Culp(CULP) - 2020 Q1 - Quarterly Report

Part I - Financial Statements This section presents the company's unaudited consolidated financial statements, including income, balance sheets, cash flows, equity, and detailed notes Consolidated Statements of Net Income The Consolidated Statements of Net Income for the three months ended August 4, 2019, show an increase in net sales, gross profit, and net income attributable to common shareholders compared to the prior year, despite higher income taxes Consolidated Statements of Net Income (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Net sales | $74,847 | $71,473 | | Gross profit | $13,365 | $10,559 | | Selling, general and administrative expenses | $10,711 | $8,033 | | Income from operations | $2,689 | $2,075 | | Income before income taxes | $2,842 | $1,948 | | Income taxes | $1,681 | $906 | | Net income | $1,174 | $965 | | Net income attributable to Culp, Inc. common shareholders | $1,338 | $957 | | Net income per share - basic | $0.11 | $0.08 | | Net income per share - diluted | $0.11 | $0.08 | Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income present the total comprehensive income, including net income and other comprehensive income components such as unrealized gains on investments and foreign currency cash flow hedges, for the three months ended August 4, 2019, and July 29, 2018 Consolidated Statements of Comprehensive Income (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Net income | $1,174 | $965 | | Total unrealized gain on investments | $6 | $134 | | Total unrealized gain on foreign currency cash flow hedge | $- | $15 | | Total other comprehensive income | $6 | $149 | | Comprehensive income | $1,180 | $1,114 | | Comprehensive income attributable to Culp, Inc. common shareholders | $1,344 | $1,106 | Consolidated Balance Sheets The Consolidated Balance Sheets provide a snapshot of the company's financial position, showing total assets, liabilities, and shareholders' equity as of August 4, 2019, July 29, 2018, and April 28, 2019 Consolidated Balance Sheets (Thousands) | Metric | August 4, 2019 (Thousands) | July 29, 2018 (Thousands) | April 28, 2019 (Thousands) | | :-------------------------------- | :------------------------- | :------------------------ | :------------------------- | | Total current assets | $122,440 | $121,415 | $123,245 | | Total assets | $224,447 | $226,372 | $219,726 | | Total current liabilities | $35,552 | $36,431 | $35,192 | | Total liabilities | $60,111 | $60,342 | $55,479 | | Total shareholders' equity attributable to Culp Inc. | $160,146 | $161,490 | $159,933 | | Total equity | $164,336 | $166,030 | $164,247 | Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows detail the cash generated from or used in operating, investing, and financing activities for the three months ended August 4, 2019, and July 29, 2018, showing a significant improvement in cash provided by operating activities in the current period Consolidated Statements of Cash Flows (Thousands) | Cash Flow Activity | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Net cash provided by (used in) operating activities | $2,023 | $(1,936) | | Net cash used provided by (used in) investing activities | $4,015 | $(10,682) | | Net cash (used in) provided by financing activities | $(1,758) | $97 | | Effect of exchange rate changes on cash and cash equivalents | $(52) | $(114) | | Increase (decrease) in cash and cash equivalents | $4,228 | $(12,635) | | Cash and cash equivalents at end of period | $44,236 | $8,593 | Consolidated Statements of Shareholders' Equity The Consolidated Statements of Shareholders' Equity illustrate the changes in equity for the three-month periods ended August 4, 2019, and July 29, 2018, reflecting net income, stock-based compensation, dividends, and other equity transactions Consolidated Statements of Shareholders' Equity - August 4, 2019 (Thousands) | Equity Component | Balance, April 28, 2019 (Thousands) | Net Income (Thousands) | Stock-based Compensation (Thousands) | Dividends Paid (Thousands) | Balance, August 4, 2019 (Thousands) | | :-------------------------------------------------- | :---------------------------------- | :--------------------- | :----------------------------------- | :------------------------- | :---------------------------------- | | Common Stock (Amount) | $620 | - | - | - | $621 | | Capital Contributed in Excess of Par Value | $43,694 | - | $154 | - | $43,803 | | Accumulated Earnings | $115,579 | $1,338 | - | $(1,241) | $115,676 | | Accumulated Other Comprehensive Income | $40 | - | - | - | $46 | | Total Shareholders' Equity attributable to Culp Inc. | $159,933 | $1,338 | $154 | $(1,241) | $160,146 | | Non-Controlling Interest | $4,314 | $(164) | - | - | $4,190 | | Total Equity | $164,247 | $1,174 | $154 | $(1,241) | $164,336 | Consolidated Statements of Shareholders' Equity - July 29, 2018 (Thousands) | Equity Component | Balance, April 29, 2018 (Thousands) | Net Income (Thousands) | Stock-based Compensation (Thousands) | Dividends Paid (Thousands) | Balance, July 29, 2018 (Thousands) | | :-------------------------------------------------- | :---------------------------------- | :--------------------- | :----------------------------------- | :------------------------- | :--------------------------------- | | Common Stock (Amount) | $623 | - | - | - | $627 | | Capital Contributed in Excess of Par Value | $48,203 | - | $(501) | - | $46,334 | | Accumulated Earnings | $114,635 | $957 | - | $(1,127) | $114,465 | | Accumulated Other Comprehensive Income | $(85) | - | - | - | $64 | | Total Shareholders' Equity attributable to Culp Inc. | $163,376 | $957 | $(501) | $(1,127) | $161,490 | | Non-Controlling Interest | $- | $8 | $4,532 (Acquisition) | - | $4,540 | | Total Equity | $163,376 | $965 | $(501) | $(1,127) | $166,030 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for the consolidated financial statements, covering accounting policies, business combinations, revenue recognition, and other key items 1. Basis of Presentation This section outlines the basis for the unaudited consolidated financial statements, noting that they include all necessary adjustments for fair presentation and should be read with the annual 10-K. It also highlights the difference in reporting periods, with the current quarter being 14 weeks compared to 13 weeks in the prior year - The three-month period ended August 4, 2019, represents a 14-week period, while the period ended July 29, 2018, represents a 