Culp, Inc. Form 10-Q Summary
Business Context and Reporting Period
Culp, Inc. manufactures, sources, and sells mattress fabrics and upholstery fabrics. The report covers the three and nine months ended January 29, 2017, compared with the periods ended January 31, 2016. The nine-month periods each comprised 39 weeks. The company operates primarily in the United States, Canada, China, and other international markets.
Financial Performance and Key Metrics
| Metric | Three Months Ended January 29, 2017 | Year-over-Year Change | Nine Months Ended January 29, 2017 | Year-over-Year Change |
|---|---|---|---|---|
| Net sales | $76.2 million | Down 2.9% | $232.2 million | Down 1.4% |
| Gross profit | $16.8 million | Up 1.2% | $52.1 million | Up 7.4% |
| Gross margin | 22.0% | Up 90 basis points | 22.4% | Up 180 basis points |
| Income from operations | $6.9 million | Down 4.0% | $22.9 million | Up 9.2% |
| Operating margin | 9.1% | Down 10 basis points | 9.9% | Up 100 basis points |
| Net income | $6.3 million | Up 30.5% | $16.1 million | Up 21.0% |
| Diluted EPS | $0.51 | Up from $0.39 | $1.29 | Up from $1.07 |
Quarterly results benefited from a $2.1 million discrete income tax benefit related to the reversal of an uncertain foreign tax position after expiration of the applicable statute of limitations. The nine-month effective tax rate was 28.9%, compared with 35.7% in the prior-year period.
Operating cash flow for the nine months was $24.2 million, compared with $15.9 million in the prior-year period. Cash used in investing activities was $40.3 million, primarily reflecting $9.3 million of capital expenditures, a $31.1 million purchase of held-to-maturity corporate bonds, and a $0.6 million joint-venture investment. Cash used in financing activities was $6.1 million, including $5.3 million of dividends.
At January 29, 2017, cash and cash equivalents were $15.7 million, short-term investments were $2.4 million, and held-to-maturity investments were $30.8 million. Total cash, short-term investments, and held-to-maturity investments were $48.9 million, compared with $42.1 million at May 1, 2016. The company had no borrowings outstanding under its revolving credit agreements and reported $35.8 million of availability under those facilities. It was in compliance with all financial covenants.
Total assets were $191.1 million and shareholders’ equity was $142.3 million at January 29, 2017. Accounts receivable were $22.7 million and inventories were $46.2 million.
Material Changes Versus the Prior Comparable Period
- Mattress fabrics sales increased 3.7% for the quarter and 3.2% year to date. Mattress fabrics operating income increased 9.8% for the quarter and 15.4% year to date, supported by lower raw-material costs and capital-investment benefits.
- Upholstery fabrics sales decreased 11.5% for the quarter and 8.0% year to date. Quarterly operating income declined 19.5%, while nine-month operating income declined 4.6%. Results were affected by soft home-furnishings demand, an uncertain economic environment, and the earlier timing of the Chinese New Year holiday.
- SG&A expense increased 5.2% in the quarter and 6.0% year to date, driven primarily by higher incentive compensation, inventory warehousing, design and sales expenses, and approximately $0.2 million of quarterly plant-consolidation charges.
- Property, plant, and equipment increased to $50.3 million from $38.2 million at January 31, 2016, reflecting expansion projects and equipment investments, primarily in the mattress fabrics segment.
- Accounts receivable and inventory declined by $6.4 million in aggregate from the prior-year quarter-end, reflecting improved inventory management, lower upholstery-fabrics volume, and improved collections.
- The company paid $5.3 million of dividends during the nine months, including a $2.6 million special dividend. No shares were repurchased under the $5.0 million authorization.
Guidance, Outlook, Risks, and Unusual Items
- Management projected fiscal 2017 capital expenditures of $12.0 million to $15.0 million and depreciation of approximately $7.0 million. Capital spending was expected to be lower in fiscal 2018.
- North Carolina expansion projects and a new distribution center were expected to be completed in the fourth quarter of fiscal 2017. Management expects annual cost savings of approximately $1.0 million to $1.5 million from the expansion projects, but additional non-recurring consolidation costs were expected in the fourth quarter.
- A new North Carolina building has an estimated total cost of $11.1 million, with $8.2 million of open purchase commitments at January 29, 2017. The company issued a $5.0 million letter of credit related to the project.
- Effective January 1, 2017, Culp invested $0.6 million for a 50% interest in a Haiti-based joint venture that will produce sewn mattress covers. Production was expected to begin in the second quarter of fiscal 2018. The investment will be accounted for under the equity method.
- Management cited continued risks from soft consumer demand, housing and home-furnishings trends, customer distribution-channel changes, raw-material and energy costs, foreign-currency movements, international economic and political conditions, and interest rates.
- Management identified short-term uncertainty in mattress fabrics due to expected order reductions from at least one significant customer, partially offset by anticipated increases from other customers.
- The company had $13.4 million of gross unrecognized income tax benefits at January 29, 2017. The IRS was examining fiscal 2014 U.S. federal returns, and Revenue Quebec had begun examining fiscal 2013 through 2015 returns; no adjustments had been proposed.
- Ordinary-course litigation was not expected by management to have a material adverse effect. No material changes to previously disclosed risk factors or legal proceedings were reported.
- On February 28, 2017, the board approved a quarterly dividend of $0.08 per share, payable in April 2017 subject to the stated record-date conditions.
Important Facts for Investors to Verify
- Assess the sustainability of earnings excluding the $2.1 million discrete tax benefit.
- Monitor upholstery-fabrics demand, Chinese New Year timing effects, and the impact of customer and distribution-channel changes.
- Track completion costs, remaining commitments, and expected savings from the North Carolina expansion and consolidation projects.
- Verify execution, funding needs, and production timing for the Haiti joint venture.
- Review the location and liquidity of the company’s $48.9 million investment and cash balance, including the $30.8 million held-to-maturity corporate-bond portfolio.
- Evaluate potential outcomes of the company’s uncertain tax positions and ongoing tax examinations.
- Confirm future dividend and repurchase decisions, which remain subject to board approval, liquidity needs, and market conditions.