CULP, INC.
We have prepared this Management's Discussion and Analysis as an aid to
understanding our financial results. It should be read in conjunction with the
consolidated financial statements and notes and other exhibits included
elsewhere in this report. It also includes management's analysis of past
financial results and certain potential risk factors that may affect future
results, as well as approaches that may be used to manage those risks. See
"Cautionary Note Regarding Forward-Looking Statements" at the beginning of this
report for a discussion of factors that may cause results to differ materially.
We sold our majority ownership interest in eLuxury, LLC ("eLuxury") on March 31,
2020 , resulting in the elimination of our home accessories segment at such time.
Accordingly, the results of operations and assets and liabilities for this
segment are excluded from the company's continuing operations for the fiscal
2020 year (and for all prior periods of comparison) and presented as a
discontinued operation in this report.
General
Our fiscal year is the 52 or 53-week period ending on the Sunday closest to
Continuing Operations Our continuing 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 have wholly owned mattress fabric operations located inStokesdale, NC ,High Point, NC , andQuebec, Canada , as well as a fifty-percent owned cut and sew mattress cover operation located inHaiti . The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. We have wholly owned upholstery fabric operations located inShanghai, China andBurlington, NC . With the acquisition ofRead Window Products, LLC ("Read") late in fiscal 2018, we now have a wholly owned company located inKnoxville, TN that provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read's own products to customers in the hospitality and commercial industries. The company operated an upholstery fabrics plant inAnderson, SC , during the first quarter of fiscal 2019, which was closed during the second quarter of fiscal 2019.
Discontinued Operation - Home Accessories Segment
Through ourJune 22, 2018 , majority investment in eLuxury, our operations also included a home accessories segment, which manufactured, sourced, and sold finished bedding accessory and home good products directly to consumers and businesses through global e-commerce and business-to-business sales channels. However, we sold our majority ownership interest in eLuxury onMarch 31, 2020 , to focus on the company's core mattress and upholstery fabrics businesses and increase liquidity during the unprecedented disruption arising from the COVID-19 pandemic. This sale of eLuxury resulted in the elimination of our home accessories segment at such time. Accordingly, the results of operations and assets and liabilities for this segment are excluded from the company's continuing operations for the fiscal 2020 year (and for all prior periods of comparison) and presented as a discontinued operation in this report. See Note 3 - Discontinued Operations, of the consolidated financial statements for further details. Impact of COVID-19 For a discussion of how COVID-19 has affected and may continue to affect our business and financial condition, see the discussion under the heading "Recent Developments" in Part I, Item 1 of this report, as well as the Risk Factors set forth in Part I, Item 1A of this report.
Executive Summary
We evaluate the operating performance of our segments based upon income (loss)
from continuing operations before certain unallocated corporate expenses, asset
impairment charges, restructuring expense (credit) and related charges, and
other non-recurring items. Cost of sales in each segment includes costs to
develop, manufacture, or source our products, including costs such as raw
material costs 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, and other miscellaneous
expenses.
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Results of Continuing Operations
Twelve Months Ended
May 3, April 28,
(dollars in thousands) 2020 2019 Change
Net sales $ 256,166 $ 281,325 (8.9 )%
Gross profit from continuing operations 40,498 45,769 (11.5 )%
Gross profit margin from continuing
operations 15.8 % 16.3 % (50 ) bp
Selling, general, and administrative expenses 34,424 33,243 3.6 %
(Loss) income from continuing operations (7,568 ) 13,351 N.M.
Operating margin from continuing operations (3.0 )% 4.7 % (770 ) bp (Loss) income before income taxes from continuing operations (7,679 ) 12,722
N.M.
Income tax expense 3,354 6,537 (48.7 )% Net (loss) income from continuing operations (11,158 ) 6,071 N.M. Net Sales Overall, our net sales decreased 8.9% in fiscal 2020 compared with a year ago, with mattress fabric net sales declining 9.8% and upholstery fabric net sales declining 8.0%. The fiscal 2020 year had 53 weeks compared to 52 weeks in fiscal 2019. The decrease in net sales for both the mattress fabrics and upholstery fabrics segments reflects the severe economic disruption caused by the COVID-19 pandemic during the fourth quarter of fiscal 2020, which significantly affected our results for the fourth quarter and fiscal 2020. The impact of the COVID-19 pandemic began to materialize in the second half ofMarch 2020 , as retail home furnishings stores across the country closed and many of our customers shut down or limited their operations for several weeks. Additionally, prior to the COVID-19 outbreak, net sales for our mattress fabrics segment were also affected by continued industry weakness in the domestic mattress industry relating to low-priced mattress imports that moved fromChina to other countries following the imposition of punitive anti-dumping measures by theU.S. Department of Commerce against Chinese-made mattresses during the first quarter of fiscal 2020. Our upholstery fabrics segment was also affected during the first half of the fiscal year by the soft retail environment for residential furniture and ongoing issues surrounding international trade agreements and associated tariffs. However, the COVID-19 pandemic during the fourth quarter of fiscal 2020 was the most significant and primary factor that resulted in the decline in net sales for fiscal 2020.