13-week period[34] 2. Significant Accounting Policies There were no changes in significant accounting policies from the prior annual report, but the company adopted ASU No. 2016-02, Leases (Topic 842), on April 29, 2019. This adoption materially impacted the Consolidated Balance Sheets by recognizing $7.2 million in Right of Use (ROU) assets and $7.1 million in lease liabilities, but did not materially affect the income statement or cash flows - No changes in significant accounting policies from the annual report on Form 10-K for the year ended April 28, 2019[35] - Adopted ASU No. 2016-02, Leases (Topic 842), on April 29, 2019, using the modified retrospective transition method[36] - The adoption of Topic 842 had a material effect on Consolidated Balance Sheets, recognizing ROU assets totaling $7.2 million and lease liabilities totaling $7.1 million[38] 3. Business Combinations (eLuxury, LLC) On June 22, 2018, the company acquired an initial 80% ownership interest in eLuxury, LLC, a bedding accessories and home goods company. The acquisition consideration totaled $18.1 million, with assets acquired including goodwill and tradename, and a contingent consideration earn-out obligation recorded at fair value - Acquired an initial 80% ownership interest in eLuxury, LLC on June 22, 2018, a company offering bedding accessories and home goods directly to consumers[42] - Estimated consideration for the initial 80% ownership totaled $18.1 million, including a $12.5 million estimated purchase price and $5.6 million fair value for contingent consideration (earn-out obligation)[44] eLuxury, LLC Acquisition Fair Value (Thousands) | Asset/Liability Acquired/Assumed | Fair Value (Thousands) | | :--------------------------------------- | :--------------------- | | Goodwill | $13,653 | | Tradename | $6,549 | | Equipment | $2,179 | | Inventory | $1,804 | | Accounts receivable and other current assets | $108 | | Accounts payable | $(1,336) | | Accrued expenses | $(295) | | Non-controlling interest in eLuxury | $(4,532) | | Total | $18,130 | - Goodwill is attributable to eLuxury's reputation and management's e-commerce expertise, deductible for income tax purposes over fifteen years[49] 4. Allowance for Doubtful Accounts The allowance for doubtful accounts showed a slight decrease in its ending balance for the three months ended August 4, 2019, compared to the prior year, with a credit for bad debts in the current period Allowance for Doubtful Accounts (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Beginning balance | $393 | $357 | | Provision for bad debts | $(30) | $9 | | Net write-offs, net of recoveries | $- | $- | | Ending balance | $363 | $366 | 5. Revenue from Contracts with Customers This note details the company's revenue recognition policies across its three business segments: mattress fabrics, upholstery fabrics, and home accessories. Revenue is disaggregated by segment, timing of recognition (point in time for products, over time for services), and includes activity in deferred revenue - Primary performance obligations include the sale of mattress fabrics, upholstery fabrics, bedding and home accessories, and customized fabrication/installation services for window treatments[62] Net Sales by Segment - August 4, 2019 (Thousands) | Segment | Products Transferred at a Point in Time (Thousands) | Services Transferred Over Time (Thousands) | Total Net Sales (Thousands) | | :----------------- | :------------------------------------------ | :--------------------------------------- | :-------------------------- | | Three Months Ended August 4, 2019: | | | | | Mattress Fabrics | $38,685 | $- | $38,685 | | Upholstery Fabrics | $29,827 | $2,033 | $31,860 | | Home Accessories | $4,302 | $- | $4,302 | | Total Net Sales | $72,814 | $2,033 | $74,847 | Net Sales by Segment - July 29, 2018 (Thousands) | Segment | Products Transferred at a Point in Time (Thousands) | Services Transferred Over Time (Thousands) | Total Net Sales (Thousands) | | :----------------- | :------------------------------------------ | :--------------------------------------- | :-------------------------- | | Three Months Ended July 29, 2018: | | | | | Mattress Fabrics | $34,398 | $- | $34,398 | | Upholstery Fabrics | $31,821 | $2,669 | $34,490 | | Home Accessories | $2,585 | $- | $2,585 | | Total Net Sales | $68,804 | $2,669 | $71,473 | Deferred Revenue Activity (Thousands) | Deferred Revenue Activity | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Beginning balance | $399 | $809 | | Revenue recognized on contract liabilities | $(483) | $(742) | | Payments received for services not yet rendered | $768 | $567 | | Ending balance | $684 | $634 | 6. Inventories Inventories are carried at the lower of cost or net realizable value using the FIFO method. The summary shows a decrease in total inventories from July 29, 2018, to August 4, 2019, primarily in finished goods Inventories (Thousands) | Inventory Component | August 4, 2019 (Thousands) | July 29, 2018 (Thousands) | April 28, 2019 (Thousands) | | :------------------ | :------------------------- | :------------------------ | :------------------------- | | Raw materials | $6,467 | $5,291 | $5,617 | | Work-in-process | $2,677 | $2,413 | $2,289 | | Finished goods | $41,516 | $47,285 | $42,954 | | Total Inventories | $50,660 | $54,989 | $50,860 | 7. Intangible Assets This section summarizes the company's intangible assets, including tradenames (indefinite useful life, not amortized), customer relationships (amortized over 9-17 years), and non-compete agreements (amortized over 15 years) Intangible Assets (Thousands) | Intangible Asset | August 4, 2019 (Thousands) | July 29, 2018 (Thousands) | April 28, 2019 (Thousands) | | :----------------------- | :------------------------- | :------------------------ | :------------------------- | | Tradenames | $7,232 | $7,232 | $7,232 | | Customer relationships, net | $2,463 | $2,764 | $2,538 | | Non-compete agreement, net | $659 | $734 | $678 | | Total | $10,354 | $10,730 | $10,448 | - Tradenames have an indefinite useful life and are not amortized, but are assessed annually for impairment[74] - Customer relationships are amortized on a straight-line basis over 9 to 17 years, with a weighted average amortization period of 8.4 years as of August 4, 2019[75][78] - Non-compete agreements are amortized on a straight-line basis over a fifteen-year life, with a weighted average amortization period of 8.8 years as of August 4, 2019[79][81] 8. Goodwill The