meets changing levels of customer demand and tastes. At the same time, we have maintained control of the most important “value added” aspects of our business, such as design, finishing, quality control, and logistics. This strategic approach has allowed us to limit our investment of capital in fixed assets and control the costs of our products, while continuing to leverage our design and finishing expertise, industry knowledge, and important relationships.
7

After six consecutive years of sales growth, sales declined in fiscal 2016 and 2017, mainly as a result of a weaker demand environment for upholstered furniture, before increasing by 10% in fiscal 2018 and 3.5% in fiscal 2019.  Our higher sales over the last two fiscal years were supported by our efforts to expand the breadth of this segment’s customer base to include more residential furniture manufacturers, including customers in international markets, as well as the growing success of our line of performance fabrics, such as LiveSmart®. Additionally, fiscal 2019 includes the first full year of sales from Read Window Products, our window treatment and installation services businesses for customers in the hospitality and commercial industries, which more than offset the loss of sales from the closure of our Anderson, South Carolina facility during the second quarter. We believe our success over the longer term is due largely to a business strategy that has included: 1) innovation in a low-cost environment, 2) speed-to-market execution, 3) consistent quality, 4) reliable service and lead times, and 5) increased recognition of and reliance on the Culp brand.
 
Our progress has been achieved through a unique business model that has enabled the upholstery fabrics segment to execute a strategy that we believe is clearly differentiated from our competitors. In this way, we have maintained our ability to provide furniture manufacturers with products from every category of fabric used to cover upholstered furniture and meet continually changing demand levels and consumer preferences. In recent years, we have implemented additional steps to grow net sales, including an emphasis on markets beyond residential furniture, such as the hospitality market. One result of these efforts was the acquisition of Read Window Products at the end of fiscal 2018, representing a significant expansion of our production capabilities in the hospitality market, along with the addition of window treatment installation services.
 
Home Accessories. Culp acquired a majority interest in eLuxury, an online retailer of bedding accessories and home goods, during the first quarter of fiscal 2019, which is now reported under our new home accessories segment. This strategic investment represents the company’s first foray into direct to consumer sales, adding a new sales channel and an expanded addressable market for finished products.
 
The home accessories segment markets bedding accessories and home goods directly to consumers and businesses through global e-commerce and business-to-business sales channels.  The primary products for this segment include mattress pads manufactured at eLuxury’s facility located in Evansville, Indiana, as well as other bedding accessory and home good products, including mattress protectors, sheet sets, pillows, comforters, duvet covers, towels, fabric by the yard, and dog beds.  Some of these products are sourced internally from Culp’s other business segments, while others are sourced from other manufacturers located primarily in the United States, China, and Southeast Asia.
 
Products for the home accessories segment are available on eLuxury’s own branded website, eLuxury.com, and through leading online retailers for specialty home goods.  Inventory for this segment primarily is stored at and distributed from eLuxury’s facility in Indiana, as well as U.S. fulfillment centers for certain products and third-party online retailers.
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Our strategic focus for this segment is to develop innovative bedding accessory products and other specialty home good items through the company’s global manufacturing platform and in coordination with all of Culp’s other business segments.  During the second half of fiscal 2019, we developed and launched new products featuring Culp mattress fabrics and upholstery fabrics, including mattress pads and mattress protectors made with Culp mattress fabrics and dog beds made with LiveSmart® performance fabric. Additionally, we are focused on expanding our sales channels beyond eLuxury’s global e-commerce platform to reach business retailers, both in brick and mortar stores and through their online platforms, as well as customers in the hospitality industry.
 
Overview of Industry and Markets
 
Culp markets products primarily to manufacturers, as well as business retailers, hospitality customers, and consumers. The mattress fabrics segment and home accessories segment supply the bedding industry, which produces mattress sets (mattresses, box springs, foundations and top of bed components) and bedding accessory products. The upholstery fabrics segment primarily supplies the residential furniture industry and, to a lesser extent, the commercial furniture industry. The residential furniture market includes upholstered furniture sold to consumers for household use, including sofas, sofa-beds, chairs, recliners, and sectionals. The commercial furniture, fabrics, and window treatments market includes fabrics and window treatment products used in the hospitality industry (primarily hotels and motels); fabrics used for upholstered office seating and modular office systems sold primarily for use in offices and other institutional settings, as well as commercial textile wall coverings; and window treatments for commercial application. The home accessories segment also supplies the home goods markets, which includes a variety of home décor, housewares, furnishings, and accessory products.  The principal industries into which the company sells products – the bedding industry and residential and commercial furniture industry – are described in more detail below. Currently, a great majority of our products for our mattress fabrics and upholstery fabrics segments are sold to manufacturers for end use in the U.S., and thus the discussions below are focused on that market.
 
Overview of Bedding Industry
 
The bedding industry has contracted and expanded in recent years in accordance with the general economy, although traditionally the industry has been relatively mature and stable. This is due in part to the fact that a majority of bedding industry sales are replacement purchases, which are less volatile than sales based on economic growth and new household formations.  Until recently, the U.S. bedding industry has largely remained a North American-based business, with limited competition from imports.  This dynamic has mainly been due to short lead times demanded by mattress manufacturers and retailers, the customized nature of product lines, the relatively low direct labor content in mattresses, and strong brand recognition.  Imports of bedding into the U.S. had been increasing gradually in recent years, but this trend significantly accelerated over the past two years, especially for lower-priced bedding.  During this time, China has accounted for the largest share of the imported units.  The result has been a decline in sales for the major U.S. bedding manufacturers, which has affected major suppliers, including Culp, to those manufacturers.
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As a result of the significant influx of low-priced imports from China, a number of domestic “mattress petitioners” filed an anti-dumping petition with the U.S. International Trade Commission and the U.S. Department of Commerce in September of 2018.  In November of 2018, the U.S. International Trade Commission found a reasonable indication that unfairly traded imports of mattresses from China caused material injury to the U.S. mattress industry, and in May of 2019, the Department of Commerce imposed punitive anti-dumping duties against Chinese-made mattresses.  We believe that, in anticipation of this ruling, the level of mattress imports entering the U.S. from China began to decline substantially in March and April 2019.  We expect this decline will continue as a result of the Department of Commerce ruling, although mattress imports from Vietnam, as well as other countries, may continue to rise as China producers move production out of China to avoid the anti-dumping duties.
 
A key trend driving the bedding industry is the increased demand for roll-packed/compressed mattresses in both online and traditional sales channels, as consumer acceptance of boxed beds as a delivery mechanism continues to drive growth and increase market share for this product, increasing potential demand for sewn mattress covers.   Another important trend is the increased awareness among consumers about the health benefits of better sleep, with an increased focus on the quality of bedding products and an apparent willingness on the part of consumers to upgrade their bedding. A further trend is the strong and growing emphasis on the design knitted or woven into mattress fabrics to appeal to the customer’s visual attraction and perceived value of the mattress on the retail floor. Mattress fabric design efforts are based on current trends in home decor and fashion. Additionally, the growth in non- traditional sources for retail mattress sales, such as online e-commerce channels and wholesale warehouse clubs, has the potential to increase overall consumption of goods due to convenience and high traffic volume, which in turn results in higher turnover of product. Among fabric types, knitted fabrics have continued to increase in popularity.  Knitted fabric was initially used primarily on premium mattresses, but these products are now being placed increasingly on mattresses at mid-range to lower retail price points.
 
Overview of Residential and Commercial Furniture Industry
 
Sales of residential and commercial furniture were both severely affected by the global economic downturn in fiscal years 2008 and 2009 and have now been in recovery for several years along with the overall economy. The pace of recovery, however, has been uneven and often weak in recent years. In general, sales of residential furniture are influenced significantly by the housing industry and by trends in home sales and household formations, while demand for commercial furniture generally reflects economic trends affecting businesses.
 
The sourcing of components and fully assembled furniture from overseas continues to play a major role in the furniture industry. By far, the largest source for these imports continues to be China. Imports of upholstery fabric, both in roll and in “kit” form, have also had a significant impact on the market for upholstery fabrics in recent years. Fabrics entering the U.S. from China and other low labor cost countries have resulted in increased price competition in the upholstery fabric and upholstered furniture markets.
 
In general, the residential furniture industry has been consolidating for several years. The result of this trend is fewer, but larger, customers for marketers of upholstery fabrics. Intense price competition continues to be an important consideration for both residential and commercial furniture.
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Additionally, with the ongoing global trade dispute between the U.S. and China, including the imposition of tariffs during fiscal 2019 and the possibility for additional tariffs on China imports, some customers are now beginning to alter supply chains away from China.
 
Products
 
As described above, our products include mattress fabrics and upholstery fabrics, which are two of our identified operating segments. These fabrics are sold in roll form and as sewn mattress covers by the mattress fabrics segment, and in roll form and as cut and sewn kits by the upholstery fabrics segment.  Additionally, with the acquisition of Read Window Products, our upholstery segment products also include window treatments and related products.  Products for our new home accessories segment include a variety of finished good bedding accessories and specialty home goods.
 
Mattress Fabrics Segment
 
Mattress fabrics segment sales constituted 49% of our total net sales for fiscal 2019, compared with 60% for fiscal 2018.  The company has emphasized fabrics that have broad appeal at prices generally ranging from $1.50 to more than $10.00 per yard.
 
Upholstery Fabrics Segment
 
Upholstery fabrics segment sales totaled 46% of our sales for fiscal 2019, compared with 40% of for fiscal 2018. The company has emphasized fabrics that have broad appeal at “good” and “better” prices, generally ranging from $3.00 to $12.00 per yard.
 
Home Accessories Segment
 
Sales for our new home accessories segment totaled 5% of our sales for fiscal 2019, with no prior year sales.
 
Culp Product Categories by Segment
 
We market products in most categories of fabric that manufacturers currently use for bedding and furniture. Additionally, with the acquisition of Read Window Products, we also market window treatment products to customers in the hospitality and commercial industries.  Our home accessories segment markets a variety of finished bedding accessories and home goods sold directly to consumers, as well as business retailers in the bedding and home furnishings industries and customers in the hospitality industry.  The following table indicates the product lines within each segment, and, with respect to the fabric products, a brief description of their characteristics.
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Mattress Fabrics
 
Woven jacquards
Various patterns and intricate designs. Woven on complex looms using a variety of synthetic and natural yarns.
   
Converted
Suedes, pile and embroidered fabrics, and other specialty type products are sourced to offer diversity for higher end mattresses.
   
Knitted fabric
Various patterns and intricate designs produced on special-width circular knit machines utilizing a variety of synthetic and natural yarns. Knitted mattress fabrics have inherent stretching properties and spongy softness, which conforms well with layered foam packages.
   
Sewn mattress covers
Covers for bedding (primarily specialty beds), sewn from mattress fabrics produced by our facilities or sourced from others.
 
Upholstery Fabrics
 
Woven jacquards
Elaborate, complex designs such as florals and tapestries in traditional, transitional, and contemporary styles. Woven on intricate looms using a wide variety of synthetic and natural yarns.
   
Woven dobbies
Fabrics that use straight lines to produce geometric designs such as plaids, stripes, and solids in traditional and country styles. Woven on less complicated looms using a variety of weaving constructions and primarily synthetic yarns.
   
Velvets
Soft fabrics with a plush feel. Woven or knitted in basic designs, using synthetic yarns that are yarn dyed or piece dyed.
   
Suedes
Fabrics woven or knitted using microdenier polyester yarns, which are piece dyed and finished, usually by sanding. The fabrics are typically plain or small jacquard designs, with some being printed. These are sometimes referred to as microdenier suedes.
   
Faux leathers
Sueded or knitted base cloths which are overprinted with polyurethane, and composite products consisting of a base fabric that is coated with a top layer of polyurethane, which simulates the look and feel of leather.
   
Cut and sewn kits
Covers made from various types of upholstery fabrics and cut and sewn to specifications of furniture manufacturing customers for use on specific furniture frames.
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With the acquisition of Read Window Products at the end of fiscal 2019, the upholstery fabrics business also markets a variety of window treatment products and installation services for customers in the hospitality and commercial industries.  These products include roller & solar shades, drapery, roman shades and top treatments, hardware products, and soft goods such as duvet covers, bed skirts, bolsters and pillows.
 
Home Accessories
 
The home accessories segment markets a variety of bedding accessory and home good products, including mattress pads and protectors, sheet sets, pillows, comforters, duvet covers, towels, fabric by the yard, and dog beds.  Our mattress pad products include a variety of styles, including bamboo pads, cooling pads, pressure relief pads, pillowtop and memory foam pads, at a variety of price points.
 
Manufacturing and Sourcing
 
Mattress Fabrics Segment
 
Our mattress fabrics segment operates four manufacturing plants, with two located in North Carolina, one in St. Jerome, Quebec, Canada and a joint venture facility in Haiti.  Over the past ten fiscal years, we made capital expenditures of approximately $74 million to consolidate our production facilities and to modernize both knit and weaving equipment, enhance and provide knit and woven finishing capabilities, and expand capacity. The result has been an increase in manufacturing efficiency and reductions in operating costs, as well as expanded product offerings and capacity.
 
Knitted fabrics are produced at both our Stokesdale facility and our St. Jerome plant, while production of jacquard mattress fabrics was consolidated into the St. Jerome facility during the fourth quarter of fiscal 2019. The majority of our finishing and inspection processes for mattress fabrics are conducted at the Stokesdale plant, with the St. Jerome plant providing additional capacity and a second location for these processes, along with distribution capabilities. We produce sewn mattress covers at our manufacturing facility in High Point, North Carolina, at our joint venture facility in Haiti, and at the manufacturing facilities of our Culp China platform in China. Our sewn cover business participates in a joint marketing arrangement for the production and marketing of sewn mattress covers with A. Lava & Son Co. of Chicago, a leading provider of mattress covers. This marketing venture is known as Culp-Lava Applied Sewn Solutions (CLASS). Our High Point facility for our sewn cover business is a leased space with limited capital investment in equipment. In fiscal 2017, we entered into a 50/50 joint venture with A. Lava to construct a second location for our CLASS operations in Haiti, and this joint venture facility began production of mattress covers for our CLASS business during the second quarter of fiscal 2018. Additionally, we utilize the company’s Culp China platform to manufacture sewn mattress covers for our CLASS business. These three manufacturing locations give us repetitive production capabilities and allow us greater flexibility in meeting demand for mattress covers from bedding producers.
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In addition to the mattress fabrics and sewn covers we manufacture, we have important supply arrangements in place that allow us to source mattress fabric and sewn covers from strategic suppliers. We source some Culp-designed knitted fabrics, certain converted fabric products, and sewn mattress covers using our Culp China platform.  We also source a portion of our woven jacquard fabric and knitted fabric, which is obtained from a supplier located in Turkey, based on designs and a production schedule created by Culp.
 
Upholstery Fabrics Segment
 
The upholstery fabrics segment currently operates two manufacturing facilities in China.  During the second quarter of fiscal 2019, we closed our U.S. plant located in Anderson, South Carolina, which mainly produced velvet upholstery fabrics with some production of certain decorative fabrics. Additionally, we fabricate a variety of window treatments, using mostly customer-supplied fabrics and materials, at our Read Window Products facility in Knoxville, Tennessee.
 
Our upholstery fabrics facilities in China are all located within the same industrial area in Shanghai. At these facilities, we apply value-added finishing processes to fabrics sourced from a limited number of strategic suppliers in China, and we inspect sourced fabric there as well. In addition, the Shanghai operations include facilities where sourced fabric is cut and sewn to provide “kits” that are designed to be placed on specific furniture frames designated by our customers.
 