Income (Loss) Before Income Taxes from Continuing Operations
Overall, our income (loss) before income taxes from continuing operations was$(7.7) million for fiscal 2020, compared with income before income taxes from continuing operations of$12.7 million for the prior year. Income (loss) before income taxes from continuing operations for fiscal 2020 included non-cash asset impairment charges of$13.7 million associated with goodwill and certain intangible assets, of which$11.5 million related to the mattress fabrics segment and$2.2 million related to the upholstery fabrics segment, as well as$70,000 in restructuring credits associated with the closure of ourAnderson, SC , upholstery fabrics facility. Income before income taxes from continuing operations for fiscal 2019 included restructuring and related charges and credits and other non-recurring charges resulting in a net charge of approximately$2.7 million , of which$1.6 million related to restructuring and related charges and credits associated with the closure of ourAnderson, SC , upholstery fabrics facility, and$1.1 million related to other non-recurring charges, including a$500,000 charitable contribution in honor of our co-founder and former chairman of the board and other non-recurring charges associated with the mattress fabrics segment.
In addition to the asset impairment charges noted above, income (loss) before income taxes for continuing operations for fiscal 2020 was significantly affected by lower sales due to the COVID-19 pandemic.
Additionally, unallocated corporate SG&A expense was higher during fiscal 2020, as compared to the prior year, due primarily to change in estimate adjustments that were recorded during fiscal 2019 that lowered share-based compensation expense in fiscal 2019, as well as an increase in professional fees during fiscal 2020 that were attributable to the adoption of ASC Topic 842 Leases, our recent acquisitions and disposal of businesses, and our comprehensive response to the COVID-19 global pandemic.
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Income Taxes
We recorded income tax expense of$3.4 million , or (43.7%) of loss before income tax expense from continuing operations, in fiscal 2020, compared with income tax expense of$6.5 million , or 51.4% of income before income tax expense from continuing operations in fiscal 2019. The decrease in our income tax expense for fiscal 2020 is primarily due to the decline in our consolidated taxable income, with a pre-tax loss from continuing operations in fiscal 2020 versus pre-tax income in fiscal 2019. Our effective income tax rates for both fiscal 2020 and 2019 reflected the mix of our pre-tax earnings from continuing operations that adversely affected our effective income tax rates for the year, as we had higher income tax rates associated with the pre-tax income earned by our foreign operations inChina andCanada , as compared to a lower income tax rate on ourU.S. pre-tax loss in fiscal 2020 and ourU.S. pre-tax income in fiscal 2019. Additionally, the current mix of taxable income that favors our foreign operations led to a significant increase in the effective income tax rates that are associated with our Global Intangible Low Taxed Income (GILTI) Tax, which represents aU.S. income tax on foreign earnings. During the fiscal 2020 year, we did not make anyU.S. income tax payments due to the utilization of the company'sU.S. Federal net operating loss carryforwards and immediate expensing ofU.S. capital expenditures. However, we did have income tax payments during the year totaling$5.0 million associated with our foreign operations located inChina andCanada .
Refer to Note 14 of the consolidated financial statements for further details regarding our provision for income taxes from continuing operations.
See the Segment Analysis section located in the Results of Continuing Operations for further details.
Liquidity AtMay 3, 2020 , our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) totaled$77.1 million compared with$45.0 million atApril 28, 2019 . The increase from the end of fiscal 2019 is attributable to$38.4 million in total proceeds received during the fourth quarter of fiscal 2020 from borrowings under our lines of credit and receipt of a loan under theU.S. Small Business Administration ("SBA") Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (such loan, the "PPP loan"). As a result of the COVID-19 global pandemic and the uncertainty relating to its duration and overall effect on our business, we proactively borrowed$29.8 million , the maximum amount available, under our domestic line of credit, an also borrowed an additional$1.0 million from our line of credit associated with ourChina operations, as a precautionary measure to increase balance sheet flexibility during the COVID-19 crisis. In addition, we applied for and received$7.6 million in cash proceeds from the PPP Loan (which, as noted below, we subsequently repaid in full onMay 13, 2020 following new guidance issued by theU.S. Treasury Department and SBA raising questions regarding the eligibility of publicly traded companies to receive loans under the Paycheck Protection Program). Excluding the cash proceeds from our lines of credit and the PPP Loan, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) as of the end of fiscal 2020 would have decreased$6.3 million from the end of fiscal 2019. This decrease was mostly due to (i) cash payments of$6.8 million returned to shareholders in the form of regular quarterly dividend payments and common stock repurchases; (ii)$4.6 million