carrying amount of goodwill remained constant at $27.222 million for the periods presented, with no new acquisitions adding to goodwill in the current quarter Goodwill (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Beginning balance | $27,222 | $13,569 | | Acquisition of business (see note 3) | $- | $13,653 | | Ending balance | $27,222 | $27,222 | 9. Investment in Unconsolidated Joint Venture The company holds a 50% equity interest in Class International Holdings, Ltd. (CLIH), a cut and sewn mattress cover operation in Haiti. CLIH reported net income in the current period, a reversal from a net loss in the prior year, positively impacting the company's equity interest - Culp International Holdings, Ltd. owns 50% of Class International Holdings, Ltd. (CLIH), which produces cut and sewn mattress covers in Haiti[85] - CLIH reported net income of $26,000 for the three months ended August 4, 2019, compared to a net loss of $154,000 for the three months ended July 29, 2018[86] - The company's equity interest in CLIH's net income was $13,000 for the current period, compared to an equity interest in net loss of $77,000 in the prior year[86] - The investment in CLIH totaled $1.5 million at August 4, 2019, representing the company's fifty percent ownership[87] 10. Accrued Expenses This note provides a summary of accrued expenses, categorized into compensation, interest, and other accrued expenses, and their classification as current or long-term liabilities on the balance sheet. Total accrued expenses remained relatively stable year-over-year Accrued Expenses (Thousands) | Accrued Expense Category | August 4, 2019 (Thousands) | July 29, 2018 (Thousands) | April 28, 2019 (Thousands) | | :--------------------------------------- | :------------------------- | :------------------------ | :------------------------- | | Compensation, commissions and related benefits | $3,493 | $3,719 | $4,229 | | Interest | $13 | $12 | $4 | | Other accrued expenses | $5,393 | $5,194 | $5,292 | | Total Accrued Expenses | $8,899 | $8,925 | $9,525 | - At August 4, 2019, $8.6 million of accrued expenses were current and $333,000 were long-term[91] 11. Exit and Disposal Activity The company completed the closure of its upholstery fabrics manufacturing facility in Anderson, South Carolina, during the second quarter of fiscal 2019 due to declining demand. This resulted in a restructuring credit of $35,000 in the current period, compared to a $2.0 million charge in the prior year - Closure of the upholstery fabrics manufacturing facility in Anderson, South Carolina, was completed in the second quarter of fiscal 2019 due to declining demand[92] Restructuring (Credit) Expense and Related Charges (Thousands) | Restructuring Item | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Inventory markdowns | $- | $1,565 | | Employee termination benefits | $(35) | $451 | | Restructuring (credit) expense and related charges | $(35) | $2,016 | - The $35,000 credit in the current period was recorded to restructuring credit, while the prior year's $2.0 million charge included $1.6 million for inventory markdowns and $451,000 for employee termination benefits[93][94] 12. Lines of Credit The company maintains revolving credit agreements in the U.S. and China, and a subordinated loan payable for eLuxury. All financial covenants were in compliance as of August 4, 2019, with no outstanding borrowings on the revolving credit lines but $925,000 outstanding on the subordinated loan - U.S. revolving credit agreement with Wells Fargo Bank, N.A. provides a $25 million commitment, expiring August 15, 2020. No borrowings outstanding at August 4, 2019[98][99] - Unsecured credit agreement for China operations provides a line of credit up to 40 million RMB ($5.8 million USD). No outstanding borrowings at August 4, 2019[101] - Subordinated loan payable for eLuxury provides a $1.0 million revolving loan commitment, expiring June 22, 2023, with $925,000 outstanding at August 4, 2019[102] - The company was in compliance with all financial covenants as of August 4, 2019[103] 13. Fair Value of Financial Instruments This note explains the fair value hierarchy (Level 1, 2, 3) and presents assets measured at fair value on a recurring basis, primarily money market and mutual funds. It also discusses held-to-maturity investments that matured in the current quarter and the nonrecurring fair value measurements from the eLuxury acquisition - Fair value hierarchy distinguishes between observable inputs (Level 1, 2) and unobservable inputs (Level 3)[105] Recurring Fair Value Assets (Thousands) | Recurring Fair Value Assets | August 4, 2019 (Thousands) | July 29, 2018 (Thousands) | April 28, 2019 (Thousands) | | :-------------------------- | :------------------------- | :------------------------ | :------------------------- | | Premier Money Market Fund | $6,920 | $6,749 | $6,639 | | Growth Allocation Fund | $213 | $180 | $203 | | Moderate Allocation Fund | $130 | $117 | $127 | | Other | $84 | $187 | $112 | - Held-to-maturity investments (U.S. corporate bonds) matured during the first quarter of fiscal 2020. Their fair value was determined as Level 2[112][114] - Long-term investments in Rabbi Trust (money market and mutual funds) are classified as available for sale and recorded at fair values of $7.3 million at August 4, 2019[115][116] - Nonrecurring fair value measurements at July 29, 2018, for eLuxury acquisition assets included Goodwill ($13.653M), Tradename ($6.549M), Equipment ($2.179M), Inventory ($1.804M), and Contingent Consideration – Earn-Out Obligation ($5.600M), all classified as Level 3[121] 14. Cash Flow Information This section provides a summary of interest and income taxes paid for the three-month periods ended August 4, 2019, and July 29, 2018 Cash Flow Information (Thousands) | Item | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :----------- | :-------------------------------------------- | :------------------------------------------- | | Interest | $0 | $24 | | Income taxes | $1,822 | $3,223 | 15. Net Income Per Share This note details the computation of basic and diluted net income per share, showing an increase in both for the three months ended August 4, 2019, compared to the prior year Net Income Per Share (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Weighted average common shares outstanding, basic | 12,399 | 12,510 | | Dilutive effect of stock-based compensation | 11 | 90 | | Weighted average common shares outstanding, diluted | 