Culp(CULP) - 2021 Q4 - Annual Report

PART I Item 1. Business Culp, Inc, a leading manufacturer of mattress and upholstery fabrics, operates globally and achieved significant sales growth in fiscal 2021 driven by heightened consumer focus on home furnishings Fiscal 2021 Net Sales Breakdown | Segment | Net Sales (Millions) | Percentage of Total | | :--- | :--- | :--- | | Mattress Fabrics | $157.7 | 53% | | Upholstery Fabrics | $142.0 | 47% | | Total | $299.7 | 100% | - Culp is the largest producer of mattress fabrics in North America and one of the largest marketers of upholstery fabrics for furniture in North America, based on total sales[14] - The company's sales increased significantly in fiscal 2021 due to increased consumer focus on the at-home experience during the COVID-19 pandemic, coupled with the company's ability to meet the surge in demand through its global platform[18] COVID-19 Impact and Business Response The company implemented liquidity preservation measures during the pandemic and subsequently invested in capacity to meet recovering demand - In response to the pandemic, Culp implemented measures to preserve liquidity and reduce costs, including selling its majority interest in eLuxury, repurposing operations for healthcare products, amending its credit facility, reducing operating costs, and temporarily suspending its share repurchase program[25] - As demand recovered in fiscal 2021, the company repaid all outstanding borrowings, reinstated full salaries and board compensation, and invested $4 million in additional knit machines to increase capacity for the mattress fabrics segment[26] - During the fourth quarter of fiscal 2021, the company acquired the remaining 50% ownership of its Haiti sewn mattress cover operation, gaining full control to enhance flexibility and capacity[28] Segments Both the Mattress Fabrics and Upholstery Fabrics segments experienced significant sales growth in fiscal 2021, driven by strong consumer demand Net Sales by Segment (in Millions) | Segment | Fiscal 2021 | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | :--- | | Mattress Fabrics | $157.7 | $131.4 | $145.7 | | Upholstery Fabrics | $142.0 | $124.8 | $135.6 | | Total Company | $299.7 | $256.2 | $281.3 | - Mattress Fabrics (Culp Home Fashions): Sales increased significantly in fiscal 2021, driven by consumer focus on home comfort and market share gains[44][45] - Upholstery Fabrics: Sales recovered in fiscal 2021 with strong growth in the residential business, driven by demand for performance fabrics like LiveSmart®, which was partially offset by lower sales in the pandemic-impacted hospitality business[51][52] Overview of Industry and Markets The bedding and furniture industries are influenced by trade policies, consumer trends like boxed mattresses, and macroeconomic factors affecting discretionary spending - The bedding industry has been disrupted by an increase in low-priced mattress imports, leading to anti-dumping duties imposed by the U.S. on imports from China and seven other countries[57][58] - Key trends in the bedding industry include the rising demand for roll-packed/boxed mattresses, increased consumer awareness of sleep health, and a growing emphasis on fabric design and performance features[59] - The residential furniture industry is influenced by the housing market and economic trends; in fiscal 2021, demand was boosted by a consumer shift in discretionary spending from travel towards home furnishings due to the pandemic[61] Human Capital The company employed 1,430 people globally at the end of fiscal 2021, with a small portion of its Canadian workforce unionized - As of the end of fiscal 2021, Culp employed 1,430 people, with 573 in the United States and 857 in international locations[112] - Approximately 12% of the company's workforce, located at the manufacturing facility in Canada, is represented by a local union, with a collective bargaining agreement that expires on February 1, 2023[113] Customers and Sales The company has a concentrated customer base, with its two largest customers accounting for a significant portion of consolidated sales - The company's largest customer in the upholstery fabrics segment is La-Z-Boy Incorporated, accounting for approximately 13% of consolidated sales in fiscal 2021[122] - The largest customer in the mattress fabrics segment is Serta Simmons Holdings, LLC, which accounted for approximately 10% of the company's overall sales in fiscal 2021[121] Net Sales by Geographic Area (Fiscal 2021) | Geographic Area | Net Sales (Thousands) | Percentage of Total | | :--- | :--- | :--- | | United States | $217,473 | 72.6% | | North America (Excl. USA) | $32,925 | 11.0% | | Far East and Asia | $43,764 | 