Market Overview

Culp Announces Results for Fourth Quarter and Fiscal 2017

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Culp, Inc. (NYSE:CFI) today reported financial and operating
results for the fourth quarter and fiscal year ended April 30, 2017.

Fiscal 2017 Full Year Highlights

  • Net sales were $309.5 million, down 1.1 percent compared with the
    prior year, with mattress fabric sales up 2.4 percent, a record year,
    and upholstery fabric sales down 6.1 percent over the prior year.
  • Pre-tax income was $29.7 million, the highest annual pre-tax income in
    Culp's history, and a 6.4 percent increase compared with the previous
    record of $27.9 million in pre-tax income for fiscal 2016.
  • Net income was $22.3 million, or $1.78 per diluted share, compared
    with net income of $16.9 million, or $1.36 per diluted share, in
    fiscal 2016.
  • Return on capital was 32 percent, equal to last year's record
    performance.
  • Cash flow from operations was $33.0 million, up from $26.8 million in
    fiscal 2016. Free cash flow for the year was strong at $18.3 million,
    up 20 percent compared with $15.2 million last year, after spending
    $14.0 million in capital expenditures, including vendor-financed
    payments and investment in Haiti.
  • Cash and cash equivalents, short-term investments and long-term
    investments held-to-maturity totaled $54.2 million, up 29 percent and
    a record level, compared with $42.1 million at the end of the previous
    fiscal year, with no debt outstanding.
  • Capital expenditures, including vendor-financed payments and
    investment in Haiti, totaled $14.0 million, compared with $11.5
    million a year ago.
  • For fiscal 2017, the company paid $6.3 million in dividends, of which
    $2.6 million was for a special dividend.

Fiscal 2017 Fourth Quarter Highlights

  • Net sales were $77.4 million, with both mattress fabric sales and
    upholstery fabric sales relatively flat compared with the fourth
    quarter last year.
  • Pre-tax income was $7.0 million, which included approximately $250,000
    of plant consolidation expenses, down 2.3 percent compared with $7.2
    million in the fourth quarter of fiscal 2016.
  • The GAAP effective income tax rate was 11.1 percent; the consolidated
    adjusted effective income tax rate was 17.5 percent
  • Net income was $6.2 million, or $0.49 per diluted share, compared
    with net income of $3.6 million, or $0.29 per diluted share, in the
    prior year period.
  • The company announced a special cash dividend of $0.21 per share,
    equal to last year's payment and the fifth special dividend in the
    past six fiscal years, and a quarterly cash dividend of $0.08 per
    share, both payable in July 2017.

Financial Outlook for First Quarter Fiscal 2018

  • The projection for first quarter fiscal 2018 is for overall sales to
    be comparable to the previous year's first quarter. Pre-tax income for
    the first quarter of fiscal 2018 is expected to be in the range of
    $7.8 million to $8.4 million. Included in this range is approximately
    $300,000 of expected plant consolidation expenses. Pre-tax income for
    the first quarter of fiscal 2017 was $8.5 million. The company expects
    fiscal 2018 to be another solid year for free cash flow.

Overview

For the fourth quarter ended April 30, 2017, net sales were $77.4
million, compared with $77.3 million a year ago. On a pre-tax basis, the
company reported income of $7.0 million, which included approximately
$250,000 of plant consolidation expenses, compared with pre-tax income
of $7.2 million for the fourth quarter of fiscal 2016. The company
reported net income of $6.2 million, or $0.49 per diluted share, for the
fourth quarter of fiscal 2017, compared with net income of $3.6 million,
or $0.29 per diluted share, for the fourth quarter of fiscal 2016. The
effective GAAP income tax rate was 11.1 percent for the fourth quarter
of fiscal 2017, compared with 49.8 percent for the fourth quarter of
last year. The 11.1 percent effective income tax rate was primarily
affected by a reversal of an uncertain income tax position in a foreign
jurisdiction. The consolidated adjusted effective income tax rate was
17.5 percent for the fourth quarter of fiscal 2017, compared with 18.6
percent for the prior year. (A reconciliation of consolidated adjusted
effective income tax rate to consolidated GAAP effective income tax rate
is presented on page 7.)

