Culp, Inc. Form 10-Q Summary
Business Context and Reporting Period
Culp, Inc. manufactures, sources, and sells mattress fabrics and upholstery fabrics, including window treatments and related services through Read Window Products. The filing covers the three and six months ended October 30, 2022, representing the second quarter and first half of fiscal 2023. Comparable periods ended October 31, 2021.
Financial Performance and Position
| Metric | Three Months Ended Oct. 30, 2022 | Three Months Ended Oct. 31, 2021 | Six Months Ended Oct. 30, 2022 | Six Months Ended Oct. 31, 2021 |
|---|---|---|---|---|
| Net sales | $58.4 million | $74.6 million | $121.0 million | $157.6 million |
| Gross profit (loss) | $(2.2) million | $10.7 million | $1.9 million | $23.2 million |
| Gross margin | (3.8%) | 14.4% | 1.6% | 14.7% |
| Operating income (loss) | $(11.9) million | $1.6 million | $(16.7) million | $5.0 million |
| Net income (loss) | $(12.2) million | $0.9 million | $(17.9) million | $3.1 million |
| Diluted EPS | $(0.99) | $0.07 | $(1.46) | $0.25 |
- Second-quarter sales declined 21.7%; mattress fabrics declined 35.8% and upholstery fabrics declined 4.5%. First-half sales declined 23.2%; mattress fabrics declined 33.8% and upholstery fabrics declined 11.2%.
- SG&A was broadly stable at $9.1 million in the quarter and decreased 1.6% to $18.0 million for the first half.
- The company recorded $6.4 million of non-cash inventory charges in the first half, including a $2.9 million write-down of mattress-fabrics inventory to net realizable value and $3.4 million of aged-inventory markdowns. The second-quarter charge was $5.3 million.
- Cash flow from operations was $6.2 million in the first half, compared with $(1.3) million in the prior-year period. Capital expenditures were $1.1 million, compared with $3.9 million.
- Cash and cash equivalents were $19.1 million at October 30, 2022, versus $14.6 million at May 1, 2022. Total assets were $161.6 million and shareholders’ equity was $102.1 million.
- There were no borrowings outstanding under the company’s revolving credit agreements. The U.S. facility provides up to $40 million, with $26.8 million of borrowing availability under the borrowing-base calculation at quarter-end. Including other revolving credit availability, management reported total current availability of approximately $32.3 million.
- The company had $24.3 million of trade accounts payable, $52.2 million of inventory, and $22.4 million of accounts receivable at quarter-end.
Material Changes Versus the Prior Comparable Period
- Profitability deteriorated sharply because of lower volumes, customer excess inventory, inflationary cost pressures, labor and quality issues, operating inefficiencies, and inventory markdowns.
- Mattress fabrics operating loss was $9.0 million in the quarter versus operating income of $3.1 million in the prior-year quarter. Its gross margin declined to (23.1%) from 15.0%.
- Upholstery fabrics operating income declined to $0.3 million from $1.0 million in the quarter. Gross margin declined to 12.3% from 13.6%.
- The company closed its Shanghai cut-and-sew upholstery operation. Related restructuring and disposal charges totaled $713,000, including $615,000 of restructuring expense and $98,000 recorded in cost of sales.
- The company began rationalizing its U.S. mattress-cover cut-and-sew platform, including planned closure of two High Point, North Carolina facilities during the third quarter of fiscal 2023 and a shift toward lower-cost production and sourcing in Haiti and Asia.
- The quarterly cash dividend was suspended on June 29, 2022. No dividends were paid in the first half of fiscal 2023, compared with $2.7 million in the prior-year period. No shares were repurchased during the first half, compared with $1.8 million of repurchases in the prior-year period.
- Other income was $829,000 in the quarter and $747,000 for the first half, compared with other expense in the prior-year periods, primarily due to more favorable foreign-exchange effects on Chinese operations.
Guidance, Outlook, Risks, and Unusual Items
- Management expects macroeconomic weakness, inflation, higher interest rates, reduced consumer discretionary spending, and customer excess inventories to continue pressuring mattress-fabrics demand and delaying product rollouts through at least the fourth quarter of fiscal 2023.
- Management expects continued softness in residential upholstery demand and operating inefficiencies at the Haiti cut-and-sew facility, while pursuing cost reductions, pricing actions, and further restructuring as needed.
- Management believes cash, operating cash flow, and available revolving-credit capacity will fund foreseeable business needs, commitments, and contractual obligations; however, liquidity could be affected by demand declines, supply-chain disruptions, inflation, higher interest rates, foreign exchange, COVID-19 developments, or geopolitical events.
- A full valuation allowance was maintained against U.S. net deferred tax assets. The company recorded $2.0 million of income tax expense for the first half despite the pretax loss, primarily because taxable income was generated by foreign operations and U.S. tax benefits were not recognized.
- Management identified no impairment of the $38.8 million mattress-fabrics asset group as of October 30, 2022, but stated that changes in demand and estimates could result in future impairment or additional inventory provisions.
- A non-binding term sheet was executed with Wells Fargo for a proposed replacement $40 million revolving credit facility expected to provide greater borrowing availability and more flexible covenants. Completion remained subject to definitive agreements.
- The company reported compliance with its financial covenants as of October 30, 2022. It had $275,000 of outstanding letters of credit and $444,000 of open equipment purchase commitments.
- The company received payments on a portion of invoices from a mattress-fabrics customer that filed for Chapter 11 and expected to collect the remaining post-May 1, 2022 invoices during the third quarter. Management did not expect a material credit loss based on information available at filing.
Important Facts for Investors to Verify
- Whether mattress and residential upholstery demand stabilizes and customer excess inventories normalize.
- The magnitude and timing of savings from the High Point and Shanghai facility closures and other restructuring actions.
- Whether additional inventory markdowns, asset impairments, or operating losses occur if demand remains weak.
- Completion and final terms of the proposed replacement revolving credit facility, including borrowing-base availability and covenants.
- The sustainability of positive operating cash flow, particularly as inventory reductions and working-capital benefits moderate.
- Whether and when the quarterly dividend may be reinstated and whether the company resumes share repurchases.
- Foreign-exchange effects, foreign tax payments, and the recoverability of U.S. deferred tax assets.