Culp, Inc. Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended April 28, 2019; 52 weeks. The provided filing is an annual Form 10-K, not a standalone fiscal 2018 fourth-quarter filing. Fiscal 2018 ended April 29, 2018.
Business Context
Culp manufactures, sources, and markets mattress fabrics and sewn mattress covers, upholstery fabrics and kits, window treatments, and bedding accessories and home goods. It operates three segments: mattress fabrics, upholstery fabrics, and home accessories. The home accessories segment began with Culp’s June 2018 acquisition of an 80% interest in eLuxury. The company also acquired Read Window Products in April 2018.
- Mattress fabrics: $145.1 million of fiscal 2019 sales, or 49% of total sales.
- Upholstery fabrics: $135.7 million, or 46% of total sales.
- Home accessories: $16.0 million, or 5% of total sales.
Key Financial Metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $296.7 million | $323.7 million | Down 8.4% |
| Gross profit | $50.2 million | $64.6 million | Down 22.3% |
| Gross margin | 16.9% | 20.0% | Down 310 basis points |
| Income from operations | $12.6 million | $27.5 million | Down 54.1% |
| Operating margin | 4.3% | 8.5% | Down 420 basis points |
| Income before taxes | $12.0 million | $26.9 million | Down 55.4% |
| Net income attributable to Culp shareholders | $5.7 million | $20.9 million | Down 72.8% |
| Diluted earnings per share | $0.45 | $1.65 | Down 72.6% |
| Net cash provided by operating activities | $13.9 million | $27.5 million | Down $13.6 million |
| Capital expenditures, cash basis | $4.7 million | $11.8 million | Down approximately 60% |
Liquidity, Debt, and Balance Sheet
- Cash, cash equivalents, and investments totaled $45.0 million at April 28, 2019, compared with $54.5 million a year earlier. Cash and cash equivalents alone were $40.0 million.
- Operating working capital was $49.8 million, broadly unchanged from $49.9 million in fiscal 2018.
- Total borrowings were $675,000, consisting of eLuxury’s subordinated loan payable. No borrowings were outstanding under Culp’s U.S. or China revolving credit facilities.
- Available capacity under revolving credit lines was $30.9 million. The company reported compliance with applicable financial covenants.
- Total assets were $219.7 million and shareholders’ equity attributable to Culp was $159.9 million at year-end.
- Goodwill increased to $27.2 million from $13.6 million, primarily because of the eLuxury acquisition. No goodwill impairment was recorded.
Material Changes Versus the Prior Comparable Period
- Mattress fabrics sales fell 24.7% to $145.1 million, and segment operating income fell 55.1% to $11.6 million. The principal driver was disruption from low-priced Chinese mattress imports, which reduced demand from domestic bedding manufacturers.
- Upholstery fabrics sales increased 3.5% to $135.7 million, supported by Read and continued demand for LiveSmart performance fabrics. Segment operating income declined 1.2% to $10.8 million, partly because of restructuring costs related to the Anderson, South Carolina plant closure.
- The new home accessories segment generated $16.0 million of sales and an operating loss of $735,000. Results reflected product rollout, sampling, marketing, integration costs, weaker demand for legacy mattress pads, and a softer retail and e-commerce environment.
- The Anderson facility closure produced a net restructuring charge of approximately $1.6 million, including inventory markdowns, employee termination benefits, and other closure costs, partially offset by a $1.5 million gain on asset sales.
- Interest expense declined to $42,000 from $94,000, while interest income increased to $766,000 from $534,000.
- The effective tax rate rose to 53.6% from 21.4%, primarily because taxable income shifted toward higher-tax foreign jurisdictions and because of $2.1 million of GILTI expense. Fiscal 2018 also benefited from Tax Cuts and Jobs Act-related tax items.
- Culp paid $4.7 million of dividends and repurchased 160,823 shares for $3.3 million during fiscal 2019. The company had $1.7 million remaining under its repurchase authorization at year-end.
Guidance, Outlook, Risks, and Unusual Items
- Management projected fiscal 2020 capital expenditures of $6.5 million to $7.0 million and depreciation expense of approximately $8.0 million.
- Management expected excess low-priced imported mattress inventory to continue affecting mattress fabrics demand and operating performance during the first quarter of fiscal 2020, although it cited improving retail demand, supply-chain shifts away from China, and potential market-share gains.
- The Department of Commerce imposed anti-dumping duties of 69% to as high as 1,731% on Chinese-made mattresses in May 2019. Management expected this to provide relief to domestic mattress manufacturers, while warning that production could shift to Vietnam or other countries.
- Management expected soft furniture demand, tariff uncertainty, and geopolitical risks to continue affecting upholstery fabrics at least into early fiscal 2020.
- Major risks include economic weakness and discretionary consumer spending, tariffs and trade-policy changes, dependence on China and other offshore suppliers, foreign-exchange movements, raw-material and petrochemical price volatility, customer concentration, competition, inventory markdowns, e-commerce platform dependence, cybersecurity, acquisition integration, litigation, environmental matters, and potential impairment of goodwill or other assets.
- eLuxury included an earn-out obligation recorded at $5.6 million at acquisition; total contingent consideration liabilities were $5.9 million at year-end. Read’s earn-out target was not achieved and no contingent liability was recorded for Read.
- The company adopted ASC Topic 606 at the beginning of fiscal 2019. The filing states that adoption did not materially affect results, but it changed the presentation of sales-return allowances.
- Fiscal 2020 adoption of the new lease standard was expected to add approximately $7.2 million of lease liabilities and corresponding right-of-use assets, with no material income-statement impact.
- The company reported no material legal proceedings, effective disclosure controls, and effective internal control over financial reporting. Management and the auditor excluded eLuxury from the internal-control assessment because it was acquired during the year.
Investor Verification Checklist
- Verify whether mattress demand and domestic manufacturers’ volumes improved after the Chinese mattress anti-dumping duties, and monitor possible production shifts to other countries.
- Assess whether mattress fabrics margins can recover from the fiscal 2019 decline and whether the CLASS sewn-cover business continues to grow.
- Evaluate eLuxury’s path from a $735,000 segment operating loss to profitability, including customer-acquisition costs, marketplace fees, product mix, and earn-out exposure.
- Monitor tariff exposure, sourcing changes in Vietnam and China, foreign-exchange effects, and the ability to pass higher input costs to customers.
- Review goodwill, tradename, and other intangible balances for impairment risk, particularly if operating performance remains weak.
- Reconcile reported liquidity with the location of cash, foreign repatriation and tax obligations, credit-line availability, lease obligations, and the $675,000 subordinated loan.
- Consider customer concentration, including Serta Simmons-related sales of approximately 18% of consolidated sales and La-Z-Boy sales of approximately 11%.