Net sales for fiscal 2017 were $309.5 million, compared with net sales
of $312.9 million in fiscal 2016. On a pre-tax basis, the company
reported income of $29.7 million for fiscal 2017, compared with pre-tax
income of $27.9 million in fiscal 2016. Net income for fiscal 2017 was
$22.3 million, or $1.78 per diluted share, compared with $16.9 million,
or $1.36 per diluted share, in fiscal 2016.

Commenting on the results, Frank Saxon, president and chief executive
officer of Culp, Inc., said, "Our results for the fourth quarter were in
line with expectations, capping off an outstanding performance for Culp
in fiscal 2017 in spite of a more challenging retail environment for
home furnishings. While our overall annual sales were slightly lower
than the prior year, our mattress fabric segment had another record
performance with total annual sales surpassing the previous year's
level. Notably, our pre-tax income for the year was the highest in the
company's history. Further, we achieved excellent cash flow from
operations and free cash flow and continued high returns on capital for
the year. Finally, we ended the year with no debt and $54.2 million in
total cash and investments, which is the highest level achieved in the
company's history.

"Throughout fiscal 2017, we demonstrated consistent execution of our
product-driven strategy in both businesses, as a result of our
relentless focus on design creativity and product innovation. Our
ability to offer a diverse product mix and meet the changing demands of
our customers has served us well in the marketplace. At the same time,
we have continued to make substantial investments in our mattress fabric
business to enhance our production capabilities, improve our operating
efficiencies and continue to provide exceptional customer service. Our
newest product introductions and ability to reach different market
segments have produced favorable results for the upholstery fabric
business, and we look forward to the opportunities ahead to build on
this momentum.

"We are pleased to announce today that our Board of Directors approved a
special cash dividend of $0.21 per share, which is equal to last year's
payment and in line with our capital allocation strategy, as well as
approved our regular quarterly cash dividend of $0.08 per share. This
marks the fifth special dividend payment in the past six years for Culp.
We are proud of our dividend history, reflecting our commitment to
delivering value to our shareholders. At the same time, we have the
financial strength and cash flow generation to support our strategy and
take advantage of additional growth opportunities, including a more
active look at potential strategic acquisitions in each of our
businesses. Having sufficient capital ready to deploy is an important
part of our capital allocation strategy and a vital element in meeting
our growth objectives," added Saxon.

Mattress Fabric Segment

Sales for this segment were $48.8 million for the fourth quarter, down
0.1 percent, compared with sales of $48.9 million in the fourth quarter
of fiscal 2016. For fiscal 2017, mattress fabric sales were $190.8
million, up 2.4 percent, compared with $186.4 million in fiscal 2016.

"Our results for the fourth quarter were in line with expectations,
reflecting consistent execution of our strategy during a period of
disruption in the mattress industry and a soft retail sales
environment," said Iv Culp, president of Culp's mattress fabric
division. "Overall, we were pleased to meet our objectives for the
quarter.

"Notably, we delivered another record performance in fiscal 2017,
topping the previous year's results with the highest annual mattress
fabric sales and profits in Culp's history. Our focus on design and
innovation continues to distinguish our products in the marketplace.
Having a favorable product mix of mattress fabrics and sewn covers
across most price points and style trends has allowed us to execute our
diversification strategy and enhance our strong value proposition.

"We are especially pleased to achieve these outstanding results during a
period of major transition across our production facilities. Throughout
the past year, we have made substantial investments and significant
changes within our multi-country production facilities that will enable
us to build upon our success and improve our service to customers. Our
expansion projects in North Carolina, including a new distribution
center and knitted fabric plant consolidation, were substantially
complete as of the fourth quarter of fiscal 2017. We expect to have all
of the equipment relocated and new installations finalized during the
first quarter of fiscal 2018. As a result, we will have expanded our
capacity and created a more efficient production platform to support our
continuous improvement initiatives and long-term growth strategy.
Additionally, we completed the expansion at our Canadian operation, with
additional finishing equipment and a new distribution center that will
allow us to ship directly to our customers in Canada. Together, these
major investments will significantly enhance our ability to serve all of
our customers and strengthen Culp's leadership position in North America.

