Culp, Inc. Form 10-Q Summary
Business context and reporting period
Culp, Inc. manufactures, sources, and sells mattress fabrics and upholstery fabrics. The company also provides window-treatment, sourcing, and installation services through Read Window Products. This Form 10-Q covers the three and nine months ended January 31, 2021, compared with February 2, 2020. The nine-month periods comprised 39 weeks and 40 weeks, respectively.
The former home accessories segment, eLuxury, was sold on March 31, 2020, and is presented as a discontinued operation in the prior-year comparative results. Continuing operations therefore consist of mattress fabrics and upholstery fabrics.
Key financial metrics
| Metric | Three months ended Jan. 31, 2021 | Three months ended Feb. 2, 2020 | Nine months ended Jan. 31, 2021 | Nine months ended Feb. 2, 2020 |
|---|---|---|---|---|
| Net sales | $79.3 million | $68.5 million | $220.7 million | $208.8 million |
| Gross profit | $13.9 million | $11.5 million | $38.0 million | $37.5 million |
| Gross margin | 17.5% | 16.8% | 17.2% | 17.9% |
| Income from continuing operations | $4.0 million | $2.7 million | $10.4 million | $10.4 million |
| Operating margin | 5.1% | 4.0% | 4.7% | 5.0% |
| Income before taxes from continuing operations | $3.1 million | $2.7 million | $8.5 million | $10.7 million |
| Net income from continuing operations | $2.1 million | $1.0 million | $1.7 million | $5.1 million |
| Net income (loss) | $2.1 million | $(4.2) million | $1.7 million | $(0.8) million |
| Diluted EPS from continuing operations | $0.17 | $0.08 | $0.14 | $0.41 |
Revenue, segment performance, cash flow, margins, debt, and liquidity
- Third-quarter sales increased 15.8%; mattress fabrics increased 15.1% to $38.6 million and upholstery fabrics increased 16.4% to $40.7 million.
- Nine-month sales increased 5.7%; mattress fabrics increased 6.2% to $114.7 million and upholstery fabrics increased 5.2% to $105.9 million.
- Third-quarter mattress fabrics operating income increased 85.4% to $3.3 million, with margin expanding to 8.5% from 5.3%. Nine-month operating income increased 23.8% to $9.5 million.
- Third-quarter upholstery fabrics operating income increased 27.5% to $3.9 million, with margin expanding to 9.5% from 8.7%. Nine-month operating income declined 1.2% to $9.3 million, with margin declining to 8.7% from 9.3%.
- Gross margin improved in the third quarter due primarily to higher volume and fixed-cost absorption, but declined year to date because of pandemic-related disruption, manufacturing inefficiencies, and segment mix.
- Net cash provided by operating activities was $21.7 million for the first nine months, versus $0.5 million of cash used in operating activities in the prior-year period.
- Capital expenditures were $4.3 million on a cash basis for the first nine months. Management projected fiscal 2021 capital expenditures of $8.0 million to $9.0 million and depreciation of approximately $7.0 million.
- Cash and cash equivalents were $36.0 million at January 31, 2021. Total cash and investments were $51.8 million, compared with $77.1 million at May 3, 2020.
- No borrowings were outstanding under the U.S. or China revolving credit facilities at January 31, 2021. The company reported approximately $38.2 million of current availability under revolving credit lines and compliance with financial covenants.
- The company repaid approximately $30.8 million of line-of-credit borrowings and the $7.6 million PPP loan during the first nine months. The PPP loan had been voluntarily repaid in full in May 2020.
- Accounts receivable were $36.4 million and inventories were $57.8 million at January 31, 2021. Trade accounts payable increased to $44.9 million, partly reflecting higher sales and extended vendor terms.
Material changes versus the prior comparable period
- Third-quarter profitability improved materially as demand for home-related products increased during the COVID-19 pandemic, while year-to-date profitability remained pressured by the first-quarter disruption and higher foreign-exchange losses.
- Other expense increased to $1.0 million in the third quarter and $2.1 million year to date, primarily from unfavorable foreign-exchange movements in China, compared with $0.3 million and $0.5 million, respectively, in the prior-year periods.
- The effective tax rate on continuing operations was 80.1% for the first nine months, compared with 52.2% in the prior year. Fiscal 2021 included a $7.6 million non-cash charge for U.S. deferred-tax valuation allowances, partly offset by a $3.5 million non-cash benefit related to revised GILTI regulations.
- Prior-year net loss included a $5.9 million net loss from the discontinued eLuxury operation, including significant impairment charges. No discontinued-operation results were recorded in fiscal 2021.
- Effective February 1, 2021, Culp acquired the remaining 50% of its Haiti cut-and-sewn mattress-cover joint venture for $948,000, subject to working-capital adjustments, obtaining full ownership and control.
- On March 2, 2021, the board reinstated the $5.0 million share-repurchase authorization. No shares had been repurchased through January 31, 2021.
Guidance, outlook, commentary, and risks
- Management cited strong residential demand, consumer focus on the home, a strong upholstery backlog, and growth in mattress and sewn-cover products.
- Management expected continued pressure from unfavorable foreign exchange, customer supply-chain constraints involving non-fabric components, higher freight and raw-material costs, and the Chinese New Year shutdown. Pricing increases were planned to mitigate these pressures.
- Management expected additional North American knit-machine capacity to become available during the fourth quarter of fiscal 2021.
- Management was cautiously optimistic that vaccine rollouts and eventual recovery in travel and leisure could benefit the hospitality business, but the timing remained uncertain.
- The continuing COVID-19 pandemic could affect employees, customers, suppliers, demand, collections, production, and global economic conditions. Management stated that its ongoing impact could not be reasonably estimated.
- Other significant risks include foreign-currency volatility, tariffs and trade policy, housing and consumer-demand trends, raw-material and energy costs, inflation, supply-chain disruptions, and potential goodwill or intangible-asset impairments.
- The company guarantees 70% of certain unpaid lease payments for eLuxury through September 2024; eLuxury and its owner have indemnified Culp for related liabilities, but the guarantee remains a contingent exposure.
- Open equipment purchase commitments for the mattress fabrics segment totaled $3.7 million at January 31, 2021. Management stated that ordinary-course litigation was not reasonably expected to have a material adverse effect.
Important facts for investors to verify
- Whether elevated demand for home-related products persists after pandemic-related changes in consumer spending.
- Whether pricing increases offset foreign-exchange, freight, raw-material, and supply-chain pressures without reducing demand.
- The sustainability of operating cash flow after working-capital normalization and planned capital expenditures.
- The effect of the unusually high 80.1% year-to-date effective tax rate, U.S. valuation allowance, and future tax-rate assumptions.
- Integration, performance, and capital requirements associated with full ownership of the Haiti operation.
- Availability and covenant requirements under the revolving credit facilities, including restrictions on dividends and repurchases during applicable amendment periods.
- Potential liability under the eLuxury lease guarantee and the performance of related supply and royalty agreements.