Culp, Inc. Form 10-Q Summary
Business context and reporting period
Culp, Inc. operates through mattress fabrics, upholstery fabrics, and home accessories segments. This filing covers the fiscal quarter ended February 2, 2020, and the nine-month period ended February 2, 2020. The comparable prior-year periods ended January 27, 2019; the current nine-month period comprised 40 weeks versus 39 weeks previously. The filing was signed March 13, 2020.
Key financial metrics
| Metric | Three months ended February 2, 2020 | Three months ended January 27, 2019 | Nine months ended February 2, 2020 | Nine months ended January 27, 2019 |
|---|---|---|---|---|
| Net sales | $72.0 million | $77.2 million | $219.5 million | $225.7 million |
| Gross profit | $12.4 million | $14.1 million | $39.9 million | $38.0 million |
| Gross margin | 17.2% | 18.3% | 18.2% | 16.8% |
| Income from operations | $(5.1) million | $4.3 million | $1.6 million | $10.7 million |
| Operating margin | (7.1)% | 5.6% | 0.7% | 4.7% |
| Net income attributable to Culp common shareholders | $(58,000) | $3.2 million | $3.6 million | $7.0 million |
| Basic earnings per share | $0.00 | $0.25 | $0.29 | $0.56 |
- Third-quarter sales declined 6.8%, while nine-month sales declined 2.8%. Third-quarter segment sales decreased 7.4% in mattress fabrics, 5.7% in upholstery fabrics, and 11.0% in home accessories.
- Third-quarter results included a $13.6 million non-cash impairment charge in home accessories, comprising $11.2 million of goodwill and $2.4 million of tradename impairment, partially offset by a $6.1 million reversal of the eLuxury contingent earn-out obligation.
- Nine-month selling, general, and administrative expense increased 9.3% to $30.8 million, partly due to higher stock-based compensation and selling expenses.
- Cash used in operating activities was $519,000 for the nine months, compared with $8.1 million of cash provided in the prior-year period. Capital expenditures were $4.1 million.
- Cash and cash equivalents were $21.9 million at February 2, 2020. Total cash and investments were $34.8 million, compared with $45.0 million at April 28, 2019.
- Total borrowings were $925,000 under eLuxury’s subordinated loan. No borrowings were outstanding under the U.S. or China revolving credit facilities. Available revolving credit capacity was approximately $30.8 million, and the company was in compliance with its financial covenants.
- Fiscal 2020 capital expenditures were projected at $6.0 million to $6.5 million, with depreciation projected at approximately $8.0 million.
Material changes versus the prior comparable period
- Quarterly profitability deteriorated sharply because of lower sales, lower gross margin, and the home accessories impairments. The nine-month operating margin fell to 0.7% from 4.7% despite a higher gross margin.
- Home accessories remained challenged by reduced bedding demand on Amazon and slower-than-expected growth in e-commerce and business-to-business channels. Excluding the impairment, management reported sequential improvement in the segment’s third-quarter operating loss.
- Mattress fabrics were affected by weak legacy customer demand, holiday shutdowns in Haiti and China, and continued pressure from low-priced mattress imports. Management expected softness in the legacy business to continue through at least the fourth quarter of fiscal 2020.
- Upholstery fabrics faced weaker shipments before the Chinese New Year, a soft residential furniture retail environment, tariffs and trade uncertainty, and the prior closure of the Anderson, South Carolina facility. Nine-month segment operating income nevertheless increased 3.7% due to product mix and foreign exchange benefits.
- Inventory increased to $57.6 million from $55.4 million a year earlier and $50.9 million at April 28, 2019. Management stated that purchases exceeded actual demand and were being adjusted to reduce inventory.
- The company adopted the new lease standard on April 29, 2019, recognizing approximately $7.2 million of right-of-use assets and $7.1 million of lease liabilities at adoption, without a material income statement or cash flow effect.
Guidance, outlook, risks, contingencies, and unusual items
- Management stated that current liquidity, operating cash flow, and available credit were sufficient for foreseeable business needs, contractual obligations, and potential acquisitions.
- The company announced a quarterly dividend of $0.105 per share payable April 15, 2020, subject to board approval and future business conditions. It repurchased 55,750 shares for $728,000 during the quarter and had approximately $4.3 million remaining under the September 2019 authorization. A new $5.0 million repurchase authorization was announced March 4, 2020.
- Management reported no significant coronavirus-related operational disruption as of the filing date, but cautioned that worsening conditions could disrupt employees, suppliers, production, distribution, consumer demand, and financial results, particularly in China.
- Management indicated that alternative sourcing and production locations included the United States, Canada, Haiti, Vietnam, and Turkey.
- Additional goodwill or intangible-asset impairments remain possible because the home accessories segment continues to be evaluated for impairment when indicators exist.
- Open equipment purchase commitments for the mattress fabrics segment totaled $2.3 million. Management stated that ordinary-course litigation was not reasonably expected to have a material adverse effect.
- The nine-month effective tax rate was 142.8%, compared with 32.5% in the prior year, driven by lower projected taxable income, foreign earnings mix, GILTI tax, and tax effects associated with the home accessories impairments.
Important facts for investors to verify
- Whether demand and margins in mattress fabrics and upholstery fabrics recover after the reported industry weakness, holiday disruptions, tariff effects, and trade uncertainty.
- Whether the home accessories segment achieves sustainable growth and profitability, particularly through Amazon and alternative e-commerce or business-to-business channels.
- The likelihood and potential size of additional goodwill or tradename impairments.
- Whether inventory levels decline as management reduces purchases and whether working-capital pressure reverses the negative operating cash flow.
- The financial and supply-chain effects of the coronavirus outbreak, including any disruption in China or other production locations.
- The sustainability of dividends and share repurchases given the decline in operating cash flow and total cash and investments.
- The effect of GILTI, foreign tax rates, and potential changes to proposed GILTI high-tax exception regulations on future tax expense and cash taxes.