CULP, INC. The following analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes and other exhibits included elsewhere in this report.
General
Our fiscal year is the 52 or 53-week period ending on the Sunday closest to
Our operations are classified into two business segments: mattress fabrics and upholstery fabrics.
The mattress fabrics segment manufactures, sources, and sells fabrics and
mattress covers primarily to bedding manufacturers. We currently have mattress
fabric operations located in
The upholstery fabrics segment develops, sources, manufactures, and sells
fabrics primarily to residential and commercial furniture manufacturers. We have
upholstery fabric operations located in
Executive Summary
We evaluate the operating performance of our business segments based upon (loss) income from operations before certain unallocated corporate expenses and other items that are not expected to occur on a regular basis. Cost of sales for each business segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses.
Results of Operations
Three Months Ended
January 29, January 30,
(dollars in thousands) 2023 2022 Change
Net sales $ 52,523 $ 80,291 (34.6)%
Gross profit 2,093 9,110 (77.0)%
Gross margin 4.0 % 11.3 % (730)bp
Selling, general, and administrative expenses 9,165 8,007 14.5%
Restructuring expense 711 - 100.0%
(Loss) income from operations (7,783 ) 1,103 N.M.
Operating margin (14.8 )% 1.4 % (1620)bp
(Loss) income before income taxes (8,682 ) 995 N.M.
Income tax expense 286 1,284 (77.7)%
Net (loss) income (8,968 ) (289 ) N.M.
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Nine Months Ended
January 29, January 30,
(dollars in thousands) 2023 2022 Change
Net sales $ 173,508 $ 237,899 (27.1)%
Gross profit 4,008 32,336 (87.6)%
Gross margin 2.3 % 13.6 % (1130)bp
Selling, general, and administrative expenses 27,133 26,275 3.3%
Restructuring expense 1,326 - 100.0%
(Loss) income from operations (24,451 ) 6,061 N.M.
Operating margin (14.1 )% 2.5 % (1660)bp
(Loss) income before income taxes (24,507 ) 5,445 N.M.
Income tax expense 2,332 2,633 (11.4)%
Net (loss) income (26,839 ) 2,812 N.M.
Net Sales
Overall, our net sales for the third quarter of fiscal 2023 decreased by 34.6% compared with the same period a year ago, with mattress fabrics sales decreasing 35.8% and upholstery fabrics sales decreasing 33.5%. Our net sales for the first nine months of fiscal 2023 decreased by 27.1% compared with the same period a year ago, with mattress fabrics sales decreasing 34.4% and upholstery fabrics sales decreasing 19.3%.
The decrease in net sales in our mattress fabrics segment for both the third quarter and the first nine months of fiscal 2023 primarily reflects an ongoing slowdown in consumer demand in the domestic mattress industry. The impact of this industry softness has been exacerbated by mattress manufacturers and retailers continuing to work through an excess of inventory, delaying the timing of shipments and new product rollouts. The decrease in net sales during both periods was partially offset by certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 1.3% during the third quarter and by approximately 3.0% during the first nine months of fiscal 2023.
The decrease in net sales for our upholstery fabrics segment for both the third quarter and the first nine months of fiscal 2023 primarily reflects reduced demand for our residential upholstery fabrics products, driven by a slowdown in new retail business in the residential home furnishings industry and high inventory levels at manufacturers and retailers. The decrease in net sales during the nine month period was partially offset by higher sales in our hospitality/contract fabric business, as compared to the prior-year period, as well as certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 1.7% during the third quarter and by approximately 2.9% during the first nine months of fiscal 2023.
See the Segment Analysis section below for further details.
Income Before Income Taxes
Overall, our loss before income taxes for the third quarter of fiscal 2023 was
Operating performance for the third quarter of fiscal 2023, as compared to the
prior-year period, was primarily affected by lower sales; operating
inefficiencies due to these lower sales and holiday shutdowns in both of our
businesses; operating inefficiencies within the upholstery fabrics segment's cut
and sew facility in
See the Segment Analysis section below for further details.
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Income Taxes
We recorded income tax expense of
Our consolidated effective income tax rate during the first nine months of
fiscal 2023 was much more negatively affected by the mix of earnings between our
Refer to Note 13 of the consolidated financial statements for further details regarding our provision for income taxes.
Liquidity
As of
Our net cash provided by operating activities was
As of
Dividend Program
On
During the first nine months of fiscal 2022, dividend payments totaled
Our board of directors has sole authority to determine if and when we will declare future dividends, and on what terms. We will continue to reassess our dividend policy each quarter. Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.