of capital expenditures that were mostly associated with our mattress fabrics segment; and (iii)$1.5 million for additional purchase price payments on our recent acquisitions, partially offset by (iv)$5.0 million in net cash provided by operating activities; and (v)$1.5 million in proceeds from a long-term note receivable associated with a discontinued operation. Our net cash provided by operating activities of$5.0 million in fiscal 2020 decreased$8.9 million compared with$13.9 million in fiscal 2019. The decrease is mostly due to lower earnings and slower cash collections on accounts receivable stemming from the COVID-19 global pandemic. Our net cash provided by operating activities in fiscal 2020 and fiscal 2019 reflects cash flows from operating activities for both our continuing operations and our discontinued operation. Our discontinued operation had net cash used in operating activities totaling$(2.3) million and$(1.5) million for fiscal 2020 and 2019, respectively. Our discontinued operation had net cash used in investing activities totaling$(134,000) and$(54,000) for fiscal 2020 and 2019, respectively. Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions fromCulp, Inc. and the owner of the noncontrolling interest of eLuxury totaling$2.4 million and$1.5 million during fiscal 2020 and 2019, respectively. We believe our liquidity will improve in the absence of our home accessories segment due to the significant losses that were incurred and the funding of working capital requirements through loans and capital contributions. AtMay 3, 2020 , our outstanding borrowings totaled$38.4 million , which consisted of$29.8 million outstanding under our domestic bank credit facility,$1.0 million outstanding under ourChina credit facility, and the$7.6 million PPP Loan. During the first quarter of fiscal 2021, we repaid in full the PPP Loan and all borrowings that were outstanding under our lines of credit atMay 3, 2020 , and currently we have no outstanding borrowings under our line of credit agreements. 31
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Dividend Program
OnJuly 1, 2020 , we announced that our board of directors approved a regular quarterly cash dividend payment of$0.105 per share. This payment will be made on or aboutJuly 17, 2020 , to shareholders of record as ofJuly 10, 2020 . During fiscal 2020, dividend payments totaled$5.1 million , all of which represented our regularly quarterly cash dividend payments ranging from$0.10 to$0.105 per share. During fiscal 2019, dividend payments totaled$4.7 million , all of which represented our regular quarterly cash dividend payments ranging from$0.09 to$0.10 per share. During fiscal 2018, dividend payments totaled$6.8 million , of which$2.6 million represented a special cash dividend payment of$0.21 per share, and$4.2 million represented our regular quarterly cash dividend payments ranging from$0.08 to$0.09 per share. Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. Future dividend payments are subject to final determination by our board of directors and will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market conditions, and other factors we consider relevant.
Common Stock Repurchases
OnSeptember 5, 2019 , we announced that our board of directors approved an authorization for us to acquire up to$5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased, and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities. During fiscal 2020, we purchased 142,496 shares of our common stock at a cost of$1.7 million , leaving approximately$3.3 million available under the share repurchase program approved by the board of directors inSeptember 2019 . The board of directors subsequently approved an increase in the company's share repurchase authorization back up to a total of$5.0 million inMarch 2020 . However, as part of our comprehensive response to the COVID-19 pandemic, we announced onApril 3, 2020 , that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty.
During fiscal 2019, we purchased 160,823 shares of our common stock at a cost of
At
Results of Continuing Operations
The following table sets forth certain items in our consolidated statements of net (loss) income as a percentage of net sales.
Fiscal Fiscal Fiscal
2020 2019 2018
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales (84.2 ) (83.7 ) (80.0 )
Gross profit from continuing operations 15.8 16.3 20.0
Selling, general and administrative expenses (13.4 ) (11.8 ) (11.5 ) Assets impairments 5.4 0.0 0.0 Restructuring credit 0.0 0.3 0.0 (Loss) Income from continuing operations (3.0 ) 4.7 8.5 Interest income, net 0.4 0.3 0.1 Other expense (0.4 ) (0.5 ) (0.3 )
(Loss) Income before income taxes from
continuing operations (3.0 ) 4.5
8.3
Income tax expense * (43.7 ) 51.4
21.4
Loss from investment in unconsolidated joint
venture 0.0 0.0
0.1
Net (loss) income from continuing operations (4.4 ) 2.2
6.4
* Calculated as a percentage of (loss) income before income taxes from
continuing operations.
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2020 compared with 2019
Segment Analysis
Mattress Fabrics Segment
Twelve Months Ended
May 3, April 28,
(dollars in thousands) 2020 2019 Change
Net sales $ 131,412 $ 145,671 (9.8 )%
Gross profit from continuing operations 16,278 22,904 (28.9 )%
Gross profit margin from continuing operations 12.4 % 15.7 % (330 ) bp
SG&A expenses 11,354 11,296 0.5 %
Income from operations 4,924 11,607 (57.6 )%
Operating margin 3.7 % 8.0 % (430 ) bp
Net Sales
Mattress fabrics sales decreased 9.8% in fiscal 2020 compared to the prior year.
