Culp(CULP) - 2021 Q3 - Quarterly Report

Part I - Financial Information Item 1. Financial Statements This section presents Culp, Inc.'s unaudited consolidated financial statements for the quarter ended January 31, 2021, including income, balance sheet, cash flow, and equity statements with detailed notes Consolidated Statements of Net Income (Loss) For Q3 FY2021, the company reported $2.1 million net income, a significant improvement from a $4.2 million net loss in the prior-year period, with net income from continuing operations more than doubling Consolidated Statements of Net Income (Loss) Highlights (in Millions, Except for Per Share Data) | 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 | $79.3M | $68.5M | $220.7M | $208.8M | | Gross profit from continuing operations | $13.9M | $11.5M | $38.0M | $37.5M | | Income from continuing operations | $4.0M | $2.7M | $10.4M | $10.4M | | Net income from continuing operations | $2.1M | $1.0M | $1.7M | $5.1M | | Net loss from discontinued operation | $0.0M | ($5.2M) | $0.0M | ($5.9M) | | Net income (loss) | $2.1M | ($4.2M) | $1.7M | ($0.8M) | | Net income (loss) per share - diluted | $0.17 | ($0.34) | $0.14 | ($0.07) | Consolidated Balance Sheets As of January 31, 2021, total assets were $212.0 million, cash decreased to $36.0 million due to debt repayment, and total liabilities increased to $83.6 million primarily from accounts payable Key Balance Sheet Data (in Millions) | Account | Jan 31, 2021 | Feb 2, 2020 | May 3, 2020 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $36.0M | $21.6M | $69.8M | | Inventories | $57.8M | $54.0M | $47.9M | | Total current assets | $148.6M | $120.9M | $151.7M | | Total assets | $212.0M | $212.1M | $215.1M | | Accounts payable - trade | $44.9M | $20.4M | $23.0M | | Total current liabilities | $62.4M | $32.8M | $40.1M | | Total liabilities | $83.6M | $52.0M | $85.4M | | Total shareholders' equity | $128.4M | $159.8M | $129.7M | Consolidated Statements of Cash Flows For the nine months ended January 31, 2021, operating activities provided $21.7 million cash, while investing activities used $13.3 million and financing activities used $42.4 million primarily for debt repayment Cash Flow Summary (Nine Months Ended, in Millions) | Activity | Jan 31, 2021 | Feb 2, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $21.7M | ($0.5M) | | Net cash used in investing activities | ($13.3M) | ($12.0M) | | Net cash used in financing activities | ($42.4M) | ($5.5M) | | Decrease in cash and cash equivalents | ($33.8M) | ($18.1M) | Notes to Consolidated Financial Statements This section details accounting policies and financial results, including the sale of the Home Accessories segment, impairment charges, debt, tax complexities, and the acquisition of a Haitian joint venture - On March 31, 2020, the company sold its entire ownership in eLuxury, LLC, eliminating the home accessories segment, with results now presented as a discontinued operation[38] - In Q3 FY2020, the company recorded a reversal of a $6.1 million contingent consideration earn-out obligation related to the eLuxury acquisition, nullified upon its sale[55] - During Q3 FY2020, the company recorded asset impairment charges of $13.6 million for the discontinued operation, including $11.2 million for goodwill and $2.4 million for its tradename[47] - Effective February 1, 2021, the company acquired the remaining 50% ownership in its Haitian joint venture, Class International Holdings, Ltd. (CIH), for $0.9 million, making it a wholly-owned subsidiary[102] - The company received and subsequently repaid a $7.6 million Paycheck Protection Program (PPP) loan in Q4 FY2020 and Q1 FY2021, respectively, out of caution following new SBA guidance[118][119] - Due to a U.S. tax law change regarding GILTI, the company recorded a $3.5 million non-cash tax benefit, but a history of U.S. taxable losses led to a $7.0 million non-cash charge for a full valuation allowance against U.S. net deferred tax assets[182][184] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and nine-month fiscal 2021 results, highlighting a 15.8% sales increase driven by home-related spending, improved operating income, strong liquidity from debt repayment, and effective working capital management Overall Performance Summary (Q3 FY2021 vs Q3 FY2020) | Metric | Q3 FY2021 | Q3 FY2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $79.3M | $68.5M | +15.8% | | Gross Profit Margin | 17.5% | 16.8% | +70bp | | Income from Continuing Operations | $4.0M | $2.7M | +48.2% | | Net Income from Continuing Operations | $2.1M | $1.0M | +103.1% | - The increase in net sales for both mattress and upholstery fabrics segments was driven by heightened consumer focus on the home