Common Stock Repurchases
In
During the first nine months of fiscal 2023, we did not purchase any shares of
our common stock. As a result, as of
During the first nine months of fiscal 2022, we repurchased 121,688 shares of
our common stock at a cost of
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Segment Analysis
Mattress Fabrics Segment
Three Months Ended
January 29, January 30,
(dollars in thousands) 2023 2022 Change
Net sales $ 24,697 $ 38,439 (35.8)%
Gross (loss) profit (1,237 ) 3,164 (139.1)%
Gross profit margin (5.0 )% 8.2 % (1320)bp
Selling, general, and administrative expenses 2,992 2,800 6.9%
(Loss) income from operations (4,229 ) 364 N.M.
Operating margin (17.1 )% 0.9 % (1800)bp
Nine Months Ended
January 29, January 30,
(dollars in thousands) 2023 2022 Change
Net sales $ 80,299 $ 122,380 (34.4)%
Gross (loss) profit (7,330 ) 16,106 (145.5)%
Gross margin (9.1 )% 13.2 % (2230)bp
Selling, general, and administrative expenses 8,821 8,991 (1.9)%
(Loss) income from operations (16,151 ) 7,115 N.M.
Operating margin (20.1 )% 5.8 % (2590)bp
Net Sales
Mattress fabrics sales decreased 35.8% in the third quarter of fiscal 2023 compared to the prior-year period. Mattress fabrics sales decreased 34.4% in the first nine months of fiscal 2023 compared to the first nine months of fiscal 2022.
The decrease in mattress fabrics net sales for the third quarter and for the first nine months of fiscal 2023 reflects an ongoing slowdown in consumer demand in the domestic mattress industry. We believe this slowdown is primarily due to inflationary pressures affecting consumer spending, as well as a shift in demand from home goods to travel, leisure, and entertainment following a pulling forward of demand for home goods during the early years of the COVID-19 pandemic. The impact of this industry softness has been exacerbated by mattress manufacturers and retailers continuing to work through an excess of inventory, delaying the timing of shipments and new product rollouts. However, we did begin the roll out of some new customer programs during the third quarter. The decrease in net sales during both periods was partially offset by certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 1.3% during the third quarter and by approximately 3.0% during the first nine months of fiscal 2023.
Despite the headwinds, we remained focused on inventory reductions and cash
generation during the quarter, while also engaging in an ongoing business
transformation plan focused on long-term improvement in the business in areas
that include quality, sales, marketing, and operational processes; supply chain
optimization; employee engagement; and our organizational management structure.
We continued to execute our product-driven strategy during the quarter, with an
emphasis on innovation, design creativity, and customer relationships.
Additionally, the strength and flexibility of our global manufacturing and
sourcing operations in the
Looking ahead, we expect the current macroeconomic environment will continue to
affect consumer spending trends for some time, resulting in ongoing industry
softness that may reduce demand for our mattress fabrics and cover products and
continue to delay the timing of new product rollouts. We expect these conditions
are likely to pressure results through at least the end of fiscal 2023.
Additionally, the ongoing impacts of the COVID-19 pandemic, as well as
Gross Profit, Selling, General & Administrative Expenses, and Operating Income
The decrease in mattress fabrics profitability during the third quarter of fiscal 2023, as compared to the prior-year period, was primarily due to lower sales and operating inefficiencies arising from these lower sales volumes and from holiday shutdowns across our locations.
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Mattress fabrics profitability for the first nine months of fiscal 2023 was
pressured by the same factors that affected the third quarter, as well as labor
challenges that resulted in increased employee training costs and operating
inefficiencies, including quality issues; higher raw material costs;
We completed the previously announced restructuring and rationalization of our
We expect the ongoing industry softness affecting sales volumes, as well as continued inflationary pressures, will affect profitability through at least the end of fiscal 2023, although we believe these headwinds will be mitigated to some extent by our ongoing efforts to control internal costs and improve efficiencies. We will consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, as well as additional reasonable pricing actions as necessary to further mitigate and manage inflation.
Segment assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
(dollars in thousands) January 29, 2023 January 30, 2022 May 1, 2022 Accounts receivable $ 8,314 $ 17,617$ 9,865 Inventory 28,757 39,544 39,028 Property, plant & equipment 34,661 39,913 38,731 Right of use assets 2,476 3,706 3,469 $ 74,208 $ 100,780$ 91,093
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As of
As of
Inventory
As of
Inventory turns were 3.5 for the third quarter of fiscal 2023, compared with 3.4 for the third quarter of fiscal 2022 and 2.9 for the fourth quarter of fiscal 2022.