These results for fiscal 2020 reflected the significant disruption from the
COVID-19 pandemic during the fourth quarter of fiscal 2020. We experienced a
rapid drop in demand beginning in mid-March, as customers and retail mattress
and home furnishings stores began closing or substantially limiting their
operations. Due to government-mandated closure requirements near the end of
March, we shut down our facilities in Canada and Haiti for several weeks. We
also reduced our production schedules and furloughed workers at our U.S.
facilities to align with the severely reduced demand, while aggressively cutting
costs, delaying non-essential capital expenditures, and reducing inventory.
Despite these challenges, we quickly shifted to repurpose a portion of our
available operations to produce face masks, bedding covers, and fabrics for
healthcare operations and consumer health. This allowed us to support
much-needed relief efforts as an essential business and keep as many workers as
possible employed. In addition, in the face of travel restrictions and cancelled
trade shows, we leveraged our recently introduced digital library, design
simulations, and 3D image rendering capabilities to continue showcasing our
products and support our customers through virtual design collaboration.
Prior to the COVID-19 outbreak, our results for fiscal 2020 were also affected
by continued disruption in the domestic mattress industry relating to low-priced
mattress imports that moved from China to other countries. Our results for
fiscal 2019, which saw a 24.7% decrease in net sales compared to fiscal 2018,
were significantly affected by more challenging market conditions faced by the
domestic bedding industry due primarily to the high volume of low-priced
imported mattresses from China . Near the end of fiscal 2019, import activity
began to slow in anticipation of an expected ruling from the U.S. Department of
Commerce . This ruling came in May 2019 , with the Department of Commerce imposing
punitive anti-dumping measures against Chinese made mattresses. At the time, we
expected that these duties would ultimately provide relief for the domestic
mattress industry and benefit our business, and this expectation appeared to
materialize during the first quarter of fiscal 2020. However, this trend was
reversed during the second and third quarters as the domestic mattress industry
saw continued disruption from low-priced mattress imports that moved from China
to other countries.
Through the first eight weeks of fiscal 2021, we have experienced an increase in
demand as government restrictions have been lifted and customers and retail
stores have started to resume operations. As of the end of June 2020 , we have
dramatically increased our production schedules and returned substantially all
of our previously furloughed workers to meet this increased demand.
Additionally, we have seen a return to pre-COVID-19 favorable demand trends for
our CLASS sewn mattress cover business, reflecting a continuing growth trend for
online boxed bedding. Across our mattress fabrics division, from fabric to
cover, we are working collaboratively with new and existing customers to develop
fresh, innovative products, and our efficient global platform continues to
support our fabric and cover business with established production capabilities
in the U.S. , Haiti , and Asia . We expect our building expansion in Haiti to be
completed during the second quarter of fiscal 2021, which will provide
additional capacity and enhance our ability to produce sewn covers.
In addition, while we believe our global platform for fabric and covers in Haiti
and Asia has us well positioned to capture market share with imported mattresses
if and when business conditions normalize from the effects of the COVID-19
pandemic, we are also encouraged by the recent anti-dumping duty petitions filed
with the U.S. International Trade Commission (ITC) and U.S. Department of
Commerce against seven countries for engaging in unfair trade practices relating
to low-priced mattress imports, as well as the ITC's preliminary determination
allowing these petitions to move forward. If successful, we believe the proposed
relief being sought will benefit the domestic mattress industry and, in turn, be
favorable for our business. We also continue to invest in our design and
marketing capabilities with technologies to improve the customer experience and
speed to market, and we are enhancing our service platform to be more responsive
to customer demand with shorter lead times. We believe we will benefit from
these advanced technologies and processes that support our sales and marketing
efforts with both legacy and new customers.
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Despite positive sales trends for the beginning of fiscal 2021, we expect the
COVID-19 pandemic will continue to have an impact on our business through at
least the first half of fiscal 2021. The ongoing economic and health effects
remain unknown and depend on factors beyond our knowledge or control, including
the duration and severity of the outbreak, actions taken to contain its spread
and mitigate the public health and economic effects, and the short- and
long-term disruption on the global economy, consumer confidence, unemployment,
employee health, and the financial health of our customers, suppliers, and
distribution channels. At this time, we cannot reasonably estimate the ongoing
impact of the COVID-19 pandemic on our mattress fabrics segment, however, if
conditions relating to the pandemic worsen, the disruption could adversely
affect our operations and financial performance.
Gross Profit and Operating Income
The decrease in mattress fabrics profitability was primarily due to the decrease in mattress fabrics sales noted above, as well as certain non-recurring charges totaling$249,000 for employee termination benefits and operational reorganization costs associated with our mattress fabrics segment.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant, and
equipment, right of use assets, and our investment in an unconsolidated joint
venture.
