Culp, Inc. Fiscal 2022 Form 10-K Summary
Reporting period: Fiscal year ended May 1, 2022, consisting of 52 weeks. The request references “2021 Q4,” but the supplied filing is the fiscal 2022 Form 10-K; fourth-quarter fiscal 2022 results are included where disclosed.
Business context
Culp manufactures, sources, and markets mattress fabrics and sewn mattress covers, upholstery fabrics and cut-and-sewn kits, and related window-treatment products and services. Continuing operations comprise mattress fabrics and upholstery fabrics. The former home accessories segment was sold in fiscal 2020 and is presented as a discontinued operation.
- Mattress fabrics represented 52% of fiscal 2022 sales; upholstery fabrics represented 48%.
- Operations and sourcing span the United States, Canada, China, Haiti, Vietnam, and Turkey.
- Fiscal 2022 included the launch of a High Point innovation campus and the start-up of a new Haiti upholstery cut-and-sew facility.
Financial performance and key metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Net sales | $294.8 million | $299.7 million | Down 1.6% |
| Gross profit | $36.1 million | $49.8 million | Down 27.6% |
| Gross margin | 12.2% | 16.6% | Down 440 basis points |
| Income from operations | $0.7 million | $12.1 million | Down 94.4% |
| Operating margin | 0.2% | 4.0% | Down 380 basis points |
| Loss before income taxes | $0.3 million loss | $10.9 million income | Declined $11.2 million |
| Net income/(loss) | $3.2 million loss | $3.2 million income | Turned to loss |
| Diluted EPS | $(0.26) | $0.26 | Declined $0.52 |
| Cash used in operating activities | $17.4 million | $21.5 million provided | Declined $38.9 million |
| Capital expenditures | $5.7 million | $6.7 million | Down $1.0 million |
Segment results: Mattress fabrics sales declined 3.5% to $152.2 million; gross margin fell to 10.8% from 15.1%, and operating income declined to $4.2 million from $11.8 million. Upholstery fabrics sales increased 0.4% to $142.7 million; gross margin fell to 13.8% from 18.3%, and operating income declined to $5.6 million from $11.9 million.
Balance sheet and liquidity: Cash and investments declined to $14.6 million from $46.9 million. Accounts receivable declined to $22.2 million from $37.7 million, while inventory increased to $66.6 million from $55.9 million. Total assets were $177.6 million, total liabilities were $58.1 million, and shareholders’ equity was $119.5 million. There were no borrowings outstanding under the company’s credit facilities at May 1, 2022.
At fiscal year-end, the company reported approximately $38 million of combined borrowing availability under its domestic and China facilities. On June 24, 2022, it entered into a new secured revolving credit agreement providing for up to $40 million, subject to borrowing-base availability, and expiring in June 2025.
Material changes versus the prior comparable period
- Revenue was broadly stable year over year, but profitability deteriorated sharply because of lower demand, higher freight, raw-material and labor costs, unfavorable product mix, foreign-exchange effects, and start-up costs in Haiti.
- Fiscal 2022 fourth-quarter sales were $56.9 million, down 28.0% from $79.1 million in the prior-year quarter. China COVID-19 shutdowns prevented shipments of residential upholstery products and sewn mattress covers during April 2022.
- Pricing and freight surcharge actions increased mattress fabrics sales by approximately 5.1% and upholstery fabrics sales by approximately 2.9%, partially offsetting volume and cost pressures.
- Operating cash flow changed from a $21.5 million inflow to a $17.4 million outflow. Working capital was pressured by increased inventory purchases, lower accounts payable, and higher material costs.
- The company repurchased 121,688 shares for $1.8 million in fiscal 2022; $3.2 million remained under the authorization at year-end. Management did not expect further repurchases through at least the first quarter of fiscal 2023.
- On June 29, 2022, the board suspended the quarterly cash dividend to preserve capital and liquidity. Fiscal 2022 dividend payments totaled $5.5 million.
- A full valuation allowance of $11.9 million was maintained against U.S. net deferred tax assets because of recent cumulative U.S. taxable losses and expected losses in fiscal 2023.
Guidance, outlook, risks, and unusual items
- Management expected weakness in the domestic mattress industry and slower residential home-furnishings activity to continue through at least the first half of fiscal 2023.
- Higher labor, freight, raw-material, energy, and petrochemical costs were expected to continue pressuring margins. Additional targeted price increases and cost-control initiatives were expected to provide partial mitigation.
- China shutdowns had been lifted, but lingering effects were expected to affect the first quarter of fiscal 2023. Haiti upholstery operations were expected to incur additional training costs and operating inefficiencies while production ramped.
- Management could not reasonably estimate the continuing effects of COVID-19 or Russia’s invasion of Ukraine. Key exposures include supply-chain disruption, inflation, labor shortages, tariffs, foreign currency, geopolitical instability, and weaker consumer demand.
- Customer concentration is material: La-Z-Boy accounted for approximately 13% of fiscal 2022 consolidated sales and Serta Simmons Holdings accounted for approximately 11%.
- On June 25, 2022, a major mattress-fabrics customer and affiliates filed for Chapter 11 reorganization. The company reported that related receivables outstanding at May 1, 2022 had been paid in full and that it did not currently expect a material credit loss on subsequent pre-bankruptcy invoices.
- Fiscal 2021 included an $819,000 bargain-purchase gain from acquiring the remaining interest in the Haiti mattress-cover operation; no comparable gain occurred in fiscal 2022.
- The company had no goodwill on its balance sheet following $27.2 million of goodwill impairments recorded in fiscal 2020. No impairment charges were recorded in fiscal 2022 or 2021.
- The company reported no material legal proceedings, effective disclosure controls, effective internal control over financial reporting, and unqualified audit opinions.
Important facts for investors to verify
- Whether fiscal 2023 demand and margins recover after the fiscal 2022 fourth-quarter decline.
- Actual availability and covenant compliance under the amended $40 million revolving credit facility, including the fiscal 2023 minimum liquidity requirement.
- The duration and financial effect of COVID-19 restrictions, China and Vietnam supply-chain disruptions, and Haiti production ramp-up costs.
- Inventory aging, markdown reserves, and working-capital conversion following the 19.0% increase in inventory.
- Credit exposure and future sales implications associated with the Chapter 11 filing of the major mattress-fabrics customer.
- The impact of the suspended dividend and reduced share repurchases on capital allocation and liquidity.
- Recoverability of the $11.9 million U.S. deferred-tax asset valuation allowance and the company’s projected foreign tax payments of approximately $3.2 million in fiscal 2023.