A large portion of our upholstery fabric products, as well as certain elements of our production processes, are being sourced from outside suppliers. Our facilities in China provide a base from which to access a variety of products, including certain fabrics (such as micro denier suedes and polyurethane fabrics) that are not produced anywhere within the U.S. We have found opportunities to develop significant relationships with key overseas suppliers in China that allow us to source products on a cost-effective basis, while limiting our investment of capital in manufacturing assets. We source unfinished and finished fabrics, as well as a portion of our cut and sewn kits, from a limited number of strategic suppliers in China who are willing to commit significant capacity to meet our needs while working with our product development team located in China to meet the demands of our customers.  Beginning in late fiscal 2019, we also developed strategic supplier relationships in Vietnam for additional sourcing of our cut and sewn kits, which has allowed us to begin adjusting our supply chains to meet customer demands in conjunction with ongoing trade disputes between the U.S. and China. The majority of upholstery fabrics and materials used by our Read Window Products business to fabricate window treatments are customer-supplied. These materials are generally sourced by customers, and we also source a portion of other window treatment products such as hardware and roller shades, from outside suppliers in the U.S., Turkey, and China.
 
Home Accessories Segment
 
Through our June 2018 investment in eLuxury, our home accessories segment currently operates one manufacturing plant in Evansville, Indiana, which primarily produces mattress pad products.  Certain bedding accessory and home good products, such as mattress protectors, dog beds, and fabric by the yard, are sourced internally from the company’s other business segments, while other products are sourced from third-party manufacturers located primarily in the United States, China, and Southeast Asia.
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Product Design and Styling
 
Consumer tastes and preferences related to bedding, upholstered furniture, window treatment products, and home goods change over time. The use of new fabrics and creative designs remains an important consideration for manufacturers and marketers to distinguish their products at retail and to capitalize on changes in preferred colors, patterns, and textures. Culp’s success is largely dependent on our ability to market fabrics and products with appealing designs and patterns. The process of developing new designs involves maintaining an awareness of broad fashion and color trends both in the United States and internationally.
 
Mattress Fabrics Segment
 
Design innovation is a very important element of producing mattress fabrics.  We invest significant resources to stay ahead of current design trends, including maintaining a trained and active design staff, investing in research and development activities such as participation in international design shows, and implementing systems for creating and cataloguing new designs. Price point delineation is accomplished through fabric quality as well as variation in design. Additionally, consumers are drawn to the mattress that is the most visually appealing when walking into a retail showroom. Fiber differentiation also plays an important part in design. For example, rayon, organic cotton, and other special fibers are incorporated into the design process to allow the retailer to offer consumers additional benefits related to their sleeping experience. Similarly, many fabrics contain special production finishes that enhance fabric performance.
 
Mattress fabric designs are not routinely introduced on a scheduled season. Designs are typically introduced upon the request of the customer as they plan introductions to retailers. Additionally, we work closely with our customers on new design offerings around the major furniture markets such as Las Vegas, Nevada, and High Point, North Carolina.
 
Upholstery Fabrics Segment
 
The company has developed an upholstery fabrics design and product development team (with staff located in the U.S. and in China) with a primary focus on value in designing body cloths, while promoting style leadership with pillow fabrics and color. Our design staff travels regularly to international trade and design shows to maintain familiarity with current design and fashion trends. The team searches continually for new ideas and for the best sources of raw materials, yarns, and fabrics, utilizing a supply network located mostly in China. Using these design elements, they develop product offerings using ideas and materials that take both fashion trends and cost considerations into account to offer products designed to meet the needs of furniture manufacturers and ultimately the desires of consumers.
 
Upholstery fabric designs are introduced at major fabric trade conferences that occur twice a year in the United States (June and December). In recent years we have become more aggressive in registering copyrights for popular fabric patterns and taking steps to discourage the illegal copying of our proprietary designs.
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Home Accessories Segment
 
The home accessories segment designs primarily finished products packaged for delivery to consumers.  Products incorporate fabrics from Culp’s other operating segments, reflecting the design innovation of these two segments and optimizing the company’s global supply chain, as well as finished products supplied from outside vendors.  The home accessories segment works to develop product offerings designed to meet the desires of consumers in the bedding accessory and home goods markets.
 
Distribution
 
Mattress Fabrics Segment
 
The vast majority of our shipments of mattress fabrics originate from our facilities in Stokesdale, North Carolina, and we have additional distribution capabilities in Canada, China, and Haiti. Through arrangements with major customers and in accordance with industry practice, we maintain a significant inventory of mattress fabrics at our distribution facility in Stokesdale (“make to stock”), so that products may be shipped to customers with short lead times and on a “just in time” basis.
 
Upholstery Fabrics Segment
 
A majority of our upholstery fabrics are marketed on a “make to order” basis and are shipped directly from our distribution facilities in Burlington, North Carolina, and Shanghai, China. In addition to “make to order” distribution, an inventory of a limited number of fabric patterns is held at our distribution facilities in Burlington and Shanghai from which our customers can obtain quick delivery of sourced fabrics through a program known as “Culp Express.” Window treatment products sold through our Read Window business are done on a “job order” basis, with manufactured products shipped directly from our manufacturing facility in Knoxville, Tennessee to the job installation site.
 
Home Accessories
 
Inventory for our home accessories business is primarily held at eLuxury’s distribution facility in Evansville, Indiana, and at U.S. fulfillment centers for certain products and third-party online retailers.
 
Sources and Availability of Raw Materials
 
Mattress Fabrics Segment
 
Raw materials account for approximately 60%-70% of mattress fabric production costs. The mattress fabrics segment purchases primarily synthetic yarns (polyester, polypropylene, and rayon), certain greige (unfinished) goods, latex adhesives, laminates, dyes, and other chemicals. Most of these materials are available from several suppliers, and prices fluctuate based on supply and demand, the general rate of inflation, and particularly on the price of petrochemical products. The mattress fabrics segment has generally not had significant difficulty in obtaining raw materials.
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Upholstery Fabrics Segment
 
Raw materials account for approximately 60%-70% of upholstery fabric manufacturing costs for products the company manufactures. Prior to closure of the Anderson, South Carolina facility during the second quarter of fiscal 2019, this segment purchased synthetic yarns (polyester, acrylic, rayon, and polypropylene), latex adhesives, dyes, and other chemicals from various suppliers. Following the closure, we ceased purchases of synthetic yarns and dyes, although these raw materials remain important to our suppliers of finished and unfinished fabrics.
 
Increased reliance by both our U.S. and China upholstery operations on outside suppliers for basic production needs such as base fabrics, yarns, and finishing services has caused the upholstery fabrics segment to become more vulnerable to price increases, delays, or production interruptions caused by problems within businesses that we do not control.
 
Home Accessories Segment
 
The home accessories segment purchases primarily cotton and synthetic fabric, yarns (polyester and rayon), and polyester fiberfill for products the company manufactures.  All of these materials are available from several suppliers, and prices fluctuate based on supply and demand, the general rate of inflation, and particularly on the price of petrochemical products.  The home accessories segment has generally not had significant difficulty in obtaining raw materials.
 
All Segments
 
Many of our basic raw materials are petrochemical products or are produced from such products. For this reason, our material costs can be sensitive to changes in prices for petrochemicals and the underlying price of oil. From fiscal 2015 and continuing into fiscal 2018, our profitability was aided by lower raw material prices due to lower oil prices, among other factors.  Later in fiscal 2018, we began to experience higher raw material prices.  We had a significant escalation of polyester prices due to a global shortage of certain components during the second and third quarters of fiscal 2019, after which these prices stabilized and returned to pre-escalation levels.
 
Seasonality
 
Mattress Fabrics Segment
 
The mattress fabrics business and the bedding industry in general are slightly seasonal, with sales being the highest in early spring and late summer, with another peak in mid-winter.
 
Upholstery Fabrics Segment
 
The upholstery fabrics business today is less seasonal than it once was.  In the past, seasonality resulted from one-week closings of our manufacturing facilities and the facilities of most of our customers in the U.S. during our first and third fiscal quarters for the holiday weeks of July 4th and Christmas.  This effect has become much less pronounced as a larger portion of our fabrics are produced or sold in locations outside of the U.S.  The timing of the Chinese National Holiday in October and, to a larger extent, the Chinese New Year (which occurs in January or February each year) now have a more significant impact on upholstery sales than the effects of U.S. holiday periods, often causing sales to be higher in advance of these holiday periods and sometimes lower during or immediately following the same periods.
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Home Accessories Segment
 
The home accessories business is subject to seasonal influences relating to traditional and promotional holidays driven by coupons and discounts from various sales channels, with generally higher sales during these holiday periods.
 
Competition
 
Competition for our products is high and is based primarily on price, design, quality, timing of delivery, and service.
 
Mattress Fabrics Segment
 
The mattress fabrics market is concentrated in a few relatively large suppliers, as well as some niche producers focusing mainly on knitted products. We believe our principal mattress fabric competitors are BekaertDeslee Textiles, Global Textile Alliance, and several smaller companies producing knitted and other fabric, as well as mattress components (sewn covers).  In addition, our bedding customers continue to face increasing competition from imports of finished beds, which indirectly compete with our mattress fabrics by replacing potential sales of our fabrics to those customers.
 
Upholstery Fabrics Segment
 
In the upholstery fabrics market, we compete against a large number of companies, ranging from a few large manufacturers comparable in size to the company to small producers and converters (companies who buy and re-sell fabrics, but have no manufacturing). We believe our principal upholstery fabric competitors are Dorell Fabrics Co., Merrimack Fabrics, Morgan Fabrics, Richloom Fabrics, and Specialty Textile, Inc. (or STI), plus a large number of smaller competitors (both manufacturers and converters).
 
The trend in the upholstery fabrics industry to greater overseas competition and the entry of more converters has caused the upholstery fabrics industry to become substantially more fragmented in recent years, with lower barriers to entry. This has resulted in a larger number of competitors selling upholstery fabrics, with an increase in competition based on price.
 
Home Accessories Segment
 
The home accessories market operates in a highly competitive and fragmented business environment and competes with other online retailers, as well as national, regional, and local retail stores, including department stores, specialty stores, and mass merchandise stores, that may carry similar product lines.
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Environmental and Other Regulations
 
We are subject to various federal and state laws and regulations, including the Occupational Safety and Health Act (“OSHA”) and federal and state environmental laws, as well as similar laws governing our manufacturing facilities in China and Canada. We periodically review our compliance with these laws and regulations in an attempt to minimize the risk of violations.
 
Our operations involve a variety of materials and processes that are subject to environmental regulation. Under current law, environmental liability can arise from previously owned properties, leased properties and properties owned by third parties, as well as from properties currently owned and leased by the company. Environmental liabilities can also be asserted by adjacent landowners or other third parties in toxic tort litigation.
 
In addition, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), and analogous state statutes, liability can be imposed for the disposal of waste at sites targeted for cleanup by federal and state regulatory authorities. Liability under CERCLA is strict as well as joint and several.
 
The U.S. Congress is considering legislation to address climate change that is intended to reduce overall greenhouse gas emissions, including carbon dioxide. In addition, the U.S. Environmental Protection Agency has made a determination that greenhouse gas emissions may be a threat to human health and the environment. International agreements may also result in new regulations on greenhouse gas emissions. It is uncertain if, when, and in what form, a mandatory carbon dioxide emissions reduction program may be enacted either through legislation or regulation. However, if enacted, this type of program could materially increase our operating costs, including costs of raw materials, transportation, and electricity. It is difficult to predict the extent to which any new rules or regulations would affect our business, but we would expect the effect on our operations to be similar to that for other manufacturers, particularly those in our industry.
 
We are periodically involved in environmental claims or litigation and requests for information from environmental regulators. Each of these matters is carefully evaluated, and the company provides for environmental matters based on information presently available. Based on this information, we do not currently believe that environmental matters will have a material adverse effect on either the company’s financial condition or results of operations. However, there can be no assurance that the costs associated with environmental matters will not increase in the future.
 
Employees
 
As of April 28, 2019, we had 1,440 employees, compared to 1,392 at April 29, 2018.  Overall, our total number of employees has increased steadily over the past five years primarily due to the growth in our mattress fabrics segment. The decrease in the number of employees in our upholstery fabrics segment can be attributed to the closure of our Anderson, SC facility during the second quarter of fiscal 2019.  The number of employees in our home accessories segment can be attributed to our June 2018 investment in eLuxury, LLC.
 
The hourly employees at our manufacturing facility in Canada (approximately 11% of the company’s workforce) are represented by a local, unaffiliated union.  The collective bargaining agreement for these employees expires on February 1, 2020.  We are not aware of any efforts to organize any more of our employees, and we believe our relations with our employees are good.
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The following table illustrates the changes in the location of our workforce and number of employees, as of year-end, over the past five fiscal years.
 
   
Number of Employees
 
   
Fiscal 2019
   
Fiscal 2018
   
Fiscal 2017
   
Fiscal 2016
   
Fiscal 2015
 
Mattress Fabrics Segment
   
912
     
847
     
793
     
682
     
631
 
Upholstery Fabrics Segment
                                       
United States
   
140
     
188
     
148
     
134
     
129
 
China
   
330
     
353
     
380
     
397
     
424
 
Total Upholstery Fabrics Segment
   
470
     
541
     
528
     
531
     
553
 
Home Accessories Segment
   
53
     
-
     
-
     
-
     
-
 
Unallocated corporate
   
5
     
4
     
4
     
4
     
4
 
Total
   
1,440
     
1,392
     
1,325
     
1,217
     
1,188
 
 
Customers and Sales
 
Mattress Fabrics Segment
 
Major customers for our mattress fabrics include the leading bedding manufacturers: Serta-Simmons Bedding (SSB), Tempur + Sealy International (TSI), and Corsicana Bedding.  Our largest customer in the mattress fabrics segment is Serta Simmons Holdings, LLC, accounting for approximately 18% of the company’s overall sales in fiscal 2019. The 18% of the company’s overall sales include sales to customers who are also subcontractors for Serta Simmons Holdings, LLC. Our mattress fabrics customers also include many small and medium-size bedding manufacturers.
 
Upholstery Fabrics Segment
 
Our major customers for upholstery fabrics are leading manufacturers of upholstered furniture, including Ashley, Flexsteel, Franklin Fusion, Jonathan Louis, and La-Z-Boy (La-Z-Boy Residential and England).  Major customers for the company’s fabrics for commercial furniture include HON Industries and Wyndham Destinations. Our largest customer in the upholstery fabrics segment is La-Z-Boy Incorporated, which accounted for approximately 11% of the company’s consolidated sales in fiscal 2019.
 
Home Accessories Segment
 
Our customers consist primarily of consumers purchasing through our online sales channels, as well as business retailers in the home goods market and customers in the hospitality industry, with no major customers. Our online sales channels include our own eLuxury-branded website, as well as leading online retail channels for specialty home goods, and the loss of one or more of these leading online retail channels could have a material adverse effect on the company.
 
The following table sets forth our net sales by geographic area by amount and percentage of total net sales for the three most recent fiscal years.
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Net Sales by Geographic Area
(dollars in thousands)
 
   
Fiscal 2019
   
Fiscal 2018
   
Fiscal 2017
       
                                                 
United States
 
$
224,433
     
75.7
%
 
$
249,529
     
77.0
%
 
$
241,236
     
77.9
%
North America (Excluding USA)(1)
 
$
29,247
     
9.9
%
 
$
27,844
     
8.6
%
 
$
29,995
     
9.7
%
Far East and Asia(2)
   
39,277
     
13.2
%
   
40,671
     
12.6
%
   
34,695
     
11.2
%
All other areas
   
3,712
     
1.2
%
   
5,681
     
1.8
%
   
3,618
     
1.2
%
Subtotal (International)
 
$
72,236
     
24.3
%
 
$
74,196
     
23.0
%
 
$
68,308
     
22.1
%
Total
 
$
296,669
     
100
%
 
$
323,725
     
100
%
 
$
309,544
     
100
%

(1)  Of this amount, $22.5 million, $21.9 million, and $22.3 million are attributable to shipments to Mexico in fiscal 2019, 2018, and 2017, respectively.
 
(2)  Of this amount, $29.8 million, $32.6 million, and $26.6 million are attributable to shipments to China in fiscal 2019, 2018, and 2017, respectively.
 
Sales are attributed to individual countries based upon the location that the company ships its products to for delivery to customers.
 
For additional segment information, including the geographic location of long-lived assets, see Note 21 in the consolidated financial statements.
 
