Culp, Inc. Fiscal 2023 First-Quarter 10-Q Summary
Business Context and Reporting Period
Culp, Inc. manufactures, sources, and sells mattress fabrics and upholstery fabrics, including window treatments and related services through Read Window Products. The filing covers the 13-week quarter ended July 31, 2022, compared with the 13-week quarter ended August 1, 2021.
Key Financial Metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $62.6 million | $83.0 million | Down 24.6% |
| Gross profit | $4.1 million | $12.5 million | Down 67.0% |
| Gross margin | 6.6% | 15.1% | Down 850 basis points |
| SG&A | $8.9 million | $9.2 million | Down 3.4% |
| Operating income (loss) | $(4.7) million | $3.3 million | Declined $8.1 million |
| Operating margin | (7.6%) | 4.0% | Down 1,160 basis points |
| Net income (loss) | $(5.7) million | $2.3 million | Declined $8.0 million |
| Diluted EPS | $(0.47) | $0.18 | Declined $0.65 |
| Operating cash flow | $5.3 million | $1.6 million | Increased $3.7 million |
| Capital expenditures | $0.7 million | $2.0 million | Decreased $1.3 million |
Mattress fabrics sales declined 31.8% to $29.4 million, with a gross loss of $37,000 and an operating loss of $2.9 million. Upholstery fabrics sales declined 16.9% to $33.2 million, with gross profit of $4.2 million and operating income of $542,000.
At July 31, 2022, cash and cash equivalents were $18.9 million, compared with $14.6 million at May 1, 2022 and $26.1 million at August 1, 2021. Total assets were $180.5 million and total shareholders’ equity was $114.0 million. Inventory was $63.7 million, up 8.8% year over year, while accounts receivable were $24.8 million, down 29.1% year over year.
The company had no outstanding borrowings under its revolving credit agreements. The amended U.S. facility provides up to $40 million of revolving availability, subject to borrowing-base limitations, and expires in June 2025. Letters of credit outstanding totaled $275,000. The company was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Sales weakened substantially because of lower consumer demand, excess customer inventory, delayed mattress shipments and product rollouts, and reduced residential furniture demand.
- Profitability was pressured by lower volume, inflation in raw materials and other costs, labor shortages, employee training, and operating inefficiencies at the new Haiti cut-and-sew facility.
- Pricing and surcharge actions partially offset cost inflation, increasing mattress fabrics sales by approximately 4.6% and upholstery fabrics sales by approximately 4.1%.
- SG&A declined primarily because of lower incentive compensation expense, but the reduction was insufficient to offset the gross-margin deterioration.
- Operating cash flow improved despite the net loss, primarily because of higher accounts payable and the absence of annual incentive payments made in the prior-year quarter.
- The company liquidated its remaining short-term and held-to-maturity investments during fiscal 2022; therefore, interest income declined to $17,000 from $74,000.
- The quarterly cash dividend was suspended effective June 29, 2022. No dividends were paid in the current quarter versus $1.4 million, or $0.11 per share, in the prior-year quarter.
- No shares were repurchased in the current quarter. Management did not expect repurchases through at least the second quarter of fiscal 2023.
Guidance, Outlook, Risks, and Unusual Items
Management expects macroeconomic weakness and reduced consumer spending to continue affecting mattress fabrics demand and delaying product rollouts, with pressure expected through at least the third quarter of fiscal 2023. The company expects additional targeted price increases, workforce adjustments, cost controls, and consolidation of its domestic mattress-cover cut-and-sew operation to improve efficiency, primarily beginning in the third quarter.
Upholstery fabrics demand may remain affected by weaker residential retail activity. Near-term profitability is also expected to reflect inflation, labor availability challenges at Read, and training and inefficiencies as the Haiti facility ramps toward planned capacity.
Key risks include inflation, raw-material and freight costs, labor availability, customer inventory levels, supply-chain disruption, additional COVID-19 shutdowns in China, foreign-exchange movements, the Russia-Ukraine conflict, interest rates, consumer confidence, housing activity, and potential impairment of intangible assets.
The company recorded a $5.7 million net loss and a $896,000 income tax expense. The effective tax rate was negative 18.7%, principally because a full valuation allowance was maintained against U.S. deferred tax assets amid cumulative U.S. losses and expected additional U.S. losses. The valuation allowance totaled $13.3 million at July 31, 2022.
A customer associated with the mattress fabrics segment filed for Chapter 11 protection in June 2022. The company received payment in full for invoices outstanding at May 1, 2022 and did not expect a material credit loss on the related post-May 1 invoices based on information available at the filing date.
Important Facts for Investors to Verify
- Whether mattress and residential upholstery demand stabilizes after the inventory correction and whether sales pressure persists beyond the third quarter of fiscal 2023.
- Whether pricing actions offset inflation in raw materials, freight, labor, and other operating costs without further reducing demand.
- Progress in consolidating the domestic mattress-cover operation and ramping the Haiti cut-and-sew facility.
- Cash generation, inventory levels, accounts payable trends, and compliance with the amended credit agreement’s $15 million minimum access-to-liquidity requirement during fiscal 2023.
- The timing and potential resumption of the quarterly dividend and common-stock repurchases.
- Changes in the U.S. deferred-tax valuation allowance and the company’s ability to generate future taxable income.
- Potential effects of customer bankruptcy proceedings, supply-chain disruption, COVID-19 restrictions, currency movements, and geopolitical events.