Culp, Inc. Form 10-Q Summary
Business context and reporting period
Culp, Inc. manufactures and sells mattress fabrics and upholstery fabrics. The filing covers the third quarter and first nine months of fiscal 2015, ended February 1, 2015, and was filed March 13, 2015. The comparable prior-year period ended January 26, 2014. The nine-month periods cover 40 weeks in fiscal 2015 versus 39 weeks in fiscal 2014.
- Mattress fabrics serve bedding manufacturers.
- Upholstery fabrics are sold primarily to residential furniture manufacturers, with production concentrated in China for this segment.
Financial performance and liquidity
| Metric | Three months ended Feb. 1, 2015 | Three months ended Jan. 26, 2014 | Nine months ended Feb. 1, 2015 | Nine months ended Jan. 26, 2014 |
|---|---|---|---|---|
| Net sales | $81.3 million | $72.4 million | $231.3 million | $213.1 million |
| Gross profit | $14.4 million | $11.8 million | $39.4 million | $37.1 million |
| Gross margin | 17.7% | 16.4% | 17.0% | 17.4% |
| Income from operations | $6.0 million | $4.8 million | $16.2 million | $15.8 million |
| Operating margin | 7.4% | 6.6% | 7.0% | 7.4% |
| Net income | $3.8 million | $8.4 million | $10.2 million | $14.7 million |
| Diluted EPS | $0.31 | $0.68 | $0.82 | $1.19 |
Third-quarter sales increased 12.3%, gross profit increased 21.7%, and operating income increased 25.7%. Nine-month sales increased 8.5% and operating income increased 2.6%. Net income declined primarily because the prior-year periods included a $5.4 million discrete income tax benefit related to previously undistributed Chinese earnings; fiscal 2015 recorded normal income tax expense.
- Mattress fabrics third-quarter sales increased 18.5% to $45.7 million, while operating income increased 57.7% to $5.2 million. The operating margin improved to 11.4% from 8.6%.
- Upholstery fabrics third-quarter sales increased 5.1% to $35.6 million, but operating income declined 4.5% to $2.5 million and the operating margin declined to 7.2% from 7.9%.
- For the first nine months, mattress fabrics operating income increased 11.9% to $14.6 million, while upholstery fabrics operating income declined 8.1% to $6.3 million.
- SG&A increased 18.9% in the quarter and 8.6% year to date, reflecting higher incentive compensation and higher sales-related costs.
Net cash provided by operating activities was $20.7 million for the first nine months, compared with $11.0 million in the prior-year period. Capital expenditures were $8.2 million on a cash basis, compared with $2.7 million in the prior year.
| Balance-sheet item | Feb. 1, 2015 | Jan. 26, 2014 | April 27, 2014 |
|---|---|---|---|
| Cash and cash equivalents | $28.8 million | $23.3 million | $29.3 million |
| Short-term investments | $8.4 million | $7.1 million | $6.3 million |
| Total debt | $2.2 million | $4.4 million | $4.4 million |
| Inventories | $38.0 million | $43.7 million | $40.7 million |
| Total shareholders’ equity | $115.0 million | $109.4 million | $111.7 million |
Cash and short-term investments totaled $37.2 million and exceeded total debt. One remaining $2.2 million term-note payment was due August 11, 2015. There were no borrowings under the U.S., China, or Europe revolving credit facilities, although a $250,000 workers’ compensation letter of credit was outstanding. The company was in compliance with its debt covenants.
Material changes, outlook, and risks
- The mattress fabrics expansion project, with an announced cost of approximately $9.5 million, improved capacity, finishing capability, efficiency, and throughput. Management expected additional benefits in the fourth quarter of fiscal 2015.
- Management expected fiscal 2015 capital expenditures of approximately $11.0 million and depreciation of approximately $6.0 million. Preliminary fiscal 2016 capital expenditures were estimated at $6.0 million to $8.0 million.
- The Wells Fargo credit agreement’s fiscal 2015 capital-expenditure limit was increased from $10 million to $12 million effective March 3, 2015.
- Upholstery fabrics profitability was pressured by lower business volume, losses at the Poland operation, higher China operating costs, and product mix. The company closed its finished-goods warehouse and distribution facility in Poznan, Poland and incurred approximately $200,000 of closure-related costs.
- The Chinese New Year holiday fell entirely in the fourth quarter of fiscal 2015 and was expected to interrupt sales and production schedules.
- The company paid $6.8 million of dividends during the first nine months, including a $4.9 million special dividend, and repurchased 43,014 shares for $745,000. A $0.06-per-share quarterly dividend was announced for payment in April 2015.
- At February 1, 2015, gross unrecognized tax benefits totaled $13.9 million; management expected these benefits to increase by approximately $706,000 during fiscal 2015.
- Key risks include housing and furniture demand, consumer confidence, raw-material and energy costs, foreign-exchange movements, international economic conditions, customer preferences, production interruptions, and the company’s ability to pass cost increases to customers.
- The company reported no material changes to legal proceedings or risk factors from its fiscal 2014 Form 10-K. The environmental litigation settlement disclosed in the prior year was approved and the lawsuit was dismissed on June 5, 2014.
Most important facts to verify
- Confirm that the intended period is fiscal 2015 third quarter ended February 1, 2015; the request metadata describes it as “2014 Q3.”
- Reconcile the year-over-year net-income decline with the prior-year $5.4 million discrete tax benefit and the fiscal 2015 effective tax rate of 37.6% for the nine-month period.
- Assess whether mattress fabrics expansion spending and expected efficiency gains support sustained margin improvement.
- Monitor upholstery fabrics performance, Poland closure costs, China operating costs, and the impact of the Chinese New Year interruption.
- Verify funding for the remaining $2.2 million debt payment, fiscal 2015 capital expenditures above the original covenant limit, and the August 31, 2015 revolving-credit expiration.
- Review the $13.9 million unrecognized tax benefit, foreign earnings tax liabilities, currency exposure, and the company’s ability to realize deferred tax assets.