Backlog
 
Mattress Fabrics and Home Accessories Segments
 
The backlog for the mattress fabric and home accessories segments is not a reliable predictor of future shipments because the majority of sales for the mattress fabrics segment are on a just-in-time basis, and the majority of sales for the home accessories segment are shipments from inventory on a quick turnaround basis.
 
Upholstery Fabrics Segment
 
Although it is difficult to predict the amount of backlog that is “firm,” we have reported the portion of the upholstery fabric backlog from customers with confirmed shipping dates within five weeks of the end of the fiscal year.  On April 28, 2019, the portion of the upholstery fabric backlog with confirmed shipping dates prior to June 3, 2019 was $10.7 million, all of which are expected to be filled during the first quarter of fiscal 2020, compared with $9.4 million as of the end of fiscal 2018 (for confirmed shipping dates prior to June 4, 2018).
21

Intellectual Property
 
We currently hold, or have registration applications pending for, numerous trademarks and copyrights for various product and trade names, logos, and fabric designs in the United States and certain foreign countries. We view such intellectual property, along with any unregistered copyrights, trademarks, service marks, trade names, domain names, trade dress, trade secrets, and proprietary technologies, as an important part of our business, and we seek to diligently protect, monitor, and defend, through appropriate action, against their unauthorized use.
 
ITEM 1A.  RISK FACTORS
 
Our business is subject to risks and uncertainties.  In addition to the matters described above under “Cautionary Statement Concerning Forward-Looking Information,” set forth below are some of the risks and uncertainties that could cause a material adverse change in our results of operations or financial condition.  The risks described below are not the only risks we face.  Additional risks and uncertainties not presently known to us or not presently deemed material by us also may materially adversely affect our business, financial condition or results of operations in future periods.
 
Continued economic uncertainty could negatively affect our sales and earnings.
 
Overall demand for our products depends upon consumer demand for furniture, bedding, and bedding accessory products, which is subject to variations in the general economy.  Because purchases of furniture, bedding and bedding accessory products are discretionary purchases for most individuals and businesses, demand for these products is sometimes more easily influenced by economic trends than demand for other products.  Economic downturns and uncertainty can affect consumer spending habits and demand for home furnishings, which reduces the demand for our products and therefore can cause a decrease in our sales and earnings.  Economic uncertainty has caused a decrease in consumer spending and demand for home furnishings, including goods that incorporate our products.  If these conditions persist, our business will be negatively affected.
 
Our business may be adversely affected by increased tariffs or other changes in U.S. policy related to imported products, as well as violations of existing trade policies.

Many of our products are manufactured or sourced outside of the United States.  The U.S. government has recently compiled a list of products under consideration for potential tariffs on imports from many countries, including China, where a significant amount of our products is produced. Certain tariffs have been imposed, and negotiations continue regarding possible additional tariffs and additional categories of products subject to the already-imposed tariffs. Any tariffs that result in increased costs of imported products and materials could require us to increase prices to our domestic customers or, if we are unable to do so, result in lowering our gross margins on products sold. As a result, the tariffs could have a material adverse effect on our results of operations.

In addition to recent announcements about tariffs, the U.S. government is considering other proposals for substantial changes to its trade and tax policies, which could include import restrictions, increased import tariffs, changes to or withdrawal from existing trade agreements, and border-adjustment taxes, among other possible measures. Material changes in these policies could increase our tax obligations or require us to increase prices to customers, which could adversely affect sales. Any significant change in U.S. policy related to imported products could have a material adverse effect on our business and financial results.
22

Finally, there are currently a number of trade regulations and duties in place to protect the U.S. textile industry against competition from low-priced foreign producers, such as those in China and Vietnam, but violations of these trade regulations and duties has had, and may in the future have, a material adverse effect on our operations. In May of 2019, the U.S. Department of Commerce imposed punitive anti-dumping measures against China mattress imports to address violations of trade regulations. Despite the imposition of these duties, if China producers move their production out of China, they may continue to engage in unfair competition in violation of trade regulations between the U.S. and other countries, or there may be a potential risk of illegal transshipments of mattress products into the United States, which involves circumventing the imposed duties by falsely claiming that mattresses are products of a particular country of origin to avoid paying higher duties. If supply chains are moved out of China to countries without anti-dumping duties and producers continue to supply low-priced imports in violation of U.S. trade laws, and if illegal transshipments are not monitored and enforcement is not effective to limit them, these shipments could have a material adverse effect on the company’s business, financial condition, results of operations or cash flows.
 
Greater reliance on offshore operations and foreign sources of products or raw materials increases the likelihood of disruptions to our supply chain or our ability to deliver products to our customers on a timely basis.
 
We rely significantly on operations in distant locations, especially China, and in addition we have been purchasing a significant share of our products and raw materials from offshore sources, particularly Asia and Turkey.  At the same time, with the closure of our Anderson, South Carolina plant during the first half of fiscal 2019, our domestic manufacturing capacity for the upholstery fabrics segment continues to decline.  These changes have caused us to rely on a much longer supply chain and on a larger number of suppliers that we do not control, both of which are inherently subject to greater risks of delay or disruption.  In addition, operations and sourcing in foreign areas are subject to the risk of changing local governmental rules, taxes, changes in import rules or customs, tariffs, shipping rates, potential political unrest and instability, or other threats that could disrupt or increase the costs of operating in foreign areas or sourcing products overseas.  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 can have a negative impact on our sales of products produced in those countries.  Any of the risks associated with foreign operations and sources could cause unanticipated increases in operating costs or disruptions in business, which could negatively impact our ultimate financial results.
23

Our business faces several risks associated with doing business in China
 
We source a variety of fabrics from a limited number of strategic suppliers in China, and we operate three upholstery manufacturing facilities in Shanghai, China.  The Chinese economy is characterized by extensive state ownership, control, and regulation.  Therefore, our business is continually subject to the risk of changes in Chinese laws and regulations that could have an adverse effect on our suppliers and manufacturing operations.  Any changes in policies governing tariffs, imports and exports, taxation, inflation, environmental regulations, foreign currency exchange rates, the labor market, property, and financial regulations could have an adverse effect on our business.  Further, the Chinese legal system is continuing to develop and evolve, and the enforcement of rules and regulations is not always consistent or uniform.  Moreover, any potential civil unrest, natural disasters, or other threats could disrupt or increase the costs of operating in China.  The Chinese economy poses additional risks to our business, including fluctuating rates of inflation and currency exchange rates, a declining labor force participation rate, and rising employee wages.  In addition, changes in the political climate or trade policy of the United States, such as increased duties or tariffs on Chinese imports, may adversely affect our business.  Any of the risks associated with our Chinese operations and sources could cause unanticipated increases in operating costs or disruptions in business, which could negatively impact our ultimate financial results.
 
We may have difficulty managing the outsourcing arrangements being used for products and services.
 
We rely on outside sources for various products and services, including yarn and other raw materials, greige (unfinished) fabrics, finished fabrics, and services such as weaving and finishing.  Increased reliance on outsourcing lowers our capital investment and fixed costs, but it decreases the amount of control that we have over certain elements of our production capacity.  Interruptions in our ability to obtain raw materials or other required products or services from our outside suppliers on a timely and cost-effective basis, especially if alternative suppliers cannot be immediately obtained, could disrupt our production and damage our financial results.
 
Write-offs or write-downs of assets would result in a decrease in our earnings and shareholders’ equity.
 
The company has long-lived assets, primarily consisting of property, plant and equipment, goodwill, and other intangible assets.  ASC Topic 360 establishes an impairment accounting model for long-lived assets such as property, plant, and equipment and requires the company to assess for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recovered.  ASC Topic 350 requires that goodwill and other intangible assets be tested at least annually for impairment or whenever events or changes in circumstances indicate that the carrying value of the asset may not be recovered.
 
Although no material write-downs were experienced in the past several fiscal years, we closed our Anderson, South Carolina upholstery fabrics facility during the second quarter fiscal 2019. As a result of this plant closure, we recorded inventory markdowns totaling $1.6 million, which was mostly offset by a gain on the sale of property, plant, and equipment of $1.5 million.
24

Since April 1, 2019, our goodwill increased $15.7 million in connection with our acquisitions of Read Window Products, LLC and eLuxury, LLC.  As of April 28, 2019, our evaluation resulted in no impairment losses. Management will continue to carefully review this assessment and impairment indicators each quarter.
 
Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition and general economic conditions, requires significant judgment. Any of such future actions could result in charges that could have an adverse effect on our financial condition and results of operations, and there is no assurance that future write-downs of fixed assets, goodwill, or other intangible assets will not occur if business conditions were to deteriorate.
 
Changes in the price, availability, and quality of raw materials could increase our costs or cause production delays and sales interruptions, which would result in decreased earnings.
 
We depend upon outside suppliers for most of our raw material needs, and we rely upon outside suppliers for component materials such as yarn and unfinished fabrics, as well as for certain services such as finishing and weaving.  Fluctuations in the price, availability, and quality of these goods and services could have a negative effect on our production costs and ability to meet the demands of our customers, which would affect our ability to generate sales and earnings.  In many cases, we are not able to pass through increased costs of raw materials or increased production costs to our customers through price increases.  In particular, many of our basic raw materials are petrochemical products or are produced from such products.  For this reason, our material costs are especially sensitive to changes in prices for petrochemicals and the underlying price of oil.  Increases in prices for oil, petrochemical products or other raw materials and services provided by outside suppliers can significantly increase our costs and negatively affect earnings.  Beginning in the second quarter and continuing through the third quarter of fiscal 2019, we began to experience higher raw material prices and resulting impacts on our profits, after which these prices leveled off and returned to pre-escalation levels during the fourth quarter of fiscal 2019. Higher raw material prices would result in downward pressure on our profit margins and earnings.
 
Increases in energy costs would increase our operating costs and could adversely affect earnings.
 
Higher prices for electricity, natural gas, and fuel increase our production and shipping costs.  A significant shortage, increased prices, or interruptions in the availability of these energy sources would increase the costs of producing and delivering products to our customers and would be likely to adversely affect our earnings.  In many cases, we are not able to pass along the full extent of increases in our production costs to customers through price increases.  Energy costs have varied significantly during recent fiscal years and remain a volatile element of our costs.  Increases in energy costs could have a negative effect on our earnings.
 
Business difficulties or failures of large customers could result in a decrease in our sales and earnings.
 
We currently have several customers that account for a substantial portion of our sales.  In the mattress fabrics segment, several large bedding manufacturers have large market shares and comprise a significant portion of our mattress fabric sales, with Serta Simmons Holdings, LLC accounting for approximately 18% of consolidated net sales in fiscal 2019. The 18% of the company’s overall sales include sales to customers who are also subcontractors for Serta Simmons Holding, LLC.  In the upholstery fabrics segment, La-Z-Boy Incorporated accounted for approximately 11% of consolidated net sales during fiscal 2019, and several other large furniture manufacturers comprised a significant portion of sales.  A business failure or other significant financial difficulty by one or more of our major customers, or the loss of one or more of these customers, could cause a significant loss in sales, an adverse effect on our earnings, and difficulty in collection of our trade accounts receivable.
25

Loss of market share due to competition would result in declines in sales and could result in losses or decreases in earnings.
 
Our business is highly competitive and fragmented, and we face significant competition from a large number of competitors, both foreign and domestic.  We compete with many other manufacturers of fabric, as well as converters who source fabrics from various producers and market them to manufacturers of furniture and bedding.  In many cases, these fabrics are sourced from foreign suppliers who have a lower cost structure than the company.  Additionally, our e-commerce business competes with many other online retailers.  The highly competitive nature of our business in each of our segments means we are constantly subject to the risk of losing market share.  As a result of increased competition, there have been deflationary pressures on the prices for many of our products, which make it more difficult to pass along increased operating costs such as raw materials, energy or labor in the form of price increases and puts downward pressure on our profit margins.  Also, the wide range of product offerings in our business can make it more difficult to differentiate our products through design, styling, finish, and other techniques.
 
If we fail to anticipate and respond to changes in consumer tastes and fashion trends, our sales and earnings may decline.
 
Demand for various types of upholstery fabrics and mattress coverings changes over time due to fashion trends and changing consumer tastes for furniture and bedding.  Our success in marketing our fabrics depends upon our ability to anticipate and respond in a timely manner to fashion trends in home furnishings.  If we fail to identify and respond to these changes, our sales of these products may decline.  In addition, incorrect projections about the demand for certain products could cause the accumulation of excess raw material or finished goods inventory, which could lead to inventory mark-downs and decreases in earnings.
 
Increasing dependence on information technology systems comes with specific risks, including cybersecurity breaches and data leaks, which could have an adverse effect on our business.
 
We increasingly rely on technology systems and infrastructure.  Additionally, we rely on third-party service providers in connection with the maintenance thereof and the execution of certain business processes.  In fiscal 2018, we launched a new platform for direct sales to retailers of bedding accessory products, and in fiscal 2019 we acquired a majority interest in an e-commerce retailer of bedding accessories and other home goods.  Greater dependence on technology systems and e-commerce heightens the risk of potential vulnerabilities from system failure and malfunction, breakdowns due to natural disasters, human error, unauthorized access, power loss, and other unforeseen events.  Data privacy breaches by employees and others with or without authorized access to our systems poses risks that sensitive data may be permanently lost or leaked to the public or other unauthorized persons.  With the growing use and rapid evolution of technology, including internet selling, cloud-based computing and mobile devices, there are additional risks of unintentional data leaks.  There is also the risk of our exposure to theft of confidential information, intentional vandalism, industrial espionage, and a variety of cyber-attacks that could compromise our internal technology system, infrastructure, or result in data leakage in-house or at our third-party providers and business partners.  Failures of technology or related systems, or an improper release of confidential information, could damage our business or subject us to unexpected liabilities.  Additionally, the devotion of additional resources to the security of our information technology systems in the future could significantly increase our costs of doing business or otherwise adversely impact our financial results.
26

Our home accessories segment could be adversely affected by increased fees from online sales channels or by the loss of one or more leading online sales channels.
 
Products for our home accessories segment are sold through our own eLuxury-branded website, as well as through a number of leading online retailers for specialty home goods. These third-party platforms charge seller’s fees through a variety of commission, referral, or other fee structures.  Increases in these fees could require us to increase product prices, which could result in reduced sales if customers are unwilling to pay these increased prices or could result in lowering our gross margins on products sold if we are unable to fully pass on these increased fees.  As a result, increased fees charged by our third-party online sales channels could have a material adverse effect on the results of operations for our home accessories segment. Additionally, the loss of one or more of these leading online retail sales channels would limit our available sales opportunities and, if we are unable to replace such sales opportunities, could cause a significant loss in sales and an adverse effect on our earnings.
 
Our intellectual property rights may not prevent others from using our copyrights or trademarks in connection with the sale of competitive products. We may be subject to claims that our products or trademarks infringe intellectual property rights of others.
 
We currently hold, or have registration applications pending for, numerous trademarks and copyrights for various product and trade names, logos, and fabric designs in the United States and certain foreign countries.  We view such intellectual property, along with any unregistered copyrights, trademarks, service marks, trade names, domain names, trade dress, trade secrets, and proprietary technologies, as an important part of our business. These intellectual property rights may not provide adequate protection against infringement or piracy, may not prevent competitors from developing and marketing products that are similar to or competitive with our fabric designs, mattress pads, or other products, and may be costly and time-consuming to protect and enforce. In addition, the laws of some foreign countries may not protect our intellectual property rights and confidential information to the same extent as the laws of the United States. If we are unable to protect and enforce our intellectual property, we may be unable to prevent other companies from using our fabric designs or trademarks in connection with competitive products, which could adversely affect our sales, profitability, cash flows and financial condition.
 
We may be subject to claims that our products, advertising, or trademarks infringe the intellectual property rights of others. The defense of these claims, even if we are ultimately successful, may result in costly litigation, and if we are not successful in our defense, we could be subject to injunctions and liability for damages or royalty obligations, and our sales, profitability, cash flows and financial condition could be adversely affected.

We have made and expect to continue to make acquisitions, which could involve certain risks and uncertainties.

