Culp, Inc. 10-Q Summary
Business context and reporting period
Culp, Inc. manufactures, sources, and sells mattress fabrics and upholstery fabrics. The upholstery segment also includes Read Window Products, which provides window treatments, soft goods, sourcing, measuring, and installation services. The filing covers the quarter and nine months ended January 29, 2023, each representing a 39-week fiscal period, compared with January 30, 2022.
Key financial metrics
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $52.5 million | $80.3 million | $173.5 million | $237.9 million |
| Gross profit | $2.1 million | $9.1 million | $4.0 million | $32.3 million |
| Gross margin | 4.0% | 11.3% | 2.3% | 13.6% |
| Operating income (loss) | $(7.8) million | $1.1 million | $(24.5) million | $6.1 million |
| Operating margin | (14.8)% | 1.4% | (14.1)% | 2.5% |
| Net income (loss) | $(9.0) million | $(0.3) million | $(26.8) million | $2.8 million |
| Diluted loss (earnings) per share | $(0.73) | $(0.02) | $(2.19) | $0.23 |
Quarterly sales declined 34.6%, while nine-month sales declined 27.1%. Mattress fabrics sales decreased 35.8% in the quarter and 34.4% year to date; upholstery fabrics sales decreased 33.5% and 19.3%, respectively.
Operating results were affected by lower volumes, production inefficiencies, inflationary labor and raw-material costs, excess customer inventories, inventory charges, and restructuring expenses. Nine-month non-cash inventory charges totaled $6.3 million, including a $2.9 million mattress-fabrics write-down to net realizable value and $3.3 million of aged-inventory markdowns.
Cash provided by operating activities was $4.6 million for the first nine months of FY2023, compared with cash used of $12.4 million in the prior-year period. Capital expenditures were $1.6 million versus $5.3 million. Cash and cash equivalents were $16.7 million at January 29, 2023, compared with $14.6 million at May 1, 2022.
There were no borrowings outstanding under the company’s revolving facilities. Available borrowings totaled $23.0 million under the U.S. ABL facility, and total availability under revolving credit lines was approximately $28.9 million, including the China facility. The ABL facility has a maximum principal amount of $35.0 million and matures January 19, 2026. Outstanding letters of credit totaled $275,000.
Total assets were $150.6 million and total liabilities were $57.1 million at January 29, 2023. Operating lease liabilities totaled $7.2 million. Inventory declined to $47.6 million from $73.1 million a year earlier, while accounts receivable declined to $21.2 million from $39.0 million.
Material changes versus the prior comparable period
- Gross margin fell 730 basis points in the quarter and 1,130 basis points for the nine-month period.
- The mattress fabrics segment generated a quarterly operating loss of $4.2 million and a nine-month operating loss of $16.2 million, compared with operating income in both prior-year periods.
- The upholstery fabrics segment generated a quarterly operating loss of $420,000, compared with operating income of $2.4 million, while nine-month operating income declined to $383,000 from $5.7 million.
- SG&A increased 14.5% in the quarter and 3.3% for the nine-month period, primarily because prior-year incentive-compensation estimate adjustments did not recur.
- The quarterly foreign-exchange loss increased to $1.1 million from $322,000; the nine-month period included a $348,000 other expense versus $963,000 in the prior year, principally reflecting foreign-exchange changes.
- The company suspended its quarterly cash dividend in June 2022 and made no dividend payments during the first nine months of FY2023. It also made no share repurchases, although $3.2 million remained available under the authorization.
Guidance, outlook, risks, contingencies, and unusual items
Management expects macroeconomic weakness, inflation, elevated interest rates, lower consumer discretionary spending, and excess customer inventories to continue pressuring demand and delaying product rollouts, likely through at least the end of FY2023. Management expects lower residential upholstery demand and continued pressure on profitability, while pursuing cost controls, pricing actions, supply-chain optimization, and further restructuring as necessary.
The company completed the closure of two High Point, North Carolina mattress-cover facilities and is shifting production toward lower-cost facilities and sourcing locations. It also closed its Shanghai cut-and-sew upholstery operation and began consolidating cut-and-sew production in Haiti. Total restructuring expense and related charges for the first nine months were $1.4 million.
A Haiti lease termination resulted in a $434,000 lease-related restructuring charge and a $277,000 impairment charge in the quarter. The related right-of-use asset was classified as held for sale at a fair value of $2.0 million. A third-party lessee is expected to pay Culp $2.4 million from April 2023 through December 2029 under the termination arrangement.
A significant mattress-fabrics customer and affiliates filed for Chapter 11 reorganization on January 23, 2023. Management stated that receivables were substantially collected, it continued selling to the customer on credit, and it did not believe a material loss was likely at the reporting date. The company also disclosed a prior customer bankruptcy but reported no material credit loss.
Management identified risks from consumer demand, housing and furniture markets, inflation, freight and labor costs, raw-material prices, supply-chain disruptions, foreign exchange, international operations, COVID-19 impacts, geopolitical events including the Russia-Ukraine war, customer financial condition, and potential inventory or asset impairments. The company reported no material changes to previously disclosed legal proceedings or risk factors, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether mattress-fabrics demand, customer excess inventories, and product-rollout delays improve after FY2023.
- Whether inventory reductions are sustainable without additional markdowns or net-realizable-value write-downs.
- Progress and realized savings from the High Point, Shanghai, and Haiti restructuring actions.
- Liquidity headroom under the borrowing-base ABL facility and compliance with its cash-dominion and springing fixed-charge-coverage covenants.
- Collection and ongoing credit exposure related to the customer in Chapter 11 proceedings.
- The company’s ability to return to profitability despite the full U.S. deferred-tax-asset valuation allowance and ongoing foreign tax expense.
- Whether and when the suspended dividend or share-repurchase program may resume.