12,410 | 12,600 | - Basic net income per share increased to $0.11 from $0.08 year-over-year[6] - Diluted net income per share increased to $0.11 from $0.08 year-over-year[6] 16. Segment Information This note provides detailed financial information for the company's three operating segments: mattress fabrics, upholstery fabrics, and home accessories. It includes net sales, gross profit, income (loss) from operations, and segment assets, along with capital expenditures and depreciation expense by segment - Operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories[128] Segment Financial Performance (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | | :-------------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | | Net sales: | | | | Mattress Fabrics | $38,685 | $34,398 | | Upholstery Fabrics | $31,860 | $34,490 | | Home Accessories | $4,302 | $2,585 | | Total Net Sales | $74,847 | $71,473 | | Gross profit: | | | | Mattress Fabrics | $5,691 | $5,302 | | Upholstery Fabrics | $6,721 | $6,153 | | Home Accessories | $953 | $669 | | Total segment gross profit | $13,365 | $12,124 | | Income (loss) from operations: | | | | Mattress Fabrics | $2,620 | $2,790 | | Upholstery Fabrics | $2,875 | $2,527 | | Home Accessories | $(535) | $33 | | Unallocated corporate expenses | $(2,306) | $(1,259) | | Total income from operations | $2,689 | $2,075 | Segment Assets (Thousands) | Segment Assets (Thousands) | August 4, 2019 | July 29, 2018 | April 28, 2019 | | :--------------------------------------- | :------------- | :------------- | :------------- | | Mattress Fabrics: | | | | | Accounts receivable | $12,632 | $11,408 | $12,098 | | Inventory | $24,410 | $31,506 | $24,649 | | Property, plant and equipment | $43,211 | $48,156 | $44,266 | | Right of use assets | $235 | $- | $- | | Investment in unconsolidated joint venture | $1,520 | $1,525 | $1,508 | | Total mattress fabrics assets | $82,108 | $92,595 | $82,521 | | Upholstery Fabrics: | | | | | Accounts receivable | $11,029 | $11,345 | $11,274 | | Inventory | $23,183 | $21,784 | $22,915 | | Property, plant and equipment | $1,856 | $2,370 | $1,795 | | Right of use assets | $3,054 | $- | $- | | Total upholstery fabrics assets | $39,122 | $35,499 | $35,984 | | Home Accessories: | | | | | Accounts receivable | $429 | $472 | $379 | | Inventory | $3,067 | $1,699 | $3,296 | | Property, plant and equipment | $1,815 | $2,141 | $1,910 | | Right of use assets | $1,042 | $- | $- | | Total home accessories assets | $6,353 | $4,312 | $5,585 | | Total segment assets | $127,583 | $132,406 | $124,090 | Capital Expenditures and Depreciation Expense (Thousands) | Capital Expenditures (Thousands) | Three Months Ended August 4, 2019 | Three Months Ended July 29, 2018 | | :------------------------------- | :-------------------------------- | :------------------------------- | | Mattress Fabrics | $669 | $1,198 | | Upholstery Fabrics | $184 | $57 | | Home Accessories | $- | $- | | Unallocated Corporate | $56 | $- | | Total capital expenditures | $909 | $1,255 | | Depreciation expense: | | | | Mattress Fabrics | $1,620 | $1,762 | | Upholstery Fabrics | $190 | $215 | | Home Accessories | $95 | $38 | | Total depreciation expense | $1,905 | $2,015 | 17. Income Taxes The effective income tax rate increased significantly to 59.1% for the current quarter from 46.5% in the prior year, primarily due to a shift in taxable income to foreign operations with higher tax rates and an increase in Global Intangible Low Taxed Income (GILTI) Tax. The note also discusses valuation allowances, deferred tax liabilities for undistributed foreign earnings, and uncertain income tax positions - Effective income tax rate was 59.1% for the three months ended August 4, 2019, compared to 46.5% for the prior-year period[146] - The increase in effective tax rate reflects a shift in taxable income to foreign operations (China and Canada) at higher rates and a significant increase in GILTI Tax[146] Effective Income Tax Rate Components | Tax Rate Component | FY2020 | FY2019 | | :-------------------------------------------------- | :----- | :----- | | U.S. federal income tax rate | 21.0% | 21.0% | | Global Intangible Low Taxed Income Tax (GILTI) | 23.7% | 2.5% | | Foreign income tax rate differential | 10.6% | 8.3% | | Tax effects of Chinese foreign exchange gains | 1.3% | 2.1% | | Change in estimate of U.S. valuation allowance | 1.8% | 8.6% | | Excess income tax deficiency related to stock-based compensation | 0.8% | 1.7% | | Other | (0.1)% | 2.3% | | Effective Income Tax Rate | 59.1% | 46.5% | - Valuation allowances against deferred income taxes totaled $711,000 at August 4, 2019, primarily for U.S. state loss carryforwards and credits[149] - A deferred income tax liability of $2.9 million was recorded at August 4, 2019, for withholding taxes on undistributed earnings and profits from foreign subsidiaries[153] - Total gross unrecognized income tax benefit was $914,000 at August 4, 2019, which would favorably affect the income tax rate in future periods[155][156] 18. Stock-Based Compensation This note describes the company's 2015 Equity Incentive Plan, detailing performance-based and time-based restricted stock units, and common stock awards. It outlines the compensation expense recognized for these awards and the remaining unrecognized compensation cost - The 2015 Equity Incentive Plan authorizes various equity and cash-related awards, with 913,648 shares available for future grants at August 4, 2019[159][160] - Performance-based restricted stock units are granted to senior executives and key employees, with compensation cost measured based on fair market value using Monte Carlo simulation and closing stock price[161][162][163][164] - Total compensation expense for performance-based restricted stock units was $68,000 for the three months ended August 4, 2019, compared to a credit of $506,000 in the prior year[176] - Remaining unrecognized compensation cost for performance-based units was $1.4 million at August 4, 2019, expected to be recognized over 2.7 years[177] - Compensation expense for time-based restricted stock units was $16,000 for the three months ended August 4, 2019[182] - Common stock awards granted to outside directors on July 1, 2019, resulted in $70,000 of compensation expense[184][185] 19. Leases This note details the company's adoption of ASU No. 2016-02, Leases (Topic 842), on April 29, 2019. It outlines the recognition of Right of Use (ROU) assets and lease liabilities for operating