Acquisitions have been and may continue to be an important element of our business strategy. Acquisitions involve numerous inherent challenges, such as properly evaluating acquisition opportunities, properly evaluating risks and other diligence matters, ensuring adequate capital availability, and balancing other resource constraints. There are risks and uncertainties related to acquisitions, including difficulties integrating acquired operations, technology, personnel, and financial and other systems; unrealized sales expectations from the acquired business; unrealized synergies and cost-savings; unknown or underestimated liabilities; diversion of management attention form running our existing businesses; and potential loss of key management employees of the acquired business. In addition, internal control over financial reporting of acquired companies may not be up to required standards. Our integration activities may place substantial demand on our management, operational resources, and financial and internal control systems. Customer dissatisfaction or performance problems with an acquired business, technology, service, or product could also have a material adverse effect on our reputation and business.
27

We are subject to litigation and environmental regulations that could adversely impact our sales and earnings.
 
We have been, and in the future may be, a party to legal proceedings and claims, including environmental matters, product liability, and employment disputes, some of which claim significant damages.  We face the continual business risk of exposure to claims that our operations have caused personal injury or property damage, including the related risk of damage to our brand and reputation in conjunction with such claims.  We maintain insurance against product liability claims and in some cases have indemnification agreements with regard to environmental claims, but there can be no assurance that these arrangements will continue to be available on acceptable terms or that such arrangements will be adequate for liabilities actually incurred.  Given the inherent uncertainty of litigation, there can be no assurance that claims against the company will not have a material adverse impact on our earnings or financial condition.  We are also subject to various laws and regulations in our business, including those relating to environmental protection and the discharge of materials into the environment.  We could incur substantial costs as a result of noncompliance with or liability for cleanup or other costs or damages under environmental laws or other regulations.
 
We must comply with a number of governmental regulations applicable to our business, and changes in those regulations could adversely affect our business.
 
Our products and raw materials are and will continue to be subject to regulation in the United States by various federal, state, and local regulatory authorities.  In addition, other governments and agencies in other jurisdictions regulate the manufacture, sale, and distribution of our products and raw materials.  Also, rules and restrictions regarding the importation of fabrics and other materials, including custom duties, tariffs, quotas and other regulations, are continually changing.  Environmental laws, labor laws, tax regulations, and other regulations continually affect our business.  All of these rules and regulations can and do change from time to time, which can increase our costs or require us to make changes in our manufacturing processes, product mix, sources of products and raw materials, or distribution.  Changes in the rules and regulations applicable to our business may negatively impact our sales and earnings.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.
28

ITEM 2.  PROPERTIES
 
Our corporate headquarters are located in High Point, North Carolina.  As of the end of fiscal 2019 (April 28, 2019), we leased our corporate headquarters and owned or leased sixteen facilities associated with our mattress and upholstery fabrics and home accessories operations. The following is a list of our principal administrative and production facilities. Our facilities listed below are organized by business segment.

Location
Principal Use
Approx.
Total Area
(Sq. Ft.)
 
Expiration
of Lease (1)
 
 
 
 
 
 
 
    Administrative:
 
 
 
 
 
High Point, North Carolina
Upholstery fabric division offices and corporate headquarters
36,643
 
2025
 
 
 
 
 
 
 
●    Mattress Fabrics:
 
 
 
 
 
Stokesdale, North Carolina
Manufacturing and headquarters office
299,163
 
Owned
 
Stokesdale, North Carolina
Distribution center
220,222
 
Owned
 
High Point, North Carolina
Manufacturing
63,522
 
(2)
 
High Point, North Carolina
Warehouse and offices
65,886
 
2020
 
St. Jerome, Quebec, Canada
Manufacturing
202,500
 
Owned
 
Ouanaminthe, Haiti (3)
Manufacturing
80,000
 
2025
 
 
 
 
 
 
 
●    Upholstery Fabrics:
 

 
 
Burlington, North Carolina
Finished goods distribution
132,000   2028  
Burlington, North Carolina
Design center
13,750
 
2021
 
Knoxville, Tennessee
Manufacturing and offices
36,700
 
2033
 
Shanghai, China
Warehouse
27,900
 
2020
 
Shanghai, China
Manufacturing, warehouse, offices
68,677
 
2021
 
Shanghai, China
Manufacturing, warehouse, offices
89,857
 
2020
 
Shanghai, China
Warehouse and offices
89,861
 
2021
 
Shanghai, China
Warehouse 64,583   2020  
Shanghai, China
Warehouse 48,610   2021  
           
●    Home Accessories:          
Evansville, Indiana
Manufacturing, warehouse, offices 63,980   2024  


(1)
Includes all options to renew.
(2)
This lease agreement is currently on a month to month basis.
(3)
This leased facility pertains to our 50% owned joint venture associated with Class International Holdings, Ltd (See note 9 in the notes to the consolidated financial statements for further details).
 
We believe that our facilities are in good condition, well-maintained, suitable, and adequate for present utilization.  In the upholstery fabrics segment, we have the ability to source upholstery fabric from outside suppliers to meet current and expected demand trends and further increase our output of finished goods. This ability to source upholstery fabric is part of our long-term strategy to have a low-cost platform that is scalable, but not capital intensive.  In the mattress fabrics segment, management has estimated that it is currently performing at near capacity. Also, we have the ability to source additional mattress fabric from outside suppliers to further increase our ultimate output of finished goods.  In the home accessories segment, management has estimated that it has the ability to meet current and expected demand trends, as well as further increased demand, for mattress pad products, and it also has the ability to source additional mattress pads to further increase our ultimate output.  The home accessories segment sources its other finished good products from outside suppliers and we believe its sourcing availability provides the capacity to meet current and expected demand trends.
29

ITEM 3.  LEGAL PROCEEDINGS
 
There are no legal proceedings to which the company, or its subsidiaries, is a party to or of which any of their property is the subject that are required to be disclosed under this item.

ITEM 4.  MINE SAFETY DISCLOSURE

Not applicable.

PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Registrar and Transfer Agent

Computershare Trust Company, N.A.

Correspondence should be mailed to:
Computershare
P.O. Box 505000
Louisville, KY 40233

Overnight correspondence should be sent to:
Computershare
462 South 4th Street, Suite 1600
Louisville, KY 40202

(800) 254-5196
(781) 575-2879 (Foreign shareholders)
www.computershare.com/investor
 
Stock Listing
 
Prior to July 13, 2017, Culp Inc. common stock was traded on the New York Stock Exchange (NYSE) under the symbol CFI. Effective July 13, 2017, Culp, Inc. common stock commenced trading on the NYSE under the symbol CULP.  As of April 28, 2019, Culp, Inc. had approximately 4,036 shareholders based on the number of holders of record and an estimate of individual participants represented by security position listings.
30

Analyst Coverage
 
These analysts cover Culp, Inc.:
 
Raymond, James & Associates – Bobby Griffin, CFA
 
Value Line – Simon R. Shoucair
 
Stifel Financial Corp - John A. Baugh, CFA
 
Stonegate Capital Partners, Inc. – Marco Rodriguez, CFA

Dividends and Share Repurchases; Sales of Unregistered Securities

Share Repurchases

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)
 
January 28, 2019 to March 3, 2019
   
400
   
$
18.03
     
400
   
$
1,677,151
 
March 4, 2019 to March 31, 2019
   
-
   
$
-
     
-
   
$
1,677,151
 
April 1, 2019 to April 28, 2019
   
-
   
$
-
     
-
   
$
1,677,151
 
Total
   
400
   
$
18.03
     
400
   
$
1,677,151
 

(1)
 
On June 15, 2016, we announced that our board of directors increased the authorization for us to acquire up to $5.0 million of our common stock.

Dividends
 
On June 12, 2019, we announced that our board of directors approved a regular quarterly cash dividend payment of $0.10 per share. These dividend payments are payable on July 16, 2019, to shareholders of record as of July 5, 2019.
 
During fiscal 2019, dividend payments totaled $4.7 million, all of which represented our regular quarterly cash dividend payments ranging from $0.09 to $0.10 per share.
 
During fiscal 2018, dividend payments totaled $6.8 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $4.2 million represented our regular quarterly cash dividend payments ranging from $0.08 to $0.09 per share.
 
During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
31

Sales of Unregistered Securities

There were no sales of unregistered securities during fiscal 2019, 2018, or 2017.

Performance Comparison

The following graph shows changes over the five fiscal years ending April 28, 2019 in the value of $100 invested in (1) the common stock of the company, (2) the Hemscott Textile Manufacturing Group Index reported by Standard and Poor’s, consisting of three companies in the textile industry, and (3) the Standard & Poor’s 500 Index.

The graph assumes an initial investment of $100 at the end of fiscal 2014 and the reinvestment of all dividends during the periods identified.


Market Information
 
See Item 6, Selected Financial Data, and Selected Quarterly Data in Item 8, for market information regarding the company’s common stock.
32

ITEM 6.  SELECTED FINANCIAL DATA

                                  percent
 
   
fiscal
   
fiscal
   
fiscal
   
fiscal
   
fiscal
   
change
 
(amounts in thousands, except per share, ratios & other, stock data)
 
2019
   
2018
   
2017
   
2016
   
2015
     
2019/2018
 
INCOME STATEMENT DATA
                                     
net sales
 
$
296,669
     
323,725
     
309,544
     
312,860
     
310,166
     
-8.4
%
cost of sales
   
246,471
     
259,092
     
240,309
     
247,749
     
254,599
     
-4.9
%
gross profit
   
50,198
     
64,633
     
69,235
     
65,111
     
55,567
     
-22.3
%
selling, general, and administrative expenses
   
38,405
     
37,172
     
39,157
     
36,773
     
32,778
     
3.3
%
restructuring credit
   
(825
)
   
-
     
-
     
-
     
-
     
100.0
%
income from operations
   
12,618
     
27,461
     
30,078
     
28,338
     
22,789
     
-54.1
%
interest expense
   
42
     
94
     
-
     
-
     
64
     
-55.3
%
interest income
   
(766
)
   
(534
)
   
(299
)
   
(176
)
   
(622
)
   
43.4
%
other expense
   
1,346
     
1,018
     
681
     
616
     
391
     
32.2
%
income before income taxes
   
11,996
     
26,883
     
29,696
     
27,898
     
22,956
     
-55.4
%
income taxes
   
6,424
     
5,740
     
7,339
     
10,963
     
7,885
     
11.9
%
loss from investment in unconsolidated joint venture
   
114
     
266
     
23
     
-
     
-
     
-57.1
%
net income
   
5,458
     
20,877
     
22,334
     
16,935
     
15,071
     
-73.9
%
net loss attributable to non-controlling interest
   
218
     
-
     
-
     
-
     
-
     
100.0
%
net income attributable to Culp Inc. common shareholders
 
$
5,676
     
20,877
     
22,334
     
16,935
     
15,071
     
-72.8
%
depreciation
 
$
8,117
     
7,672
     
7,085
     
6,671
     
5,773
     
5.8
%
weighted average shares outstanding
   
12,462
     
12,431
     
12,312
     
12,302
     
12,217
     
0.2
%
weighted average shares outstanding, assuming dilution
   
12,548
     
12,633
     
12,518
     
12,475
     
12,422
     
-0.7
%
PER SHARE DATA
                                               
net income attributable to Culp Inc. common shareholders - basic
 
$
0.46
     
1.68
     
1.81
     
1.38
     
1.23
     
-72.9
%
net income attributable to Culp Inc. common shareholders - diluted
   
0.45
     
1.65
     
1.78
     
1.36
     
1.21
     
-72.6
%
dividends per share
 
$
0.38
     
0.55
     
0.51
     
0.66
     
0.62
     
-30.9
%
book value
 
$
12.91
     
13.12
     
12.03
     
10.50
     
9.77
     
-1.6
%
BALANCE SHEET DATA
                                               
operating working capital (4)
 
$
49,757
     
49,939
     
40,869
     
45,794
     
41,829
     
-0.4
%
property, plant and equipment, net
   
48,389
     
51,794
     
51,651
     
39,973
     
36,078
     
-6.6
%
total assets
   
219,726
     
217,984
     
205,634
     
175,142
     
171,300
     
0.8
%
capital expenditures
   
2,975
     
7,439
     
18,771
     
10,708
     
11,174
     
-60.0
%
dividends paid
   
4,732
     
6,843
     
6,280
     
8,140
     
7,579
     
-30.8
%
subordinated loan payable current maturities of long-term debt
   
675
     
-
     
-
     
-
     
2,200
     
100.0
%
shareholders' equity attributable to Culp Inc.
   
159,933
     
163,376
     
148,630
     
128,812
     
119,427
     
-2.1
%
capital employed (3)
   
125,311
     
114,817
     
98,429
     
90,357
     
83,225
     
9.1
%
RATIOS & OTHER DATA
                                               
gross profit margin
   
16.9
%
   
20.0
%
   
22.4
%
   
20.8
%
   
17.9
%
       
operating income margin
   
4.3
%
   
8.5
%
   
9.7
%
   
9.1
%
   
7.3
%
       
net income margin
   
1.8
%
   
6.4
%
   
7.2
%
   
5.4
%
   
4.9
%
       
effective income tax rate
   
53.6
%
   
21.4
%
   
24.7
%
   
39.3
%
   
34.3
%
       
debt to total capital employed ratio (1) (3)
   
0.5
%
   
0.0
%
   
0.0
%
   
0.0
%
   
2.6
%
       
operating working capital turnover (4)
   
5.8
     
7.1
     
7.3
     
7.0
     
7.7
         
days sales in receivables
   
29
     
29
     
29
     
27
     
34
         
inventory turnover
   
4.6
     
4.9
     
5.0
     
5.6
     
6.1
         
STOCK DATA
                                               
stock price
                                               
   high
 
$
32.05
     
34.05
     
37.80
     
35.23
     
29.19
         
   low
   
17.05
     
26.15
     
25.57
     
22.72
     
16.60
         
   close
   
20.74
     
30.10
     
32.10
     
26.24
     
26.02
         
P/E ratio (2)
                                               
   high
   
71
     
21
     
21
     
26
     
24
         
   low
   
38
     
16
     
14
     
17
     
14
         
daily average trading volume (shares)
   
33.8
     
22.1
     
42.1
     
67.3
     
38.6
         

(1)
 
Debt includes subordinated loan payable and current maturities of long-term debt.
 
 
 
(2)
 
P/E ratios based on trailing 12-month diluted net income per share.
 
 
 
(3)
 
Capital employed does not include cash and cash equivalents, short-term investments (available for sale), short-term investments (held-to-maturity), long-term investments (held-to-maturity), long-term investments (rabbi trust), subordinated loan payable, current maturities of long-term debt, noncurrent deferred tax assets and liabilities, income taxes receivable and payable, and deferred compensation.
 
 
 
(4)
  Operating working capital for this calculation is accounts receivable and inventories, offset by accounts payable-trade, account payable - capital expenditures, and deferred revenue.

33

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following analysis of the financial condition and results of operations should be read in conjunction with the consolidated 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.  Fiscal 2019, 2018, and 2017 each included 52 weeks. Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories.  The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers.  The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers.  With the recent acquisition of Read Window Products, the upholstery fabrics segment also provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services for Read’s own products to customers in the hospitality and commercial industries.  The home accessories segment is the company’s new finished products business that manufactures, sources, and sells bedding accessories and home goods directly to consumers and businesses through global e-commerce and business-to-business sales channels.
 
We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses, restructuring expense (credit) and related charges, and other non-recurring items.  Cost of sales in all our segments include costs to manufacture, develop, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers, all costs associated with being a public company, and other miscellaneous expenses.
 
