Culp, Inc. manufactures, sources, and markets mattress fabrics (also known as mattress ticking) used for covering mattresses and box springs, and upholstery fabrics primarily for use in production of upholstered furniture (residential and commercial).
We believe that Culp is the largest producer of mattress fabrics in North America, as measured by total sales, and one of the largest marketers of upholstery fabrics for furniture in North America, again measured by total sales. Our mattress fabrics are used primarily in the production of bedding products, including mattresses, box springs, and mattress sets. Our upholstery fabrics are used in the production of residential and commercial upholstered furniture, sofas, recliners, chairs, loveseats, sectionals, sofa-beds, and office seating. Culp primarily markets fabrics that have broad appeal in the “good” and “better” priced categories of furniture and bedding.
We have two operating segments - mattress fabrics and upholstery fabrics. The mattress fabric business markets woven and knitted fabrics used by bedding manufacturers. The upholstery fabrics segment markets a variety of products in most categories of fabric used as coverings for furniture.
Culp markets a variety of fabrics in different categories, including fabrics produced at our manufacturing facilities and fabrics produced by other suppliers. The company had eight active manufacturing plants and distribution facilities as of the end of fiscal 2009, which are located in North and South Carolina, Quebec, Canada, and Shanghai, China. We also source fabrics from other manufacturers, located primarily in China, Turkey and in the U.S., with almost all of those fabrics being produced specifically for the company and created by Culp designers. We operate distribution centers in North Carolina and Shanghai, China to facilitate distribution of our products. In recent years, 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 especially strong in the upholstery fabrics segment, where more than three-fourths of our sales now consist of fabrics produced in Asia.
Total net sales in fiscal 2009 were $204 million. The mattress fabrics segment had net sales of $115 million (57% of total net sales), while the upholstery fabrics segment had net sales of $89 million (43% of total net sales). Fiscal 2008 was the first year that mattress fabric sales exceeded upholstery fabric sales for a full year and the proportion of sales represented by mattress fabric was even higher in fiscal 2009.
Sales declined in both of our segments during fiscal 2009 as compared to fiscal 2008. These declines were mostly caused by extremely weak business conditions in the home furnishings industry, which affects both of our business segments. The decrease in mattress fabrics was smaller (at 16%), while upholstery sales declined by 24%. The decline in mattress fabrics sales reversed a trend of increasing sales in recent years, but the upholstery fabrics decline continued a trend of decreasing sales that has persisted over the last several years.
In mattress fabrics, knitted fabrics has been a growing portion of our sales, as consumer demand for this type of mattress panel covering has risen significantly. During fiscal 2009, we acquired the knitted fabrics business of Bodet & Horst USA, including its manufacturing operation in High Point, North Carolina, which had served as our primary source of knitted mattress fabrics for six years. This acquisition provided us with more control over our ability to supply bedding customers with this increasingly important fabric type.
During the second half of fiscal 2009, we implemented a comprehensive profit improvement plan in the upholstery fabrics segment, which built upon restructuring actions and cost-savings measures we had taken in prior years. This plan had the effect of improving our financial results significantly, despite the lower sales environment. In the upholstery fabrics segment, a significant and growing portion of our fabrics are now produced by other manufacturers, but in most cases the company continues to control important components of the production process, such as design, finishing, quality control and distribution. Microdenier suedes and a variety of other fabrics are now sourced in China through our sourcing, finishing and distribution operation located near Shanghai.
Overall, Culp faced a difficult business environment during all of fiscal 2009, as demand for both bedding and furniture were weak. Management took action to respond to these conditions by scaling back operations where appropriate, controlling costs in other areas, and eliminating complexity from our business, while maintaining a focus on providing customers with products that remain in demand, upholding high levels of customer service, and pursuing a strategic acquisition to secure a key product category. The company continues to position itself as a more flexible fabric producer and marketer, with a smaller fixed asset base than in prior years, and with a more variable cost structure that will allow us to take advantage of opportunities in the bedding and furniture industries as they occur.
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.” 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.culpinc.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.
