Culp, Inc. Form 10-K Summary
Reporting period: Fiscal year ended April 28, 2013; 52 weeks. The source also includes unaudited fourth-quarter fiscal 2013 data. Although the request references 2012 Q4, this filing is the fiscal 2013 annual report and compares fiscal 2013 with fiscal 2012.
Business Context
Culp manufactures, sources, and markets mattress fabrics and upholstery fabrics. Its two operating segments are mattress fabrics and upholstery fabrics. Fiscal 2013 sales were generated primarily in North America, with international sales representing 22.9% of total sales. The company operated or sourced products through facilities and suppliers in the United States, Canada, China, and Poland.
- Mattress fabrics: $154.0 million of sales, 57.3% of consolidated sales.
- Upholstery fabrics: $114.8 million of sales, 42.7% of consolidated sales.
- Approximately 89% of upholstery sales involved products produced outside the United States, primarily in China.
Financial Performance and Key Metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net sales | $268.8 million | $254.4 million | +5.6% |
| Gross profit | $49.5 million | $39.7 million | +24.7% |
| Gross margin | 18.4% | 15.6% | +280 basis points |
| Operating income | $21.1 million | $14.7 million | +43.4% |
| Operating margin | 7.8% | 5.8% | +200 basis points |
| Income before taxes | $20.3 million | $14.2 million | +42.9% |
| Net income | $18.3 million | $13.3 million | +37.8% |
| Diluted earnings per share | $1.47 | $1.03 | +42.4% |
| Operating cash flow | $17.1 million | $12.0 million | Increase |
Fiscal 2013 represented the fourth consecutive year of revenue growth, and management stated that pretax income reached its highest level in more than 15 years. Results benefited from higher sales volume, favorable product mix, new product introductions, manufacturing efficiencies, and more stable raw-material costs.
Segment Results
| Segment | Sales | Sales Growth | Operating Income | Operating Margin |
|---|---|---|---|---|
| Mattress fabrics | $154.0 million | +5.8% | $19.9 million | 12.9% |
| Upholstery fabrics | $114.8 million | +5.4% | $7.0 million | 6.1% |
- Mattress-fabric gross margin improved to 19.2% from 17.1%, and operating income increased 26%.
- Upholstery-fabric gross margin improved to 17.4% from 13.8%, and operating income increased 97%.
- The new Culp-Lava Applied Sewn Solutions operation began production of sewn mattress covers in November 2012. Fiscal 2013 capital investment was $751,000, with approximately $300,000 projected for fiscal 2014.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash and short-term investments totaled $28.8 million at April 28, 2013, versus $31.0 million a year earlier.
- Total debt, including current maturities and the line of credit, was $7.2 million; cash and short-term investments exceeded total debt.
- Operating cash flow was $17.1 million. Cash uses included $4.4 million of capital expenditures, $2.5 million of long-term debt payments, $5.0 million of share repurchases, and $7.6 million of dividends.
- Long-term debt consisted primarily of $6.6 million of unsecured term notes bearing fixed interest at 8.01%; scheduled principal payments are $2.2 million annually in fiscal 2014, 2015, and 2016.
- Fiscal 2014 capital expenditures were estimated at $7.2 million, primarily for the mattress-fabrics segment.
- The company was in compliance with its financial covenants at year-end. The U.S. and European revolving facilities were scheduled to expire in August 2013; renewal negotiations were ongoing. The China facility was renewed in June 2013 through June 2014.
Material Changes and Unusual Items
- Income-tax expense was $2.0 million, or 9.7% of pretax income. The effective rate was affected by a $12.1 million benefit from substantially reversing the U.S. deferred-tax valuation allowance and a $7.0 million charge related primarily to expected U.S. tax on undistributed foreign earnings.
- Management determined that $55.6 million of undistributed foreign earnings would not be indefinitely reinvested. The related deferred-tax liability was $7.0 million at fiscal year-end, after consideration of foreign tax credits.
- U.S. federal and state tax-loss carryforwards totaled $50.7 million, with related future tax benefits of $19.8 million. The remaining deferred-tax valuation allowance was $963,000.
- Other expense increased to $583,000 from $236,000, primarily because of foreign-exchange losses in China.
- The company paid its first regular quarterly dividend since 2001 and a $0.50 per-share special dividend. On June 12, 2013, it announced an increase in the quarterly dividend from $0.03 to $0.04 per share.
- On May 8, 2013, Culp agreed to acquire equipment and other assets from Bodet & Horst for $2.7 million and amended related consulting and non-compete arrangements.
Fourth-Quarter Fiscal 2013
- Net sales were $70.4 million, down 7% from $75.7 million in the fourth quarter of fiscal 2012, which had been the highest quarterly sales level in nine years.
- Operating income was $6.1 million, compared with $5.7 million in the prior-year quarter; operating margin improved to 8.6% from 7.5%.
- Net income was $3.7 million, or $0.30 diluted earnings per share, compared with $3.4 million, or $0.27 per diluted share.
- Upholstery sales were affected by the timing of the Chinese New Year and somewhat lower industry demand.
Outlook, Risks, and Contingencies
Management expected continued investment in mattress-fabric capacity and product development, but did not provide quantified revenue or earnings guidance. The company described industry conditions as improved but still weak and uneven relative to pre-downturn levels.
- Demand depends on discretionary consumer purchases of bedding and furniture, housing activity, consumer confidence, disposable income, interest rates, and inflation.
- Heavy reliance on China and other foreign suppliers increases exposure to supply-chain disruption, political and regulatory changes, tariffs, customs, currency movements, and quality or delivery issues.
- Raw materials and energy costs, particularly petrochemical-based inputs, can pressure margins because the company may be unable to fully pass cost increases to customers.
- Major customer concentration is significant: customers associated with Serta and Simmons represented approximately 15% of consolidated sales, Sealy approximately 12%, and La-Z-Boy approximately 13% in fiscal 2013.
- Confirmed upholstery backlog expected to ship by June 2, 2013 was $9.0 million, down from $12.2 million a year earlier. Mattress-fabric backlog was not considered a reliable predictor because sales are primarily just-in-time.
- A lawsuit involving alleged environmental liabilities at a former Pennsylvania facility remained pending. A tentative fiscal 2014 settlement would require a cash contribution that management considered immaterial, subject to final agreement, governmental review, and court approval.
- The company had $13.1 million of gross unrecognized tax benefits, including $8.9 million classified as non-current deferred taxes and $4.2 million as long-term income taxes payable. The timing and ultimate cash impact remain uncertain.
Important Facts for Investors to Verify
- Whether sales and margin gains continue after the unusually strong fiscal 2012 fourth quarter and amid weaker fiscal 2013 fourth-quarter sales.
- The sustainability of the upholstery segment’s margin recovery and the profitability of the U.S. upholstery operation.
- Execution, demand, and capital requirements for the CLASS sewn-mattress-cover operation and the Bodet & Horst transaction.
- Renewal terms and availability under the U.S. and European revolving credit facilities.
- Realization of U.S. tax-loss carryforwards and resolution of the $13.1 million of unrecognized tax benefits.
- Customer concentration, foreign sourcing exposure, raw-material costs, currency movements, and potential environmental or litigation costs.