Culp, Inc. Form 10-Q Summary
Business Context and Reporting Period
Culp, Inc. operates through two segments: mattress fabrics and upholstery fabrics. This unaudited report covers the three and six months ended October 29, 2017, the second quarter and first half of fiscal 2018. The comparable periods ended October 30, 2016. Each six-month period comprised 26 weeks.
Financial Performance and Liquidity
| Metric | Three Months Ended Oct. 29, 2017 | Change vs. Prior Year | Six Months Ended Oct. 29, 2017 | Change vs. Prior Year |
|---|---|---|---|---|
| Net sales | $80.7 million | +7.1% | $160.2 million | +2.7% |
| Gross profit | $15.8 million | -6.5% | $32.3 million | -8.6% |
| Gross margin | 19.6% | -280 bps | 20.1% | -250 bps |
| Income from operations | $6.4 million | -12.5% | $13.4 million | -16.4% |
| Operating margin | 7.9% | -180 bps | 8.3% | -190 bps |
| Net income | $4.0 million | -11.2% | $9.0 million | -8.5% |
| Diluted EPS | $0.32 | From $0.36 | $0.71 | From $0.78 |
- Six-month cash flow from operations was $10.2 million, down from $17.0 million in the prior-year period.
- Six-month investing cash use was $7.0 million, including $5.0 million of capital expenditures on a cash basis and a $0.6 million investment in the Haiti joint venture. Management separately reported total fiscal year-to-date capital expenditures of $7.5 million, including $2.5 million vendor-financed.
- Six-month financing cash use was $8.2 million, including $4.6 million of dividends, $2.5 million of vendor-financed capital expenditure payments, and $1.1 million of employee withholding-tax payments.
- Cash and cash equivalents were $15.7 million at October 29, 2017. Total cash and investments were $49.1 million, compared with $54.2 million at April 30, 2017.
- There were no borrowings outstanding under the U.S. or China revolving credit facilities at period-end. Available revolving credit capacity was reported at approximately $36.0 million, and the company was in compliance with its covenants.
- Total assets were $201.0 million and shareholders’ equity was $153.1 million at October 29, 2017. Accounts receivable were $24.2 million and inventories were $50.2 million.
Material Changes Versus the Prior Comparable Period
- Sales increased in both segments, but profitability declined because of higher costs associated with the consolidation of U.S. mattress-fabric production facilities, higher China-related freight costs, and other operating disruptions.
- Mattress fabrics sales increased 6.8% in the quarter and 1.0% for the six-month period. Six-month operating income declined 18.4% to $12.9 million, and the operating margin fell to 13.3% from 16.5%.
- Upholstery fabrics sales increased 7.7% in the quarter and 5.4% for the six-month period. Six-month operating income declined 4.0% to $5.3 million, with the operating margin decreasing to 8.3% from 9.1%.
- The company completed the major transformation of its North American mattress-fabric manufacturing operations during the quarter and expects greater operating efficiencies going forward.
- A Haiti joint venture producing cut-and-sewn mattress covers commenced production in October 2017. Culp recognized a $193,000 share of the joint venture’s start-up loss during the first half.
- The effective tax rate declined to 29.1% from 37.7%, primarily because adoption of ASU 2016-09 reduced tax expense by $556,000 and because of the geographic mix of earnings.
- Interest income increased because the company invested approximately $31.0 million in investment-grade U.S. corporate bonds. Other expense increased primarily because of unfavorable foreign-currency effects in China.
Guidance, Outlook, Risks, and Unusual Items
- Management projected fiscal 2018 capital expenditures, including vendor-financed expenditures, to be comparable to fiscal 2017 and projected depreciation of approximately $8.0 million. These are current expectations and may change.
- Management expects the completed North American manufacturing consolidation to generate operating efficiencies, while gradually adding capacity at the Haiti joint venture in line with demand.
- A forced Chinese government shutdown of certain textile mills for environmental controls disrupted the supply chain and resulted in additional freight costs and higher inventory.
- The company incurred approximately $400,000 of non-recurring legal and professional fees related to a proposed acquisition of a China business that did not close.
- The IRS is examining fiscal 2014–2016 U.S. federal tax returns and proposed an approximately $12.5 million transfer-pricing adjustment. Management disagrees with the proposal and expects the examination to be completed during fiscal 2019. The ultimate outcome and any cash settlement remain uncertain; the company reported $12.6 million of gross unrecognized tax benefits.
- Key ongoing risks include housing and furniture-market demand, consumer confidence, raw-material and petrochemical costs, foreign-exchange movements, international operating conditions, supply-chain disruptions, inflation, interest rates, and the ability to pass cost increases to customers.
- On November 30, 2017, after the reporting date, the board approved a 12.5% increase in the quarterly dividend from $0.08 to $0.09 per share. The company retained $5.0 million of share-repurchase authorization and made no repurchases during the period.
Important Facts for Investors to Verify
- Whether the North American manufacturing consolidation produces the expected efficiency and margin recovery.
- The persistence and financial impact of China supply-chain disruptions, freight costs, currency effects, and raw-material inflation.
- The outcome and timing of the IRS transfer-pricing examination and potential tax cash exposure.
- Demand growth and profitability for the CLASS mattress-cover business and the Haiti joint venture.
- Actual fiscal 2018 capital expenditures, depreciation, operating cash flow, and liquidity relative to management’s expectations.
- The company’s ability to fund dividends, potential acquisitions, and capital expenditures while maintaining covenant compliance.
- Future effects of the new revenue-recognition, lease, cash-flow-classification, and income-tax accounting standards identified in the filing.