Culp(CULP) - 2022 Q4 - Annual Report

Part I Business Culp, Inc. manufactures mattress (52%) and upholstery (48%) fabrics globally; FY2022 net sales decreased 1.6% to $294.8 million due to market challenges Overview Culp manufactures mattress and upholstery fabrics, operating two segments and expanding capacity despite fiscal 2022 market challenges - Culp is the largest producer of mattress fabrics and one of the largest marketers of upholstery fabrics in North America by total sales[13] - The company has increasingly relied on production outside the U.S. and Canada, particularly in the upholstery fabrics segment where most sales are from fabrics produced in Asia[15] - In fiscal 2022, Culp expanded its capacity by commencing operations at a new upholstery cut and sew facility in Haiti and launched a new innovation campus in High Point, North Carolina[18] COVID-19 Impact and Business Response COVID-19 significantly impacted Culp's FY2022 operations with shutdowns, increased costs, and ongoing uncertainty, prompting safety and liquidity measures - In response to the pandemic, Culp implemented safety measures, adjusted its workforce, temporarily reduced salaries and board compensation, and drew on credit facilities to preserve liquidity in early 2020[22] - Fiscal 2022 operations were materially affected by COVID-19 shutdowns of sourcing partners in Vietnam (Q2) and its own operations in China (Q4), which prevented shipments[24] - The ongoing impact of the pandemic on financial operations remains unknown and depends on factors like virus spread, government restrictions, supply chain conditions, and consumer demand[25] Segments Culp operates two segments: Mattress Fabrics (52% of FY2022 sales) and Upholstery Fabrics (48%), utilizing global supply chains and expanding facilities Net Sales by Segment (in Millions) | Segment | Fiscal 2022 | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | :--- | | Mattress Fabrics | $152.2 | $157.7 | $131.4 | | Upholstery Fabrics | $142.6 | $142.0 | $124.8 | | Total Company | $294.8 | $299.7 | $256.2 | - The Mattress Fabrics segment utilizes an on-shore (U.S.), near-shore (Haiti), and off-shore (China) supply chain strategy for its sewn mattress covers to provide flexibility in meeting customer demand[37] - The Upholstery Fabrics segment has shifted to a flexible, scalable model, sourcing most products from Asia while maintaining control over design, finishing, and quality control. It recently expanded with a cut and sew facility in Haiti[44][43] Overview of Industry and Markets Culp serves bedding and furniture industries, sensitive to economic conditions, which experienced a demand surge in FY2021 but slowed in H2 FY2022 due to inflation - The bedding industry experienced weakness in the second half of FY2022 due to inflationary pressures affecting consumer spending, a trend expected to continue into FY2023[50] - Key trends in the bedding industry include the rise of roll-packed/boxed mattresses, consumer focus on health benefits of sleep, and the growing importance of fabric design[54] - The residential furniture industry saw a sales trend reversal in the second half of FY2022 as pandemic restrictions lifted and inflationary pressures grew, causing a slowdown expected to persist into FY2023[56] Human Capital Culp employed 1,582 people globally in FY2022, emphasizing a safe, diverse environment through development, giving, and safety programs, with good employee relations - As of the end of fiscal 2022, Culp employed 1,582 people, an increase of 152 from the prior year, with 945 in the mattress fabrics segment and 603 in the upholstery segment[103] - The company launched the "CULPgrow" program in 2021 to provide employees with skills assessment, education assistance (GED, ESOL), and career development resources[111] - The company maintains comprehensive safety programs and developed extensive protocols to manage the COVID-19 pandemic, including hosting on-site vaccination clinics for employees and the community[115][116] Customers and Sales Culp's largest customers are Serta Simmons (11% of sales) and La-Z-Boy (13%), with the US accounting for 69.3% of FY2022 net sales - La-Z-Boy Incorporated was the largest customer in the upholstery fabrics segment, accounting for approximately 13% of the company's consolidated sales in fiscal 2022[118] - Serta Simmons Holdings, LLC was the largest customer in the mattress fabrics segment, accounting for approximately 11% of the company's overall sales in fiscal 2022[117] Net Sales by Geographic Area (in thousands) | Geographic Area | FY 2022 | % of Total | FY 2021 | % of Total | | :--- | :--- | :--- | :--- | :--- | | United States | $204,454 | 69.3% | $217,473 | 72.6% | | International | $90,385 | 30.7% | $82,247 | 27.4% | | Total | $294,839 | 100.0% | $299,720 | 100.0% | - Culp, Inc. is one of the largest producers of mattress fabrics and marketers of upholstery fabrics in North America, with operations classified into two segments: mattress fabrics and upholstery fabrics[13] Fiscal 2022 Net Sales Breakdown | Segment | Net Sales (in millions) | Percentage of Total | | :--- | :--- | :--- | | Mattress Fabrics | $152.2 | 52% | | Upholstery Fabrics | $142.6 | 48% | | Total | $294.8 | 100% | - Fiscal 2022 sales declined 1.6% year-over-year, driven by a fourth-quarter drop due to COVID-related shutdowns in China and weakness in the domestic mattress and residential home furnishings industries[17] - The company operates production facilities in North Carolina, Tennessee, Quebec (Canada), Shanghai (China), and Ouanaminthe (Haiti), and sources products from China, Vietnam, and Turkey[14] Risk Factors The company faces significant macroeconomic, operational, and financial risks, including COVID-19 impacts, foreign