leases, supplemental cash flow information, and the maturity schedule of lease liabilities - The company adopted Topic 842, requiring recognition of ROU assets and lease liabilities for operating leases on the balance sheet[186] Lease Components (Thousands) | Lease Component | August 4, 2019 (Thousands) | April 29, 2019 (Thousands) | | :-------------------------------- | :------------------------- | :------------------------- | | Right of use asset | $6,530 | $7,191 | | Operating lease liability - current | $2,456 | $2,629 | | Operating lease liability – noncurrent | $3,955 | $4,473 | - Operating lease expense for the three months ended August 4, 2019, was $719,000[192] Operating Lease Liability Maturity (Thousands) | Fiscal Year | Operating Lease Liability Maturity (Thousands) | | :---------- | :--------------------------------------------- | | 2020 | $2,025 | | 2021 | $2,044 | | 2022 | $1,096 | | 2023 | $683 | | 2024 | $659 | | Thereafter | $346 | | Less: interest | $(442) | | Present value of lease liabilities | $6,411 | - Weighted average remaining lease term was 3.5 years and weighted average discount rate was 3.82% as of August 4, 2019[196] 20. Commitments and Contingencies This note addresses legal proceedings, accounts payable for capital expenditures, and purchase commitments. Management believes legal actions will not have a material adverse effect, and the company has open purchase commitments for equipment in its mattress fabrics segment - Management determined that legal proceedings and claims are not reasonably possible to have a material adverse effect on financial position, results of operations, or cash flows[196] - Accounts payable – capital expenditures totaled $60,000 at August 4, 2019[197] - Open purchase commitments to acquire equipment for the mattress fabrics segment totaled $1.5 million at August 4, 2019[198] 21. Statutory Reserves Chinese subsidiaries are required to transfer 10% of their net income to a statutory surplus reserve fund until it reaches 50% of registered capital. This reserve, totaling $4.2 million at August 4, 2019, is non-distributable except under specific conditions like liquidation or business expansion - Chinese subsidiaries must transfer 10% of net income to a statutory surplus reserve fund until it reaches 50% of registered capital[199] - The statutory surplus reserve was $4.2 million at August 4, 2019[200] - The surplus reserve fund is non-distributable other than during liquidation and can be used for previous years' losses, business expansion, or conversion into share capital[200] 22. Common Stock Repurchase Program The company had $1.7 million remaining under a $5.0 million common stock repurchase authorization approved in June 2016, with no shares purchased during the current quarter. A new $5.0 million repurchase authorization was approved on September 5, 2019 - No shares of common stock were purchased during the three months ended August 4, 2019[204] - $1.7 million remained available for repurchases under the $5.0 million program approved on June 15, 2016[204] - A new authorization to acquire up to $5.0 million of common stock was approved on September 5, 2019[205] 23. Dividend Program The board of directors approved a quarterly cash dividend of $0.10 per share, payable in October 2019. Total dividend payments for the current quarter were $1.2 million, an increase from $1.1 million in the prior year - A quarterly cash dividend of $0.10 per share was approved on September 5, 2019[206] - Dividend payments totaled $1.2 million ($0.10 per share) for the three months ended August 4, 2019, compared to $1.1 million ($0.09 per share) for the prior-year period[207] CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION This section serves as a cautionary statement regarding forward-looking statements within the report, highlighting inherent risks and uncertainties that could cause actual results to differ materially from projections. It disclaims any duty to update these statements and lists various influencing factors - The report contains forward-looking statements subject to risks and uncertainties, with no duty to update them[209] - Factors influencing actual results include housing starts, consumer confidence, disposable income, general economic conditions, interest rates, consumer debt, inflation, acquisition integration, consumer tastes, tariffs, trade policy, foreign currency values, economic/political instability, goodwill/intangible asset impairments, and raw material prices[210] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on financial performance, liquidity, and capital resources, with segment analysis and key income statement discussions General This section provides an overview of the company's fiscal year structure and its three primary business segments: mattress fabrics, upholstery fabrics, and home accessories. It also explains the criteria used to evaluate the operating performance of these segments - The fiscal year is a 52 or 53-week period ending on the Sunday closest to April 30[213] - Operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories[213] - Segment operating performance is evaluated based on income from operations before unallocated corporate expenses, restructuring (credit) expense, and other non-recurring items[214] Executive Summary The executive summary highlights the company's financial performance for the first quarter of fiscal 2020, showing increased net sales, gross profit, and net income attributable to common shareholders. It also addresses changes in income taxes, liquidity, and updates on dividend and stock repurchase programs Executive Summary - Financial Performance (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | Change (%) | | :-------------------------------------------------- | :-------------------------------------------- | :------------------------------------------- | :--------- | | Net sales | $74,847 | $71,473 | 4.7% | | Gross profit | $13,365 | $10,559 | 26.6% | | Gross profit margin | 17.9% | 14.8% | 310bp | | SG&A expenses | $10,711 | $8,033 | 33.3% | | Income from operations | $2,689 | $2,075 | 29.6% | | Operating margin | 3.6% | 2.9% | 70bp | | Income before income taxes | $2,842 | $1,948 | 45.9% | | Income taxes | $1,681 | $906 | 85.5% | | Net income | $1,174 | $965 | 21.7% | | Net income attributable to Culp Inc common shareholders | $1,338 | $957 | 39.8% | - Net sales increased by 4.7% overall, with mattress fabric sales up 12.5% and upholstery fabric sales down 