Culp, Inc. Form 10-Q Summary
Business context and reporting period
Culp, Inc. operates in mattress fabrics and upholstery fabrics, including Read Window Products. The filing covers the 13-week quarter ended August 1, 2021, the first quarter of fiscal 2022, compared with the 13-week period ended August 2, 2020. The financial statements are unaudited.
During the prior fiscal fourth quarter, Culp acquired the remaining 50% of Class International Holdings, Ltd. (CIH), a Haiti-based mattress-cover operation, for approximately $2.7 million and became its sole owner. The transaction produced an $819,000 bargain-purchase gain at acquisition.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $83.0 million | $64.5 million | 28.8% increase |
| Gross profit | $12.5 million | $9.9 million | 26.2% increase |
| Gross margin | 15.1% | 15.4% | Down 30 basis points |
| Income from operations | $3.3 million | $1.9 million | 76.2% increase |
| Operating margin | 4.0% | 2.9% | Up 110 basis points |
| Income before taxes | $3.2 million | $1.5 million | 107.0% increase |
| Income tax expense | $0.9 million | $4.3 million | 79.1% decrease |
| Net income (loss) | $2.3 million | $(2.7) million | Returned to profitability |
| Diluted EPS | $0.18 | $(0.22) | Improved |
Mattress fabrics sales increased 19.3% to $43.1 million, with segment operating margin improving to 8.4% from 5.1%. Upholstery fabrics sales increased 41.0% to $40.0 million, but segment operating margin declined to 5.7% from 7.5% because of freight inflation, foreign-exchange effects, lower Read sales, and Haiti start-up costs.
Selling, general and administrative expense rose 14.5% to $9.2 million, partly because the prior-year period benefited from COVID-19-related cost reductions. The effective tax rate was 28.7%, compared with 283.7% in the prior-year period. The prior-year tax expense included a $7.0 million non-cash valuation allowance charge, partly offset by a $3.5 million GILTI-related benefit.
Cash flow, liquidity, debt, and balance sheet
- Net cash provided by operating activities was $1.6 million, down from $10.6 million in the prior-year quarter. The decline primarily reflected higher inventory purchases, incentive-plan payments, tax payments, and Haiti lease-related payments.
- Cash used in investing activities was $10.4 million, including $2.0 million of capital expenditures and net purchases of investments.
- Cash used in financing activities was $2.1 million, including $1.4 million of dividends and $723,000 of common-stock repurchases.
- Cash and cash equivalents were $26.1 million at August 1, 2021, compared with $37.0 million at May 2, 2021.
- Total cash and investments were approximately $44.0 million, compared with $46.9 million at fiscal year-end.
- There were no borrowings outstanding under the U.S. or China revolving credit facilities. The U.S. facility provides a $30 million revolving commitment, with $725,000 available for additional letters of credit as of August 1, 2021. Management reported compliance with financial covenants.
- Total assets were $212.2 million and shareholders’ equity was $129.5 million at August 1, 2021.
- Inventory was $58.6 million, up 45.1% year over year, while trade accounts payable was $45.3 million, up 75.9%.
- Management expects fiscal 2022 cash capital expenditures of $10.0 million to $10.5 million and depreciation of approximately $7.0 million.
Material changes versus the prior comparable period
- Sales recovered substantially from the COVID-19-affected prior-year quarter, supported by stronger residential demand, higher demand for mattress products, pricing actions, and improved supply-chain execution.
- Consolidated operating profitability improved despite higher freight and raw-material costs, labor shortages, foreign-exchange headwinds, and start-up costs in Haiti.
- The company moved from a 50% equity-method investment in CIH to full consolidation following the February 2021 acquisition.
- Interest expense declined to zero because the company repaid the prior-year borrowings, including $30.8 million drawn on credit lines and a $7.6 million Paycheck Protection Program loan.
- The company repurchased 48,686 shares for $723,000; $4.3 million remained available under the $5.0 million repurchase authorization.
- The quarterly dividend increased to $0.11 per share from $0.105 per share in the prior-year period. A $0.11 per-share dividend was approved on September 1, 2021, for payment on October 18, 2021.
Guidance, outlook, risks, and unusual items
- Management expects fiscal 2022 capital expenditures of $10.0 million to $10.5 million and cash income tax payments of approximately $4.2 million.
- Freight, labor, and raw-material inflation is expected to pressure near-term margins. The company planned additional freight and other surcharges during the second quarter, creating a temporary cost-price lag.
- The new Haiti upholstery facility was expected to begin operations near the end of the second quarter of fiscal 2022. Additional start-up costs and a future increase of approximately $2.8 million in right-of-use assets were anticipated.
- Management cited labor shortages, supply-chain constraints, Vietnam-related shutdowns and quarantines, foreign-exchange fluctuations, and continued COVID-19 uncertainty as key near-term risks.
- Read’s hospitality business remained under pressure from pandemic-related effects on travel and leisure.
- The company expects to be subject to GILTI tax for fiscal 2022 regarding certain Canadian and Haitian operations and continues to maintain a full valuation allowance against U.S. net deferred tax assets of approximately $11.6 million.
- The company guarantees 70% of unpaid lease payments for a former eLuxury facility through September 2024; eLuxury and its owner have indemnified Culp for related liabilities.
- Open commitments included $1.2 million for mattress-fabrics equipment and $865,000 for High Point leasehold improvements. Management stated that litigation is not reasonably expected to have a material adverse effect.
- The company adopted ASU 2019-12 on May 3, 2021; adoption did not materially affect the financial statements. Disclosure controls were deemed effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing actions and planned surcharges offset continuing freight, labor, raw-material, and foreign-exchange pressures.
- Whether the Haiti mattress-cover and upholstery facilities begin operations as scheduled and achieve expected capacity and profitability.
- Whether the significant inventory and accounts-payable increases convert into sustained sales and operating cash flow.
- The effect of GILTI, foreign tax rates, valuation allowances, and future changes in taxable income on the effective tax rate.
- Progress toward the projected $10.0 million to $10.5 million fiscal 2022 capital-expenditure plan and its funding from operating cash flow.
- Future dividend and share-repurchase decisions, given working-capital needs, planned investments, and pandemic-related uncertainty.