Culp, Inc. Form 10-Q Summary
Business context and reporting period
Culp, Inc. operates in mattress fabrics, upholstery fabrics, and home accessories. The unaudited report covers the fiscal third quarter and nine months ended January 27, 2019; the comparable periods ended January 28, 2018, each representing 39 weeks. The company acquired Read Window Products on April 1, 2018, and acquired an initial 80% interest in eLuxury on June 22, 2018.
Financial performance and liquidity
| Metric | Three months ended Jan. 27, 2019 | Three months ended Jan. 28, 2018 | Nine months ended Jan. 27, 2019 | Nine months ended Jan. 28, 2018 |
|---|---|---|---|---|
| Net sales | $77.2 million | $85.3 million | $225.7 million | $245.5 million |
| Gross profit | $14.1 million | $17.6 million | $38.0 million | $49.9 million |
| Gross margin | 18.3% | 20.6% | 16.8% | 20.3% |
| Income from operations | $4.3 million | $7.6 million | $10.7 million | $21.0 million |
| Operating margin | 5.6% | 9.0% | 4.7% | 8.6% |
| Net income attributable to Culp shareholders | $3.2 million | $(0.7) million | $7.0 million | $8.2 million |
| Diluted EPS | $0.25 | $(0.06) | $0.56 | $0.65 |
- Net cash provided by operating activities was $8.1 million for the nine months, compared with $21.5 million in the prior-year period.
- Cash and cash equivalents were $26.4 million; total cash and investments were approximately $40.0 million at January 27, 2019.
- The company had no borrowings under its revolving credit facilities. Available revolving capacity was approximately $31.0 million, consisting of a $25.0 million U.S. facility and a $6.0 million China facility.
- Total assets were $224.9 million, total liabilities were $57.7 million, and total equity was $167.2 million. The balance sheet included a $5.8 million eLuxury contingent earn-out liability.
- Nine-month capital expenditures on a cash basis were $4.4 million, including $1.4 million of vendor-financed expenditures. Management projected fiscal 2019 capital expenditures of $6.0 million to $6.5 million and depreciation of approximately $8.0 million.
Material changes versus the prior comparable periods
- Third-quarter sales declined 9.5% and nine-month sales declined 8.1%, primarily because mattress-fabrics sales fell 27.1% and 26.5%, respectively.
- Mattress-fabrics operating income declined 53.1% in the quarter and 54.9% year to date, reflecting weaker bedding-industry demand, low-priced Chinese mattress imports, excess customer inventory, weather disruptions, and a weak retail and e-commerce environment.
- Upholstery-fabrics sales increased 2.3% in the quarter and 7.2% year to date, substantially reflecting the Read acquisition. Nine-month operating income increased 3.1% despite restructuring charges.
- Home accessories generated $4.4 million of third-quarter sales and $11.8 million of nine-month sales, but recorded operating losses of $311,000 and $254,000, respectively, as eLuxury experienced product rollout, sampling, marketing, integration, and weak e-commerce challenges.
- Gross margins declined 230 basis points in the quarter and 350 basis points year to date; operating margins declined 340 and 390 basis points, respectively.
- Income tax expense declined to $3.4 million from $12.0 million for the nine months. The prior-year period included a $5.9 million provisional Tax Cuts and Jobs Act charge, while fiscal 2019 included a $593,000 favorable final provisional adjustment.
- The company repurchased 160,423 shares for $3.3 million during the nine months, compared with no repurchases in the prior-year period. Approximately $1.7 million remained authorized for repurchases at January 27, 2019.
Outlook, commentary, risks, and unusual items
- Management expected mattress-fabrics demand to remain under pressure through at least the fourth quarter of fiscal 2019 as excess imported mattress inventory was sold. A preliminary ruling on anticipated anti-dumping measures was expected in May 2019; the timing and effect remained uncertain.
- Management cited potential longer-term benefits from anti-dumping measures, customer supply-chain changes, design strength, market-share gains, and improved sequential demand, but did not provide consolidated revenue or earnings guidance.
- The Anderson, South Carolina upholstery facility was closed during the second quarter because of declining demand. Nine-month restructuring and related charges totaled $1.6 million net, partially offset by a $1.5 million gain on property sales.
- The eLuxury acquisition generated a $5.6 million fair-value earn-out obligation. No contingent payment was expected under the Read acquisition based on results through January 27, 2019. eLuxury contributed a $75,000 noncontrolling-interest loss for the period after acquisition.
- Principal risks include housing and consumer demand, changing consumer preferences, tariffs and trade policy, foreign exchange, international operating conditions, raw-material and petrochemical costs, inflation, interest rates, and acquisition integration.
- The company adopted ASC 606 in fiscal 2019 without a material effect on earnings or financial position. It expected the new lease standard, required in fiscal 2020, to materially increase recognized lease assets and liabilities.
- On February 27, 2019, the board approved a quarterly dividend of $0.10 per share payable April 15, 2019. Future dividends remain subject to board approval.
- Subsequent to quarter-end, the China credit facility was renewed through January 31, 2020. Management reported compliance with all financial covenants and effective disclosure controls.
Important facts for investors to verify
- Whether anti-dumping actions against Chinese mattress imports occur on the expected timetable and materially improve mattress-fabrics demand.
- The pace of customer inventory reduction, mattress-fabrics volume recovery, and segment margin normalization.
- Whether eLuxury can achieve profitable growth after integration and product rollout investments.
- The valuation and future cash settlement of the $5.8 million eLuxury earn-out obligation and the remaining Read payment obligations.
- Cash conversion, working-capital requirements, and liquidity as operating cash flow remains below the prior-year level.
- Exposure to tariffs, foreign exchange, raw-material inflation, and international supply-chain disruptions.