14.6% | | All other areas | $5,558 | 1.9% | | Total | $299,720 | 100.0% | Item 1A. Risk Factors The company faces risks from macroeconomic conditions, operational dependencies on international trade, and market pressures including competition and customer concentration - Macroeconomic Risks: The COVID-19 pandemic continues to pose a significant risk, potentially affecting operations, supply chains, and consumer demand, while general economic uncertainty can negatively impact sales[134][141] - Operational Risks: The company's business may be adversely affected by increased tariffs or changes in U.S. trade policy, as many products are manufactured or sourced from outside the U.S., particularly China[146][151] - Market and Financial Risks: The business is highly competitive, creating deflationary price pressures, and is exposed to fluctuations in raw material prices and the potential loss of a major customer, with two customers accounting for 23% of consolidated sales[143][161][163] - Cybersecurity and Technology Risks: The company's increasing dependence on information technology systems exposes it to risks of system failures, cybersecurity breaches, and data leaks, which could damage the business[167][168] Item 2. Properties Culp operates seventeen owned and leased facilities globally, which are considered adequate for current operations, with the mattress segment running near capacity Key Operational Facilities | Segment | Location | Principal Use | Ownership | | :--- | :--- | :--- | :--- | | Administrative | High Point, NC | Corporate Headquarters | Leased | | Mattress Fabrics | Stokesdale, NC | Manufacturing & Distribution | Owned | | Mattress Fabrics | St. Jerome, Quebec, Canada | Manufacturing | Owned | | Mattress Fabrics | Ouanaminthe, Haiti | Manufacturing | Leased | | Upholstery Fabrics | Shanghai, China | Manufacturing & Warehouse | Leased | | Upholstery Fabrics | Burlington, NC | Distribution & Design | Leased | - The company notes that its mattress fabrics segment is currently performing at near capacity, while the upholstery fabrics segment has the flexibility to source products from outside suppliers to meet demand[193] Item 3. Legal Proceedings The company reports no material legal proceedings requiring disclosure - There are no material legal proceedings to be disclosed[196] PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Culp's common stock trades on the NYSE under the symbol 'CULP', and the company paid dividends in fiscal 2021 while reinstating its share repurchase program - The company's common stock is listed on the NYSE under the ticker symbol CULP[200] - In fiscal 2021, dividend payments totaled $5.3 million, with quarterly dividends ranging from $0.105 to $0.11 per share[204] - A $5.0 million share repurchase authorization was reinstated on March 2, 2021, after being temporarily suspended due to the pandemic; no shares were repurchased in fiscal 2021[203] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2021 saw a 17% increase in net sales and a significant turnaround in profitability, though cash decreased due to the repayment of precautionary borrowings Fiscal 2021 vs. 2020 Results of Continuing Operations (in thousands) | Metric | Fiscal 2021 | Fiscal 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $299,720 | $256,166 | 17.0% | | Gross Profit | $49,832 | $40,498 | 23.0% | | Gross Profit Margin | 16.6% | 15.8% | +80bp | | Income (Loss) from Operations | $12,076 | $(7,568) | N.M. | | Operating Margin | 4.0% | (3.0)% | +700bp | | Net Income (Loss) | $3,218 | $(11,158) | N.M. | - The increase in net sales for both segments reflects heightened demand driven by a greater consumer focus on the home, which the company met through its flexible global platform[226] - Cash and investments decreased from $77.1 million to $46.9 million, primarily due to the repayment of $38.4 million in borrowings from credit lines and a PPP loan that were drawn down in fiscal 2020[235][236] Segment Analysis Both segments delivered strong top-line growth, with the Mattress Fabrics segment showing a substantial improvement in operating income and margin Mattress Fabrics Segment Performance (in thousands) | Metric | Fiscal 2021 | Fiscal 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $157,671 | $131,412 | 20.0% | | Gross Profit | $23,864 | $16,278 | 46.6% | | Operating Income | $11,798 | $4,924 | 139.6% | | Operating Margin | 7.5% | 3.7% | +380bp | Upholstery Fabrics Segment Performance (in thousands) | Metric | Fiscal 2021 | Fiscal 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $142,049 | $124,754 | 13.9% | | Gross Profit | $25,968 | $24,220 | 7.2% | | Operating Income | $11,876 | $9,867 | 20.4% | | Operating Margin | 8.4% | 