"Our results for the year include a growing contribution from CLASS, our
mattress cover business. Importantly, CLASS has allowed us to develop
new products with our core customers and to reach new customers and
additional market segments, especially the Internet ‘bed in a box'
space, with solid growth prospects. Along with our other consolidation
projects in North Carolina, we plan to move our CLASS production
platform during July 2017 to a new location that offers more efficient
and streamlined production flow and access to a larger labor pool.
Additionally, this facility will include expanded showroom and product
development space to further support our ability to capture new market
opportunities and respond to changing demand trends with more robust
product development activity. Our previously announced joint venture
mattress cover production facility in Haiti is under construction and is
expected to commence operations in September or October 2017. This new
operation will complement our U.S. production capabilities with
additional capacity via a mirrored platform, thus improving our ability
to meet customer demand while remaining cost-competitive.

"Looking ahead, we are well positioned to execute our strategy in spite
of the current uncertainty in the mattress industry. We have a solid
market position throughout the industry with strong customer
relationships in all product categories. More importantly, we have
worked hard to create a sustainable production and distribution platform
that will favorably position Culp for the long-term. While short-term
demand trends remain uncertain, we are confident in our ability to
deliver another solid performance in fiscal 2018," said Culp.

Upholstery Fabric Segment

Sales for this segment were $28.5 million for the fourth quarter, up 0.6
percent compared with sales of $28.4 million in the fourth quarter of
fiscal 2016. For fiscal 2017, upholstery fabric sales were $118.7
million, down 6.1 percent compared with $126.4 million in fiscal 2016.

"Our results for the fourth quarter of fiscal 2017 were in line with
expectations," noted Boyd Chumbley, president of Culp's upholstery
fabrics division. "In spite of relatively flat sales growth, we were
pleased with our overall operating performance and higher profitability
compared with the fourth quarter of fiscal 2016.

"For fiscal 2017, while the modest decline in annual sales reflects the
soft retail environment for residential furniture that has persisted for
most of the past fiscal year, we were able to grow margins and report
comparable profitability to last year. In spite of the market
challenges, we continued to execute our product-driven strategy with a
sustained focus on innovation and creative designs, offering a more
diverse product mix and expanding our sales into new markets. Over the
past year, we made progress in each of these key areas of focus. Our
design team has done an outstanding job in keeping pace with current
style trends and meeting the changing demands of our customers. Notably,
our ‘performance line' of highly durable, stain-resistant upholstery
fabrics was a strong performer for Culp in fiscal 2017. We are
encouraged by the momentum we are seeing in this product category, and
we look forward to the additional sales opportunities this provides for
Culp.

"While we faced a generally weaker sales environment in the residential
furniture market, we achieved meaningful sales growth in the hospitality
area, which accounted for a higher percentage of our overall sales in
fiscal 2017 compared with the prior year. This trend is encouraging, as
we continue our focus on diversifying our sales mix.

"Our global production capabilities provide a strong competitive
advantage for Culp, and we have continued to leverage our flexible and
scalable China platform to support our product-driven strategy. Sales of
China produced fabrics accounted for 92 percent of upholstery fabric
sales in fiscal 2017, and our operating performance for the year
reflects an increasingly diverse product mix of fabric styles and price
points as well as a more favorable currency exchange rate in China.

"Looking ahead, in spite of uncertain retail market conditions, we have
many reasons to be optimistic about the opportunities for our upholstery
fabric business. Our recent showing at the April furniture market was
encouraging with strong placements for Culp, especially with our
‘performance line' of fabrics, providing confidence in our sales
prospects for fiscal 2018. We will continue to pursue our same
product-driven strategy and identify new market opportunities, including
exploring potential acquisitions in the hospitality market that will
complement our upholstery fabric business, which is principally in the
residential market. As the overall economy, housing market and consumer
confidence improves, we believe Culp is well positioned to benefit from
a return to more robust spending for home furnishings," said Chumbley.

