Culp, Inc. Form 10-K Summary
Reporting period: Fiscal year ended May 2, 2021. Fiscal 2021 comprised 52 weeks versus 53 weeks in fiscal 2020. The filing is an annual report, not a standalone 2020 fourth-quarter filing. Continuing operations comprise mattress fabrics and upholstery fabrics. The former home accessories segment was sold on March 31, 2020 and is presented as a discontinued operation.
Business Context
Culp manufactures, sources, and markets mattress fabrics, sewn mattress covers, upholstery fabrics, cut-and-sewn furniture kits, and hospitality and commercial window-treatment products. Fiscal 2021 benefited from increased consumer spending on home furnishings during the COVID-19 pandemic, although customer capacity constraints, labor shortages, freight disruption, raw-material inflation, and foreign-currency pressure remained significant challenges.
Key Financial Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $299.7 million | $256.2 million | 17.0% increase |
| Gross profit | $49.8 million | $40.5 million | 23.0% increase |
| Gross margin | 16.6% | 15.8% | Up 80 basis points |
| SG&A | $37.8 million | $34.4 million | 9.7% increase |
| Operating income from continuing operations | $12.1 million | $(7.6) million | Returned to profitability |
| Income before taxes from continuing operations | $10.9 million | $(7.7) million | Returned to profitability |
| Net income from continuing operations | $3.2 million | $(11.2) million | Returned to profitability |
| Net income | $3.2 million | $(28.7) million | Returned to profitability |
| Diluted EPS | $0.26 | $(2.32) | Improved materially |
| Cash flow from operations | $21.5 million | $5.0 million | Up $16.5 million |
| Capital expenditures, cash basis | $6.7 million | $4.6 million | Increase |
Segment Performance
| Segment | Fiscal 2021 Sales | Fiscal 2020 Sales | Fiscal 2021 Operating Income | Fiscal 2021 Margin |
|---|---|---|---|---|
| Mattress fabrics | $157.7 million | $131.4 million | $11.8 million | 7.5% |
| Upholstery fabrics | $142.0 million | $124.8 million | $11.9 million | 8.4% |
Mattress fabrics sales increased 20.0%, with gross margin improving to 15.1% from 12.4%. Upholstery fabrics sales increased 13.9%; residential demand and performance-fabric products were strong, while hospitality demand remained depressed.
Liquidity, Debt, and Balance Sheet
- Cash and investments totaled $46.9 million at May 2, 2021, compared with $77.1 million at May 3, 2020. The decline primarily reflected repayment of $38.4 million of credit-facility and PPP borrowings.
- There were no outstanding borrowings under the U.S. or China revolving credit facilities at year-end. Available borrowing capacity was approximately $38 million.
- The U.S. revolving facility provides a $30 million commitment and expires August 15, 2022. The China facilities provide additional capacity, including a RMB-denominated line equivalent to approximately $6.2 million at year-end.
- Accounts receivable increased to $37.7 million and inventories increased to $55.9 million, reflecting higher fourth-quarter sales. Trade accounts payable increased to $42.5 million.
- Total assets were $214.1 million and total liabilities were $85.1 million at year-end.
- Quarterly dividends totaled $5.3 million in fiscal 2021. The board approved a subsequent quarterly dividend of $0.11 per share. The $5 million share-repurchase authorization was reinstated in March 2021, but no shares were repurchased during fiscal 2021.
Material Changes Versus Fiscal 2020
- Sales and profitability recovered sharply from the COVID-19-related shutdowns and demand disruption in the fourth quarter of fiscal 2020.
- Fiscal 2020 included $13.7 million of continuing-operations goodwill and tradename impairment charges and $20.2 million of discontinued-operation impairment charges; no asset impairment charges were recorded in fiscal 2021.
- Fiscal 2020 included a $17.5 million net loss from discontinued operations associated with eLuxury; fiscal 2021 had no discontinued-operation results.
- SG&A increased primarily because of higher incentive compensation, while interest expense declined after all borrowings were repaid in the first quarter of fiscal 2021.
- Fiscal 2021 included an $819,000 bargain-purchase gain from acquiring the remaining 50% of the Haiti mattress-cover joint venture for approximately $954,000. Culp became the sole owner effective February 1, 2021.
- A $4.9 million net non-cash income-tax charge included an $8.5 million charge for a full valuation allowance against U.S. deferred tax assets, partly offset by a $3.6 million GILTI-related benefit. The effective tax rate was 70.7%.
Guidance, Outlook, Risks, and Unusual Items
- Management projected fiscal 2022 cash capital expenditures of $9 million to $10 million and depreciation of approximately $7 million.
- Management expected strong residential mattress and upholstery demand to continue, subject to additional pandemic-related shutdowns and customer supply-chain constraints.
- Management expected the Haiti upholstery-kit facility to become operational in the second quarter of fiscal 2022 and planned a High Point design and innovation campus.
- Preliminary antidumping duties on mattress imports from seven countries began benefiting the mattress fabrics business in the third and fourth quarters of fiscal 2021; management was cautiously optimistic that the benefit would continue.
- Near-term margin risks include rising raw-material and freight costs, labor shortages, container availability, foreign-currency fluctuations in China and Canada, and the inability to fully pass cost increases to customers. A price increase announced in the fourth quarter of fiscal 2021 began taking effect in fiscal 2022.
- COVID-19 impacts remained difficult to estimate and could affect employees, customers, suppliers, demand, collections, and global supply chains.
- Customer concentration remains material: La-Z-Boy represented approximately 13% of consolidated sales and Serta Simmons approximately 10% in fiscal 2021.
- The company relies substantially on foreign manufacturing and sourcing, particularly China, Vietnam, Turkey, Canada, and Haiti, creating exposure to tariffs, trade-policy changes, currency movements, political instability, labor disruption, and logistics interruptions.
- The company reported no material legal proceedings and stated that environmental matters were not expected to materially affect financial condition or results, although future liabilities remain possible.
Investor Verification Checklist
- Verify the fiscal-period distinction: this Form 10-K covers the year ended May 2, 2021, rather than only fourth-quarter fiscal 2020.
- Reconcile reported net income with continuing operations, discontinued operations, the bargain-purchase gain, impairment charges, and the unusual income-tax valuation allowance.
- Assess whether residential demand, antidumping duties, and the fiscal 2022 price increase offset freight, raw-material, labor, and currency pressures.
- Review liquidity after planned $9 million to $10 million of fiscal 2022 capital expenditures, dividends, lease commitments, and Haiti expansion costs.
- Monitor customer concentration, foreign sourcing and manufacturing exposure, and the renewal of the China U.S.-dollar credit facility.
- Evaluate the realizability of the $11.7 million U.S. deferred-tax-asset valuation allowance and the $1.4 million of unrecognized tax benefits.
- Confirm the completion, operating ramp, and customer concentration associated with the new Haiti upholstery-kit facility.