May 3, April 28,
(dollars in thousands) 2020 2019 % Change
Accounts receivable $ 12,212 $ 12,098 0.9 %
Inventory 26,620 24,649 8.0 %
Property, plant & equipment 40,682 44,266 (8.1 )%
Right of use asset 362 -
100.0 %
Investment in unconsolidated joint venture 1,602 1,508 6.2 %
$ 81,478 $ 82,521 (1.3 )%
Refer to Note 21 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As ofMay 3, 2020 , accounts receivable was comparable withApril 28, 2019 . Accounts receivable for fiscal 2020 reflect slower cash collections and a decrease in net sales that emerged during the fourth quarter of fiscal 2020 as a result of the COVID-19 global pandemic. We experienced slower cash collections during the fourth quarter of fiscal 2020 primarily because we granted extended credit terms to certain customers in response to the challenging business conditions stemming from the pandemic. Days' sales outstanding was 48 days for the fourth quarter of fiscal 2020, as compared with 29 days for the fourth quarter of fiscal 2019. Net sales for the fourth quarter of fiscal 2020 were$23.4 , a decrease of$14.6 million , or 38.5%, compared with net sales of$38.0 million for the fourth quarter of fiscal 2019.
Inventory
As ofMay 3, 2020 , inventory increased 8.0% compared withApril 28, 2019 . The increase reflects excess inventory purchases compared with actual demand trends, which were significantly lower than expected due COVID-19.
Property, Plant, & Equipment
The$40.7 million atMay 3, 2020 , represents property, plant, and equipment of$27.7 million and$13.0 million located in theU.S. andCanada , respectively. The$44.3 million atApril 28, 2019 , represents property, plant, and equipment of$32.4 million and$11.9 million located in theU.S. andCanada , respectively. As ofMay 3, 2020 , property, plant, and equipment decreased as compared withApril 28, 2019 . This trend represents a decrease in capital expenditure requirements and a progression toward a more maintenance level of spending on machinery and equipment, as well as significant cost cutting measures in capital expenditures during the fourth quarter of fiscal 2020, as part of our comprehensive response to COVID-19. During fiscal 2020, our mattress fabrics segment reported capital expenditures of$3.5 million and depreciation expense of$6.7 million . 34
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Right of Use Assets
As ofMay 3, 2020 , our right of use assets balance reflects the adoption of ASC Topic 842, Leases. See the heading titled "Leases" under the "Recently Adopted Accounting Pronouncements" section in Note 1 to the consolidated financial statements, as well as Note 15 to the consolidated financial statements, for further details. The$362,000 represents right of use assets located in theU.S. There is not a comparable balance as ofApril 29, 2019 , as ASC Topic 842, Leases was adopted atApril 29, 2019 , the beginning of our fiscal 2020 year.
Investment in Unconsolidated Joint Venture
Our investment in unconsolidated joint venture represents our fifty percent
ownership of
Upholstery Fabrics SegmentNet Sales Twelve Months Ended May 3, April 28, (dollars in thousands) 2020 2019 % Change Non-U.S. Produced$ 113,630 91 %$ 121,818 90 % (6.7 )% U.S. Produced 11,124 9 % 13,836 10 % (19.6 )% Total$ 124,754 100 %$ 135,654 100 % (8.0 )% Upholstery fabrics sales decreased 8.0% in fiscal 2020 compared to the prior year, reflecting material disruption from the COVID-19 pandemic during the fourth quarter of fiscal 2020. The first six weeks of the fourth quarter were consistent with our expectations, with ourAsia supply chain returning to full output by the beginning of March following the previous government-mandated shutdown inChina associated with the COVID-19 outbreak. However, orders and shipments declined significantly beginning in the second half of March as most of ourU.S. customers andU.S. furniture retailers shut down or substantially limited their operations due to the pandemic. Many of our customers delayed shipments, deferred orders in process, and halted new orders as a result of the disruption, resulting in a substantial decrease in sales. We responded to the new operating environment to support the needs of our customers by developing innovative virtual showcase presentations that allowed us to continue representing our products to customers in the face of travel restrictions and event cancellations. We also adjusted our workforce to align with the significantly reduced demand and aggressively reduced discretionary spending. Prior to the COVID-19 outbreak, our results for the fiscal 2020 year were also affected by the soft retail environment for residential furniture and ongoing issues surrounding international trade agreements and associated tariffs during the first half of the year. Additionally, the drop inU.S. produced sales for fiscal 2020 reflects the closure of ourAnderson, SC , production facility that was completed during the second quarter of fiscal 2019, as net sales for the first six months of fiscal 2019 included sales from theAnderson facility, whereas there were no such sales in the first six months of fiscal 2020. Despite the challenging market conditions, we executed our product-driven strategy throughout the fiscal 2020 year with a continued focus on innovation and creative design that supports our diverse customer base and helps customers differentiate themselves in the marketplace. Our line of LiveSmart® performance fabrics remains popular with both existing and new residential furniture customers, and our new LiveSmart Evolve™ line of sustainability fabrics, which features the use of recycled fibers along with the same stain-resistant performance, continues to be well received. We also experienced continued growth in our hospitality business throughout the year, which was less affected by the COVID-19 disruption during the fourth quarter due to orders already in process.Read Window Products , our window treatment and installation services business, provided a meaningful contribution for the year, including the fourth quarter, as it continued operations to fulfill existing project orders and reallocated a portion of its operations to sew face masks for healthcare workers. However, while our hospitality business has thus far been less affected by the disruption from the COVID-19 pandemic, the ongoing pressure on the travel and leisure industries as a result of the pandemic may negatively affect it, at least in the short-term, as it remains uncertain whether hotels and other hospitality venues will undertake new refurnishing projects in the current environment. 35 -------------------------------------------------------------------------------- For the first eight weeks of fiscal 2021, we are encouraged by recent sales trends and reports of consumer spending in the home furnishings sector. As customers and retail stores across theU.S. have resumed operations, we have seen a gradual increase in orders and shipments during this period. However, despite these positive trends, we expect the COVID-19 pandemic will continue to have an impact on our business through at least the first half of fiscal 2021. The ongoing economic and health effects, as well as the duration of such effects, remain unknown and depend on factors beyond our knowledge or control. At this time, we cannot reasonably estimate the ongoing impact of the COVID-19 pandemic on our upholstery fabrics segment, however, if conditions worsen, the impact on our employees, suppliers, consumers, and the global economy could adversely affect our operations and financial performance.