Balance Sheet

"We are pleased to end fiscal 2017 with a strong financial position,"
added Ken Bowling, senior vice president and chief financial officer of
Culp, Inc. "As of April 30, 2017, we reported $54.2 million in cash and
cash equivalents, short-term investments and long-term investments
held-to-maturity, a record level for Culp and up 29 percent from the
previous year's ending balance of $42.1 million, with no debt. This year
over year increase in cash was achieved despite spending $14.0 million
for capital expenditures, including vendor-financed payments and
investment in Haiti, and returning $6.3 million to shareholders in
regular and special dividends. Cash flow from operations for fiscal 2017
was $33.0 million, compared with $26.8 million in fiscal 2016. Free cash
flow for the year was $18.3 million, compared with last year's $15.2
million, representing a 20 percent year over year increase. (See
reconciliation of free cash flow on page 8).

"As we look to fiscal 2018, we expect another solid year of free cash
flow, with capital expenditures expected to be comparable to fiscal 2017
and modest projected growth in working capital. We are well positioned
to make the capital investments and any potential acquisitions that may
develop to support our growth strategy, as well as continue to return
funds to our shareholders," added Bowling.

Dividends and Share Repurchases

Consistent with its capital allocation strategy to return funds to
shareholders through dividends and share repurchases, the company
announced that its Board of Directors has approved the payment of a
special cash dividend of $0.21 per share. In addition, the Board
approved the payment of the company's quarterly cash dividend of $0.08
per share. Both of these payments will be made on July 17, 2017, to
shareholders of record as of July 3, 2017.

The company did not repurchase any shares in fiscal 2017, leaving $5.0
million available under the share repurchase program approved by the
Board in June 2016.

Since June 2011, and including the special and regular dividends to be
paid in July, the company will have returned approximately $50.0 million
to shareholders in the form of regular quarterly and special dividends
and share repurchases.

Financial Outlook for First Quarter Fiscal 2018

Commenting on the outlook for the first quarter of fiscal 2018, Saxon
remarked, "At this time, we expect overall sales to be comparable to the
first quarter of fiscal 2017.

"With ongoing uncertainty in the mattress industry, we expect first
quarter sales in our mattress fabric business to be slightly lower than
the first quarter of fiscal 2017, which was an exceptionally strong
first quarter performance. Operating income and margins in this segment,
including approximately $300,000 in plant consolidation expenses, are
expected to be moderately lower than the record quarterly performance
for the same period a year ago. Overall, we expect to see improvement in
our quarterly operating results as we move forward in fiscal 2018.

"In our upholstery fabrics business, we expect first quarter sales to be
slightly higher compared with the first quarter of fiscal 2017. We
believe the upholstery fabrics segment's operating income and margins
will be slightly higher compared with the same quarter of last year.

"Considering these factors, the company expects to report pre-tax income
for the first fiscal quarter of 2018 in the range of $7.8 million to
$8.4 million, including approximately $300,000 in plant consolidation
expenses. Pre-tax income for last year's first quarter was $8.5 million.

"Based on our current budget, capital expenditures for fiscal 2018 are
expected to be comparable to the previous year. Additionally, the
company expects another solid year of free cash flow, even after another
year of high capital expenditures and modest growth in working capital."

In closing, Saxon remarked, "We are pleased with Culp's performance in
fiscal 2017 and our ability to execute our strategy in an uncertain
market environment. Our success reflects our capacity to leverage our
outstanding design capabilities and deliver a diverse range of
innovative fabrics that keep pace with customer demand and style trends.
At the same time, we are identifying new market opportunities and
positioning Culp for growth in those markets. Importantly, we have
followed a disciplined capital allocation strategy, allowing us to make
substantial capital investments to support our continued growth and
return significant funds to shareholders. While short-term demand trends
for home furnishings are difficult to predict, we believe Culp is well
positioned in the marketplace, and we look forward to the opportunities
before us in fiscal 2018."