7.6%. Home accessories segment sales were $4.3 million compared to $2.6 million in the partial prior-year period[217] - Income before income taxes increased by 45.9%, influenced by a non-recurring restructuring credit of $35,000 in the current quarter versus a $2.0 million charge in the prior year[223] - The effective income tax rate rose to 59.1% from 46.5% due to a shift in taxable income to foreign operations with higher tax rates and increased Global Intangible Low Taxed Income (GILTI) Tax[227] - Cash and investments slightly decreased to $44.2 million from $45.0 million, primarily due to dividend payments, capital expenditures, and acquisition payments, partially offset by $2.0 million net cash provided by operating activities[229] - A quarterly cash dividend of $0.10 per share was approved, and a new $5.0 million common stock repurchase authorization was announced[233][236] Segment Analysis This section provides a detailed analysis of financial performance and key operational highlights for each of the company's three business segments Mattress Fabrics Segment The Mattress Fabrics segment experienced a 12.5% increase in net sales, driven by an extra week in the quarter and higher demand for sewn mattress covers and woven fabrics. However, operating profits declined due to temporary lower demand for more profitable knitted products and increased employee-related costs. Inventory levels were significantly reduced to align with demand Mattress Fabrics Segment Performance (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | Change (%) | | :--------------------- | :-------------------------------------------- | :------------------------------------------- | :--------- | | Net sales | $38,685 | $34,398 | 12.5% | | Gross profit | $5,691 | $5,302 | 7.3% | | Gross profit margin | 14.7% | 15.4% | (70)bp | | SG&A expenses | $3,071 | $2,512 | 22.3% | | Income from operations | $2,620 | $2,790 | (6.1)% | | Operating margin | 6.8% | 8.1% | (130)bp | - Net sales increase reflects a 14-week period (vs. 13 weeks in prior year) and higher customer demand for sewn mattress covers (CLASS business) and woven mattress fabrics[239] - Operating profits declined due to temporary lower demand for more profitable knitted products, resulting in reduced production schedules, and increases in employee-related costs[242] - Inventory decreased by $7.1 million (22.5%) compared to July 29, 2018, as management aligned purchases with lower demand following an influx of low-priced imported mattresses from China[249] - Property, plant & equipment decreased, indicating a progression toward maintenance-level spending[251] Upholstery Fabrics Segment The Upholstery Fabrics segment saw a 7.6% decrease in net sales, primarily due to a soft retail environment, international trade issues, and the closure of the Anderson, SC facility. Despite this, operating performance improved with a 13.8% increase in income from operations, driven by a more profitable product mix and favorable foreign currency exchange rates from China operations. The segment also expanded its LiveSmart® brand with a sustainable textile product Upholstery Fabrics Segment Performance (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | Change (%) | | :--------------------- | :-------------------------------------------- | :------------------------------------------- | :--------- | | Net sales | $31,860 | $34,490 | (7.6)% | | Gross profit | $6,721 | $6,153 | 9.2% | | Gross profit margin | 21.1% | 17.8% | 330bp | | SG&A expenses | $3,846 | $3,626 | 6.1% | | Income from operations | $2,875 | $2,527 | 13.8% | | Operating margin | 9.0% | 7.3% | 170bp | - Net sales decline is attributed to a soft retail environment for residential furniture, ongoing international trade agreements and tariffs, and the closure of the Anderson, SC facility[257] - Improved operating performance reflects a more profitable product mix and more favorable foreign currency exchange rates associated with China operations[261] - The segment expanded its LiveSmart® brand with LiveSmart Evolve™, a new line of sustainable textile products using recycled fibers[258] - Inventory increased by $1.4 million (6.4%) compared to July 29, 2018, primarily due to increased tariffs[270] Home Accessories Segment The Home Accessories segment, including the eLuxury acquisition, saw a 66.4% increase in net sales due to a full quarter of operations compared to a partial period in the prior year. However, it reported an operating loss driven by reduced demand for legacy bedding products and increased marketing expenses. The company is strategically focusing on developing innovative products, expanding into the business-to-business market, and diversifying customers Home Accessories Segment Performance (Thousands) | Metric | Three Months Ended August 4, 2019 (Thousands) | Three Months Ended July 29, 2018 (Thousands) | Change (%) | | :--------------------- | :-------------------------------------------- | :------------------------------------------- | :--------- | | Net sales | $4,302 | $2,585 | 66.4% | | Gross profit | $953 | $669 | 42.5% | | Gross profit margin | 22.2% | 25.9% | (370)bp | | SG&A expenses | $1,488 | $636 | 134.0% | | (Loss) income from operations | $(535) | $33 | N.M. | | Operating margin | (12.4)% | 1.3% | N.M. | - Net sales increase is primarily due to a full 14-week period of operations in Q1 FY2020 compared to a partial 6-week period in Q1 FY2019 following the eLuxury acquisition on June 22, 2018[276] - The operating loss was driven by reduced demand for legacy bedding products and increased marketing fees and promotional expenses[278] - Strategic focus includes developing innovative bedding products, refining the business model with a more aggressive focus on the business-to-business market, greater customer diversification, and new online retail marketplaces[279] - Inventory increased by $1.4 million (80.5%) compared to July 29, 2018, representing the segment's start-up and the eLuxury acquisition[296] Other Income Statement Categories This section analyzes changes and drivers for key income statement items beyond segment performance, including SG&A, interest, and income taxes Selling, General and Administrative Expenses Selling, General and Administrative (SG&A) expenses increased by 33.3% year-over-year, primarily due to higher stock-based compensation expense (reversal of a prior-year credit), increased annual incentive bonus expense, and a full period of operations for the home accessories