Culp, Inc. Form 10-Q Summary
Business Context and Reporting Period
Culp, Inc. manufactures, sources, and sells mattress and upholstery fabrics, including sewn mattress covers and hospitality/commercial window-treatment services. The filing covers the three and six months ended November 1, 2020, the second quarter and first half of fiscal 2021. The comparable six-month period ended November 3, 2019 included 27 weeks versus 26 weeks in the current period.
The former home accessories segment, eLuxury, was sold on March 31, 2020. Its prior-period results are presented as a discontinued operation; continuing operations now consist of mattress fabrics and upholstery fabrics.
Financial Performance and Liquidity
| Metric | Three months ended Nov. 1, 2020 | Three months ended Nov. 3, 2019 | Six months ended Nov. 1, 2020 | Six months ended Nov. 3, 2019 |
|---|---|---|---|---|
| Net sales | $76.9 million | $69.6 million | $141.3 million | $140.3 million |
| Gross profit | $14.3 million | $13.5 million | $24.2 million | $25.9 million |
| Gross margin | 18.6% | 19.4% | 17.1% | 18.5% |
| Income from continuing operations | $4.5 million | $4.4 million | $6.4 million | $7.7 million |
| Operating margin | 5.9% | 6.3% | 4.5% | 5.5% |
| Net income from continuing operations | $2.4 million | $2.3 million | $(0.3) million | $4.0 million |
| Diluted earnings per share | $0.19 | $0.18 | $(0.03) | $0.33 |
- Second-quarter sales increased 10.5%, with mattress fabrics up 12.2% and upholstery fabrics up 8.7%. First-half sales increased 0.7%, with mattress fabrics up 2.2% and upholstery fabrics down 0.9%.
- Six-month net loss was driven primarily by $5.9 million of income tax expense, including a $7.0 million non-cash valuation allowance charge and a $3.5 million non-cash benefit from the retroactive GILTI tax-regulation change.
- Operating cash flow was $22.7 million in the first half of fiscal 2021, compared with $8.2 million in the prior-year period. Capital expenditures were $2.0 million, versus $2.4 million.
- Cash and cash equivalents were $45.3 million at November 1, 2020. Total cash and investments were $56.5 million, compared with $77.1 million at May 3, 2020.
- There were no borrowings under the U.S. or China credit facilities at quarter-end. The U.S. facility provides $30 million of revolving capacity, and management reported $38.0 million of current availability under revolving credit lines.
- Total assets were $202.8 million and total shareholders’ equity was $127.3 million at November 1, 2020. Accounts receivable were $33.0 million, inventories were $47.7 million, and trade accounts payable were $38.2 million.
Material Changes Versus the Prior Comparable Period
- Quarterly demand improved substantially as consumers increased spending on home furnishings during the COVID-19 pandemic. Mattress fabrics benefited from stronger mattress and boxed-bedding demand; residential upholstery improved, while hospitality-related activity remained weak.
- Quarterly mattress-fabrics gross margin increased to 18.9% from 17.5%, supported by higher volume, fixed-cost absorption, and improved production efficiency.
- Quarterly upholstery-fabrics gross margin declined to 18.1% from 21.5%, primarily because of unfavorable foreign-exchange movements in China and sales mix pressures.
- Consolidated quarterly gross and operating margins declined despite higher sales. SG&A increased 6.9% in the quarter, primarily from higher incentive compensation, although first-half SG&A decreased 2.8% following cost reductions.
- Other expense increased to $680,000 in the quarter and $1.0 million year to date, primarily because of foreign-exchange losses. First-half foreign-exchange loss was $689,000 versus a $150,000 gain in the prior year.
- The company repaid $29.8 million of U.S. revolver borrowings, $1.0 million of China borrowings, and the $7.6 million PPP loan during the first quarter. The PPP loan was voluntarily repaid in May 2020.
- eLuxury’s prior-year six-month discontinued operation generated a $670,000 net loss; no discontinued-operation results were recorded in the current period.
Guidance, Outlook, Risks, and Unusual Items
- Management projected fiscal 2021 cash capital expenditures of $8.5 million to $9.0 million and depreciation of approximately $7.0 million. A planned $4.0 million investment in additional North American knit machines is expected to provide capacity during the fourth quarter.
- Management stated that cash, investments, operating cash flow, and available credit are expected to fund foreseeable business needs and contractual obligations. It does not expect to pay U.S. cash income taxes during fiscal 2021 because of tax attributes, AMT refunds, capital-expensing provisions, and the GILTI change.
- Management expects unfavorable China foreign-exchange movements and hospitality-related sales mix to pressure upholstery-fabrics profitability at least through the third quarter of fiscal 2021.
- Supply-chain constraints, non-fabric component shortages, labor shortages, and the continuing COVID-19 pandemic could delay customer deliveries and adversely affect operations, demand, collections, and financial performance.
- The company had $5.0 million of open equipment purchase commitments for the mattress fabrics segment and $68,000 of unpaid capital-expenditure invoices.
- Culp guarantees 70% of unpaid lease payments for eLuxury’s Indiana facility through September 2024. eLuxury and its owner have indemnified Culp, but the guarantee remains outstanding.
- The board suspended the $5.0 million share-repurchase program; no shares were repurchased during the period. A quarterly dividend of $0.11 per share was approved on December 3, 2020, for payment in January 2021.
- The company recorded full valuation allowances against specified U.S. deferred tax assets and reported $1.4 million of gross unrecognized tax benefits as of November 1, 2020.
- Management reported no material changes to legal proceedings or risk factors and concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether the strong residential and mattress demand persists after pandemic-related changes in consumer spending.
- The effect of hospitality weakness, foreign-exchange movements, raw-material costs, labor shortages, and supply-chain constraints on future margins.
- The recoverability of U.S. deferred tax assets and the potential variability of the unusually high effective tax rate.
- Progress, timing, and returns from the planned $4.0 million capacity expansion and total fiscal 2021 capital expenditures.
- Compliance with credit-facility covenants, including temporary limits on capital expenditures, dividends, and share repurchases.
- Collection performance on the increased accounts-receivable balance and the adequacy of the $595,000 doubtful-accounts allowance.
- The continuing exposure under the eLuxury lease guarantee and the commercial performance of the related supply and royalty arrangements.