Culp, Inc. Form 10-Q Summary
Business context and reporting period
Culp, Inc. designs, manufactures, sources, and sells mattress fabrics and upholstery fabrics, including window treatments and related services through Read Window Products. The filing covers the quarter and six months ended October 31, 2021, compared with October 31, 2020, and November 1, 2020, respectively. Each six-month period comprised 26 weeks.
During the prior fiscal year, Culp acquired the remaining 50% of Class International Holdings, Ltd. (“CIH”), a Haitian mattress-cover operation, resulting in 100% ownership and consolidated reporting. The acquisition generated an $819,000 bargain-purchase gain.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2021 | Three months ended Nov. 1, 2020 | Six months ended Oct. 31, 2021 | Six months ended Nov. 1, 2020 |
|---|---|---|---|---|
| Net sales | $74.6 million | $76.9 million | $157.6 million | $141.3 million |
| Gross profit | $10.7 million | $14.3 million | $23.2 million | $24.2 million |
| Gross margin | 14.4% | 18.6% | 14.7% | 17.1% |
| Income from operations | $1.6 million | $4.5 million | $5.0 million | $6.4 million |
| Operating margin | 2.2% | 5.9% | 3.1% | 4.5% |
| Net income (loss) | $851,000 | $2.4 million | $3.1 million | $(349,000) |
| Diluted EPS | $0.07 | $0.19 | $0.25 | $(0.03) |
- Second-quarter sales decreased 3.0%; six-month sales increased 11.5%, partly reflecting the pandemic-affected prior-year comparison.
- Second-quarter gross profit declined 24.8% and operating income declined 63.7%. Six-month gross profit declined 3.9% and operating income declined 22.5%.
- Six-month income tax expense was $1.3 million at a 30.3% effective rate, versus $5.9 million at a 109.5% rate in the prior-year period. The prior-year rate was materially affected by a $7.7 million valuation-allowance charge and a $3.5 million GILTI-related tax benefit.
- Six-month operating cash flow was $(1.3) million, compared with $22.7 million provided in the prior-year period. Capital expenditures were $3.9 million versus $2.0 million.
- Cash and investments totaled $36.6 million at October 31, 2021, including $17.0 million of cash and cash equivalents, $9.7 million of short-term available-for-sale investments, and $9.9 million of held-to-maturity investments.
- There were no borrowings under the company’s revolving credit facilities. The U.S. facility had $30 million of borrowing capacity, subject to $275,000 of outstanding letters of credit; management reported compliance with financial covenants.
- Total liabilities were $80.9 million and shareholders’ equity was $128.5 million at October 31, 2021. Inventory was $63.8 million, up 33.6% from November 1, 2020.
Material changes versus the prior comparable period
- Mattress fabrics second-quarter sales rose 2.1% to $40.9 million, while operating income fell 28.4% to $3.1 million. Six-month sales rose 10.3% and operating income rose 8.4%.
- Upholstery fabrics second-quarter sales fell 8.5% to $33.7 million, while operating income fell 68.7% to $1.0 million. Six-month sales rose 13.0%, but operating income fell 39.0%.
- Margins were compressed by higher freight, raw-material, and labor costs; labor shortages and operating inefficiencies; unfavorable foreign-exchange movements; customer supply-chain constraints; and start-up costs for the new Haiti upholstery facility.
- Pricing increases and freight surcharges increased second-quarter mattress-fabrics sales by approximately 4.6% and upholstery-fabrics sales by approximately 2.3%; management stated that these actions only partially offset cost inflation.
- SG&A decreased 6.7% in the quarter, primarily because of lower incentive compensation and sales commissions, but increased 2.9% for the six months.
- The company repurchased 121,688 shares for $1.8 million during the first six months, leaving $3.2 million available under its $5.0 million authorization. Quarterly dividends paid totaled $2.7 million.
- The company adopted ASU 2019-12 on May 3, 2021; adoption had no material effect on financial position, results, or cash flows.
Guidance, outlook, risks, and unusual items
- Management projected fiscal 2022 cash capital expenditures of $10.3 million to $10.7 million and depreciation of approximately $7.0 million.
- Management expected the new Haiti upholstery cut-and-sew facility to begin operations during the third quarter of fiscal 2022. Additional start-up costs and an $8-year lease commitment are expected.
- Management expects continued near-term pressure from inflation in freight, materials, and labor, customer supply-chain constraints, labor shortages, foreign-exchange movements, and the COVID-19 pandemic, including the Omicron variant.
- An additional upholstery-fabrics price increase was planned for the third quarter to offset a portion of cost inflation.
- Management expected fiscal 2022 cash income-tax payments of approximately $3.6 million and stated that the company would likely remain subject to GILTI tax because certain Canadian and Haitian operations were not expected to qualify for the high-tax exception.
- The company maintained a full valuation allowance against U.S. net deferred tax assets totaling $11.5 million at October 31, 2021.
- Open equipment purchase commitments totaled $810,000. The company also guarantees 70% of certain unpaid lease payments for eLuxury through September 2024; eLuxury and its owner have provided indemnification.
- Management stated that ordinary-course litigation was not reasonably expected to have a material adverse effect and that there were no material changes to previously disclosed risk factors.
- On December 1, 2021, the board approved a quarterly dividend of $0.115 per share, payable January 19, 2022.
Important facts for investors to verify
- Whether pricing actions can offset persistent freight, labor, raw-material, and foreign-exchange cost inflation.
- The pace of inventory normalization and the risk of excess inventory or slower customer order uptake.
- Operational execution, start-up costs, and expected capacity benefits from the Haiti facilities.
- The sustainability of operating cash flow after working-capital investment, dividends, repurchases, and planned capital expenditures.
- The effect of GILTI, foreign withholding taxes, valuation allowances, and changes in projected taxable income on future tax rates and cash taxes.
- Customer and supplier exposure to COVID-19 disruptions, Vietnam shutdowns, non-fabric component shortages, labor constraints, and broader global supply-chain conditions.
- Availability under revolving credit facilities, covenant compliance, and the company’s ability to maintain dividends and share repurchases.