Gross Profit and Operating Income
Twelve Months Ended
May 3, April 28,
(dollars in thousands) 2020 2019 Change
Gross profit from continuing operations
(4.5 )%
Gross profit margin from continuing operations 19.4 % 18.7 % 70 bp
SG&A expenses 14,353 14,551 (1.4 )%
Income from operations 9,867 10,823 (8.8 )%
Operating margin 7.9 % 8.0 % (10 ) bp
The decrease in upholstery fabrics profitability was primarily due to the decrease in sales noted above.
2019 Upholstery Fabrics Restructuring Plan
OnJune 12, 2018 , our board of directors announced the closure of our upholstery fabrics manufacturing facility located inAnderson, SC . This closure was completed during the second quarter of fiscal 2019 and was due to a continued decline in demand for the products manufactured at this facility, reflecting a change in consumer style preferences.
The following summarizes our restructuring credit and related charges that were associated with the above restructuring plan:
(dollars in thousands) 2020 2019
Inventory markdowns $ - $ 1,564
Other operating costs associated with a closed facility - 824
Employee termination benefits (70 ) 661
Gain on sale of property, plant, and equipment - (1,486 )
Restructuring credit and related charges (1) (2)
(1) The
Consolidated Statement of Net Loss.
(2) Of this total net charge, a charge of
credit of
administrative expenses, and restructuring credit, respectively, in the
fiscal 2019 Consolidated Statement of Net Income.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
May 3, April 28,
(dollars in thousands) 2020 2019 % Change
Accounts receivable $ 12,881 $ 11,274 14.3 %
Inventory 21,287 22,915 (7.1 )%
Property, plant & equipment 1,633 1,795 (9.0 )%
Right of use asssets 1,633 - 100.0 %
$ 37,434 $ 35,984 4.0 %
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Accounts Receivable
As ofMay 3, 2020 , accounts receivable increased 14.3% compared withApril 28, 2019 . Accounts receivable for fiscal 2020 reflect slower cash collections and a decrease in net sales that emerged during the fourth quarter of fiscal 2020 as a result of the COVID-19 global pandemic. We experienced slower cash collections during the fourth quarter of fiscal 2020 primarily because we granted extended credit terms to certain customers in response to the challenging business conditions stemming from the pandemic. Days' sales outstanding was 47 days for the fourth quarter of fiscal 2020, as compared with 34 days for the fourth quarter of fiscal 2019. Net sales for the fourth quarter of fiscal 2020 were$24.0 million , a decrease of$5.0 million , or 17.3%, compared with net sales of$29.0 million for the fourth quarter of fiscal 2019.
Inventory
As ofMay 3, 2020 , inventory decreased 7.1% compared withApril 28, 2019 . The trend primarily reflects the decrease in net sales noted above during the fourth quarter of fiscal 2020 compared with the fourth quarter of fiscal 2019.
Property, Plant, & Equipment
The$1.6 million atMay 3, 2020 , represents property, plant, and equipment of$1.2 million and$471,000 located in theU.S. andChina , respectively. The$1.8 million atApril 28, 2019 , represents property, plant, and equipment of$1.2 million and$591,000 located in theU.S. andChina , respectively.
Right of Use Assets
As ofMay 3, 2020 , our right of use assets balance reflects the adoption of ASC Topic 842, Leases. See the heading titled "Leases" under the "Recently Adopted Accounting Pronouncements" section in Note 1 to the consolidated financial statements, as well as Note 15 to the consolidated financial statements, for further details. The$1.6 million represents right of use assets of$857,000 and$776,000 located in theU.S. andChina , respectively. There is not a comparable balance as ofApril 29, 2019 , as ASC Topic 842, Leases was adopted atApril 29, 2019 , the beginning of our fiscal 2020 year.