environment during the COVID-19 pandemic[261] - Operating performance was pressured by unfavorable foreign exchange rate fluctuations in China and higher SG&A from increased incentive compensation costs[265] - The company's liquidity position is strong, with cash and investments of $51.8 million as of January 31, 2021, after repaying $38.4 million in borrowings during the fiscal year[270][272] Segment Analysis This section details the performance of Mattress Fabrics and Upholstery Fabrics segments, both showing strong Q3 sales growth driven by consumer home spending and product success, despite weakness in hospitality Mattress Fabrics Segment Performance (Q3 FY2021 vs Q3 FY2020, in Millions) | Metric | Q3 FY2021 | Q3 FY2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $38.6M | $33.5M | +15.1% | | Income from Continuing Operations | $3.3M | $1.8M | +85.4% | | Operating Margin | 8.5% | 5.3% | +320bp | - The Mattress Fabrics segment benefited from increased demand due to consumer focus on home, growth with new and existing customers, and the success of its fabric-to-cover model[284] Upholstery Fabrics Segment Performance (Q3 FY2021 vs Q3 FY2020, in Millions) | Metric | Q3 FY2021 | Q3 FY2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $40.7M | $35.0M | +16.4% | | Income from Continuing Operations | $3.9M | $3.0M | +27.5% | | Operating Margin | 9.5% | 8.7% | +80bp | - Upholstery Fabrics growth was driven by the residential business and LiveSmart® products, while the hospitality business remained under pressure from the pandemic[312] Liquidity and Capital Resources The company maintains strong liquidity with $51.8 million in cash and investments, generated $21.7 million from operations, repaid $38.4 million in debt, reinstated its share repurchase program, and continues quarterly dividends - As of January 31, 2021, the company had cash and investments of $51.8 million and no outstanding borrowings under its lines of credit[365][368] - Net cash provided by operating activities was $21.7 million for the first nine months of FY2021, a significant improvement from a use of $0.5 million in the prior year, reflecting higher earnings and strong working capital management[367] - The company's $5.0 million share repurchase program, temporarily suspended due to COVID-19, was reinstated on March 2, 2021[374][375] - On March 2, 2021, the board approved a quarterly cash dividend of $0.11 per share[377] Quantitative and Qualitative Disclosures About Market Risk The company faces market risk from variable interest rates and foreign currency fluctuations in Canada and China, but minimizes interest rate risk with no outstanding borrowings and aims for natural hedges for currency exposure - The company is exposed to interest rate risk on its revolving credit agreements, with variable rates tied to LIBOR or determined by the Chinese government[404][405] - The company is exposed to foreign currency risk from its Canadian and Chinese operations, using the U.S. dollar as functional currency and aiming for a natural hedge by balancing local currency assets and liabilities[406] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of January 31, 2021, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of January 31, 2021, the company's principal executive and financial officers concluded that disclosure controls and procedures were effective[407][409] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[410] Part II - Other Information Legal Proceedings No material changes to the company's legal proceedings were reported during the three months ended January 31, 2021, compared to the prior annual report - No material changes to legal proceedings were reported for the quarter[412] Risk Factors No material changes to the company's risk factors were reported during the three months ended January 31, 2021, compared to the prior annual report - No material changes to risk factors were reported for the quarter[413] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any equity securities in Q3 FY2021, as its $5.0 million share repurchase program, temporarily suspended due to COVID-19, was reinstated on March 2, 2021 Issuer Purchases of Equity Securities (Q3 FY2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased | | :--- | :--- | :--- | :--- | | Nov 2, 2020 to Jan 31, 2021 | 0 | N/A | $5,000,000 | - The company's board of directors temporarily suspended the share repurchase program on April 3, 2020, and reinstated it on March 2, 2021[415] Exhibits This section lists exhibits filed with the Form 10-Q report, including CEO/CFO certifications and Inline XBRL data files - Exhibits filed include CEO/CFO certifications (Rule 302 and Section 906) and Inline XBRL documents[417][418]