segment - SG&A expenses increased by 33.3% to $10.711 million for Q1 FY2020 from $8.033 million for Q1 FY2019[301] - Stock-based compensation expense was $154,000 in Q1 FY2020, compared to a credit of $501,000 in Q1 FY2019, which reflected a change in estimate due to decreased profitability[301] - Higher annual incentive bonus expense due to stronger financial results[302] - Higher SG&A expenses in the home accessories segment due to a full period of operations in Q1 FY2020 compared to a partial period in Q1 FY2019[303] Interest Expense Interest expense decreased by 55.0% year-over-year, reflecting the company's historically low amount of outstanding borrowings, primarily related to the subordinated loan payable for eLuxury - Interest expense decreased to $9,000 for Q1 FY2020 from $20,000 for Q1 FY2019[301] - The decrease is due to historically low outstanding borrowings, with $925,000 related to the eLuxury subordinated loan payable at August 4, 2019[306] Interest Income Interest income increased by 66.0% year-over-year, reflecting the investment of excess cash in U.S. money market funds earning higher interest rates. However, interest income is expected to decrease for the remainder of fiscal 2020 due to recent and potential future interest rate reductions - Interest income increased to $249,000 for Q1 FY2020 from $150,000 for Q1 FY2019[301] - The increase reflects investment of excess cash in U.S. money market funds earning higher interest rates[307] - Interest income is expected to decrease for the remainder of fiscal 2020 due to recent and potential future interest rate reductions[307] Other Expense Other expense decreased by 66.1% year-over-year, primarily due to the absence of a realized loss on short-term investments from the prior year and more favorable foreign currency exchange rates associated with China operations - Other expense decreased to $87,000 for Q1 FY2020 from $257,000 for Q1 FY2019[301] - The decrease is primarily due to the absence of a $94,000 realized loss on the sale of short-term investments in the prior year and more favorable foreign currency exchange rates in China[308] Income Taxes The effective income tax rate increased to 59.1% from 46.5% due to a shift in taxable income to foreign operations with higher tax rates and a significant increase in Global Intangible Low Taxed Income (GILTI) Tax. The company expects minimal U.S. cash income taxes for fiscal 2020 due to net operating loss carryforwards - Effective income tax rate was 59.1% for Q1 FY2020, up from 46.5% for Q1 FY2019[309] - The increase is due to a continued shift in taxable income to foreign operations (China and Canada) at higher tax rates and a significant increase in GILTI Tax[311] - U.S. income taxes incurred on a cash basis for fiscal 2020 are expected to be minimal due to the projected utilization of U.S. Federal net operating loss carryforwards[319] - Proposed GILTI High-Tax exception election, if enacted, could provide relief from GILTI Tax starting fiscal 2021[312] Liquidity and Capital Resources This section discusses the company's financial flexibility, including cash position, operating cash flows, credit arrangements, and capital allocation strategies Liquidity Overall The company's liquidity sources, including cash, operations, and credit lines, are deemed adequate for foreseeable business needs. Cash and investments slightly decreased, but net cash provided by operating activities significantly improved year-over-year - Sources of liquidity include cash and cash equivalents, cash flow from operations, and revolving credit lines, which are deemed adequate[321] - Cash and investments totaled $44.2 million at August 4, 2019, a slight decrease from $45.0 million at April 28, 2019, due to dividends, capital expenditures, and acquisition payments, partially offset by $2.0 million net cash provided by operating activities[322] - Net cash provided by operating activities was $2.0 million for Q1 FY2020, an improvement from a $2.0 million use of cash in Q1 FY2019[323] Liquidity by Geographic Area The geographic distribution of cash and investments shows a significant shift of funds from the Cayman Islands to the U.S. during fiscal 2019, leveraging the 2017 Tax Cuts and Jobs Act for repatriation of earnings Liquidity by Geographic Area (Thousands) | Region | August 4, 2019 (Thousands) | July 29, 2018 (Thousands) | April 28, 2019 (Thousands) | | :------------- | :------------------------- | :------------------------ | :------------------------- | | United States | $37,906 | $3,407 | $33,078 | | China | $4,654 | $4,742 | $9,670 | | Canada | $1,634 | $176 | $2,196 | | Cayman Islands | $42 | $31,024 | $64 | | Total | $44,236 | $39,349 | $45,008 | - A significant shift of cash and investments from the Cayman Islands to the U.S. occurred in fiscal 2019, driven by the 2017 Tax Cuts and Jobs Act allowing 100% dividend received deduction on repatriated foreign earnings[327][328] Common Stock Repurchase Program The company had $1.7 million remaining under its $5.0 million common stock repurchase authorization from June 2016, with no shares purchased in the current quarter. A new $5.0 million repurchase authorization was approved in September 2019 - No shares were purchased during the three months ended August 4, 2019[329] - $1.7 million remained available for repurchases under the $5.0 million program approved on June 15, 2016[329] - A new authorization to acquire up to $5.0 million of common stock was approved on September 5, 2019[330] Dividend Program The board approved a quarterly cash dividend of $0.10 per share. Total dividend payments for the current quarter were $1.2 million, an increase from $1.1 million in the prior year - A quarterly cash dividend of $0.10 per share was approved on September 5, 2019[331] - Dividend payments totaled $1.2 million ($0.10 per share) for the three months ended August 4, 2019, compared to $1.1 million ($0.09 per share) for the prior-year period[332] Working Capital Operating working capital remained stable year-over-year. Accounts receivable increased slightly with higher net sales, while inventory decreased significantly in the mattress fabrics segment due to demand alignment, partially offset by increases in upholstery fabrics and home accessories due to tariffs and segment start-up, respectively - Operating working capital was $51.4 million at August 4, 2019, comparable to $51.7 million at July 29, 2018[334] - Accounts receivable increased by 3.7% to $24.1 million