About the Company

Culp, Inc. is one of the world's largest marketers of mattress fabrics
for bedding and upholstery fabrics for residential and commercial
furniture. The company markets a variety of fabrics to its global
customer base of leading bedding and furniture companies, including
fabrics produced at Culp's manufacturing facilities and fabrics sourced
through other suppliers. Culp has operations located in the United
States, Canada and China.

This press release contains "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 27A of the Securities and Exchange Act of 1934).
Such
statements are inherently subject to risks and uncertainties.
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 such statements.

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," "estimate," "plan" and "project" and their derivatives, and
include but are not limited to statements about expectations for our
future operations, production levels, 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 measures, as well as any statements
regarding future economic or industry trends or future developments.
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. Changes in consumer tastes or preferences toward
products not produced by us could erode demand for our products. 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. 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, is
included in Item 1A "Risk Factors" in our Form 10-K filed with the
Securities and Exchange Commission on July 15, 2016, for the fiscal year
ended May 1, 2016.

               
 

CULP, INC.

Condensed Financial Highlights

(Unaudited)

 

 

Three Months Ended

Fiscal Year Ended

April 30,

May 1,

April 30,

May 1,

2017

2016

2017

2016

 
Net sales $ 77,350,000 $ 77,253,000 $ 309,544,000 $ 312,860,000
Income before income taxes $ 6,999,000 $ 7,167,000 $ 29,696,000 $ 27,898,000
Net income $ 6,198,000 $ 3,601,000 $ 22,334,000 $ 16,935,000
Net income per share:
Basic $ 0.50 $ 0.29 $ 1.81 $ 1.38
Diluted $ 0.49 $ 0.29 $ 1.78 $ 1.36
 
Average shares outstanding:
Basic 12,340,000 12,257,000 12,312,000 12,302,000
Diluted 12,567,000 12,434,000 12,518,000 12,475,000
             

Consolidated Adjusted Effective Income Tax Rate

For the Twelve Months Ended April 30, 2017, and May 1, 2016

(Unaudited)

(Amounts in Thousands)

 
TWELVE MONTHS ENDED
   
Amounts
April 30, May 1,
2017 2016
 
 
Consolidated Effective GAAP Income Tax Rate (1) 24.7% 39.3%
 
Non-Cash U.S. Income Tax Expense (18.2)% (20.3)%
 
Reversal of Foreign Uncertain Income Tax Position 11.6% 0.0%
 
Other Non-Cash Foreign Income Tax Expense (0.6)% (0.4)%
 
Consolidated Adjusted Effective Income Tax Rate (2) 17.5% 18.6%
 
 
 
(1) Calculated by dividing consolidated income tax expense by
consolidated income before income taxes.
 
(2) Represents estimated cash income tax expense for our
subsidiaries located in Canada and China divided by consolidated
income before income taxes.
       

 

Reconciliation of Free Cash Flow

For the Twelve Months Ended April 30, 2017, and May 1, 2016

(Unaudited)

(Amounts in thousands)

 
Twelve Months Ended

Twelve Months Ended

April 30, 2017 May 1, 2016
 
Net cash provided by operating activities $ 32,981 $ 26,795
Minus: Capital expenditures (11,858 ) (11,475 )
Minus: Investment in unconsolidated joint venture (1,129 ) -
Add: Proceeds from the sale of equipment 141 233
Minus: Payments on life insurance policy (18 ) (18 )
Minus: Payments on vendor-financed capital expenditures (1,050 ) -
Minus: Purchase of long-term investments (Rabbi Trust) (1,351 ) (1,649 )
Add: Excess tax benefits related to stock-based compensation 657 841
Effect of exchange rate changes on cash and cash equivalents   (56 )   498  
 
Free Cash Flow $ 18,317   $ 15,225  
                           

Reconciliation of Return on Capital

For the Twelve Months Ended April 30, 2017, and May 1, 2016

(Unaudited)

(Amounts in thousands)

 
Twelve Months Ended Twelve Months Ended
April 30, 2017 May 1, 2016

 

