Culp, Inc. Form 10-Q Summary
Business Context and Reporting Period
Culp, Inc. manufactures, sources, and sells mattress fabrics and upholstery fabrics. The filing covers the quarter and six months ended November 1, 2015, representing the second quarter and first half of fiscal 2016. The comparable prior periods ended November 2, 2014; the six-month periods were 26 weeks in 2015 and 27 weeks in 2014.
- Mattress fabrics serve bedding manufacturers.
- Upholstery fabrics primarily serve residential furniture manufacturers, with additional hospitality and lifestyle retail exposure.
- Common shares outstanding at November 1, 2015: 12.35 million.
Financial Performance and Liquidity
| Metric | Three Months Ended Nov. 1, 2015 | Three Months Ended Nov. 2, 2014 | Six Months Ended Nov. 1, 2015 | Six Months Ended Nov. 2, 2014 |
|---|---|---|---|---|
| Net sales | $77.0 million | $74.0 million | $157.1 million | $150.1 million |
| Gross profit | $15.7 million | $12.3 million | $31.9 million | $25.0 million |
| Gross margin | 20.4% | 16.6% | 20.3% | 16.7% |
| Income from operations | $6.3 million | $4.9 million | $13.8 million | $10.2 million |
| Operating margin | 8.2% | 6.6% | 8.8% | 6.8% |
| Net income | $3.8 million | $3.0 million | $8.5 million | $6.3 million |
| Diluted EPS | $0.30 | $0.24 | $0.68 | $0.51 |
- Six-month operating cash flow was $11.2 million, down from $14.5 million primarily because of higher inventory purchases and bonus payments.
- Capital expenditures were $5.3 million on a cash basis, primarily for the mattress fabrics segment; depreciation was $3.2 million.
- Cash and cash equivalents were $31.2 million and short-term investments were $6.3 million at November 1, 2015, totaling $37.5 million versus $39.7 million at May 3, 2015.
- Total assets were $173.7 million and shareholders’ equity was $123.0 million at November 1, 2015.
- Inventories increased 22% year over year to $46.5 million, while accounts receivable declined 7% to $23.3 million.
- The company paid $6.4 million in dividends during the first half, including a $5.0 million special dividend.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 4.0%; first-half sales increased 4.7%. The first half included one fewer week than the prior-year period.
- Gross margin expanded by 3.8 percentage points in the quarter and 3.6 percentage points for the first half.
- Six-month net income increased 33.5%, while diluted EPS increased from $0.51 to $0.68.
- Mattress fabrics drove much of the improvement: first-half sales rose 8.6%, operating income rose 43.9%, and operating margin increased to 14.4% from 10.9%.
- Upholstery fabrics first-half sales declined 0.5%, but operating income increased 38.0% and operating margin rose to 8.1% from 5.8%.
- Management cited improved production efficiency and capacity from recent mattress-fabrics capital investments, lower raw-material costs, favorable product mix, and a more stable cost environment in China.
- SG&A increased 22.8% for the first half and rose to 11.6% of sales from 9.9%, primarily because of higher incentive compensation and costs associated with higher sales.
- Interest expense fell to zero for the first half from $67,000 because the company repaid its remaining term debt.
- The company paid its final $2.2 million annual installment on its unsecured senior term notes on August 11, 2015. No long-term debt or revolving-credit borrowings were outstanding at quarter-end.
- Upholstery-fabrics results benefited from the absence of approximately $200,000 of non-recurring European closure charges recorded in the prior-year quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management plans to continue emphasizing design creativity, product innovation, customer service, and flexible manufacturing during the remainder of fiscal 2016.
- Fiscal 2016 capital expenditures are projected at approximately $10.0 million to $11.0 million, and depreciation is projected at approximately $7.0 million. These are current estimates and may change.
- The U.S. revolving credit facility was extended to August 31, 2017, with a $10.0 million commitment and a $12.0 million annual capital-expenditure limit. A $250,000 letter of credit was outstanding, but there were no borrowings.
- The China credit facility provides approximately $6.3 million of capacity and expires February 9, 2016; there were no borrowings. The company reported compliance with applicable financial covenants.
- Culp Europe closed its finished-goods warehouse and distribution facility in Poznan, Poland, in fiscal 2015 due primarily to economic weakness. Management is evaluating its future European sales strategy.
- Key risks include housing and furniture demand, consumer confidence, interest rates, inflation, raw-material and energy costs, pricing pressure, foreign-currency movements, international economic conditions, and changing consumer preferences.
- The company held $14.2 million of gross unrecognized tax benefits at November 1, 2015 and expects these benefits to increase by approximately $846,000 during fiscal 2016.
- Open equipment purchase commitments totaled $1.9 million. Management stated that ordinary-course litigation is not reasonably expected to have a material adverse effect.
- The board subsequently approved a 17% increase in the quarterly dividend from $0.06 to $0.07 per share, payable in January 2016, subject to the stated record-date conditions.
- Controls and procedures were evaluated as effective, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether margin expansion is sustained after the benefits of lower raw-material costs, capital investments, and favorable product mix moderate.
- Whether inventories remain elevated and whether inventory turns recover from 6.4 to 5.3 year over year.
- Progress and returns from the Canadian mattress-fabrics equipment and capacity investments.
- Availability and renewal status of the China credit facility and continued compliance with lending covenants.
- Cash generation after dividends, capital expenditures, and potential share repurchases; $4.3 million remained available under the repurchase authorization at quarter-end.
- Foreign-exchange exposure and the ability to maintain the company’s stated natural hedge.
- Developments concerning European operations, tax contingencies, and the $1.9 million of equipment purchase commitments.