at August 4, 2019, reflecting a 4.7% increase in net sales[335] - Inventories decreased by $4.3 million (7.9%) to $50.7 million at August 4, 2019, primarily due to a $7.1 million (22.5%) decline in mattress fabrics inventory[337][338] - The decrease in mattress fabrics inventory was partially offset by increases in upholstery fabrics (due to tariffs) and home accessories (due to segment start-up and eLuxury acquisition)[339] - Accounts payable - trade decreased by $2.4 million (9.7%) to $22.6 million, reflecting the overall decrease in inventory purchases[341] Financing Arrangements The company maintains revolving credit agreements in the U.S. and China to support short-term cash needs and mitigate foreign currency risk. All financial covenants were in compliance as of August 4, 2019, with $925,000 outstanding on the eLuxury subordinated loan - Revolving credit agreements are in place for U.S. and China operations to support cash needs, mitigate foreign currency risk, and repatriate earnings[342] - The company was in compliance with all financial covenants at August 4, 2019[343] - Borrowings totaled $925,000 related to the subordinated loan payable between eLuxury and its minority owner[343] Capital Expenditures and Depreciation Capital expenditures on a cash basis decreased significantly year-over-year, primarily related to the mattress fabrics segment. Depreciation expense also slightly decreased. Projections for fiscal 2020 anticipate capital expenditures between $7.0 million and $8.0 million, and depreciation expense of approximately $8.0 million - Capital expenditures on a cash basis were $935,000 for Q1 FY2020, down from $2.2 million (including $1.4 million vendor-financed) for Q1 FY2019[345] - Depreciation expense was $1.9 million for Q1 FY2020, compared to $2.0 million for Q1 FY2019[346] - Projected cash capital expenditures for fiscal 2020 are $7.0 million to $8.0 million, with depreciation expense projected at approximately $8.0 million[347] - Open purchase commitments for equipment in the mattress fabrics segment totaled $1.5 million at August 4, 2019[349] Critical Accounting Policies and Recent Accounting Developments There were no changes in the company's significant accounting policies or their application from the prior annual report. For details on recently adopted and issued accounting pronouncements, refer to Notes 2 and 19 - No changes in significant accounting policies or their application from the annual report on Form 10-K for the year ended April 28, 2019[350] - Refer to Notes 2 and 19 for information on recently adopted and issued accounting pronouncements[350] Contractual Obligations There were no significant or new contractual obligations reported as of August 4, 2019, compared to those disclosed in the annual report on Form 10-K for the year ended April 28, 2019 - No significant or new contractual obligations from those reported in the annual report on Form 10-K for the year ended April 28, 2019[351] Inflation The company warns that significant increases in raw material costs, utility/energy costs, and general economic inflation could materially and adversely impact its financial results, as competitive conditions limit its ability to pass these cost increases on to customers - Significant increases in raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact due to limited ability to pass costs to customers[352] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in interest rates on its revolving credit lines and fluctuations in foreign currency values for its Canadian and Chinese subsidiaries. It attempts to mitigate foreign currency risk through a natural hedge strategy - Exposure to market risk from changes in interest rates on revolving credit lines (variable spread over LIBOR)[353][354] - Exposure to market risk from changes in the value of foreign currencies for subsidiaries in Canada and China[355] - The company attempts to maintain a natural hedge by balancing assets and liabilities denominated in local currencies to mitigate foreign currency risk[355] Controls and Procedures The company's management, including the CEO and CFO, evaluated the effectiveness of its disclosure controls and procedures as of August 4, 2019, and concluded they are effective. There were no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and concluded to be effective as of August 4, 2019[357] - No material change in internal control over financial reporting occurred during the quarter ended August 4, 2019[358] Part II – Other Information This section provides additional disclosures on legal proceedings, risk factors, equity security sales, and a comprehensive list of exhibits Item 1. Legal Proceedings There have been no material changes to the company's legal proceedings during the three months ended August 4, 2019, with details available in the annual report on Form 10-K - No material changes to legal proceedings during the three months ended August 4, 2019[360] Item 1A. Risk Factors There have been no material changes to the company's risk factors during the three months ended August 4, 2019, with comprehensive details provided in the annual report on Form 10-K - No material changes to risk factors during the three months ended August 4, 2019[361] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not purchase any shares of its common stock during the three months ended August 4, 2019. There was $1.684 million remaining under a previously announced repurchase plan, and a new $5.0 million repurchase authorization was approved on September 5, 2019 Unregistered Sales of Equity Securities and Use of Proceeds (Thousands) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :-------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------- | | April 29, 2019 to June 2, 2019 | - | - | - | $1,684,362 | | June 3, 2019 to June 30, 2019 | - | - | - | $1,684,362 | | July 1, 2019 to August 4, 2019 | - | - | - | $1,684,362 | | Total | - | - | - | $1,684,362 | - On September 5, 2019, the board of directors approved a new authorization to acquire up to $5.0 million of common stock[362] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including various agreements, certifications (CEO and CFO), and XBRL documents - Exhibits include Form of Annual Incentive Award Agreement, Form of Restricted Stock Unit Agreement, Certifications of CEO and CFO (Sections 302 and 906 of Sarbanes-Oxley Act), and XBRL Instance, Schema, Calculation, Label, Presentation, and Definition Documents[364][366][373]