Executive Summary
 
Results of Operations

   
Twelve Months Ended
       
(dollars in thousands)
 
April 28, 2019
   
April 29, 2018
   
Change
 
Net sales
 
$
296,669
   
$
323,725
     
(8.4
)%
Gross profit
   
50,198
     
64,633
     
(22.3
)%
Gross profit margin
   
16.9
%
   
20.0
%
   
(310
)bp
SG&A expenses
   
38,405
     
37,172
     
3.3
%
Income from operations
   
12,618
     
27,461
     
(54.1
)%
Operating margin
   
4.3
%
   
8.5
%
   
(420
)bp
Income before income taxes
   
11,996
     
26,883
     
(55.4
)%
Income taxes
   
6,424
     
5,740
     
11.9
%
Net income
   
5,458
     
20,877
     
(73.9
)%

34


Net Sales
 
Overall, our net sales decreased 8.4% in fiscal 2019 compared with a year ago, with mattress fabric net sales declining 24.7% and upholstery fabric net sales increasing 3.5%. Net sales from our new home accessories segment were $16.0 million since the June 2018 investment in eLuxury, with no comparable prior-year sales.
 
The decrease in mattress fabrics net sales reflects the significant challenges faced by the domestic bedding industry during fiscal 2019, primarily related to the high volume of low-priced imported mattresses from China. On May 29, 2019, the U.S. Department of Commerce imposed punitive anti-dumping measures against Chinese made mattresses, which we believe will ultimately provide some relief for the domestic mattress industry, but the anticipation of these duties led to an influx of these products at the end of calendar 2018 and continuing through February 2019, and a weaker mattress retail environment towards the end of fiscal 2019 delayed the sale of this excess inventory. This led to continued disruption in the market and reduced demand for our mattress fabrics and sewn covers through the end of fiscal 2019.
 
The increase in upholstery fabrics sales for fiscal 2019 primarily relates to the net sales contribution from Read, acquired on April 1, 2018, partially offset by a decrease in sales associated with our closed facility located in Anderson, South Carolina.
 
The financial results for our new home accessories business segment, which includes our June 2018 majority investment in eLuxury, reflect typical product roll-out, sampling, and marketing challenges in connection with the start-up and integration of a newly combined platform. These challenges, along with a weak retail and e-commerce sales environment, unfavorably affected our financial results for fiscal 2019.
 
Income Before Income Taxes
 
Income before income taxes decreased 55.4% compared to the same period a year ago. This decrease was primarily due to the decrease in sales of mattress fabrics noted above.  Additionally, income before income taxes was affected by restructuring and related charges and credits and other non-recurring items of approximately $2.7 million during fiscal 2019, of which $1.6 million related to the closure of our upholstery fabrics operation located in Anderson, South Carolina, and non-recurring charges totaling $1.1 million which include $500,000 for a charitable contribution, payable over a period of three years, in honor of our co-founder and former chairman, Robert G. Culp, III, as well as other non-recurring charges associated with the mattress fabrics segment.
 
Income Taxes
 
We recorded income tax expense of $6.4 million, or 53.6% of income before income tax expense, in fiscal 2019 compared with income tax expense of $5.7 million, or 21.4% of income before income tax expense, in fiscal 2018. Our income tax expense of $6.4 million and the increase in our income tax rate compared with fiscal 2018, reflects the mix of our taxable income favoring our foreign tax jurisdictions located in Canada and China that have higher income tax rates in relation to the U.S., and a significant decline in U.S. taxable income, which declined more than anticipated during our fourth quarter. This resulted in a significant increase in our Global Intangible Low Taxed Income (GILTI) Tax, which was mostly incurred during our fourth quarter. Our income tax expense of $5.7 million in fiscal 2018 included an income tax benefit totaling $2.1 million associated with the 2017 Tax Cuts and Jobs Act (the “Tax Act”), which represented an income tax benefit of $4.3 million pertaining to the one-time mandatory repatriation tax, partially offset by a $2.2 million income tax charge for the re-measurement of our U.S. deferred income taxes resulting from the reduction in the U.S. federal corporate income tax rate, compared with a final provisional income tax benefit of $550,000 that was recorded in the third quarter of fiscal 2019.
 
See the Segment Analysis section located in the Results of Operations for further details.

35

 
Liquidity
 
At April 28, 2019, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) totaled $45.0 million compared with $54.5 million at April 29, 2018. The decrease from the end of fiscal 2018 was primarily due to cash payments of $12.1 million for acquisitions that were mostly associated with the purchase of our 80% ownership in eLuxury, $8.1 million to our shareholders in the form of regular quarterly dividend payments and common stock repurchases, $4.7 million in capital expenditures (of which $1.4 million was vendor financed) that were mostly associated with our mattress fabric segment, and $1.3 million in employee withholding tax payments associated with the vesting of certain stock-based compensation awards, partially offset by net cash provided by operating activities totaling $13.9 million and proceeds from the sale of property, plant, and equipment totaling $1.9 million that were associated with the closure of our upholstery fabrics facility located in Anderson, South Carolina.
 
Our net cash provided by operating activities of $13.9 million in fiscal 2019 decreased $13.6 million compared with $27.5 million in fiscal 2018. The decrease is primarily due to the decreased income from operations noted above.

At April 28, 2019, all of our outstanding borrowings totaling $675,000 pertained to our subordinated credit agreement between eLuxury and its minority owner.
 
Dividend Program
 
On June 12, 2019, we announced that our board of directors approved a regular quarterly cash dividend payment of $0.10 per share. This payment will be made on or about July 16, 2019, to shareholders of record as of July 5, 2019.
 
During fiscal 2019, dividend payments totaled $4.7 million, all of which represented our regular quarterly cash dividend payments ranging from $0.09 to $0.10 per share. During fiscal 2018, dividend payments totaled $6.8 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $4.2 million represented our regular quarterly cash dividend payments ranging from $0.08 to $0.09 per share. During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular quarterly cash dividend payments ranging from $0.07 to $0.08 per share.
 
Common Stock Repurchases
 
On 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 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.
 
36

 
During fiscal 2019, we purchased 160,823 shares of our common stock at a cost of $3.3 million, most of which was purchased during our second and third quarters. During fiscal 2018 and 2017, there were no repurchases of our common stock.

At April 28, 2019, we had $1.7 million available for additional repurchases of our common stock

Results of Operations
 
The following table sets forth certain items in our consolidated statements of net income as a percentage of net sales.

   
Fiscal
   
Fiscal
   
Fiscal
 
   
2019
   
2018
   
2017
 
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
Cost of sales
   
(83.1
)
   
(80.0
)
   
(77.6
)
Gross profit
   
16.9
     
20.0
     
22.4
 
Selling, general and administrative expenses
   
(12.9
)
   
(11.5
)
   
(12.7
)
Restructuring credit
   
0.3
     
-
     
-
 
Income from operations
   
4.3
     
8.5
     
9.7
 
Interest income, net
   
0.3
     
0.1
     
0.1
 
Other expense
   
(0.6
)
   
(0.3
)
   
(0.2
)
Income before income taxes
   
4.0
     
8.3
     
9.6
 
Income taxes *
   
53.6
     
21.4
     
24.7
 
Loss from investment in unconsolidated joint venture
   
0.0
     
0.1
     
0.0
 
Net income
   
1.8
     
6.4
     
7.2
 
Net loss from non-controlling interest
   
0.1
     
-
     
-
 
Net income attributable to Culp Inc. common shareholders
   
1.9
%
   
6.4
%
   
7.2
%
 
* Calculated as a percentage of income before income taxes.

2019 compared with 2018
 
Segment Analysis
 
Mattress Fabrics Segment

   
Twelve Months Ended
       
(dollars in thousands)
 
April 28, 2019
   
April 29, 2018
   
Change
 
                   
Net sales
 
$
145,059
   
$
192,597
     
(24.7
)%
Gross profit
   
22,904
     
38,797
     
(41.0
)%
Gross profit margin
   
15.8
%
   
20.1
%
   
(430
)bp
SG&A expenses
   
11,296
     
12,935
     
(12.7
)%
Income from operations
   
11,608
     
25,861
     
(55.1
)%
Operating margin
   
8.0
%
   
13.4
%
   
(540
)bp

37


Net Sales

Mattress fabrics sales decreased 24.7% in fiscal 2019 compared to the prior year. These results reflected the more challenging market conditions faced by the domestic bedding industry during fiscal 2019, primarily related to the high volume of low-priced imported mattresses from China.

During March and April of 2019, import activity began to slow in anticipation of the expected ruling from the U.S. Department of Commerce.  This ruling came in May 2019, with the Department of Commerce imposing punitive anti-dumping measures from 69 percent to as high as 1,731 percent against Chinese made mattresses. We believe these duties will ultimately provide relief for the domestic mattress industry, but the anticipation of this ruling led to an influx of these products at the end of calendar 2018 and continuing through February 2019, and a weaker mattress retail environment towards the end of fiscal 2019 delayed the sale of this excess inventory. This led to continued disruption in the market and reduced demand for our mattress fabrics and sewn covers through the end of fiscal 2019.

Our design strengths and efficient manufacturing platform allow us to provide a diverse product mix that meets the changing demands of our customers across most price points. Our net sales for fiscal 2019 reflected continued growth in our CLASS mattress cover business. The growth in CLASS has allowed us to develop new products with existing customers and reach new customers and additional market segments, particularly the boxed bedding space.

Currently, we expect the excess supply of low-priced imported mattresses will continue during our first quarter of fiscal 2020, and in turn, will continue to affect short-term demand trends and operating performance. Despite these continuing challenges, we are beginning to see some recent positive developments and improvements in retail demand trends, as well as many customers altering their supply chains away from China, and we believe our design strengths and efficient manufacturing platform are providing market share gain and improved operating results. Nevertheless, it remains uncertain as to when demand trends will return to normal levels.

Gross Profit and Operating Income
 
Overall
 
The decrease in mattress fabrics profitability was primarily due to the decrease in mattress fabrics sales noted above, as well as certain non-recurring charges totaling $249,000 for employee termination benefits and operational reorganization costs associated with our mattress fabrics segment.

Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant and equipment, and our investment in unconsolidated joint venture.
         
(dollars in thousands)
April 28, 2019
 
April 29, 2018
 
% Change
 
Accounts receivable
 
$
12,098
   
$
15,195
     
(20.4
)%
Inventory
     24,649        28,740        (14 )%
Property, plant & equipment
   
44,266
     
48,797
     
(9.3
)%
Investment in unconsolidated joint venture
   
1,508
     
1,501
     
0.5
%

38


Accounts Receivable

As of April 28, 2019, accounts receivable decreased 20.4% compared with April 29, 2018. This decrease reflects the decrease in net sales noted above.

Inventory

As of April 28, 2019, inventory decreased 14.2% compared with April 29, 2018. The decrease reflects the decreased in net sales noted above.

Property, Plant & Equipment

The $44.3 million at April 28, 2019, represents property, plant and equipment of $32.4 million and $11.9 million located in the U.S. and Canada, respectively. The $48.8 million at April 29, 2018, represents property, plant, and equipment of $35.4 million and $13.4 million located in the U.S. and Canada, respectively.

As of April 28, 2019, property, plant, and equipment decreased compared with April 29, 2018. This trend represents a decrease in capital expenditure requirements and a progression toward a more maintenance level of spending on machinery and equipment. During fiscal 2019, our mattress fabrics segment reporting capital expenditures of $2.5 million and depreciation expense of $7.0 million.

Investment in Unconsolidated Joint Venture

Our investment in unconsolidated joint venture represents our fifty percent ownership of Class International Holdings, Ltd. (see Note 9 to the consolidated financial statements for further details).

Upholstery Fabrics Segment
 
Net Sales

     
Twelve Months Ended
         
(dollars in thousands)
April 28, 2019
     
April 29, 2018
     
% Change
 
                     
Non-U.S. Produced
 
$
121,818
     
90
%
 
$
122,635
     
94
%
   
(0.7
)%
U.S. Produced
   
13,836
     
10
%
   
8,493
     
6
%
   
62.9
%
Total
 
$
135,654
     
100
%
 
$
131,128
     
100
%
   
3.5
%

Although overall upholstery fabrics sales increased in fiscal 2019 compared to the prior year, our sales decreased 8.3% during the fourth quarter of fiscal 2019 compared to the fourth quarter of fiscal 2018.  Our upholstery fabrics net sales reflected more challenging market conditions with generally weaker consumer demand for furniture during the fourth quarter, as well as the ongoing trade dispute between the U.S. and China and continued uncertainties surrounding tariffs. The anticipation of additional tariffs resulted in more advance customer purchases in previous quarters and inflated inventories heading into the fourth quarter. This factor, combined with the generally weaker demand for furniture, affected our sales for the fourth quarter.

The increase in upholstery fabric net sales for the year includes the contribution from Read, acquired on April 1, 2018 (see below for further details regarding the acquisition of Read), partially offset by the decline in sales associated with the closure of our Anderson, South Carolina facility during the second quarter of fiscal 2019.  Additionally, these results reflect our product-driven strategy with a sustained focus on innovation and creative designs. Our ability to provide a diverse product offering has allowed us to reach new market segments and expand our customer base in both the residential and hospitality markets. Our results reflect the continued success of this strategy, highlighted by expanded sales of LiveSmart®, our popular “performance” line of highly durable stain-resistant fabric.

39


Currently, we expect the soft retail demand trends for furniture, as well as the impact of the continued uncertainties surrounding tariffs and the associated geopolitical risks, to continue at least through the early part of fiscal 2020.

Gross Profit and Operating Income

 
Twelve Months Ended
     
(dollars in thousands)
April 28, 2019
 
April 29, 2018
 
Change
 
             
Gross profit
 
$
25,374
   
$
25,836
     
(1.8
)%
Gross profit margin
   
18.7
%
   
19.7
%
   
(100
)bp
SG&A expenses
   
14,551
     
14,881
     
(2.2
)%
Income from operations
   
10,823
     
10,956
     
(1.2
)%
Operating margin
   
8.0
%
   
8.4
%
   
(40
)bp

Despite the increase in net sales noted above, our profitability in upholstery fabrics decreased slightly in fiscal 2019 compared with the same period a year ago. The decrease in profitability was primarily due to restructuring related charges totaling $2.3 million related to the closure of our upholstery fabrics operation located in Anderson, South Carolina (see below for further details regarding closure of our Anderson plant facility).

Exit and Disposal Activity

On June 12, 2018, our board of directors announced the closure of our upholstery fabrics manufacturing facility in Anderson, South Carolina. This closure was completed during the second quarter of fiscal 2019 and was due to a continued decline in demand for the products manufactured at this facility, reflecting a change in consumer style preferences. The following summarizes our restructuring credit and related charges totaling $1.6 million that were associated with this exit and disposal activity.

       
(dollars in thousands)
 
2019
 
Inventory markdowns
 
$
1,564
 
Other operating costs associated with a closed facility
   
824
 
Employee termination benefits
   
661
 
Gain on sale of property, plant, and equipment
   
(1,486
)
Total net charge
 
$
1,563
 

Of this total net charge, a charge of $2.3 million, a charge of $40,000 and a credit of $825,000 was recorded in cost of sales, selling, general, and administrative expenses, and restructuring credit, at least through the early part of fiscal 2020, respectively, in the fiscal 2019 Consolidated Statement of Net Income.

40


Business Combination - Read Window Products, LLC

Effective April 1, 2018, we entered into an Asset Purchase Agreement (Agreement) to acquire certain assets and assume certain liabilities of Read, a source of custom window treatments for the hospitality and commercial industries. Based in Knoxville, Tennessee, Read is a turn-key provider of window treatments that offers sourcing of upholstery fabrics and other products, as well as measuring and installation services for Read's own products. Read’s custom product line includes motorization, shades, upholstered drapery, upholstered headboards and shower curtains. In addition, Read supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters and pillows, for leading hospitality brands worldwide. The addition of window treatments and other soft goods to our product line allows us to be a more complete source of fabrics for the hospitality market, in which we believe there are significant growth opportunities.

The purchase price for the net assets acquired was $5.7 million, of which $4.5 million was paid at closing on April 1, 2018, $375,000 was paid in May 2018, and $763,000 was paid in July 2019.

