Culp, Inc. Form 10-Q Summary
Business context and reporting period
Culp, Inc. operates two segments: mattress fabrics, serving bedding manufacturers, and upholstery fabrics, serving residential and commercial furniture manufacturers. The upholstery segment also includes Read Window Products, which provides window treatments, sourcing, fabrication, installation, and hospitality soft goods.
This filing covers the quarter and six months ended October 29, 2023, the second quarter and first half of fiscal 2024. Comparable periods ended October 30, 2022. The six-month periods each comprised 26 weeks.
Key financial metrics
| Metric | Three months ended October 29, 2023 | Three months ended October 30, 2022 | Six months ended October 29, 2023 | Six months ended October 30, 2022 |
|---|---|---|---|---|
| Net sales | $58.7 million | $58.4 million | $115.4 million | $121.0 million |
| Gross profit | $8.0 million | $(2.2) million | $15.0 million | $1.9 million |
| Gross margin | 13.5% | (3.8)% | 13.0% | 1.6% |
| Loss from operations | $(2.2) million | $(11.9) million | $(5.3) million | $(16.7) million |
| Operating margin | (3.8)% | (20.4)% | (4.6)% | (13.8)% |
| Net loss | $(2.4) million | $(12.2) million | $(5.8) million | $(17.9) million |
| Net loss per diluted share | $(0.19) | $(0.99) | $(0.47) | $(1.46) |
- Second-quarter mattress fabrics sales increased 19.6% to $31.4 million; upholstery fabrics sales decreased 14.9% to $27.3 million.
- First-half mattress fabrics sales increased 9.0% to $60.6 million; upholstery fabrics sales decreased 16.2% to $54.8 million.
- Second-quarter upholstery operating income increased to $1.4 million from $0.3 million. First-half operating income increased to $2.7 million from $0.8 million.
- Second-quarter mattress operating loss narrowed to $0.9 million from $9.0 million. First-half operating loss narrowed to $2.3 million from $11.9 million.
- SG&A increased 10.3% in the quarter and 10.6% year to date, reflecting wage inflation, incentive compensation, professional fees, bad-debt provisions, travel, and product sampling.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $15.2 million at October 29, 2023, down from $21.0 million at April 30, 2023 and $19.1 million at October 30, 2022.
- First-half operating cash flow was $(4.5) million, compared with $6.2 million provided in the prior-year period.
- First-half investing cash flow was $(1.0) million, including $2.0 million of cash capital expenditures, primarily for mattress-fabric machinery.
- There were no borrowings outstanding under the company’s revolving credit facilities. The U.S. asset-based facility had $26.2 million of available borrowings and $0.5 million of outstanding letters of credit at October 29, 2023.
- The U.S. ABL facility has a $35.0 million maximum principal amount and matures January 19, 2026. The applicable interest rate was 6.80% at October 29, 2023.
- Total liabilities were $58.5 million and shareholders’ equity was $83.6 million. Inventory was $44.5 million, down 14.9% from the prior-year comparable date.
- Management stated that cash of $15.2 million and current revolving-credit availability of $26.2 million should fund foreseeable business needs, commitments, and contractual obligations.
Material changes versus the prior comparable period
- Profitability improved substantially because the prior-year period included significant mattress inventory write-downs, upholstery inventory markdowns, inventory closeout sales, and China restructuring costs.
- The company recorded a $1.3 million non-cash inventory credit in the quarter and a $2.0 million credit for the first half, compared with non-cash inventory charges of $5.3 million and $6.4 million, respectively, in the prior-year periods.
- Mattress gross margin improved to 7.9% in the quarter and 7.4% year to date, from negative margins in the comparable periods, due to improved inventory management, pricing, new product placements, and operating efficiencies.
- Upholstery gross margin increased to 19.7% in the quarter and 19.5% year to date, helped by lower fixed costs, lower freight costs, favorable foreign exchange, improved inventory management, and stronger hospitality and Read contributions.
- Accounts receivable increased 2.6% year over year to $23.0 million, while the allowance for doubtful accounts increased to $541,000 from $288,000.
- The company completed its discontinuation of upholstery cut-and-sew kit production in Haiti, recording $0.6 million of restructuring and related charges in the first half and $1.4 million cumulatively for the activity.
Outlook, risks, contingencies, and unusual items
- Management expects macroeconomic pressure and weak consumer spending to continue affecting mattress and residential upholstery demand, with mattress-industry softness expected to continue through at least the third quarter of fiscal 2024.
- Management expects to mitigate pressure through new products priced to current costs, pricing actions, improved efficiency, inventory management, cost reductions, and potential further restructuring.
- The company does not expect share repurchases or dividends through at least the third quarter of fiscal 2024. The quarterly dividend remains suspended, and $3.2 million remained available under the repurchase authorization.
- Management projects approximately $3.2 million of fiscal 2024 cash income-tax payments, compared with $2.3 million in fiscal 2023. A full valuation allowance remains against U.S. deferred tax assets; the allowance totaled $20.2 million at October 29, 2023.
- Key risks include inflation, interest rates, consumer demand, raw-material and labor costs, freight, foreign exchange, customer credit, supply-chain disruptions, geopolitical events, potential COVID-related disruptions in China, and inventory valuation estimates.
- Open equipment purchase commitments totaled $1.6 million, and capital-expenditure vendor invoices payable totaled $298,000.
- Management concluded that no material adverse effect was reasonably possible from disclosed ordinary-course litigation. No material changes to previously disclosed risk factors were reported.
- The mattress asset group had a $35.5 million carrying amount and passed the recoverability test; no impairment charge was recorded. The company recorded $379,000 of equipment impairment within Haiti restructuring costs.
Investor verification points
- Verify whether mattress-fabric sales growth and pricing actions continue to offset weak industry demand and the segment’s continuing operating losses.
- Monitor operating cash flow, cash balances, working-capital requirements, and reliance on the $26.2 million of available borrowing capacity.
- Assess the sustainability of upholstery profitability given continued residential demand weakness and the company’s dependence on hospitality, contract, and Read business.
- Review inventory aging, markdown reserves, and the risk of additional write-downs if demand or pricing deteriorates.
- Track U.S. deferred-tax-asset realizability, foreign income taxes, and projected fiscal 2024 cash tax payments.
- Evaluate the effects of the Haiti restructuring, future cost reductions, and any additional restructuring actions.