sourcing reliance, supply chain disruptions, and cost fluctuations - Macroeconomic Risks: The COVID-19 pandemic continues to pose a threat through potential shutdowns, supply chain disruptions, and reduced consumer demand. Economic uncertainty, inflation, and competition could also negatively impact sales and earnings[130][138][139] - Operational Risks: The company is vulnerable to tariffs, changes in U.S. trade policy, and disruptions in its extensive offshore operations, particularly in China. Reliance on a global supply chain increases risks of delays, and cybersecurity breaches pose a significant threat[142][147][164] - Financial & Business Risks: The business is sensitive to the price and availability of raw materials, particularly petrochemicals. It relies on several large customers, and the loss of any could significantly impact sales. Failure to anticipate fashion trends could also lead to sales declines[156][159][163] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[181] Properties As of May 1, 2022, Culp owned or leased seventeen facilities globally, including manufacturing plants in NC, Canada, Haiti, and China, deemed adequate for demand - The company's principal owned properties are its mattress fabrics manufacturing and distribution facilities in Stokesdale, North Carolina, and its manufacturing facility in St. Jerome, Quebec, Canada[185] - Key leased properties include manufacturing facilities in Haiti for both mattress and upholstery segments, manufacturing and warehouse facilities in Shanghai, China, and corporate offices in High Point, North Carolina[185] - Management believes its facilities are well-maintained and provide sufficient capacity to meet current and expected demand, with the ability to source additional products from outside suppliers if needed[187] Legal Proceedings The company reports no material legal proceedings required for disclosure - There are no material legal proceedings to which the company or its subsidiaries are a party[190] Mine Safety Disclosure This item is not applicable to the company - Not applicable[191] Part II Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Culp's common stock trades on NYSE (CULP); the company suspended its quarterly cash dividend in June 2022 to preserve capital, with $3.2 million available for repurchases - On June 29, 2022, the board of directors suspended the company's quarterly cash dividend to preserve capital and manage liquidity[198] Dividend Payments (FY2020-2022) | Fiscal Year | Total Dividend Payments (in millions) | Quarterly Dividend per Share Range | | :--- | :--- | :--- | | 2022 | $5.5 | $0.11 - $0.115 | | 2021 | $5.3 | $0.105 - $0.11 | | 2020 | $5.1 | $0.10 - $0.105 | - As of May 1, 2022, approximately $3.2 million remained available for share repurchases under the $5.0 million authorization from March 2020. No shares were repurchased during the fourth quarter of fiscal 2022[197] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2022, Culp's net sales decreased 1.6% to $294.8 million, resulting in a net loss of $3.2 million due to lower sales, margin pressure, and increased costs, impacting liquidity Fiscal 2022 vs. 2021 Performance Summary (in thousands) | Metric | Fiscal 2022 | Fiscal 2021 | Change | | :--- | :--- | :--- | :--- | | Net sales | $294,839 | $299,720 | (1.6)% | | Gross profit | $36,093 | $49,832 | (27.6)% | | Income from operations | $678 | $12,076 | (94.4)% | | Net (loss) income | $(3,211) | $3,218 | (199.8)% | - Operating performance in fiscal 2022 was materially affected by lower sales, operating inefficiencies from a rapid Q4 revenue decline, and higher freight, raw material, and labor costs[222] - Cash and investments decreased from $46.9 million at the end of FY2021 to $14.6 million at the end of FY2022, driven by net cash used in operating activities ($17.4 million), capital expenditures ($5.7 million), dividends ($5.5 million), and stock repurchases ($1.8 million)[229][230] Segment Analysis In FY2022, Mattress Fabrics sales fell 3.5% with operating income down 64.3%, while Upholstery Fabrics sales rose 0.4% but operating income fell 52.6%, both impacted by inflation Mattress Fabrics Segment Performance (FY2022 vs FY2021, in thousands) | Metric | FY 2022 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | Net sales | $152,159 | $157,671 | (3.5)% | | Operating income | $4,212 | $11,798 | (64.3)% | | Operating margin | 2.8% | 7.5% | (470) bp | Upholstery Fabrics Segment Performance (FY2022 vs FY2021, in thousands) | Metric | FY 2022 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | Net sales | $142,680 | $142,049 | 0.4% | | Operating income | $5,626 | $11,876 | (52.6)% | | Operating margin | 3.9% | 8.4% | (450) bp | - Mattress fabrics profitability was hurt by lower sales, operating inefficiencies from the Q4 revenue decline, higher costs (freight, raw material, labor), and unfavorable foreign exchange rates[247] - Upholstery fabrics profitability decreased due to higher freight and material costs, start-up costs at the new Haiti facility, and unfavorable currency fluctuations in China[269] Liquidity and Capital Resources Culp's liquidity tightened in FY2022, with cash and investments decreasing to $14.6 million from $46.9 million due to cash used in operations, capital expenditures, dividends, and repurchases - Cash and investments totaled $14.6 million as of May 1, 2022, a decrease from $46.9 million as of May 2, 2021[317] - Net cash used in operating activities was $17.4 million in FY2022, compared to net cash provided by operating activities of $21.5 million in FY2021[319] - The board of directors suspended the quarterly cash dividend on June 29, 2022, to preserve capital and manage liquidity[324] - During fiscal 2022, the company repurchased 