Culp, Inc. Fiscal 2020 Form 10-K Summary
Reporting period: Fiscal year ended May 3, 2020, including 53 weeks. The filing is not a fiscal 2019 fourth-quarter filing, although it includes fourth-quarter data. Culp manufactures and sources mattress fabrics and sewn covers, upholstery fabrics, cut-and-sewn kits, and hospitality window-treatment products. Continuing operations comprise mattress fabrics and upholstery fabrics.
Business Context
- Fiscal 2020 results were materially affected by the COVID-19 pandemic, particularly during the fourth quarter, when customers and retail stores closed or curtailed operations.
- The company sold its majority interest in eLuxury on March 31, 2020. The home accessories segment is presented as a discontinued operation for fiscal 2020 and prior comparable periods.
- Fiscal 2020 continuing-operations sales were 51% mattress fabrics and 49% upholstery fabrics.
Key Financial Metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $256.2 million | $281.3 million | Down 8.9% |
| Gross profit | $40.5 million | $45.8 million | Down 11.5% |
| Gross margin | 15.8% | 16.3% | Down 50 bp |
| Operating income (loss), continuing operations | $(7.6) million | $13.4 million | Declined |
| Operating margin | (3.0)% | 4.7% | Down 770 bp |
| Net income (loss), continuing operations | $(11.2) million | $6.1 million | Declined |
| Net income (loss) | $(28.7) million | $5.5 million | Declined |
| Cash flow from operations | $5.0 million | $13.9 million | Down $8.9 million |
| Capital expenditures | $4.6 million | $3.0 million | Up from low prior-year base |
| Cash and cash equivalents | $69.8 million | $40.0 million | Up $29.8 million |
| Cash, short-term and long-term investments | $77.1 million | $45.0 million | Up $32.1 million |
| Borrowings at year-end | $38.4 million | None | New pandemic-related borrowings |
Fourth-quarter continuing-operations net sales were $47.4 million, down 29% from $67.0 million in the prior-year fourth quarter. Fourth-quarter continuing-operations net loss was $19.2 million, including $13.7 million of asset impairment charges.
Segment Results and Changes
| Segment | Fiscal 2020 Sales | Fiscal 2019 Sales | Fiscal 2020 Operating Result |
|---|---|---|---|
| Mattress fabrics | $131.4 million | $145.7 million | $4.9 million |
| Upholstery fabrics | $124.8 million | $135.7 million | $9.9 million |
- Mattress fabrics sales decreased 9.8%; operating margin fell to 3.7% from 8.0%, reflecting COVID-19 disruption and continued pressure from low-priced imported mattresses that shifted from China to other countries.
- Upholstery fabrics sales decreased 8.0%; operating margin was 7.9% versus 8.0%. Gross margin improved to 19.4% from 18.7%, but lower sales reduced operating income.
- U.S.-produced upholstery sales declined 19.6%, partly reflecting the closure of the Anderson, South Carolina facility in fiscal 2019. Non-U.S.-produced upholstery sales declined 6.7%.
- SG&A increased 3.6% to $34.4 million, primarily because of higher professional fees and unusually low prior-year share-based compensation expense.
Liquidity, Debt, and Capital Resources
- Operating cash flow declined to $5.0 million, driven by lower earnings and slower collections. The company granted extended payment terms to certain customers affected by the pandemic.
- Accounts receivable increased 7% to $25.1 million; inventory was broadly stable at $47.9 million despite the sales decline, reflecting excess purchases relative to demand.
- At May 3, 2020, borrowings consisted of $29.8 million under the U.S. revolving facility, $1.0 million under the China facility, and a $7.6 million Paycheck Protection Program loan.
- The company repaid the PPP loan in full on May 13, 2020 and repaid the revolving-credit borrowings in June 2020. Management stated that no borrowings were outstanding under the credit facilities thereafter.
- The U.S. revolving facility was amended in March 2020, increasing capacity to $30 million and extending maturity to August 15, 2022. The June 2020 amendment added temporary covenant and capital-allocation restrictions.
- Fiscal 2021 capital expenditures were projected at approximately $5.0 million, subject to changes in pandemic conditions.
Unusual Items, Outlook, and Risks
- The company recorded $33.9 million of total goodwill and tradename impairment charges, including $13.7 million in continuing operations and $20.2 million in discontinued operations. No goodwill remained on the May 3, 2020 balance sheet.
- eLuxury generated a $17.5 million net loss from discontinued operations, including impairment charges and a $1.9 million loss on disposal. The company received no consideration for eLuxury’s net assets but received repayment of certain loans and receivables.
- The board temporarily suspended share repurchases in April 2020. Fiscal 2020 repurchases totaled 142,496 shares costing $1.7 million. Dividends paid totaled $5.1 million.
- Management reported improving orders and shipments during the first eight weeks of fiscal 2021 as customers and stores reopened, and substantially all furloughed workers had returned by the end of June 2020. However, management expected COVID-19 effects to continue through at least the first half of fiscal 2021 and could not reasonably estimate the full impact.
- Key risks include renewed COVID-19 shutdowns, discretionary demand for furniture and bedding, customer credit deterioration, tariffs and trade-policy changes, low-priced mattress imports and potential transshipment, dependence on offshore suppliers and China operations, raw-material and energy-price volatility, customer concentration, and further asset impairments.
- The company had a guarantee covering 70% of unpaid lease payments for eLuxury’s facility through September 2024, although eLuxury, the buyer, and the buyer’s owner agreed to indemnify Culp and seek release of the guarantee.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor Verification Checklist
- Verify the distinction between continuing operations and the discontinued eLuxury operation when assessing revenue, earnings, margins, and trends.
- Confirm the post-year-end repayment of the $38.4 million of year-end borrowings and the company’s current borrowing availability and covenant compliance.
- Monitor accounts receivable collections, customer payment terms, inventory aging, and potential credit losses following the fourth-quarter disruption.
- Assess whether the reported fiscal 2021 demand recovery persisted and whether COVID-19, housing, consumer spending, and hospitality trends affected subsequent filings.
- Review the March and June 2020 credit-facility amendments, including covenant changes, dividend and repurchase restrictions, and LIBOR replacement provisions.
- Evaluate exposure to mattress-import trade cases, tariffs, China/Vietnam sourcing, currency movements, and supplier concentration.
- Reconcile the $33.9 million impairment charges and assess whether additional goodwill, tradename, inventory, or other asset impairments could arise.