Culp(CULP) - 2019 Q3 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements The company's unaudited statements show decreased net sales and operating income, though net income recovered from a prior-year loss Consolidated Statements of Net Income (Loss) Third-quarter net sales declined, but net income recovered significantly due to a large prior-year tax expense Q3 Fiscal 2019 vs Q3 Fiscal 2018 (Three Months Ended) | Metric | Jan 27, 2019 ($ thousands) | Jan 28, 2018 ($ thousands) | Change | | :--- | :--- | :--- | :--- | | Net Sales | 77,226 | 85,310 | -9.5% | | Gross Profit | 14,123 | 17,603 | -19.8% | | Income from Operations | 4,299 | 7,644 | -43.8% | | Income Taxes | 1,225 | 8,208 | -85.1% | | Net Income (Loss) Attributable to Culp, Inc. | 3,154 | (748) | N/A | Nine Months Fiscal 2019 vs Nine Months Fiscal 2018 | Metric | Jan 27, 2019 ($ thousands) | Jan 28, 2018 ($ thousands) | Change | | :--- | :--- | :--- | :--- | | Net Sales | 225,705 | 245,541 | -8.1% | | Gross Profit | 38,008 | 49,873 | -23.8% | | Income from Operations | 10,659 | 20,997 | -49.2% | | Net Income Attributable to Culp, Inc. | 7,044 | 8,211 | -14.2% | Consolidated Balance Sheets Total assets and shareholders' equity increased year-over-year, driven by acquisitions and a decrease in total liabilities Key Balance Sheet Items ($ thousands) | Metric | Jan 27, 2019 | Jan 28, 2018 | April 29, 2018 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | 26,418 | 22,428 | 21,228 | | Total Current Assets | 124,473 | 126,968 | 132,069 | | Goodwill | 27,222 | 11,462 | 13,569 | | Total Assets | 224,908 | 216,844 | 217,984 | | Total Current Liabilities | 39,594 | 44,410 | 40,584 | | Total Liabilities | 57,676 | 64,662 | 54,608 | | Total Equity | 167,232 | 152,182 | 163,376 | Consolidated Statements of Cash Flows Net cash from operations decreased significantly, while investing activities provided cash due to asset sales Cash Flow Summary (Nine Months Ended, $ thousands) | Activity | Jan 27, 2019 | Jan 28, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | 8,085 | 21,469 | | Net cash provided by (used in) investing activities | 6,760 | (9,009) | | Net cash used in financing activities | (9,574) | (10,891) | | Increase in cash and cash equivalents | 5,190 | 1,633 | - Key investing activities included $12.1 million paid for acquisitions and $17.2 million in proceeds from the sale of short-term investments[24] - Financing activities were dominated by $3.5 million in dividends paid and $3.3 million in common stock repurchases[24] Notes to Consolidated Financial Statements Notes detail the adoption of ASC 606, two key acquisitions, a facility closure, and shareholder return activities - The company adopted ASC Topic 606 (Revenue from Contracts with Customers) at the beginning of fiscal 2019, which did not have a material impact on results but affected balance sheet classifications for sales return allowances[40][80] - Acquired Read Window Products for $5.7 million and an 80% interest in eLuxury for an estimated $18.1 million[48][51][61] - The closure of the Anderson, SC upholstery fabrics facility resulted in a net charge of $1.6 million for the nine-month period[125][126] - During the nine-month period, the company repurchased 160,423 shares of common stock for $3.3 million and paid dividends totaling $3.5 million[267][270] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses declining sales and operating income, attributing them to import pressures on the mattress fabrics segment Executive Summary Nine-month net sales and operating income fell due to challenges in the mattress fabrics segment, though liquidity remains strong Nine-Month Performance Summary ($ thousands) | Metric | Nine Months FY2019 | Nine Months FY2018 | Change | | :--- | :--- | :--- | :--- | | Net Sales | 225,705 | 245,541 | (8.1)% | | Gross Profit | 38,008 | 49,873 | (23.8)% | | Income from Operations | 10,659 | 20,997 | (49.2)% | | Net Income | 6,969 | 8,211 | (15.1)% | - The primary driver for the sales decline was the mattress fabrics segment, which faced significant challenges from a high volume of low-priced imported mattresses from China[286] - The company's cash and investments totaled $40.0 million at January 27, 2019, down from $54.5 million at the end of fiscal 2018, mainly due to acquisitions, capital expenditures, and shareholder returns[297][298] Segment Analysis The mattress fabrics segment declined sharply while upholstery fabrics grew, and the new home accessories segment posted a small loss Nine-Month Segment Performance ($ thousands) | Segment | Net Sales | % Change YoY | Income from Operations | % Change YoY | | :--- | :--- | :--- | :--- | :--- | | Mattress Fabrics | 107,335 | (26.5)% | 8,910 | (54.9)% | | Upholstery Fabrics | 106,611 | 7.2% | 9,044 | 3.1% | | Home Accessories | 11,759 | N/A | (254) | N/A | - Mattress Fabrics sales were significantly impacted by a high volume of low-priced imported mattresses from China, reducing demand from major customers[307] - Upholstery Fabrics sales growth was driven by the acquisition of Read, partially offset by the closure of the Anderson, SC facility[325] Liquidity and Capital Resources The company maintains a strong liquidity position with no debt, despite cash decreasing due to acquisitions and shareholder returns - As of January 27, 2019, the company had $40.0 million in cash and investments and no outstanding borrowings on its credit lines[387] - The decrease in cash was driven by $12.1M for acquisitions, $4.4M in capex, $3.5M in dividends, and $3.3M in stock repurchases[298][388] - The company has been repatriating earnings from its Cayman Islands subsidiary to the U.S. to take advantage of the 2017 Tax Act, moving $17.6 million during fiscal 2019[393] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from variable interest rates and foreign currency fluctuations, which are actively managed - The company has exposure to variable interest rates on its U.S. revolving credit agreement, which is tied to LIBOR; however, there were no outstanding borrowings at the end of the quarter[422] - Exposure to foreign currency risk exists for subsidiaries in Canada and China; the company attempts a natural hedge by balancing local currency assets and liabilities[423] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and internal financial reporting controls were effective - Based on an evaluation as of January 27, 2019, the CEO and CFO concluded that the company's disclosure controls and procedures are effective[424] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[425] Part II - Other Information Item 1A. Risk Factors The company identifies potential U.S. tariffs on Chinese imports as a key risk that could adversely affect costs and margins - The company identifies potential tariffs on imports from China, where a significant amount of its products are produced, as a key risk[428] - Increased tariffs could lead to higher costs, which may necessitate price increases for domestic customers or result in lower gross margins if prices cannot be passed on[428] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased over 123,000 shares of its common stock during the third quarter under its authorized buyback program Issuer Purchases of Equity Securities (Q3 FY2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 29 - Dec 2, 2018 | 24,929 | $21.57 | | Dec 3 - Dec 30, 2018 | 67,588 | $20.06 | | Dec 31 - Jan 27, 2019 | 31,026 | $18.65 | | Total | 123,543 | $20.01 | - As of January 27, 2019, approximately $1.7 million was still available for share repurchases under the existing program[431] Item 5. Other Information The company amended its compensation for non-employee directors and promoted its Chief Operating Officer to President - The board of directors amended the compensation for non-employee directors to an annual package of a $55,000 cash retainer and $55,000 in stock grants[432] - Robert G. Culp, IV was named President and Chief Operating Officer, expanding his role from Chief Operating Officer[433]