 
Consolidated Income from Operations $ 30,078 $ 28,338
Average Capital Employed (2)   95,055     88,691  
 
Return on Average Capital Employed (1)   31.6 %   32.0 %
 
Average Capital Employed
 
April 30, 2017 January 29, 2017 October 30, 2016 July 31, 2016 May 1, 2016
 
Total assets $ 205,634 $ 191,056 $ 179,127 $ 183,360 $ 175,142
Total liabilities   (57,004 )   (48,742 )   (43,178 )   (51,925 )   (46,330 )
 
Subtotal $ 148,630 $ 142,314 $ 135,949 $ 131,435 $ 128,812
Less:
Cash and cash equivalents (20,795 ) (15,659 ) (13,910 ) (45,549 ) (37,787 )
Short-term investments (2,443 ) (2,410 ) (2,430 ) (2,434 ) (4,359 )
Long-term investments - Held-to-Maturity (30,945 ) (30,832 ) (31,050 ) - -
Long-term investments - Rabbi Trust (5,466 ) (5,488 ) (4,994 ) (4,611 ) (4,025 )
Income taxes receivable - - - - (155 )
Deferred income taxes - non-current (419 ) (422 ) (581 ) (1,942 ) (2,319 )
Income taxes payable - current 287 217 513 358 180
Income taxes payable - long-term 467 1,817 3,734 3,779 3,841
Deferred income taxes - non-current 3,593 2,924 1,699 1,532 1,483
Line of credit - - - 7,000 -
Deferred compensation   5,520     5,327     5,171     5,031     4,686  
Total Capital Employed $ 98,429   $ 97,788   $ 94,101   $ 94,599   $ 90,357  
 
Average Capital Employed (2) $ 95,055  
 
 
May 1, 2016 January 31, 2016 November 1, 2015 August 2, 2015 May 3, 2015
 
Total assets $ 175,142 $ 173,551 $ 168,947 $ 166,879 $ 171,300
Total liabilities   (46,330 )   (48,477 )   (45,972 )   (48,154 )   (51,873 )
 
Subtotal $ 128,812 $ 125,074 $ 122,975 $ 118,725 $ 119,427
Less:
Cash and cash equivalents (37,787 ) (31,713 ) (31,176 ) (25,933 ) (29,725 )
Short-term investments (4,359 ) (4,259 ) (6,320 ) (6,336 ) (10,004 )
Long-term investments - Rabbi Trust (4,025 ) (3,590 ) (3,279 ) (2,893 ) (2,415 )
Income taxes receivable (155 ) (23 ) (75 ) (142 ) (229 )
Deferred income taxes - non-current (2,319 ) (4,312 ) (3,415 ) (4,405 ) (5,169 )
Current maturities of long-term debt - - - 2,200 2,200
Income taxes payable - current 180 622 305 392 325
Income taxes payable - long-term 3,841 3,480 3,655 3,634 3,792
Deferred income taxes - non-current 1,483 1,209 1,206 1,071 982
Deferred compensation   4,686     4,495     4,421     4,280     4,041  
Total Capital Employed $ 90,357   $ 90,983   $ 88,297   $ 90,593   $ 83,225  
 
 
Average Capital Employed (2) $ 88,691  
 
 
Notes:
 

(1) Return on average capital employed represents operating
income for the fiscal 2017 or 2016 divided by average capital
employed. Average capital employed does not include cash and cash
equivalents, short-term investments, long-term investments - Held
-To-Maturity, long-term investments - Rabbi Trust, current
maturities of long-term debt, line of credit, noncurrrent deferred
tax assets and liabilities, income taxes receivable and payable,
and deferred compensation.

 

(2) Average capital employed used for the twelve months ending
April 30, 2017 was computed using the five quarterly periods
ending April 30, 2017, January 29, 2017, October 30, 2016, July
31, 2016 and May 1, 2016. Average capital employed used for the
twelve months ending May 1, 2016 was computed using the five
quarterly periods ending May 1, 2016, January 31, 2016, November
1, 2015, August 2, 2015 and May 3, 2015.

 

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