7.9% | +50bp | - The Mattress Fabrics segment's sales growth was driven by strong consumer demand, market share gains, and growth in the sewn mattress cover business, boosting profitability despite cost pressures[250][251][254] - The Upholstery Fabrics segment saw a significant sales increase in its residential business, partially offset by lower sales in its hospitality business, leading to higher profitability[280][286] Liquidity and Capital Resources The company generated strong operating cash flow, repaid all outstanding borrowings, and plans to increase capital expenditures in fiscal 2022 - Net cash provided by operating activities was $21.5 million in fiscal 2021, a significant increase from $5.0 million in fiscal 2020, reflecting higher earnings and strong working capital management[237][337] - Capital expenditures were $6.7 million in fiscal 2021, primarily related to the mattress fabrics segment, with projections to increase to $9 million to $10 million for fiscal 2022[363][364] - As of May 2, 2021, the company had no outstanding borrowings under its U.S. or China lines of credit, having repaid all amounts drawn down during the prior year[338][357] Critical Accounting Estimates Key accounting estimates involve inventory valuation, income tax valuation allowances, and stock-based compensation, with a full valuation allowance on U.S. deferred tax assets - Key critical accounting estimates include inventory valuation, determination of the valuation allowance for income taxes, and the calculation of stock-based compensation[370] - For inventory, the company provides markdowns based on aging categories and planned discontinuations, with a reserve for inventory markdowns of $6.1 million as of May 2, 2021[372][375] - A full valuation allowance of $11.7 million was recorded against all U.S. net deferred income tax assets as of May 2, 2021, due to a recent history of cumulative U.S. taxable losses[378] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate changes and foreign currency fluctuations, which it attempts to mitigate through natural hedging - The company is exposed to interest rate risk on its U.S. revolving credit agreement, which is based on LIBOR; there were no borrowings outstanding as of May 2, 2021[389] - Culp is exposed to foreign currency risk from its operations in Canada and China, aiming to maintain a natural hedge by balancing local currency assets and liabilities[390] Item 8. Consolidated Financial Statements and Supplementary Data This section contains the company's audited financial statements, which detail key events such as a business combination, a discontinued operation, and significant tax considerations Notes to Consolidated Financial Statements Key notes detail the acquisition of the remaining interest in a joint venture, the sale of the Home Accessories segment, and the impairment of goodwill - Note 2 - Business Combination: Effective February 1, 2021, Culp acquired the remaining 50% ownership interest in its Haiti-based joint venture, Class International Holdings, Ltd. (CIH), resulting in a gain on bargain purchase of $819,000[493][495][498] - Note 3 - Discontinued Operation: The Home Accessories segment (eLuxury) was sold on March 31, 2020, and its results are presented as a discontinued operation, which recorded a net loss of $17.5 million in fiscal 2020[414][520][522] - Note 9 - Goodwill: As a result of impairment charges totaling $27.2 million in fiscal 2020, the company reported no goodwill on its balance sheet as of May 2, 2021, and May 3, 2020[574] - Note 12 - Income Taxes: The company recorded a full valuation allowance of $11.7 million against its U.S. net deferred tax assets due to a recent history of U.S. taxable losses, significantly impacting the effective tax rate[612][614] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of the fiscal year-end - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[759] - Based on an assessment using the 2013 COSO framework, management concluded that the company's internal control over financial reporting was effective as of May 2, 2021[761] PART III Items 10, 11, 12, 13, and 14 Required information for these items is incorporated by reference from the company's forthcoming definitive Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and accountant fees is incorporated by reference from the company's forthcoming definitive Proxy Statement[778][780][781][785][787] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and exhibits filed with the report, noting the omission of financial statement schedules - The consolidated financial statements of Culp, Inc. are filed as part of this report[793] - All financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes[794]