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Property, Plant, & Equipment
The
As of
Right of Use Assets
The
As of
Upholstery Fabrics SegmentNet Sales Three Months Ended January 29, January 30, (dollars in thousands) 2023 2022 % Change Non-U.S. Produced$ 25,514 92%$ 39,286 94% (35.1 )% U.S. Produced 2,312 8% 2,566 6% (9.9 )% Total$ 27,826 100%$ 41,852 100% (33.5 )% Nine Months Ended January 29, January 30, (dollars in thousands) 2023 2022 % Change Non-U.S. Produced$ 86,633 93%$ 108,814 94% (20.4 )% U.S. Produced 6,576 7% 6,705 6% (1.9 )% Total$ 93,209 100%$ 115,519 100% (19.3 )%
Upholstery fabrics sales decreased 33.5% in the third quarter of fiscal 2023 compared to the prior-year period, which was an especially strong sales period. Upholstery fabrics sales decreased by 19.3% for the first nine months of fiscal 2023, as compared to the first nine months of fiscal 2022.
The decrease in upholstery fabrics net sales for the third quarter and for the first nine months of fiscal 2023 reflects reduced demand for our residential upholstery fabrics products compared to the prior-year periods, driven by high inventory levels and a slowdown in new retail business for the residential home furnishings industry. It also reflects slightly lower sales for our Read business during both periods, as compared to the prior-year periods. For the first nine months of fiscal 2023, the decrease in net sales was partially offset by higher sales in our hospitality/contract fabric business, as compared to the prior year period, as well as pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These actions increased net sales for the division by approximately 1.7% during the quarter and by approximately 2.9% during the first nine months of fiscal 2023.
Looking ahead, we expect the high inventory levels and the slowdown in new retail business for the residential home furnishings industry may affect demand for our residential business for some period of time. Despite this challenge, we believe our business is well positioned for the long term with our product-driven strategy and innovative product offerings, as well as our flexible Asian platform and our long-term supplier relationships.
Notably, the ongoing economic and health effects of the COVID-19 pandemic, as
well as the impact of
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Gross Profit, Selling, General & Administrative Expenses, and Operating Income
Three Months Ended
January 29, January 30,
(dollars in thousands) 2023 2022 Change
Gross profit 3,330 5,946 (44.0)%
Gross margin 12.0 % 14.2 % (220)bp
Selling, general, and administrative expenses 3,750 3,500 7.1%
Restructuring expense 711 - 100.0%
(Loss) income from operations (420 ) 2,446 (117.2)%
Operating margin (1.5 )% 5.8 % (730)bp
Nine Months Ended
January 29, January 30,
(dollars in thousands) 2023 2022 Change
Gross profit 11,436 16,230 (29.5)%
Gross margin 12.3 % 14.0 % (170)bp
Selling, general, and administrative expenses 11,053 10,491 5.4%
Restructuring expense 1,326 - 100.0%
Income from operations 383 5,739 (93.3)%
Operating margin 0.4 % 5.0 % (460)bp
The decrease in upholstery fabrics profitability for the third quarter of fiscal
2023, as compared to the prior-year period, primarily reflects lower residential
sales, as well as operating inefficiencies in our cut and sew operation in
Upholstery fabrics profitability for the first nine months of fiscal 2023 was
affected by the same factors that affected the third quarter, as well as
Based on demand trends, we began a rationalization and consolidation of our cut
and sew upholstery kit platform in
Looking ahead, we expect lower sales volumes in our residential business will continue to pressure our profitability. We will continue our ongoing cost reduction efforts and will consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, while maintaining our ability to service our customers.
Restructuring Activities
Second Quarter of Fiscal 2023
During the second quarter of fiscal 2023, we closed our cut and sew upholstery
fabrics operation located in
Third Quarter of Fiscal 2023
During the third quarter of fiscal 2023, we entered into an agreement to
terminate the lease ("the Termination Agreement") of a facility (the "Terminated
Facility") located in Ouanaminthe,
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facility. As a result, we will produce both upholstery cut and sewn kits and mattress covers in this location. We believe this strategic action will realign our capacity and costs with current demand levels, while still allowing us to support our customers and scale for additional capacity if conditions improve.