The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.                                                    

(dollars in thousands)
 

Fair Value

 

Customer relationships

 

$

2,247

 

Goodwill

   

2,107

 

Inventory

   

1,128

 

Accounts receivable

   

897

 

Tradename

   

683

 

Property, plant & equipment

   

379

 

Other assets

   

35

 

Deferred revenue

   

(903

)

Accounts payable

   

(719

)

Accrued expenses

   

(174

)


 

$

5,680

 


The Agreement contains a contingent consideration arrangement that requires us to pay the former shareholder of Read an earn-out payment based on adjusted EBITDA, as defined in the Agreement for calendar year 2018 in excess of fifty percent of a pre-established adjusted EBITDA target. As of April 28, 2019, based on actual financial results in relation to the pre-established adjusted EBITDA target, a contingent payment is not required under the terms of the Agreement, and therefore, no contingent liability has been recorded.

Acquisition costs totaling $339,000 were included in selling, general, and administrative expenses in our fiscal 2018 Consolidated Statement of Net Income.

41


Segment Assets

Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.
         
(dollars in thousands)
April 28, 2019
 
April 29, 2018
 
% Change
 
Accounts receivable
 
$
11,274
   
$
11,112
     
1.5
%
Inventory
   
22,915
     
24,714
     
(7.3
)%
Property, plant & equipment
   
1,795
     
2,445
     
(26.7
)%

Accounts Receivable

As of April 28, 2019, accounts receivable was comparable with April 29, 2018. This trend reflects a decrease in net sales of 8.3% for the fourth quarter of fiscal 2019 compared with the fourth quarter of fiscal 2018 noted above, offset by higher days sales outstanding of 34 days for the fourth quarter of fiscal 2019 compared with 31 days for the fourth quarter of fiscal 2018.

Inventory

As of April 28, 2019, inventory decreased compared with April 29, 2018. The trend primarily represents the decrease in net sales noted above during the fourth quarter of fiscal 2019 compared with the fourth quarter of fiscal 2018.

Property, Plant & Equipment

The $1.8 million at April 28, 2019, represents property, plant, and equipment located in the U.S. of $1.2 million and located in China of $591,000. The $2.4 million at April 29, 2018, represents property, plant, and equipment located in the U.S. of $1.8 million and located in China of $661,000.

Home Accessories Segment

   
Twelve Months Ended
 
(dollars in thousands)
 
April 28, 2019
   
April 29, 2018
 
             
Net sales
 
$
15,956
     
-
 
Gross profit
   
4,428
     
-
 
Gross profit margin
   
27.8
%
   
-
 
SG&A expenses
   
5,163
     
-
 
Loss from operations
   
(735
)
   
-
 
Operating margin
   
(4.6
)%
   
-
 

42


Net Sales, Gross Profit, and Operating Income

This segment, which includes our June 2018 majority investment in eLuxury, represents our e-commerce and finished products business offering bedding accessories and home goods.  The combined platform for this new segment supports sales of finished products to both consumers and business through global e-commerce and business-to-business sales channels.

Net sales for our home accessories segment were $16.0 million since the June 2018 investment date in eLuxury, with no comparable prior year sales.  Our home accessories segment financial results for fiscal 2019 reflect typical product roll-out, sampling, and marketing challenges in connection with the start-up and integration of a newly combined platform. These challenges, along with reduced demand for legacy products, primarily mattress pads, unfavorably affected our financial results for the year.

Our strategic focus for the segment is to develop innovative bedding accessory products and other home good items through our global manufacturing platform and in coordination with Culp’s other business segments.  During the second half of fiscal 2019, we developed and launched new products featuring Culp mattress fabrics and upholstery fabrics, including mattress pads and mattress protectors made with Culp mattress fabrics and dog beds made with LiveSmart® performance fabric. Additionally, we are focused on expanding our sales channels beyond eLuxury’s e-commerce platform to reach business retailers, both in brick and mortar stores and through their online platforms, as well as customers in the hospitality industry.

Business Combination - eLuxury, LLC

Overview

Effective June 22, 2018, we entered an Equity Purchase Agreement (Equity Agreement”) pursuant to which we acquired an 80% ownership interest in eLuxury, a company that offers bedding accessories and home goods directly to consumers. eLuxury’s primary products include a line of mattress pads manufactured at eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, as well as other bedding items. Their products are available on eLuxury’s own branded website, eLuxury.com, Amazon, and other leading online retailers for specialty home goods.

This acquisition brings together eLuxury's experience in e-commerce, online brand building and direct to consumer shopping and fulfillment with our global production, sourcing and distribution capabilities.

The estimated consideration given for the 80% ownership interest in eLuxury totaled $18.1 million, of which $12.5 million represents the estimated purchase price and $5.6 million represents the estimated fair value for contingent consideration associated with an earn-out obligation (see below for further details). Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018, $185,000 was paid in August 2018, and $749,000 is to be paid in September 2019, subject to certain conditions as defined in the Equity Agreement.

43


Assets Acquired and Liabilities Assumed

The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.

(dollars in thousands)
 
Fair Value
 
Goodwill
 
$
13,653
 
Tradename
   
6,549
 
Equipment
   
2,179
 
Inventory
   
1,804
 
Accounts receivable and other current assets
   
108
 
Accounts payable
   
(1,336
)
Accrued expenses
   
(295
)
Non-controlling interest in eLuxury
   
(4,532
)
   
$
18,130
 

As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires us to pay the seller, who is also the owner of the noncontrolling interest, an earn-out payment based on a multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending August 31, 2021, less $12.0 million. We recorded a contingent liability at the acquisition date for this earn-out obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model.

Consolidation and Non-Controlling Interest

As a result of the acquisition of our 80% controlling interest, we included all the accounts of eLuxury in our consolidated financial statements and have eliminated all significant intercompany balances and transactions. Net income (loss) attributable to the noncontrolling interest in eLuxury is excluded from total consolidated net income (loss) to arrive at net income (loss) attributable to Culp Inc. common shareholders.

Other

Acquisitions costs totaling $270,000 were included in selling, general, and administrative expenses in our fiscal 2019 Consolidated Statement of Net Income.

Segment Assets

Segment assets consist of accounts receivable, inventory, and property, plant and equipment.

     
(dollars in thousands)
April 28, 2019
 
April 29, 2018
 
Accounts receivable
 
$
379
   
$
-
 
Inventory
   
3,296
     
-
 
Property, plant & equipment
   
1,910
     
-
 

44


Property, Plant & Equipment

The $1.9 million at April 28, 2019, represents property, plant, and equipment located in the U.S.

Refer to Note 21 located in the notes to the consolidated financial statements for disclosures regarding determination of our segment assets.

Other Income Statement Categories

 
Twelve Months Ended
     
(dollars in thousands)
April 28, 2019
 
April 29,2018
 
% Change
 
             
SG&A expenses
 
$
38,405
   
$
37,172
     
3.3
%
Interest expense
   
42
     
94
     
(55.3
)%
Interest income
   
766
     
534
     
43.4
%
Other expense
   
1,346
     
1,018
     
32.2
%
 
Selling, General and Administrative Expenses
 
SG&A expenses during fiscal 2019 increased compared with fiscal 2018. This trend is primarily due to increased selling expenses associated with our home accessories segment, partially offset by lower incentive compensation expense reflecting weaker financial results for the company in relation to pre-established targets, as well as lower professional fees.

Interest Expense

Interest costs incurred were $42,000 during fiscal 2019 compared with $194,000 during fiscal 2018.

No interest costs for the construction of qualifying fixed assets were capitalized during fiscal 2019. Interest costs of $100,000 were capitalized for the construction of qualifying fixed assets during fiscal 2018. Interest costs that have been capitalized will be amortized over the related assets’ useful lives.

Interest Income

During fiscal 2019 and 2018, our interest income was primarily associated with our investment grade U.S. corporate bonds located in the Cayman Islands. The increase in our interest income during fiscal 2019 compared with fiscal 2018 stemmed from repatriated earnings and profits from our foreign subsidiaries that were invested in U.S. money market funds at higher interest rates. Additionally, the increase is due to higher interest rates and participant account balances held in our Rabbi Trust that are associated with our deferred compensation plan, during fiscal 2019 compared with fiscal 2018.
 
Other Expense

Other expenses during fiscal 2019 increased compared with fiscal 2018. This increase is primarily due to a $500,000 contribution for an endowed scholarship to the University of North Carolina at Chapel Hill in honor of our Co-Founder and former Chairman of the Board. This charitable contribution will be paid over a period of three years.
 
45

 
Income Taxes

Effective Income Tax Rate
 
We recorded income tax expense of $6.4 million, or 53.6% of income before income tax expense, in fiscal 2019 compared with income tax expense of $5.7 million, or 21.4% of income before income tax expense, in fiscal 2018. The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:


 

2019

   

2018

 

federal income tax rate

   

21.0

%

   

30.4

%

undistributed earnings from foreign subsidiaries

   

37.2

     

-

 

valuation allowance

   

(37.1

)

   

0.4

 

global intangible low taxed income tax (GILTI)

   

17.9

     

-

 

foreign tax rate differential

   

13.7

     

3.7

 

tax effects of the 2017 Tax Cuts and Jobs Act

   

(4.6

)

   

(7.6

)

tax effects of Chinese foreign exchange gains(losses)

   

2.3

     

(2.8

)

reversal of foreign uncertain income tax position

   

-

     

-

 

tax effects of stock-based compensation

   

0.6

     

(1.8

)

other

   

2.6

     

(0.9

)


   

53.6

%

   

21.4

%



















Our income tax expense of $6.4 million and the increase in our income tax rate compared with fiscal 2018, reflects the mix of our taxable income favoring our foreign tax jurisdictions located in Canada and China that have higher income tax rates in relation to the U.S., and a significant decline in U.S. taxable income, which declined more than anticipated during our fourth quarter. This resulted in a significant increase in our Global Intangible Low Taxed Income (“GILTI”) Tax, which was mostly incurred during our fourth quarter. Our income tax expense of $5.7 million in fiscal 2018 included an income tax benefit totaling $2.1 million associated with the Tax Act, which represents an income tax benefit of $4.3 million pertaining to the one-time mandatory repatriation tax, partially offset by a $2.2 million income tax charge for the re-measurement of our U.S. deferred income taxes resulting from the reduction in the U.S. federal corporate income tax rate, compared with a final provisional income tax benefit of $550,000 that was recorded in the third quarter of fiscal 2019.

2017 Tax Cuts and Jobs Act

On December 22, 2017 (the “Enactment Date”), the Tax Act was signed into law. The Tax Act contains significant changes to corporate taxation, including (i) the reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing certain business assets, (iii) a one-time mandatory repatriation tax (the “Transition Tax”) related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, (iv) limitations on the use of foreign tax credits to reduce the U.S. income tax liability, (v) the repeal of the domestic production activities deduction, (vi) additional limitations on the deductibility of interest expense and executive compensation, and (vii) the creation of the GILTI tax.

The corporate income tax rate reduction was effective as of January 1, 2018. Since we have a fiscal year rather than a calendar year, we were subject to IRS rules relating to transitional income tax rates for fiscal 2018. As a result, our fiscal 2018 U.S. federal income tax rate was a blended income tax rate of 30.4% compared with a fully reduced U.S. federal income tax rate of 21.0% during fiscal 2019.

The re-measurement of our U.S. deferred income tax balances to the new U.S. federal corporate income tax rate and the determination of the income tax effects of the Transition Tax on our accumulated earnings and profits associated with our foreign subsidiaries were components of the Tax Act that significantly affected our financial statements during fiscal 2019 and 2018. As of April 29, 2018, we had not yet completed our assessment of the effects of the Tax Act, however, we were able to determine reasonable estimates for the effects of the components specified above, and thus we reported provisional amounts for these items under guidance provided by SEC Staff Accounting Bulletin No. 118 (“SAB 118”). As a result, our estimates changed and revisions to these estimates were recorded during the measurement period allowed by SAB 118, which was not to extend beyond one year from the Enactment Date.

46


The provisional estimates related to our U.S. deferred income tax balances and Transition Tax changed due to a variety of factors that included, (i) actual versus estimates of accumulated earnings and profits associated with our foreign subsidiaries, (ii) utilization of our foreign income tax credits, (iii) the election of whether or not to apply our existing U.S. federal net operating loss carryforwards against the Transition Tax, (iv) actual versus estimates regarding the reversal of U.S. deferred income taxes occurring in fiscal 2018 based on our blended U.S. federal income tax rate of 30.4% compared with our fully reduced U.S. federal income tax rate of 21.0% during fiscal 2019.

In order to determine the effects of the new U.S. federal corporate income tax rate on our U.S. deferred income tax balances during fiscal 2019 and 2018, ASC Topic 740 “Income Taxes” (ASC Topic 740), requires the re-measurement of our U.S. deferred income tax balances as of the Enactment Date of the Tax Act, based on income tax rates at which our U.S. deferred income tax balances are expected to reverse in the future. As a result, we recorded a provisional income tax charge of $2.2 million for the re-measurement of our U.S. net deferred income taxes during fiscal 2018. During the third quarter of fiscal 2019, we completed our assessment of the remeasurement of our U.S. deferred income tax balances in accordance with SAB 118 and recorded a final provisional income tax benefit of $268,000.

The Transition Tax was based on our total post-1986 foreign earnings and profits (“E&P”) that were previously deferred from U.S. income tax and applicable income tax rates associated with E&P held in cash and other specified assets (the “aggregate foreign cash position”).  Also, E&P was not permanently reinvested prior to the Tax Act. As a result, we recorded a provisional income tax benefit of $4.3 million for the income tax effects of the Transition Tax during fiscal 2018. This $4.3 million income tax benefit related to an income tax benefit of $18.0 million for the release of deferred income tax liabilities related to E&P and an income tax benefit of $11.7 million related to the reduction in our U.S. Federal income tax rate pursuant to the Tax Act on the effective settlement of an IRS exam related to E&P, partially offset by an income tax charge for the write-off and the establishment of a valuation allowance against our unused foreign tax credits totaling $25.4 million. During the third quarter of fiscal 2019, we completed our assessment of the income tax effects of the Transition Tax and recorded a final provisional income tax benefit of $282,000. Additionally, we elected to pay the Transition Tax over a period of eight years in accordance with the Tax Act.

GILTI

In addition to the above components of the Tax Act, GILTI was effective during fiscal 2019. Our policy to account for GILTI is to expense this tax in the period incurred. As a result, we recorded an income tax charge of $2.1 million during fiscal 2019.

On June 14, 2019, the U.S. Treasury released proposed regulations regarding the GILTI provisions of the U.S. income tax code. The proposed regulations contain a provision for an exclusion from treatment as GILTI if taxable income amounts are subject to a high rate of foreign income tax, as defined in the proposed regulations. If an entity were to qualify for the high-income tax exception, the high-taxed income earned that would be subject to GILTI and U.S. income tax may be excluded from U.S. income tax. However, since these regulations are in proposed form, an entity is not allowed to record an income tax benefit under these provisions until these regulations have been finalized.

47


Deferred Income Taxes – Valuation Allowance
 
Summary
 
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.
 
Refer to Note 14 located in the notes to the consolidated financial statements for disclosures regarding our assessments of our recorded valuation allowance as of April 28, 2019 and April 29, 2018 respectively.
 
Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries
 
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. At April 28, 2019, we assessed the financial reporting requirements of our U.S. parent company and determined that our undistributed earnings from our foreign subsidiaries would not be reinvested indefinitely and would be 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. 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.
 
Refer to Note 14 located in the notes 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 as of April 28, 2019 and April 29, 2018, respectively.

Uncertainty in Income Taxes

At April 29, 2018, we had a $903,000 total gross unrecognized income tax benefit that relates to double taxation under applicable income tax treaties with foreign tax jurisdictions, in which currently, significant change is not expected within the next fiscal year.

United States federal income tax returns filed by us remain subject to examination for income tax years 2017 and subsequent. Canadian federal income tax returns filed by us remain subject to examination for income tax years 2015 and subsequent. Canadian provincial (Quebec) income tax returns filed by us remain subject to examination for income tax years 2016 and subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year 2014 and subsequent.

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. This examination was completed during the fourth quarter of fiscal 2018 with final adjustments totaling $4,000.