Discontinued Operation - Home Accessories Segment
Overview
Through ourJune 22, 2018 , majority investment in eLuxury, our operations for the majority of fiscal 2019 and fiscal 2020 included our home accessories segment, beginning as of the date of such acquisition. The home accessories segment represented our e-commerce and finished products business offering bedding accessories and home goods directly to both consumers and businesses through global e-commerce and business-to-business sales channels. However, we sold our majority ownership interest in eLuxury onMarch 31, 2020 , to increase liquidity and focus on the company's core mattress and upholstery fabrics businesses during the unprecedented disruption arising from the COVID-19 pandemic. As a result of the sale, we no longer operate in the home accessories segment and determined that this segment qualified as a discontinued operation. The applicable financial results of our former home accessories segment through the closing of the sale of eLuxury have been reclassified as a discontinued operation for all periods presented in this report. See Note 3 - Discontinued Operations, to the consolidated financial statements for further details. Terms of Disposal We sold our entire ownership interest in eLuxury to its noncontrolling interest holder, effectiveMarch 31, 2020 , in consideration of an accelerated settlement of certain financial obligations due and payable by eLuxury to us and the entry into certain supply and royalty arrangements designed to preserve an additional sales channel for our core products. In connection with the sale, (i) we received$509,500 at closing as an accelerated repayment of principal amounts previously loaned to eLuxury, together with outstanding interest, under a loan agreement between us and eLuxury; (ii) we forgave$300,000 of borrowings payable by eLuxury to us under this loan agreement; (iii) we entered into an amended and restated credit and security agreement with eLuxury and the buyer (the former noncontrolling interest holder) (together, the "Borrowers"), pursuant to which the Borrowers agreed to repay an additional$1.0 million previously loaned to eLuxury within thirty days of the closing of the sale transaction (and which amount was secured by the assets of both Borrowers); and (iv) eLuxury agreed to pay$613,000 within sixty days of the sale transaction in satisfaction of certain trade accounts payable due from eLuxury to us. The remaining$1.0 million due and outstanding under our prior loan to eLuxury, as well as the$613,000 in outstanding trade accounts payable due from eLuxury to us, has been paid in full in accordance with the terms of the sale agreement outlined above. 37
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Impact on Operating Results
The impact on our assets, liabilities, and operating results from the sale of eLuxury and reclassification of the applicable financial results of our former home accessories segment as a discontinued operation is set forth below. See also Note 3 - Discontinued Operations, to the consolidated financial statements for further details. Consolidated Balance Sheets The following is a summary of the assets and liabilities that were sold onMarch 31, 2020 , in connection with our sale of our entire ownership interest in eLuxury, and a reconciliation of the assets and liabilities disclosed in the notes to the consolidated financial statements to the assets and liabilities of the disposal group that are presented separately as held for sale - discontinued operation on the Consolidated Balance Sheet as ofApril 28, 2019 : March 31, April 28, (dollars in thousands) 2020 2019 ASSETS current assets: cash and cash equivalents $ 285 $ - accounts receivable 588 378 inventories 3,344 3,296 other current assets 170 33 total current assets held for sale - discontinued 4,387
3,707
operation
property, plant, and equipment 1,694 1,910 goodwill - 13,653 intangible asset - 6,549 right of use asset 918 - total noncurrent assets held for sale - discontinued operation 2,612 22,112 total assets$ 6,999 $ 25,819 LIABILITIES ANDNET ASSETS current liabilities: accounts -payable trade$ 1,394 $ 1,653 operating lease liability - current 195
-
accrued expenses 351
560
total current liabilities held for sale - discontinued operation 1,940
2,213
loan payable -Culp Inc. 1,500
830
subordinated loan payable - noncontrolling interest 925
675
operating lease liability - long-term 743
-
total noncurrent liabilities held for sale - discontinued operation 3,168
1,505
total liabilities 5,108
3,718
total net assets of discontinued operation$ 1,891 $ 22,101 38
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Net Loss from Discontinued Operation
The following is a reconciliation of the major classes of financial statement
line items constituting loss before income taxes from discontinued operations
that are presented in the Consolidated State of Net (Loss) Income for fiscal
years 2020, 2019, and 2018:
(1)
(dollars in thousands) 2020 2019 2018
net sales $ 13,763 $ 15,956 $ -
cost of sales (10,953 ) (11,527 ) -
gross profit 2,810 4,429 -selling, general and administrative expenses (4,100 ) (5,162 )
-
asset impairments (2) (20,202 ) - -
reversal of contingent consideration -
earn-out obligation (3) 5,856 - -
interest expense (4) (84 ) (30 ) -
other income 34 37 -
loss from discontinued operation related to
major classes
of loss before income taxes (15,686 ) (726 ) -
loss on disposal of discontinued operation (1,891 ) - -
loss before income taxes from discontinued
operation (5) (17,577 ) (726 ) -
income tax benefit 68 113 -
net loss from discontinued operation $ (17,509 ) $ (613 ) $ -
(1) Discontinued operations were not presented in fiscal 2018 as we acquired
eLuxury on
(2) During fiscal 2020, we recorded asset impairment charges totaling
million, of which
and tradename, respectively. Of the
in the fourth quarter. See Notes 8, 9, and 17 to the consolidated financial
statements for further details of our assessments that resulted in the
impairment of the goodwill and tradename associated with this discontinued
operation.
