Culp, Inc. Form 10-Q Summary
Business Context and Reporting Period
Culp, Inc. operates through mattress fabrics and upholstery fabrics segments. The report covers the 13-week quarter ended July 29, 2018, compared with July 30, 2017. The company acquired Read Window Products effective April 1, 2018, and acquired an initial 80% interest in eLuxury effective June 22, 2018.
Key Financial Metrics
Amounts are in thousands, except per-share data and percentages.
| Metric | Q1 Fiscal 2019 | Q1 Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $71,473 | $79,533 | (10.1%) |
| Gross profit | $10,559 | $16,465 | (35.9%) |
| Gross margin | 14.8% | 20.7% | (590 bp) |
| Income from operations | $2,075 | $6,964 | (70.2%) |
| Operating margin | 2.9% | 8.8% | (590 bp) |
| Income before taxes | $1,948 | $6,742 | (71.1%) |
| Net income | $965 | $4,984 | (80.6%) |
| Net income attributable to Culp shareholders | $957 | $4,984 | (80.8%) |
| Diluted EPS | $0.08 | $0.40 | Down $0.32 |
- Operating cash flow was negative $1,936, compared with positive $2,404 in the prior-year quarter.
- Investing cash flow was negative $10,682, including $11,971 of cash paid for acquisitions and $757 of cash capital expenditures.
- Financing cash flow was positive $97, including $4,000 of net proceeds from the U.S. revolving credit facility and $1,127 of dividends paid.
- Cash and cash equivalents were $8,593 at July 29, 2018. Cash and investments totaled approximately $39,349, compared with $54,473 at April 29, 2018.
- Total assets were $226,372 and total liabilities were $60,342. Shareholders’ equity attributable to Culp was $161,490, with $4,540 of non-controlling interest.
- U.S. line-of-credit borrowings were $4,000; no China facility borrowings were outstanding. The company was in compliance with its financial covenants.
- The effective tax rate was 46.5%, compared with 24.3% in the prior-year quarter, primarily reflecting the mix of earnings among jurisdictions and foreign tax effects.
Material Changes Versus the Prior Comparable Period
- Mattress fabrics sales decreased 23.6% to $36,983, with operating income down 55.7% to $2,823. Management attributed the decline primarily to increased low-priced mattress imports from China, industry disruption, and uncertainty involving a large mattress retailer.
- Upholstery fabrics sales increased 10.9% to $34,490, aided by the Read acquisition and organic growth in China-produced performance fabrics. Segment operating income declined 12.7% to $2,527, partly because of unfavorable foreign currency effects and the planned closure of the Anderson, South Carolina facility.
- Restructuring and related charges totaled approximately $2,016, consisting of $1,565 of inventory markdowns and $451 of employee termination benefits. The Anderson facility is expected to close in the second quarter of fiscal 2019.
- eLuxury contributed $2.6 million of revenue and $27,000 of net income from June 22 through July 29, 2018. The acquisition included estimated consideration of $18.1 million, including a $5.6 million contingent earn-out obligation, and resulted in $4.5 million of non-controlling interest.
- SG&A declined 15.5% to $8,033, primarily due to lower incentive compensation and lower sales-related costs.
- Inventory was $54,989, broadly comparable with $55,227 a year earlier, while accounts receivable increased to $23,225 from $22,140. Operating working capital increased to $51.7 million from $42.6 million.
- The company adopted ASC 606 using the modified retrospective method. The adoption had no material impact on retained earnings or ongoing net income, but changed the presentation of sales-return allowances.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued uncertainty in the mattress industry during the second quarter. It is optimistic that potential relief under U.S. trade laws addressing low-priced Chinese mattress imports could benefit the company, but no outcome or timing is assured.
- Fiscal 2019 capital expenditures are projected at $6.0 million to $6.5 million, with depreciation projected at approximately $8.0 million. Management has reduced or deferred certain capital projects.
- Management expects most of the approximately $2.0 million Anderson closure charge to be offset during the second and third quarters by proceeds from selling related property and equipment.
- The eLuxury purchase price allocation remains provisional and could change significantly. The eLuxury earn-out is based on adjusted EBITDA for the twelve months ending August 31, 2021.
- Read includes a contingent earn-out, but management currently believes no payment will be required and has recorded no contingent liability for it.
- Key risks include weak bedding demand, imported mattress competition, tariffs and trade-policy changes, foreign currency fluctuations, raw-material and energy inflation, changes in consumer preferences, interest-rate exposure, and international operating conditions.
- The company expects the adoption of the new lease standard in fiscal 2020 to materially increase recognized assets and liabilities for operating leases.
- On August 13, 2018, the U.S. credit facility was amended to reduce the commitment from $30 million to $25 million, reduce the unencumbered-liquid-assets covenant from $20 million to $15 million, and extend expiration to August 15, 2020.
- The board approved a $0.09 quarterly dividend for payment in October 2018. The company repurchased 2,990 shares for $72,000 during the quarter and had approximately $4.9 million remaining under its repurchase authorization.
Important Facts for Investors to Verify
- Whether mattress industry demand and low-priced Chinese imports improve, including the status and effect of potential trade remedies.
- The pace and cost of closing the Anderson facility and whether asset-sale proceeds offset the restructuring charge as expected.
- eLuxury’s operating performance, final purchase-price allocation, contingent earn-out exposure, and integration results.
- Liquidity after the decline in cash and investments, negative quarterly operating cash flow, acquisition spending, dividends, and working-capital needs.
- Compliance with the amended credit facility’s covenants and the availability of revolving credit capacity.
- The effect of tariffs, foreign currency movements, raw-material costs, and the elevated effective tax rate on future margins and cash taxes.
- The company’s ability to execute projected capital expenditures while maintaining dividends and potential share repurchases.