Culp, Inc. Form 10-Q Summary
Business context and reporting period
Culp, Inc. manufactures, sources, and sells mattress fabrics and upholstery fabrics, including mattress covers, upholstery products, window treatments, and related hospitality services. The filing covers the three and nine months ended January 30, 2022, compared with January 31, 2021; each nine-month period represents 39 weeks. Fiscal 2022 includes full ownership and consolidation of CIH, a Haiti-based cut-and-sewn mattress-cover operation, following the February 1, 2021 acquisition of the remaining 50% interest.
Key financial metrics
| Metric | Three months ended Jan. 30, 2022 | Three months ended Jan. 31, 2021 | Nine months ended Jan. 30, 2022 | Nine months ended Jan. 31, 2021 |
|---|---|---|---|---|
| Net sales | $80.3 million | $79.3 million | $237.9 million | $220.7 million |
| Gross profit / margin | $9.1 million / 11.3% | $13.9 million / 17.5% | $32.3 million / 13.6% | $38.0 million / 17.2% |
| Income from operations / margin | $1.1 million / 1.4% | $4.0 million / 5.1% | $6.1 million / 2.5% | $10.4 million / 4.7% |
| Net income (loss) | $(0.3) million | $2.1 million | $2.8 million | $1.7 million |
| Diluted EPS | $(0.02) | $0.17 | $0.23 | $0.14 |
- Third-quarter sales increased 1.2%; mattress fabrics sales declined 0.4% and upholstery fabrics sales increased 2.7%.
- Nine-month sales increased 7.8%; mattress fabrics increased 6.7% and upholstery fabrics increased 9.1%.
- Third-quarter gross profit declined 34.3%, and operating income declined 72.7%. Nine-month gross profit declined 15.0%, and operating income declined 41.9%.
- SG&A decreased 18.6% in the quarter and 4.8% year to date, primarily because of lower incentive compensation, partly offset by higher salary, marketing, and design costs.
- Nine-month income tax expense was $2.6 million, or 48.4% of pretax income, versus $6.8 million, or 80.1%, in the prior-year period. The prior-year rate included significant discrete GILTI and U.S. deferred-tax valuation allowance effects.
Cash flow, balance sheet, debt, and liquidity
- Cash used in operating activities was $12.4 million for the first nine months of fiscal 2022, compared with $21.7 million of cash provided in the prior-year period. Inventory purchases, normalized vendor terms, incentive compensation payments, Haiti start-up costs, and taxes were significant uses of cash.
- Cash and cash equivalents were $11.8 million at January 30, 2022, versus $37.0 million at January 31, 2021, and $37.0 million at May 2, 2021.
- Total cash and investments were $22.2 million at January 30, 2022, compared with $46.9 million at May 2, 2021.
- Inventory was $73.1 million, up 26.5% from January 31, 2021 and 30.8% from May 2, 2021. Operating working capital was $64.9 million, compared with $48.8 million and $50.2 million at the prior-year comparable date and fiscal year-end, respectively.
- No borrowings were outstanding under the company’s revolving credit agreements. Management reported approximately $38 million of current availability under revolving credit lines and compliance with financial covenants.
- Capital expenditures were $5.3 million through nine months, versus $4.3 million in the prior-year period. Management projected fiscal 2022 capital expenditures of $6.8 million to $7.0 million and depreciation of approximately $7.0 million.
- The company paid $4.1 million of dividends and repurchased 121,688 shares for $1.8 million during the nine-month period. The board had $3.2 million remaining under the repurchase authorization at January 30, 2022.
Material changes, outlook, and unusual items
- Profitability was pressured by unfavorable mattress-fabrics production mix, higher freight, raw-material, and labor costs, hiring and training inefficiencies, COVID-19 absenteeism, foreign-exchange losses in China, and start-up costs for the new Haiti upholstery-kit facility.
- Management stated that mattress-cover customers were working through existing inventories and delaying new-product launches. It also cited weaker near-term domestic mattress demand and a likely slowdown from the post-pandemic home-furnishings surge.
- Pricing actions and freight surcharges increased sales and partially offset inflation. Additional targeted price increases were planned for the fourth quarter, with further benefit expected from upholstery pricing on new orders.
- The Haiti upholstery facility began shipping products in January 2022, but ramp-up was slower than expected because travel restrictions delayed training. Management expected production to increase over the following months.
- Management could not reasonably estimate the continuing effects of COVID-19 or Russia’s invasion of Ukraine, including potential effects on petrochemical prices, consumer spending, suppliers, and global operations.
- The company expects to be subject to GILTI tax for fiscal 2022 for subsidiaries in Canada and Haiti and continues to maintain a full valuation allowance against U.S. net deferred tax assets of $10.1 million.
- On January 12, 2022, the company extended its eLuxury supply agreement through March 31, 2027, terminated its royalty agreement, received a $150,000 termination fee, and was released from its 70% lease-payment guarantee.
- Management stated that existing legal proceedings are not expected to have a material adverse effect. Open equipment purchase commitments totaled $812,000.
Important facts for investors to verify
- Whether pricing actions sufficiently offset persistent freight, labor, raw-material, foreign-exchange, and inflationary pressures.
- Inventory normalization, inventory turns, operating cash conversion, and the ability to rebuild cash balances after the $12.4 million year-to-date operating cash outflow.
- The pace and profitability of the Haiti upholstery-kit facility ramp-up and the utilization of CIH’s near-shore mattress-cover capacity.
- Demand trends in mattress covers, residential upholstery, hospitality, and commercial markets, including customer inventory levels and supply-chain constraints.
- The impact of GILTI, foreign earnings, valuation allowances, and projected fiscal 2022 cash tax payments of approximately $3.5 million.
- Management’s ability to fund projected capital expenditures, dividends, and potential share repurchases without increasing borrowings.