Culp, Inc. Form 10-Q Summary
Business Context and Reporting Period
Culp, Inc. manufactures, sources, and sells mattress fabrics and upholstery fabrics. The report covers the 13-week quarter ended July 30, 2017, the first quarter of fiscal 2018, compared with the 13-week period ended July 31, 2016. The financial statements are unaudited.
- Mattress fabrics: products for bedding manufacturers, including mattress covers.
- Upholstery fabrics: products primarily for residential and commercial furniture manufacturers.
- Shares outstanding at July 30, 2017: 12.4 million.
Financial Performance and Key Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $79.5 million | $80.7 million | (1.4%) |
| Gross profit | $16.5 million | $18.4 million | (10.6%) |
| Gross margin | 20.7% | 22.8% | (210 bps) |
| SG&A expense | $9.5 million | $9.7 million | (2.5%) |
| Operating income | $7.0 million | $8.7 million | (19.7%) |
| Operating margin | 8.8% | 10.7% | (190 bps) |
| Income before taxes | $6.7 million | $8.5 million | (21.1%) |
| Net income | $5.0 million | $5.3 million | (6.2%) |
| Diluted EPS | $0.40 | $0.43 | (7.0%) |
| Cash flow from operations | $2.4 million | $6.2 million | Down $3.8 million |
The effective tax rate declined to 24.3% from 37.8%, primarily due to a $554,000 tax benefit from adopting ASU 2016-09 and a more favorable mix of domestic and foreign earnings.
- Mattress fabrics sales declined 4.2% to $48.4 million; operating income declined 24.2% to $6.4 million, and operating margin fell to 13.1% from 16.6%.
- Upholstery fabrics sales increased 3.2% to $31.1 million; operating income declined 3.0% to $2.9 million, and operating margin declined to 9.3% from 9.9%.
- Cash and cash equivalents were $18.3 million at July 30, 2017, compared with $20.8 million at April 30, 2017.
- Cash, short-term investments, and held-to-maturity investments totaled $51.7 million at July 30, 2017, compared with $54.2 million at April 30, 2017.
- Inventories were $55.2 million, up 15% from $48.1 million a year earlier, primarily due to higher mattress-fabrics inventory.
- Total assets were $207.9 million and shareholders’ equity was $149.7 million at July 30, 2017.
Debt, Liquidity, and Capital Allocation
- The U.S. revolving credit facility provides $30.0 million of capacity and had $5.0 million outstanding at July 30, 2017, at an applicable interest rate of 2.68%.
- The China revolving facility provides up to approximately $5.9 million; there were no borrowings outstanding.
- Available borrowing capacity under the revolving credit lines was reported as $30.9 million.
- The company was in compliance with its financial covenants.
- First-quarter capital expenditures were $3.5 million on a cash basis, including $1.3 million of vendor-financed expenditures.
- Management projected fiscal 2018 capital expenditures, including vendor-financed expenditures, to be comparable with fiscal 2017, and projected depreciation of approximately $8.0 million.
- The company paid $3.6 million in dividends, including a $0.21-per-share special dividend and a $0.08-per-share quarterly dividend.
- No shares were repurchased; $5.0 million remained available under the repurchase authorization.
Material Changes, Outlook, Risks, and Unusual Items
- Management cited a weak and uncertain home-furnishings retail environment and disruptions in the mattress industry, including changes to at least one major customer’s distribution channels.
- Mattress-fabrics profitability was pressured by manufacturing inefficiencies from consolidating production facilities and relocating knitting equipment and the mattress-cover operation.
- The mattress-fabrics segment recorded approximately $610,000 of non-recurring charges, including $375,000 of plant-consolidation moving costs and $235,000 related to a workers’ compensation claim.
- Management expected continued effects from production changes and mattress-industry uncertainty during the second quarter of fiscal 2018.
- Both segments implemented plans to reduce inventory in the second quarter.
- The company owns 50% of a Haiti joint venture expected to begin production in October 2017. Its first-quarter equity loss was $118,000, and its investment balance was $1.5 million at July 30, 2017.
- Culp signed a non-binding letter of intent to acquire a China-based mattress-fabrics business with stated annual revenue of approximately $12 million and pre-tax income of approximately $2.5 million. Closing remained subject to due diligence, definitive documentation, and other approvals.
- A new North Carolina building was placed into service in July 2017. Capital-expenditure obligations totaled $5.6 million at quarter-end, including $3.9 million of financed completed work; open purchase commitments totaled $6.4 million.
- The company reported $12.4 million of gross unrecognized income tax benefits, primarily related to foreign-tax treaty positions. IRS examinations for fiscal 2014–2016 and Quebec examinations for fiscal 2013–2015 were ongoing, with no proposed adjustments disclosed.
- Key risks include demand and housing-market conditions, customer concentration and order volatility, foreign currency movements, raw-material and petrochemical costs, inflation, interest rates, international operations, and execution of facility consolidations and new investments.
Most Important Facts for Investors to Verify
- Whether mattress-fabrics demand stabilizes and whether customer-order reductions are offset by growth from other customers and the mattress-cover business.
- Whether production relocations and consolidation-related inefficiencies normalize and whether additional unusual charges arise.
- Progress toward reducing the elevated inventory balance and converting earnings into operating cash flow.
- Utilization of the $5.0 million U.S. borrowing and compliance with revolving-credit covenants.
- Execution, timing, funding, and expected returns of the Haiti joint venture and proposed China acquisition.
- Final outcomes of the U.S. and Quebec tax examinations and potential changes in the $12.4 million unrecognized tax benefit.
- Continuation of the $0.08 quarterly dividend, which remains subject to board approval and changing business conditions.