Culp, Inc. Form 10-Q Summary
Reporting period: Three months ended July 30, 2023, the first quarter of fiscal 2024. The comparable period ended July 31, 2022; both periods comprised 13 weeks. Culp operates through mattress fabrics and upholstery fabrics segments.
Financial Performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $56.7 million | $62.6 million | Down 9.5% |
| Gross profit | $7.1 million | $4.1 million | Up 71.6% |
| Gross margin | 12.5% | 6.6% | Up 591 basis points |
| Loss from operations | $(3.1) million | $(4.7) million | Improved 35.0% |
| Operating margin | (5.4%) | (7.6%) | Improved 213 basis points |
| Loss before income taxes | $(2.6) million | $(4.8) million | Improved 45.0% |
| Income tax expense | $0.7 million | $0.9 million | Down 21.8% |
| Net loss | $(3.3) million | $(5.7) million | Improved 41.4% |
| Basic and diluted loss per share | $(0.27) | $(0.47) | Improved |
- Mattress fabrics sales were $29.2 million, down 0.5%; operating loss improved to $1.4 million from $2.9 million.
- Upholstery fabrics sales were $27.4 million, down 17.4%; operating income increased to $1.3 million from $0.5 million.
- SG&A expense increased 10.9% to $9.8 million, driven by wage inflation, incentive compensation, professional fees, bad-debt provisions, and product-sampling costs.
- Interest income increased to $345,000 from $17,000, primarily because of higher market interest rates. Other income was $96,000 versus other expense of $82,000, largely reflecting more favorable foreign-exchange effects in China.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Net cash used in operating activities was $4.4 million, compared with $5.3 million of operating cash provided in the prior-year quarter.
- Capital expenditures on a cash basis were $513,000, compared with $711,000; depreciation was $1.6 million versus $1.8 million.
- Cash and cash equivalents were $16.8 million at July 30, 2023, down from $21.0 million at April 30, 2023 and $18.9 million at July 31, 2022.
- Total inventory was $43.8 million, down 31.3% from the prior-year balance of $63.7 million. Accounts receivable was $22.6 million, down 8.9% year over year.
- Total liabilities were $56.8 million and shareholders’ equity was $86.1 million. The filing reports no borrowings outstanding under the U.S. or China revolving credit agreements.
- The U.S. asset-based revolving facility has maximum commitments of $35.0 million, matures January 19, 2026, and had $25.5 million of available borrowings at July 30, 2023. The China facility provides up to RMB40 million, or approximately $5.6 million at the period-end exchange rate.
- Total available borrowing capacity under the revolving credit lines was reported as $31.1 million. The company was in compliance with its financial covenants.
- The company had $275,000 of outstanding letters of credit and $725,000 of remaining letter-of-credit capacity under the U.S. facility.
Material Changes Versus the Prior Comparable Period
- Sales declined because of continued softness in the domestic mattress market and reduced residential home-furnishings demand. Upholstery sales also benefited less from the post-pandemic recovery in China than in the prior-year period.
- Profitability improved because of product pricing aligned with current costs, operating-efficiency improvements, lower overhead, restructuring benefits, stronger hospitality and contract business, Read business contributions, and favorable foreign exchange in China.
- The company discontinued production of cut-and-sewn upholstery kits in Haiti during the quarter. Related restructuring expense and restructuring-related charges totaled $517,000, including $338,000 of restructuring expense and $179,000 of inventory markdowns and disposal costs.
- Inventory reductions reflected lower purchases, weaker demand, prior write-downs, and promotional programs to reduce aged inventory. The quarter included a $717,000 non-cash inventory credit, partly offset by restructuring-related markdowns.
- Total assets declined to $142.9 million from $152.2 million at April 30, 2023 and $180.5 million at July 31, 2022, primarily due to lower cash, inventory, property and equipment, and right-of-use assets.
Guidance, Outlook, Risks, and Unusual Items
- Management expects macroeconomic pressure and industry softness to continue affecting mattress-fabrics demand through at least the second quarter of fiscal 2024. Residential upholstery demand is also expected to remain under pressure.
- Management expects benefits from new products, pricing actions, improved operating efficiency, inventory management, the exit from Haiti cut-and-sew production, hospitality/contract fabrics, and improvement in the Read business.
- The company expects fiscal 2024 cash income-tax payments of approximately $3.2 million, subject to foreign earnings, exchange rates, repatriation timing, and capital-project timing.
- Management stated that cash of $16.8 million and revolving-credit availability of $31.1 million should fund foreseeable business needs, commitments, and contractual obligations.
- The company does not expect to repurchase shares through at least the second quarter of fiscal 2024. It repurchased no shares during the quarter, and $3.2 million remained available under the repurchase authorization.
- The quarterly dividend was suspended in June 2022. The filing states that dividends are not expected through at least the second quarter of fiscal 2023; this fiscal-year reference appears inconsistent with the current fiscal period and should be verified.
- Key risks include weak consumer and housing-related demand, inflation and interest rates, labor and raw-material costs, inventory valuation, foreign exchange, supply-chain disruptions, China or Haiti operating risks, geopolitical events, potential COVID-related disruptions, customer credit risk, and possible impairment of long-lived assets.
- Management identified a significant cumulative operating loss in mattress fabrics since the second quarter of fiscal 2023 but concluded that the related asset group remained recoverable and recorded no impairment charge as of July 30, 2023.
Investor Verification Points
- Verify the pace of demand recovery in mattress fabrics and residential upholstery fabrics and whether the expected second-quarter softness persists.
- Monitor operating cash generation, cash balances, inventory normalization, and compliance with the ABL facility’s excess-availability triggers and springing fixed-charge coverage covenant.
- Assess whether restructuring actions produce sustainable cost savings and whether additional restructuring or asset-impairment charges arise.
- Review the realizability of the company’s U.S. deferred-tax assets; a full valuation allowance covered approximately $19.6 million of U.S. deferred-tax assets and capital-loss carryforwards at July 30, 2023.
- Confirm expected fiscal 2024 tax payments, cash repatriation requirements, and the status of the suspended dividend and share-repurchase program.
- Evaluate collectibility and valuation of the Haiti-related note receivable, which had a reported present value of $1.9 million and is classified as a Level 3 fair-value measurement.