121,688 shares of common stock for $1.8 million[327] Critical Accounting Estimates Management identifies three critical accounting estimates: Inventory Valuation, Income Taxes (valuation allowance), and Stock-Based Compensation, all requiring significant judgment - Inventory Valuation: Management provides markdowns based on inventory aging (at 6, 9, 12, and 15-month intervals) and planned product discontinuations. The reserve for markdowns was $7.3 million as of May 1, 2022[350][351] - Income Taxes – Valuation Allowance: The company uses significant judgment to assess the realizability of deferred tax assets. As of May 1, 2022, a full valuation allowance of $11.9 million was recorded against all U.S. net deferred income tax assets due to a recent history of U.S. taxable losses[352][354] - Stock-Based Compensation: The company uses a Monte Carlo valuation model for performance-based awards with market conditions, requiring complex assumptions about volatility and interest rates. Determining the probability of vesting for performance awards also requires significant judgment[357][358] Quantitative and Qualitative Disclosures About Market Risk The company faces market risk from interest rate changes and foreign currency fluctuations in Canada and China, but believes a 10% exchange rate change would not be material - The company is exposed to interest rate risk on its revolving credit agreements, which have variable rates tied to LIBOR (now SOFR) for the U.S. facility and Chinese government rates for China facilities[363][364][365] - The company faces foreign currency exchange risk from its operations in Canada and China, as their functional currency is the U.S. dollar. It attempts to mitigate this with a natural hedge[366] Consolidated Financial Statements and Supplementary Data This section presents Culp's audited consolidated financial statements for FY2022 and prior years, including the independent auditor's report and detailed notes - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in all material respects in conformity with U.S. GAAP[369] - Note 2 details the fiscal 2021 business combination where Culp acquired the remaining 50% of its CLASS International Holdings, Ltd. (CIH) joint venture in Haiti, resulting in a gain on bargain purchase of $819,000[454][459] - Note 3 explains the sale of the eLuxury business and elimination of the home accessories segment in March 2020, which is presented as a discontinued operation with a net loss of $17.5 million in fiscal 2020[394][476] - Note 18 provides detailed financial information by operating segment (Mattress Fabrics and Upholstery Fabrics), including breakdowns of sales, profit, assets, and capital expenditures[664][665][668] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no disagreements with its accountants on accounting or financial disclosure matters for the past three fiscal years - There were no disagreements with accountants on accounting principles or financial disclosures[686] Controls and Procedures Management concluded that Culp's disclosure controls and internal control over financial reporting were effective as of May 1, 2022, with an unqualified auditor opinion - Management concluded that the company's disclosure controls and procedures were effective as of May 1, 2022[688] - Management concluded that the company's internal control over financial reporting was effective as of May 1, 2022, based on the COSO 2013 framework[690] - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of May 1, 2022[696] Other Information The company reports no other information under this item - None[702] Part III Directors, Executive Officers, and Corporate Governance Information for this section is incorporated by reference from the company's definitive Proxy Statement - Information for this section is incorporated by reference from the company's definitive Proxy Statement[708] Executive Compensation Information for this section is incorporated by reference from the company's definitive Proxy Statement - Information for this section is incorporated by reference from the company's definitive Proxy Statement[710] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and equity compensation plans is incorporated by reference from the company's definitive Proxy Statement Equity Compensation Plan Information as of May 1, 2022 | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted-average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | — | $ — | 577,349 | | Equity compensation plans not approved by security holders | — | $ — | — | | Total | — | $ — | 577,349 | - Other information regarding security ownership is incorporated by reference from the company's definitive Proxy Statement[711] Certain Relationships and Related Transactions, and Director Independence Information for this section is incorporated by reference from the company's definitive Proxy Statement - Information for this section is incorporated by reference from the company's definitive Proxy Statement[715] Principal Accountant Fees and Services Information for this section is incorporated by reference from the company's definitive Proxy Statement - Information for this section is incorporated by reference from the company's definitive Proxy Statement[717] Part IV Exhibits and Financial Statement Schedules This section lists documents filed with the Form 10-K, including consolidated financial statements, notes, and an index of all exhibits - This section contains the list of consolidated financial statements filed with the report[721] - An index of all exhibits filed with the Form 10-K is provided, including governance documents, material contracts, and certifications[726][729] Form 10-K Summary The company reports no summary under this item - None[728]