During the fourth quarter of fiscal 2016, the Internal Revenue Service commenced and examination of our U.S. Federal income tax returns for fiscal years 2014 through 2016. This examination was effectively settled during the fourth quarter of fiscal 2018 with no adjustment.

48


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 statute 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.

Refer to Note 14 located in the notes to the consolidated financial statements for disclosures and additional information regarding our uncertain income tax positions.

Income Taxes Paid

Our income tax payments totaled $6.7 million during fiscal 2019 compared with $4.0 million during fiscal 2018. Our income tax payments were mostly associated with our subsidiaries located in Canada and China. These payments increased during fiscal 2019 as compared with the same period a year ago, primarily due to withholding tax payments of $879,000 associated with an earnings and profit distribution from our subsidiary located in Canada, installment payments totaling $600,000 pertaining to our Transition Tax in connection with the Tax Act,  and higher installment payments associated with our subsidiary located in Canada  as a result of increased taxable income.

As a result of the Tax Act, we started making installment payments associated with the Transition Tax in fiscal 2019. Additionally, we elected to pay the Transition Tax over a period of eight years in accordance with the Tax Act. Lastly, at April 28, 2019, we have U.S. federal net operating loss carryforwards totaling $6.9 million. This fact, coupled with the lower U.S. corporate income tax rate and the immediate expensing of U.S. capital expenditures next year, is currently expected to result in minimal U.S. cash income taxes paid in fiscal 2020.

2018 compared with 2017
 
Segment Analysis
 
Mattress Fabrics Segment

   
Twelve Months Ended
       
(dollars in thousands)
 
April 29, 2018
   
April 30, 2017
   
Change
 
                   
Net sales
 
$
192,597
   
$
190,805
     
0.9
%
Gross profit
   
38,797
     
43,065
     
(9.9
)%
Gross profit margin
   
20.1
%
   
22.6
%
   
(250
)bp
SG&A expenses
   
12,935
     
13,685
     
(5.5
)%
Income from operations
   
25,861
     
29,380
     
(12.0
)%
Operating margin
   
13.4
%
   
15.4
%
   
(200
)bp

49


Net Sales

Although overall mattress fabrics sales increased slightly in fiscal 2018 compared to the prior year, our sales decreased 4.7% during the fourth quarter of fiscal 2018 compared to the fourth quarter of fiscal 2017. Our mattress fabrics net sales reflected more challenging market conditions with soft demand trends across the bedding industry and the impact of lower priced imported mattresses that occurred during the fourth quarter.

Gross Profit and Operating Income
 
Overall
 
The decrease in mattress fabrics profitability primarily reflected higher operating costs that were incurred in the first half of fiscal 2018 and were associated with production disruptions during a transition period of substantial capital investment and supply chain enhancements designed to improve our operations and product delivery performance.
 
Below is a summary of our significant capital projects and improvements that were ongoing in fiscal 2017 and were completed as of the second quarter of fiscal 2018:

Our building expansion projects in North Carolina, including a new distribution center and knitted fabric plant consolidation, were completed during the first quarter of fiscal 2018

All of our knitting and other fabric forming equipment was relocated into our expanded facility located in North Carolina and placed into service as of the end of our second quarter of fiscal 2018.

We completed the relocation of our CLASS production platform to an existing facility in High Point, North Carolina, as of the end of our second quarter of fiscal 2018. This relocation provided a more efficient and streamlined production flow and access to a larger labor pool, as well as expanded showroom and production development space.

We completed expansion of our Canadian operations in the fourth quarter of fiscal 2017, with additional finishing equipment and a new distribution center that allows us to ship directly to our customers in Canada.

Joint Venture

Effective January 1, 2017, Culp International Holdings, Ltd. (Culp International), a wholly-owned subsidiary of the company, entered into a joint venture agreement, pursuant to which Culp International owns fifty percent of CLASS International Holdings, Ltd (CLIH). CLIH produces cut and sewn mattress covers, and its operations are located in a modern industrial park on the northeastern border of Haiti, which borders the Dominican Republic. CLIH commenced production in the second quarter of fiscal 2018 (October 2017) and complements our mattress fabric operations with a mirrored platform that enhances our ability to meet customer demand while adding a lower cost operation to our platform (see note 9 located in the notes to the consolidated financial statements for further details).

50


Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant and equipment, and our investment in an unconsolidated joint venture.

             
(dollars in thousands)
 
April 29, 2018
   
April 30, 2017
   
% Change
 
Accounts receivable
 
$
15,195
   
$
15,512
     
(2.0
)%
Inventory
    28,740       31,526       (8.8 )%
Property, plant & equipment
   
48,797
     
48,916
     
(0.2
)%
Investment in unconsolidated joint venture
   
1,501
     
1,106
     
35.7
%

Accounts Receivable

As of April 29, 2018, accounts receivable were comparable with April 30, 2017. This trend reflects a decrease in net sales of 4.7% for the fourth quarter of fiscal 2018 compared with the fourth quarter of fiscal 2017 noted above.

Inventory

As of April 29, 2018, inventory decreased compared with April 30, 2017. The trend primarily represents the decrease in net sales noted above during the fourth quarter of fiscal 2018 compared with the fourth quarter of fiscal 2017.

Property, Plant & Equipment

The $48.8 million at April 29, 2018, represents property, plant and equipment of $35.4 million and $13.4 million located in the U.S. and Canada, respectively. The $48.9 million at April 30, 2017, represents property, plant, and equipment of $34.0 million and $14.9 million located in the U.S. and Canada, respectively.

As of April 29, 2018, property, plant, and equipment was comparable with April 30, 2017. The mattress fabric segment incurred depreciation expense of $6.8 million and had capital spending of $6.7 million in fiscal 2018.

Investment in Unconsolidated Joint Venture

Our investment in unconsolidated joint venture represents our fifty percent ownership of CLIH noted above.

51


Upholstery Fabrics Segment
 
Net Sales

     
Twelve Months Ended
         
(dollars in thousands)
April 29, 2018
     
April 30, 2017
     
% Change
 
                     
Non-U.S. Produced
 
$
122,635
     
94
%
 
$
109,012
     
92
%
   
12.5
%
U.S. Produced
   
8,493
     
6
%
   
9,727
     
8
%
   
(12.6
)%
Total
 
$
131,128
     
100
%
 
$
118,739
     
100
%
   
10.4
%

The increase in upholstery fabric net sales reflected our focus on innovation and creative designs, supported by our manufacturing platform located in China. Our ability to provide a diverse product offering allowed us to reach new market segments. Our results reflected the success of this strategy, highlighted by expanded sales of LiveSmart®, our popular “performance” line of highly durable stain-resistant fabric. In response, we launched a new website specifically to promote this innovative product line, along with a more aggressive marketing campaign.

Also, we achieved continued sales growth in fabrics designed for the hospitality market. In order to take advantage of the growth opportunities in the hospitality market, we completed the acquisition of Read during the fourth quarter of fiscal 2018 (see note 2 to the consolidated financial statements for further details).

Gross Profit and Operating Income

 
Twelve Months Ended
     
(dollars in thousands)
April 29,2018
 
April 30, 2017
 
Change
 
             
Gross profit
 
$
25,836
   
$
26,170
     
(1.3
)%
Gross profit margin
   
19.7
%
   
22.0
%
   
(230
)bp
SG&A expenses
   
14,881
     
15,079
     
(1.3
)%
Income from operations
   
10,956
     
11,091
     
(1.2
)%
Operating margin
   
8.4
%
   
9.3
%
   
(90
)bp

Despite the increase in net sales noted above, our profitability in upholstery fabrics decreased in fiscal 2018 compared with fiscal 2017. The decrease in profitability was primarily due to higher operating costs associated with our operations located in China resulting from unfavorable foreign exchange rates experienced in the second half of fiscal 2018, and a decline in profitability associated with our U.S. upholstery fabric operation located in Anderson, South Carolina, resulting from changing consumer style preferences and reduced customer demand for products made in this facility.

52


Segment assets consist of accounts receivable, inventory, and property, plant, and equipment.

             
(dollars in thousands)
 
April 29, 2018
   
April 30, 2017
   
% Change
 
Accounts receivable
 
$
11,112
   
$
9,065
     
22.6
%
Inventory
   
24,714
     
19,956
     
23.8
%
Property, plant & equipment
   
2,445
     
1,879
     
30.1
%

Accounts Receivable

As of April 29, 2018, accounts receivable increased by 22.6% compared with April 30, 2017. This increase was primarily due to an increase in net sales of 11% during the fourth quarter of fiscal 2018 compared with the fourth quarter of fiscal 2018 and accounts receivable acquired from Read.

Inventory

As of April 29, 2018, inventory increased by 23.8% compared with April 30, 2017. This increase was primarily due to the increase in net sales and inventory acquired from Read.

Property, Plant & Equipment

The $2.4 million at April 29, 2018, represents property, plant, and equipment located in the U.S. of $1.8 million and located in China of $661,000. The $1.9 million at April 30, 2017, represents property, plant, and equipment located in the U.S. of $1.2 million and located in China of $655,000.

Other Income Statement Categories

   
Twelve Months Ended
       
(dollars in thousands)
 
April 29,2018
   
April 30, 2017
   
% Change
 
                   
SG&A expenses
 
$
37,172
   
$
39,157
     
(5.1
)%
Interest expense
   
94
     
-
     
100.0
%
Interest income
   
534
     
299
     
78.6
%
Other expense
   
1,018
     
681
     
49.5
%
 
Selling, General and Administrative Expenses
 
SG&A expenses for fiscal 2018 compared with fiscal 2017 included lower incentive compensation expense reflecting weaker financial results in relation to pre-established financial targets, partially offset by the following items that increased SG&A expenses:

Non-recurring charges associated with the consolidation of our mattress production facilities that were primarily incurred during the first half of fiscal 2018.
Non-recurring legal and other professional fees incurred that related to acquisition activity.

53


Interest Expense

Interest costs incurred were $194,000 during fiscal 2018 compared with $158,000 for the same period a year ago. Our interest costs during fiscal 2018 and 2017 pertained to borrowings associated with our U.S. revolving line of credit and with the construction of a new building associated with our mattress fabrics segment (Refer to Notes 13 and 15 located in the notes to the consolidated financial statements for further details).

The interest costs incurred during fiscal 2018 were partially offset by interest costs totaling $100,000 for the construction of qualifying fixed assets that were capitalized through the second quarter. Interest costs incurred during fiscal 2017 were fully offset by interest costs for the construction of qualifying fixed assets that were capitalized. Interest costs that have been capitalized will be amortized over the related assets’ useful lives.

Interest Income

Interest income increased during fiscal 2018 compared with fiscal 2017. The increase in interest income was due to management's decision at the end of the second quarter of fiscal 2017 to invest approximately $31.0 million in investment grade U.S. Corporate bonds with maturities that primarily ranged 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.
 
Other Expense

Other expense increased during fiscal 2018 compared with the same period a year ago. This increase was mostly due to unfavorable foreign currency exchange rates associated with our operations located in China.
 
Income Taxes

Effective Income Tax Rate
 
We recorded income tax expense of $5.7 million, or 21.4% of income before income tax expense, in fiscal 2018 compared with income tax expense of $7.3 million, or 24.7% of income before income tax expense, in fiscal 2017. The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements:

   
2018
   
2017
 
federal income tax rate
   
30.4
%
   
34.0
%
tax effects of the 2017 Tax Cuts and Jobs Act
   
(7.6
)
   
-
 
tax effects of Chinese foreign exchange (losses) gains
   
(2.8
)
   
1.6
 
tax effects of stock-based compensation
   
(1.8
)
   
-
 
foreign tax rate differential
   
3.7
     
-
 
reversal of foreign uncertain income tax position
   
-
     
(11.6
)
valuation allowance
   
0.4
     
(0.2
)
other
   
(0.9
)
   
0.9
 
     
21.4
%
   
24.7
%

54


Liquidity and Capital Resources

Liquidity

Overall

Currently, our sources of liquidity include cash and cash equivalents, 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 of $40.0 million at April 28, 2019, cash flow from operations, and current availability ($30.9 million at April 28, 2019) under our revolving credit lines will be sufficient to fund our business needs and our contractual obligations (see commitments table below).
 
At April 28, 2019, our cash and cash equivalents, and short-term and long-term investments (held-to-maturity) totaled $45.0 million compared with $54.5 million at April 29, 2018. The decrease from the end of fiscal 2018 was primarily due to cash payments of $12.1 million for acquisitions that were mostly associated with the purchase of our 80% ownership in eLuxury, $8.1 million to our shareholders in the form of regular quarterly dividend payments and common stock repurchases, $4.7 million in capital expenditures (of which $1.4 million was vendor financed) that were mostly associated with our mattress fabric segment, and $1.3 million in employee withholding tax payments associated with the vesting of certain stock-based compensation awards, partially offset by net cash provided by operating activities totaling $13.9 million and proceeds from the sale of property, plant, and equipment totaling $1.9 million that were associated with the closure of our upholstery fabrics facility located in Anderson, South Carolina.
 
Our net cash provided by operating activities of $13.9 million in fiscal 2019 decreased $13.6 million compared with $27.5 million in fiscal 2018. The decrease is primarily due to decreased income from operations.

At April 28, 2019, all of our outstanding borrowings totaling $675,000 pertained to our subordinated credit agreement between eLuxury and its minority owner.
 
Our cash and cash equivalents and short-term investments may be adversely affected by factors beyond our control, such as weakening industry demand and delays in receipt of payments on accounts receivable.

By Geographic Area
 
We currently hold cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) in the U.S. and our foreign jurisdictions to support operational requirements, potential acquisitions, to mitigate our risk related to foreign exchange rate fluctuations, and for U.S. and foreign income tax planning purposes.

A summary of our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) by geographic area follows:

   
April 28,
   
April 29,
 
(dollars in thousands)
 
2019
   
2018
 
United States
 
$
33,078
   
$
10,537
 
China
   
9,670
     
9,221
 
Canada
   
2,196
     
3,715
 
Cayman Islands
   
64
     
31,000
 
   
$
45,008
   
$
54,473
 


55


During the third and fourth quarters of fiscal 2019, we experienced significant shift of cash and investments held in the Cayman Islands to the U.S. This trend was primarily due to our strategy of taking advantage of the Tax Act, which allows a U.S. corporation a 100% dividend received deduction on earnings and profits repatriated to the U.S. from 10% owned foreign corporations.

At April 29, 2018, of the $31.0 million in cash and investments held in the Cayman Islands, almost all pertained to investment grade U.S. corporate bonds. As our U.S. corporate bonds matured, we repatriated almost all of our earnings and profits residing in the Cayman Islands to our U.S. parent company. During fiscal 2019, we received cash proceeds from the sale of our U.S. corporate bonds totaling $25.7 million, of which $21.7 million was received in the third and fourth quarters. In turn, we repatriated earnings and profits to our U.S. parent company totaling $31.3 million during fiscal 2019, of which $28.0 million pertained to our third and fourth quarters.
 
Dividend Program
 
On June 12, 2019, we announced that our board of directors approved a regular quarterly cash dividend payment of $0.10 per share. This payment will be made on or about July 16, 2019, to shareholders of record as of July 5, 2019.
 
During fiscal 2019, dividend payments totaled $4.7 million, all of which represented our regular quarterly cash dividend payments ranging from $0.09 to $0.10 per share.
 
During fiscal 2018, dividend payments totaled $6.8 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $4.2 million represented our regular quarterly cash dividend payments ranging from $0.08 to $0.09 per share.
 
During fiscal 2017, dividend payments totaled $6.3 million, of which $2.6 million represented a special cash dividend payment in the first quarter of $0.21 per share, and $3.7 million represented our regular quarterly cash dividend payments ranging from $0.07 to $0.08 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 Repurchases
 
On 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 fiscal 2019, we purchased 160,823 shares of our common stock at a cost of $3.3 million, most of which was purchased during our second and third quarters. During fiscal 2018 and 2017, there were no repurchases of our common stock.