Mattress Fabrics. The mattress fabrics segment manufactures and markets mattress fabric to bedding manufacturers. These fabrics encompass woven jacquard fabric, knitted fabric and, to a lesser extent, printed fabric. Culp Home Fashions, as this business is known in the trade, has manufacturing facilities located in Stokesdale and High Point, North Carolina, and St. Jerome, Quebec, Canada. The Stokesdale and St. Jerome plants manufacture and finish jacquard (damask) fabric, and the Stokesdale plant also produces printed fabric. The Stokesdale plant houses the division offices and finished goods distribution capabilities. In August 2008, a third manufacturing plant facility was added when we acquired the knitted mattress fabrics business of Bodet & Horst USA, including its manufacturing facilities in High Point. We have also maintained flexibility in our supply of the major categories of mattress fabrics. All woven jacquard and knitted fabrics can be produced in multiple facilities, (internal or external to the company) providing us with mirrored, reactive capacity.
In recent years, we have taken significant steps to enhance our competitive position in this segment by consolidating all of our mattress fabrics manufacturing into these three manufacturing facilities. The company had capital expenditures during the period fiscal 2005 through 2009 totaling approximately $20.0 million, most of which related to purchase of new weaving machines that are faster and more efficient than the equipment they replaced. Additionally, we had a $1.3 million capital project in fiscal 2008 that significantly enhanced our finishing capabilities in this segment. More recently, during fiscal 2009 we completed a $5.0 million capital project in Stokesdale and St. Jerome to enhance our weaving and finishing capabilities and further increase our capacity and service performance.
The Bodet & Horst acquisition was another step to enhance and secure our competitive position, as we invested $11.4 million to purchase the manufacturing operation that had been serving as our primary source of knitted mattress fabrics for six years. Knitted fabrics have been an increasingly important category of mattress fabrics, with industry sales in this type of fabric growing much faster than other categories. The completion of this acquisition during fiscal 2009 not only secured our supply of knitted mattress fabrics, but allowed for improved supply logistics, greater control of product development, and accelerated responsiveness to our customers. The acquisition included the purchase of equipment, inventory and intellectual property associated with the business, as well as the assumption of a lease for the High Point manufacturing facility. The transaction was financed by the issuance of $11.0 million of unsecured notes with a term of seven years.
Upholstery Fabrics. The upholstery fabrics segment markets fabrics for residential and commercial furniture, including jacquard woven fabrics, velvets, microdenier suedes, woven dobbies, knitted fabrics, and piece-dyed woven products. Historically, all of our upholstery fabrics had been produced in our U.S. manufacturing plants. In fiscal year 2007, however, sales of upholstery fabrics made in non-U.S. locations, including our facilities in China, exceeded U.S.-produced sales for the first time. This trend continued during the next two years, with non-U.S. produced upholstery accounting for almost 77% of our upholstery sales for fiscal 2009 (81% in the fourth quarter).
The upholstery segment operates fabric manufacturing facilities in Anderson, South Carolina, and Shanghai, China. We market fabrics produced in these two locations, as well as a variety of upholstery fabrics sourced from third party producers, mostly in China.
As demand for U.S.-produced upholstery has declined significantly, we took aggressive steps to reduce our U.S. manufacturing costs, capacity, and selling, general and administrative expenses. Our restructuring actions over the past several years reduced our U.S. upholstery operations to the one manufacturing plant in South Carolina and one upholstery distribution facility in Burlington, North Carolina.
The down-sizing of our U.S. upholstery operations represents the continuation of a longer-term trend that has affected the company and the upholstery fabric business for the past eight years. At the end of fiscal 2000, we had fourteen manufacturing plants in the U.S. for upholstery fabrics, with total sales in the segment of $382 million. Total segment sales for fiscal 2009 were $89 million.
During the time that U.S. upholstery operations were shrinking, we established operations in China and gradually expanded them over time to include a variety of activities. The facilities near Shanghai began operations in 2004 with a finishing and inspection operation, where goods woven in China by selected outside suppliers are treated with finishing processes and subjected to U.S. quality control measures before being distributed to customers. In subsequent years, a variety of finished goods (with no further finishing needed) began to be sourced through our China operations, and in fiscal 2006 the operation was expanded to include a facility where upholstery fabrics are cut and sewn into “kits” that are made to the specifications of furniture manufacturing customers in the U.S. Cut and sewn “kit” operations have become an important method for furniture producers to reduce production costs by moving a larger percentage of the labor component of furniture manufacturing to lower cost environments. Other recent developments in our China operations include expansion of our product development and design capabilities in China and further strengthening of key strategic partnerships with mills. We also expanded our marketing efforts to sell our China products in countries other than the U.S., including the Chinese local market.
