Culp, Inc. Fiscal 2018 Form 10-K Summary
Business context and reporting period
Culp, Inc. manufactures, sources, and markets mattress fabrics and sewn mattress covers, as well as upholstery fabrics and related products. The company operates through two segments: mattress fabrics and upholstery fabrics. The filing covers the 52-week fiscal year ended April 29, 2018; the source also provides unaudited fourth-quarter data. The filing was signed July 13, 2018.
- Fiscal 2018 net sales were generated 60% by mattress fabrics and 40% by upholstery fabrics.
- Manufacturing and sourcing operations span the United States, Canada, China, and Haiti, with approximately 1,392 employees at year-end.
- International sales represented 23.0% of consolidated sales, up from 22.1% in fiscal 2017.
Key financial metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $323.7 million | $309.5 million | 4.6% |
| Gross profit | $64.6 million | $69.2 million | (6.6%) |
| Gross margin | 20.0% | 22.4% | (240) basis points |
| Income from operations | $27.5 million | $30.1 million | (8.7%) |
| Operating margin | 8.5% | 9.7% | (120) basis points |
| Net income | $20.9 million | $22.3 million | (6.5%) |
| Diluted earnings per share | $1.65 | $1.78 | (7.3%) |
| Operating cash flow | $27.5 million | $34.1 million | $(6.6) million |
| Capital expenditures, cash basis | $11.8 million | $12.9 million | Decrease |
- Mattress fabrics sales increased 0.9% to $192.6 million. Gross profit declined 9.9% to $38.8 million, and operating income declined 12.0% to $25.9 million.
- Upholstery fabrics sales increased 10.4% to $131.1 million, driven by non-U.S.-produced products, LiveSmart performance fabrics, and hospitality-related sales. Operating income declined 1.2% to $11.0 million.
- Fourth-quarter fiscal 2018 sales were $78.2 million, compared with $77.4 million in the prior-year quarter. Fourth-quarter net income was $12.7 million, including a significant tax benefit; fiscal 2018 third-quarter net income was a loss of $0.7 million.
- Cash, cash equivalents, and investments totaled $54.5 million at April 29, 2018, compared with $54.2 million one year earlier. Cash and cash equivalents alone were $21.2 million.
- Accounts receivable were $26.3 million, inventories were $53.5 million, and operating working capital was $49.9 million.
- Total assets were $218.0 million and shareholders’ equity was $163.4 million. No borrowings were outstanding under the company’s revolving credit agreements.
- Fiscal 2018 dividends totaled $6.8 million, including a $0.21-per-share special dividend. The board subsequently approved a regular quarterly dividend of $0.09 per share. No shares were repurchased during fiscal 2018, leaving $5.0 million authorized for future repurchases.
Material changes versus the prior comparable period
- Revenue growth returned, primarily because upholstery fabrics sales increased 10.4%, reversing sales declines in the prior two fiscal years. Mattress fabrics sales were broadly stable.
- Profitability weakened despite higher sales. Cost of sales increased 7.8%, while gross profit declined because of higher operating costs, unfavorable foreign exchange effects in China, weaker Anderson, South Carolina operations, mattress-facility consolidation disruptions, and softer late-year bedding demand.
- Raw-material prices began increasing late in fiscal 2018 after several years of favorable costs associated partly with lower oil prices.
- Capital spending fell materially as multi-year mattress-fabrics expansion and facility-consolidation projects were substantially completed. The new North Carolina building entered service in the first quarter of fiscal 2018.
- Culp acquired Read Window Products effective April 1, 2018, for net assets valued at approximately $5.7 million, expanding window-treatment, soft-goods, and installation capabilities in the hospitality and commercial markets. Read contributed $880,000 of April revenue and $5,000 of April net income.
- The company’s 50%-owned Haiti joint venture commenced production in the second quarter of fiscal 2018 and generated a $266,000 loss attributable to Culp.
- The effective tax rate declined to 21.4% from 24.7%, partly because of provisional benefits from the 2017 Tax Cuts and Jobs Act and a $497,000 tax benefit from adoption of share-based compensation guidance.
Guidance, outlook, commentary, risks, and unusual items
- Management expected soft bedding-industry demand and pressure from lower-priced imported mattresses to continue through at least the first half of fiscal 2019.
- Management expected to realize additional operating efficiencies after completing mattress-fabrics consolidation, equipment relocation, distribution, and supply-chain projects.
- On June 22, 2018, after year-end, Culp acquired a majority interest in eLuxury for an estimated $12.5 million, including $11.6 million paid at closing and $874,000 subject to holdback provisions. The transaction adds a direct-to-consumer e-commerce channel for bedding accessories and home goods.
- On June 12, 2018, the board approved closure of the Anderson, South Carolina upholstery facility, expected by October 30, 2018. Management estimated approximately $450,000 of employee termination costs and an undetermined inventory write-down; no long-lived-asset impairment charge was expected based on estimated fair value.
- Key risks include economic weakness affecting discretionary furniture and bedding demand, intense price competition and imports, customer concentration, reliance on China and other offshore suppliers, tariffs and geopolitical disruptions, foreign-exchange volatility, raw-material and energy inflation, inventory markdowns, impairment risk, cybersecurity, litigation, and environmental regulation.
- Serta Simmons Holdings accounted for approximately 25% of consolidated fiscal 2018 sales, and La-Z-Boy accounted for approximately 12%, creating meaningful customer-concentration exposure.
- The company reported an unqualified audit opinion and effective internal control over financial reporting. No material legal proceedings requiring disclosure were reported.
Important facts for investors to verify
- Whether mattress-fabrics demand and lower-priced imports continue to pressure sales and margins in fiscal 2019.
- Whether the eLuxury acquisition expands revenue and profitability without creating material integration, contingent-consideration, or impairment costs.
- The final inventory write-down and termination costs associated with the Anderson facility closure.
- The sustainability of the 20.0% gross margin and 8.5% operating margin after raw-material inflation and foreign-exchange effects.
- The company’s exposure to major customers, China-based operations, offshore suppliers, tariffs, and currency movements.
- The final accounting effects of the Tax Cuts and Jobs Act, including the provisional transition-tax and deferred-tax estimates.
- Cash availability and the timing of approximately $9.6 million of disclosed fiscal 2019 contractual obligations, including capital expenditures, operating leases, and capital-expenditure payables.