Based on the terms of the Termination Agreement, once we vacate and return
possession of the Terminated Facility to the lessor (which has now occurred), a
third party lessee will take possession of the Terminated Facility and has
agreed to pay us
As a result of this strategic action, we recorded restructuring expense of
The following summarizes our restructuring expense and restructuring related
charges that were associated with both our restructuring activities noted above
for the nine-months ending
Nine Months Ended
(dollars in thousands) January 29, 2023
Lease termination costs $ 481
Employee termination benefits 468
Impairment loss - leasehold improvements and equipment 357
Loss on disposal and markdowns of inventory 98
Other associated costs 20
Restructuring expense and restructuring related charges (1) $ 1,424
(1) Of the total
See Note 8 to the consolidated financial statements for further details regarding our restructuring activities associated with our upholstery fabrics segment.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets and assets held for sale:
(dollars in thousands) January 29, 2023 January 30, 2022 May 1, 2022 Accounts receivable $ 12,927 $ 21,381$ 12,361 Inventory 18,870 33,589 27,529 Property, plant & equipment 1,794 2,018 2,030 Right of use assets 2,995 8,727 8,124 Assets held for sale 1,950 - - $ 38,536 $ 65,715$ 50,044
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivablec
As of
As of
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Inventory
As of
As of
Inventory turns were 3.8 for the third quarter of fiscal 2023, compared with 3.8 for the third quarter of fiscal 2022, and 3.0 for the fourth quarter of fiscal 2022.
Property, Plant, & Equipment
The
As of
Right of Use Assets
The
As of
Assets Held for Sale
As of
Other Income Statement Categories
Three Months Ended
(dollars in thousands) January 29, 2023 January 30, 2022 % Change
SG&A expenses $ 9,165 $ 8,007 14.5 %
Interest income 196 214 (8.4 )%
Other expense 1,095 322 240.1 %
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Nine Months Ended
(dollars in thousands) January 29, 2023 January 30, 2022 % Change
SG&A expenses $ 27,133 $ 26,275 3.3 %
Interest income 292 347 (15.9 )%
Other expense 348 963 (63.9 )%
Selling, General, and Administrative Expenses
The increase in selling, general, and administrative expenses during the third quarter and first nine months of fiscal 2023, compared with the third quarter and the first nine months of fiscal 2022, is due mostly to change in estimate adjustments that were recorded during the third quarter of fiscal 2022, which adjustments were not required during fiscal 2023. The change in estimate adjustments recorded during the third quarter of fiscal 2022 lowered incentive compensation expense, reflecting unfavorable financial results in relation to pre-established targets.
Interest Income
The decrease in interest income during the third quarter and first nine months of fiscal 2023, compared with the third quarter and first nine months of fiscal 2022, is mostly due to the liquidation of all of our remaining short-term investments classified as available-for-sale and corporate bond investments classified as held-to-maturity during the fourth quarter of fiscal 2022, partially offset by a significant increase in market interest rates during fiscal 2023.
Other Expense
Management is required to assess certain economic factors to determine the
currency of the primary economic environment in which our foreign subsidiaries
operate. Based on our assessments, the
The increase in other expense during the third quarter of fiscal 2023 compared
with the third quarter of fiscal 2022 is due mostly to significantly less
favorable exchange rates applied against our balance sheet accounts denominated
in Chinese Renminbi to determine the corresponding
The decrease in other expense for the first nine months of fiscal 2023 compared
with the first nine months of fiscal 2022 is due mostly to significantly more
favorable exchange rates applied against our balance sheet accounts denominated
in Chinese Renminbi to determine the corresponding
The
Income Taxes
Effective Income Tax Rate & Income Tax Expense
We recorded income tax expense of
Our effective income tax rates for the nine-month periods ended
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The following schedule summarizes the principal differences between income tax
expense at the
January 29, January 30,
2023 2022
U.S. federal income tax rate 21.0 % 21.0 %
U.S. valuation allowance (29.3 ) (26.9 )
Withholding taxes associated with foreign
jurisdictions (2.0 ) 9.8
Capital expenditure deduction - Quebec, Canada (1.6 ) -
Foreign income tax rate differential 1.4 7.9
Tax effects of local currency foreign exchange gains (losses)
1.3 (1.0 )
Global Intangible Low Taxed Income Tax ("GILTI") - 37.4
Other (0.3 ) 0.2
(9.5)% 48.4 %
Our consolidated effective income tax rate during the first nine months of
fiscal 2023 was much more negatively affected by the mix of earnings between our
During the first nine months of fiscal 2023, we incurred a significantly higher
consolidated pre-tax loss totaling
We evaluate the realizability of our
As of
Based on our assessments as of