At April 28, 2019, we had $1.7 million available for additional repurchases of our common stock

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Working Capital

Accounts receivable at April 28, 2019, were $23.8 million, a decrease of $2.6 million or 10%, compared with $26.3 million at April 29, 2018. The decrease in accounts receivable primarily relates to our decrease in net sales during the fourth quarter of fiscal 2019 compared with the fourth quarter of fiscal 2018. Net sales during the fourth quarter of fiscal 2019 were $71.0 million, a decrease of 9%, compared with $78.2 million during the fourth quarter of fiscal 2018. Days’ sales in accounts receivable were 30 days during both our fourth quarter of fiscal 2019 and 2018.

Inventories at April 28, 2019 were $50.9 million, a decrease of 2.6 million or 5%, compared with $53.5 million at April 29, 2018. The decrease in inventory primarily relates to our decrease in net sales during the fourth quarter of fiscal 2019 compared with the fourth quarter of fiscal 2018 noted above, partially offset by an increase in inventory associated with our new home accessories business segment totaling $3.3 million. Inventory turns were 4.6 and 4.8 during the fourth quarter of fiscal 2019 and 2018, respectively.
 
Accounts payable-trade at April 28, 2019, were $24.4 million, a decrease of $2.9 million or 11% compared with $27.2 million at April 29, 2018. The decrease in accounts payable is due to the decline in inventory purchases as a result of the decline in our net sales volume noted above.
 
Operating working capital (accounts receivable and inventories, less deferred revenue and accounts payable-trade and capital expenditures) was $49.8 million at April 28, 2019, compared with $49.9 million at April 29, 2018. Operating working capital turnover was 5.8 in fiscal 2019 compared to 7.1 in fiscal 2018.

Financing Arrangements

Revolving Credit Agreements

Currently, we have revolving credit agreements with banks for our U.S. parent company and our operations located in China. The purposes of our revolving credit lines of credit are to support potential short-term cash needs in different jurisdictions, mitigate our risk associated with foreign currency exchange rate fluctuations, and ultimately repatriate earnings and profits from our foreign subsidiaries to the U.S. to take advantage of the Tax Act, which allows a U.S. corporation a 100% dividend received income tax deduction on earnings and profits repatriated to the U.S. from 10% owned foreign corporations.

Subordinated Loan Payable

On February 17, 2019, eLuxury entered into a subordinated credit agreement with the owner of its noncontrolling interest which provides a revolving loan commitment of $1.0 million that expires on June 22, 2023.  Interest was charged at a rate (applicable interest rate of 3.93% April 28, 2019) as a variable spread over LIBOR based on Culp's ratio of debt to EBITDA. At April 28, 2019, there were borrowings outstanding under this agreement totaling $675,000.

Overall

Our loan agreements require, among amount other things, that we maintain compliance with certain financial covenants. As of April 28, 2019, we complied with these financial covenants.

57


Refer to Note 13 located in the notes to the consolidated financial statements for further details of our credit agreements.

Commitments
 
The following table summarizes our contractual payment obligations and commitments for each of the next five fiscal years (in thousands):
 
   
2020
   
2021
   
2022
   
2023
   
2024
   
Thereafter
   
Total
 
                                                         
Capital expenditures
 
$
1,428
     
-
     
-
     
-
     
-
     
-
   
$
1,428
 
Accounts payable -
                                                       
    capital expenditures
   
78
     
-
     
-
     
-
     
-
     
-
     
78
 
Operating leases
   
3,044
     
2,120
     
1,169
     
723
     
678
     
346
     
8,080
 
Subordinated Loan Payable
   
-
     
-
     
-
     
-
     
675
     
-
     
675
 
Interest expense
   
27
     
27
     
27
     
27
     
4
     
-
     
112
 
Total (1)
 
$
4,577
     
2,147
     
1,196
     
750
     
1,357
     
346
   
$
10,373
 
 
Note:  Payment Obligations by End of Each Fiscal Year
 
 (1)
At April 28, 2019, we had $903,000 of total gross unrecognized tax benefits, of which $380,000 and $523,000 were classified as net non-current deferred income taxes and income taxes payable – long-term, respectively. The final outcome of these tax uncertainties is dependent upon various matters including tax examinations, legal proceedings, competent authority proceedings, changes in regulatory tax laws, or interpretations of those tax laws, or expiration of statutes of limitation. As a result of these inherent uncertainties, the company cannot reasonably estimate the timing of payment of these amounts. Of the $903,000 in total gross unrecognized tax benefits, $380,000 would not be subject to cash payments due to the company’s U.S. federal net operating loss carryforwards.
 
Capital Expenditures
 
Capital expenditures on a cash basis were $4.7 million (of which $1.4 million was vendor financed) for fiscal 2019, compared with $11.8 million (of which $3.8 million was vendor financed) for fiscal 2018. Capital expenditures for fiscal 2019 and 2018 mostly related to our mattress fabrics segment.
 
Depreciation expense was $8.1 million for fiscal 2019 compared with $7.7 million for fiscal 2018. Depreciation expense for fiscal 2019 and 2018 mostly related to our mattress fabrics segment.

For fiscal 2020, we are currently projecting capital expenditures to be in the range of $6.5 million to $7.0 million. Depreciation expense for the company as a whole is projected to be $8.0 million for fiscal 2020. The estimated capital expenditures and depreciation expense for fiscal 2020 primarily relate to our mattress fabrics segment. These are management’s current expectations only, and changes in our business could cause changes in plans for capital expenditures and expectations for related depreciation expense. Funding for capital expenditures is expected to be primarily from cash provided by operating activities.

Accounts Payable – Capital Expenditures

Refer to Note 15 located in the notes to the consolidated financial statements for further details of our accounts payable – capital expenditures.

58


Purchase Commitments - Capital Expenditures

Refer to Note 15 located in the notes to the consolidated financial statements for further details of our purchase commitments – capital expenditures.

Handling Costs

We record warehousing costs in SG&A expenses. These costs were $4.2 million, $4.6 million, and $4.6 million, in fiscal 2019, 2018, and 2017, respectively. Warehousing costs include the operating expenses of our various finished goods distribution centers, such as personnel costs, utilities, building rent and material handling equipment, and lease expense. Had these costs been included in cost of sales, gross profit would have been $46.0 million, or 15.5% of net sales, in fiscal 2019, $60.0 million, or 18.5% of net sales, in fiscal 2018, and $64.6 million, or 20.9% of net sales, in fiscal 2017.

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.
 
Critical Accounting Policies
 
U.S. generally accepted accounting principles require us to make estimates and assumptions that affect our reported amounts in the consolidated financial statements and accompanying notes.  Some of these estimates require difficult, subjective and/or complex judgments about matters that are inherently uncertain, and as a result actual results could differ significantly from those estimates.  Due to the estimation processes involved, management considers the following summarized accounting policies and their application to be critical to understanding the company’s business operations, financial condition and results of operations.
 
Accounts Receivable - Allowance for Doubtful Accounts
 
As of April 28, 2019, accounts receivable totaled $23.8 million of which $12.1 million, $11.3 million, and $379,000 pertained to our mattress fabrics segment, upholstery fabrics segment, and home accessories segment, respectively.  Additionally, as of April 28, 2019, the aggregate accounts receivable balance of our ten largest customers was $10.3 million, or 43% of trade accounts receivable. No customers within any of our business segments accounted for more than 10% of our consolidated accounts receivable balance as of April 28, 2019.
 
We continuously perform credit evaluations of our customers, considering numerous inputs including customers’ financial position, past payment history, cash flows and management capability; historical loss experience; and economic conditions and prospects.  Once evaluated, each customer is assigned a credit grade.  Credit grades are adjusted as warranted.  Significant management judgment and estimates must be used in connection with establishing the reserve for allowance for doubtful accounts.  While management believes that adequate allowances for doubtful accounts have been provided in the consolidated financial statements, it is possible that we could experience additional unexpected credit losses.
 
The reserve balance for doubtful accounts was $393,000 and $357,000 at April 28, 2019, and April 29, 2018, respectively.

59

 
Inventory Valuation
 
We operate as a “make-to-order” and “make-to-stock” business.  Although management closely monitors demand in each product area to decide which patterns and styles to hold in inventory, the increasing availability of low-cost imports and shifts in consumer preferences expose the company to markdowns of inventory.

Management continually examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value.  Experience has shown that the most significant indicator of the need for inventory markdowns is the age of the inventory and the planned discontinuance of certain patterns.  As a result, the company provides inventory valuation markdowns based upon set percentages for inventory aging categories, generally using six, nine, twelve and fifteen-month categories.  We also provide inventory valuation write-downs based on the planned discontinuance of certain products based on current market values at that time as compared to their current carrying values. While management believes that adequate markdowns for excess and obsolete inventory have been made in the consolidated financial statements, significant unanticipated changes in demand or changes in consumer tastes and preferences could result in additional excess and obsolete inventory in the future.
 
Goodwill
 
In accordance with ASC Topic 350, Intangibles – Goodwill and Other, our operations are currently classified into four reporting units: mattress fabrics, upholstery fabrics, Read Window Products, LLC, and home accessories.
 
We assess goodwill for impairment at the end of each fiscal year or between annual tests if we believe indicators of impairment exist. Such indicators could include but are not limited to (1) deterioration in the environment of the industry and markets in which we operate, (2) unanticipated competition, and (3) a deterioration in general economic conditions. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would conduct a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. We estimate the fair values of our reporting units using a combination of the income or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss.
 
At April 28, 2019 and April 29, 2018, our goodwill totaled $27.2 million and $13.6 million, respectively.
 
Our evaluation of goodwill completed as of April 28, 2019, resulted in no impairment losses.
 
Income Taxes
 
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for temporary differences between the financial statement carrying amounts and the tax bases of the company’s assets and liabilities and operating loss and tax credit carryforwards at income tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred income taxes of a change in income tax rates is recognized in net income (loss) in the period that includes the enactment date.

60

 
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 we 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.
 
Refer to Note 14 located in the notes to the consolidated financial statements for disclosures regarding our assessments of our recorded valuation allowance as of April 28, 2019 and April 29, 2018.
 
Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries
 
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. 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.
 
For fiscal 2019 and beyond, the Tax Act allows a U.S. corporation a 100% dividend received deduction for accumulated earnings and profits from a 10% owned foreign corporation. Therefore, a deferred tax liability will only be required for withholding taxes that are incurred by foreign subsidiaries at the time their accumulated earnings and profits are distributed.
 
Refer to Note 14 located in the notes 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 as of April 28, 2019 and April 29, 2018, respectively.
 
Uncertainty In Income Taxes
 
In accordance with ASC Topic 740, we must recognize the income tax impact from an uncertain income tax position only if it is more likely than not that the income tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The income tax impact recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain income tax positions are recorded as income tax expense. Significant judgment is required in the identification of uncertain income tax positions and in the estimation of penalties and interest on uncertain income tax positions.

Refer to Note 14 located in the notes to the consolidated financial statements for disclosures and additional information regarding our uncertain income tax positions.
 
Stock-Based Compensation
 
ASC Topic 718, “Compensation-Stock Compensation”, requires that all stock-based compensation be recognized as compensation expense in the financial statements and that such cost be measured at the grant date for awards issued to employees and our board of directors. Equity awards issued to non-employees are measured at the earlier date of when the performance criteria are met or at the end of each reporting period.
 
61

 
Compensation expense for our time vested restricted stock awards are amortized on a straight-line basis over the remaining vesting periods. Our common stock awards issued to our board of directors vest immediately, and therefore, compensation cost was measured at the closing price of our common stock on the date of grant and recognized in full at that time. Compensation expense for performance based restricted stock units is recorded based on an assessment each reporting period of the probability that certain performance goals will be met during the contingent vesting period. For performance goals that are not probable of occurrence, no compensation expense will be recognized. Performance goals that were previously deemed probable and subsequently were not or are not expected to be met, previously recognized compensation cost will be reversed. At April 29, 2019, the remaining compensation cost related to our performance based restricted stock units was $328,000.
 
We recorded $130,000, $2.2 million, and $3.4 million of compensation expense within selling, general, and administrative expense for our equity-based awards in fiscal 2019, 2018, and 2017, respectively.

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting". ASU No. 2016-09 was effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2016. Accordingly, we adopted this guidance during the first quarter of fiscal 2018. ASU No. 2016-09 aimed to simplify several aspects of accounting and financial reporting for share-based payment transactions. One provision within this pronouncement requires that excess income tax benefits and deficiencies related to share-based payments be recognized within income tax expense as a discrete event in the period in which they occur, rather than within additional paid-in capital on our Consolidated Balance Sheet on a prospective basis. The impact to our results of operations related to this provision was an income tax charge of $77,000 during fiscal 2019 and an income tax benefit of $497,000, during fiscal 2018. The impact of this provision on our future results of operations will depend in part on the market prices for the shares of our common stock on the dates there are taxable events related to the share-based awards, and therefore, the impact is difficult to predict. In connection with another provision within ASU No. 2016-09, we elected to account for forfeitures of share-based awards as an estimate of the number of awards that are expected to vest, which is consistent with our accounting policy prior to adoption.

Also, we adopted the provisions of ASU No. 2016-09 related to changes on the Consolidated Statements of Cash Flows on a retrospective basis. As a result, we no longer classify excess income tax benefits as a financing activity, which increased net cash provided by operating activities and reduced net cash provided by financing activities by $657,000 for fiscal 2017. Additionally, we no longer classify payments for employee taxes when common stock shares are withheld to satisfy the employer’s statutory income tax withholding obligation as an operating activity, which increased net cash provided by operating activities and reduced net cash provided by financing activities by $429,000 for fiscal 2017.
 
Our equity incentive plans are described more fully in Note 16 in the notes to the consolidated financial statements.
 
Adoption of New Accounting Pronouncements
 
Refer to Note 1 located in the notes to the consolidated statements for recently adopted accounting pronouncements for fiscal 2019.
 
Recently Issued Accounting Standards
 
Refer to Note 1 located in the notes to the consolidated statements for recently issued accounting pronouncements for fiscal 2020 and beyond.
 
62


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
 
We are exposed to market risk from changes in interest rates on our revolving credit lines.

At April 28, 2019, our U.S. revolving credit agreement, as well as eLuxury’s subordinated credit agreement with the owner of its non-controlling interest, require interest to be charged at a rate (applicable interest rate of 3.36% at April 28, 2019) as a variable spread over LIBOR based on Culp's ratio of debt to EBITDA as defined in the U.S. revolving credit agreement. Our revolving credit line associated with our China subsidiaries bears interest at a rate determined by the Chinese government. At April 28, 2019, we did not have any borrowings outstanding under our revolving credit agreement and had $675,000 in borrowings outstanding under the subordinated credit agreement between eLuxury and the owner of its non-controlling interest.
 
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 U.S. dollar as their functional currency. A substantial portion of the company’s imports purchased outside the U.S. are denominated in U.S. dollars. A 10% change in the above exchange rates at April 28, 2019, would not have had a significant impact on our results of operations or financial position.

63


ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Culp, Inc.:
 
Opinion on the financial statements
 
We have audited the accompanying consolidated balance sheets of Culp, Inc. (a North Carolina Corporation) and subsidiaries (the “Company”) as of April 28, 2019 and April 29, 2018, the related consolidated statements of net income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended April 28, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the company as of April 28, 2019 and April 29, 2018, and the results of its operations and its cash flows for each of the three years in the period ended April 28, 2019, in conformity with accounting principles generally accepted in the United States of America.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of April 28, 2019, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated July 12, 2019 expressed an unqualified opinion.
 
Basis for opinion
 
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/s/ GRANT THORNTON LLP
 
We have served as the Company’s auditor since fiscal 2008.
 
Charlotte, North Carolina
 
July 12, 2019
 
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CONSOLIDATED BALANCE SHEETS        
 

       
 
(dollars in thousands, except per share data and preferred and common stock shares)  
   
 

       
 
April 28, 2019 and April 29, 2018   2019     2018  
ASSETS        
 
current assets:        
 
cash and cash equivalents   $ 40,008     $ 21,228  
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