As our China operation increased the variety of its activities, we took steps to maintain the flexibility of the operation to expand or contract with demand for our products. As business conditions weakened during fiscal 2009 and demand decreased dramatically, we took action to consolidate the China operation and substantially reduce its scale and cost structure. During the year, our China operation was reduced from six facilities to three, with cost reductions of approximately $5 million on an annualized basis.
During these changes in the size of our upholstery operations, our basic strategic approach has not changed. We have moved our upholstery business 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. At the same time, we have attempted to maintain 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 to lower the costs of our products significantly, while continuing to leverage our design and finishing expertise, industry knowledge and important relationships. In this way, we maintain our ability to provide furniture manufacturers with products from every category of fabric used to cover upholstered furniture, and to meet continually changing demand levels and consumer preferences.
Overview of Industry and Markets
Culp markets products primarily to manufacturers that operate in three principal markets. The mattress fabrics segment supplies the bedding industry, which produces mattress sets (mattresses, box springs, and foundations). The upholstery fabrics segment 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, sleep sofas, chairs, recliners and sectionals. The commercial furniture and fabrics market includes upholstered office seating and modular office systems sold primarily for use in offices and other institutional settings, and commercial textile wall covering. The principal industries into which the company sells products are described below.
Overview of Bedding Industry
After many years of steady growth, both in unit volume and average selling prices, the bedding industry experienced a decrease in overall sales in 2008, due to the weak economy and an especially weak housing market. According to the International Sleep Products Association (ISPA), a trade association, the U.S. wholesale bedding industry accounted for an estimated $6.2 billion in sales in 2008, a 9.1% decrease from 2007. The industry is comprised of several hundred manufacturers, but the largest four manufacturers accounted for more than 59% of the total wholesale shipments in 2008, while the top fifteen accounted for approximately 81%. Until recently, the bedding industry has been mature and stable, averaging approximately 6% growth over a twenty year period, with only one year in the twenty years before 2008 experiencing a decline in revenue (by 0.3% in 2001). This stability has been partly due to replacement purchases, which account for an estimated 70% of bedding industry sales. During 2008, however, the U.S. mattress retail environment slowed due to weakened economic conditions. This weakness has persisted into 2009, with significant decreases in bedding sales being reported for the first half of this calendar year.
Despite the overall weakness in the bedding market, the trend toward higher average selling prices for mattresses sold in the U.S. continued during 2008. According to ISPA, while wholesale sales of bedding decreased 9.1% in 2008, the number of units sold decreased by 11.0%. There are indications, however, that sales of higher priced bedding have suffered disproportionally in the current economic downturn. In particular, sales of specialty bedding products, including foam and air-adjustable mattresses, have experienced significant declines after enjoying a position as a faster growing category of bedding prior to 2008. According to industry statistics, specialty bedding producers, which produce mattresses that do not use inner spring construction, saw sales decrease by 17.8% in 2008.
Unlike the residential furniture industry, which has faced intense competition from imports, the bedding industry has faced limited competition from imports. The primary reasons for this fact include: 1) the short lead times demanded by mattress manufacturers and retailers, 2) the limited inventories carried by manufacturers and retailers, 3) the customized nature of each manufacturer and retailer’s product lines, 4) high shipping costs, 5) the relatively low direct labor content in mattresses, and 6) strong brand recognition.
Other key trends in the bedding industry include:
Consumers have become increasingly aware of and are concerned with the health benefits of better sleep. This has caused an increased focus on the quality of bedding products and an apparent willingness on the part of consumers to pay more for bedding. The average selling price of mattress sets has increased in recent years. In recent months, however, due to the economic slowdown, consumers have begun to move toward more value priced mattresses, which over time could lead to a lower overall average price for mattress sets.
Mattress manufacturers are using common SKUs and less expensive fabric for borders, which is the ticking that goes around the side of the mattresses and box springs. Virtually all of these border fabrics are woven damask ticking of the type we manufacture, and this trend has caused significant pricing pressures in this category of mattress fabric.
The production of flame-resistant materials for bedding is an increasingly important issue for bedding manufacturers. A national standard for flame resistance in bedding became effective July 1, 2007.
There is increasing popularity of knitted mattress ticking, as opposed to woven and printed ticking. Knitted ticking was initially used primarily on premium mattresses, but these products are now being placed increasingly on mattresses at mid-range retail price points. Knitted fabric is typically used on the top panel of a mattress, while woven ticking remains the predominant fabric on the borders or sides of mattress sets.