January 29, January 30,
(dollars in thousands) 2023 2022 May 1, 2022
U.S. federal and state net deferred income tax
assets $ 15,741 7,802 9,527
U.S. capital loss carryforward 2,330 2,330 2,330
$ 18,071 10,132 11,857
Undistributed Earnings
Refer to Note 13 of the consolidated financial statements for disclosures
regarding our assessments of our recorded deferred income tax liability balances
associated with undistributed earnings from our foreign subsidiaries as of
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Uncertain Income Tax Positions
Refer to Note 13 of the consolidated financial statements for disclosures
regarding our assessments of our uncertain income tax positions as of
Income Taxes Paid
The following table sets forth taxes paid by jurisdiction:
Nine Months Nine Months
Ended Ended
January 29, January 30,
(dollars in thousands) 2023 2022
United States Transition Tax Payment $ 265 $ 266
China Income Taxes, Net of Refunds 1,680 2,036
Earnings and Profits Distributed to the U.S. - 487
Canada - Income Taxes, Net of Refunds (9 ) 256
$ 1,936 $ 3,045
Future Liquidity
We are currently projecting annual cash income tax payments of approximately
Additionally, we currently expect to pay minimal income taxes in the
As of
Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents
(collectively, "cash"), cash flow from operations, and amounts available under
our revolving credit lines. As of
As of
Our net cash provided by operating activities was
As of
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The income taxes we pay also affect our liquidity. See the above section titled "Income Taxes Paid" of this Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION for further detail.
Our cash balance may be adversely affected by factors beyond our control, such
as (i) customer demand trends, (ii) supply chain disruptions, (iii) rising
interest rates and inflation, (iv) world events (including the
By Geographic Area
A summary of our cash and investments by geographic area follows:
(dollars in thousands) Janaury 29, 2023 January 30, 2022 May 1, 2022 United States $ 9,658 $ 12,351$ 4,430 China 6,114 8,838 9,502 Canada 700 454 267 Haiti 244 557 341 Cayman Islands 9 10 10 $ 16,725 $ 22,210$ 14,550
The total balance as of
Common Stock Repurchase Program
In
During the first nine months of fiscal 2023, we did not purchase any shares of
our common stock. As a result, as of
During the first nine months of fiscal 2022, we repurchased 121,688 shares of
our common stock at a cost of
Dividend Program
On
During the nine-month period ending
Our board of directors has sole authority to determine if and when we will declare future dividends, and on what terms. We will continue to reassess our dividend policy each quarter. Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.
Working CapitalOperating Working Capital
Operating working capital (accounts receivable and inventories, less accounts
payable-trade, accounts payable-capital expenditures, and deferred revenue) was
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Accounts Receivable
Accounts receivable was
Accounts receivable was
Inventory
Inventory was
Inventory turns were 4.0 for the third quarter of fiscal 2023, as compared with 3.4 for the third quarter of fiscal 2022 and 3.1 for the fourth quarter of fiscal 2022.
Accounts Payable - Trade
Accounts payable - trade was
Accounts payable - trade was
Financing Arrangements
Currently, we have revolving credit agreements with banks for our
As of
Our loan agreements require, among other things, that we maintain compliance
with certain financial covenants. As of
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Refer to Note 9 of the consolidated financial statements for further disclosure regarding our revolving credit agreements.
Capital Expenditures and Depreciation
Overall
Capital expenditures on a cash basis were
Depreciation expense was
Accounts Payable - Capital Expenditures
As of
Purchase Commitments - Capital Expenditures
As of
Critical Accounting Policies and Recent Accounting Developments
As of
Refer to Note 2 of the consolidated financial statements for recently adopted
and issued accounting pronouncements, if any, since the filing of our Form 10-K
for the year ended
Contractual Obligations
There were no significant or new contractual obligations since those reported in
our annual report on Form 10-K for the year ended
Inflation
Any significant increase in our raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating cost increases on to customers. During fiscal 2022 and continuing through the first nine months of fiscal 2023, higher freight costs, labor costs, and raw material prices have increased the prices we pay for shipping, labor, and raw materials. Inflationary pressures also began to affect consumer spending during the second half of fiscal 2022, and these pressures have continued through the first nine months of fiscal 2023. We are unable to predict how long these trends will last, or to what extent inflationary pressures may affect the economic and purchasing cycle for home furnishing products (and therefore affect demand for our products) over the short and long term.
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