(3) See separate section in Note 3 to the consolidated financial statements
titled "Contingent Consideration" for further details.
(4) Interest expense is directly attributable to our discontinued operations as
it pertains to loans payable assumed by the buyer, (the noncontrolling
interest holder) or required to be paid to Culp based on the terms of the
sale agreement.
(5) See separate section in Note 3 to the consolidated financial statements
titled "Consolidation and Deconsolidation" for further details.
The following is a summary of net (loss) income from continuing operations, loss
from discontinued operation, and net (loss) income attributable to Culp Inc.
common shareholders and the holder of eLuxury's noncontrolling interest for
fiscal years 2020, 2019, and 2018:
(dollars in thousands) 2020 2019 2018
net (loss) income from continuing operations
net (loss) income from continuing operations
attributable to
noncontrolling interest - - -
net (loss) income from continuing operations
attributable
to Culp Inc. common shareholders$ (11,158 ) $ 6,071
net loss from discontinued operation$ (17,509 ) $ (613
) $ -
net loss from discontinued operation
attributable to
noncontrolling interest 4,674 218 -
net loss from discontinued operation
attributable to
common shareholders$ (12,835 ) $ (395
) $ -
net loss (income)$ (28,667 ) $ 5,458
net loss from noncontrolling interest 4,674 218 -
net (loss) income attributable to
common shareholders$ (23,993 ) $ 5,676 $ 20,877 39
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Continuing Obligations, Financial Commitments, and Continuing Relationships with the Discontinued Operation
Supply and Royalty Agreements
In connection with the sale of our ownership interest in eLuxury, we entered into supply and royalty agreements with eLuxury to preserve an additional sales channel for our core products - upholstery and mattress fabrics. The supply agreement requires eLuxury to purchase from us all its requirements for mattress and upholstery fabrics products of the type we were supplying to eLuxury at the time of the sale transaction, as well as certain home accessories and soft products, subject to our ability to provide competitive pricing and delivery terms for such products. The royalty agreement requires eLuxury to pay us a royalty fee based on a percentage of sales, as defined in the royalty agreement, for sales of eLuxury's products to certain business-to-business customers, including customers we referred to eLuxury prior to the sale transaction and new customer relationships we develop for eLuxury going forward, as well as sales of eLuxury products generated by sales representatives that we develop or introduce to eLuxury. There are no guarantees or provisions under either the supply or royalty agreements that require eLuxury to purchase a minimum amount of our products or sell a certain amount of eLuxury products to customers or through sales representatives developed or introduced by us. As a result, the success of these agreements and the period of time in which our involvement with eLuxury is expected to continue are based on eLuxury's ability to sell products that require mattress and upholstery fabrics and our ability to help grow eLuxury's business-business sales platform. As a result of our continuing involvement with eLuxury, we reported net sales and the related cost of sales associated with our inventory shipments to eLuxury in accordance with Topic 205-20-50-4B, which requires us to report these transactions in continuing operations for the all periods presented in our Consolidated Statement of (Loss) Income. Therefore, we reported both net sales and cost of sales totaling$968,000 during fiscal 2020 and$612,000 during fiscal 2019, which amounts were previously eliminated in consolidation prior to the sale of eLuxury onMarch 31, 2020 . After the sale of eLuxury onMarch 31, 2020 , and through the remainder of fiscal 2020 endingMay 3, 2020 , our shipments to eLuxury totaled$7,000 . Shipments forApril 2020 were severely affected by the COVID-19 global pandemic.
Financial Guarantee
Currently, we have an agreement that guarantees 70% of any unpaid lease payments associated with eLuxury's facility located inEvansville, Indiana . The lease agreement expires inSeptember 2024 and requires monthly payments of$18,865 . However, in connection with the sale of our ownership interest in eLuxury, the buyer (the noncontrolling interest holder) must use commercially reasonable efforts to cause the lessor to release us from this financial guarantee of eLuxury's lease agreement. Additionally, eLuxury, the buyer, and the sole owner of the buyer have agreed to indemnify us from any liabilities and obligations that we would be required to pay with regards to our guarantee of this lease agreement.
See Note 3 to the consolidated financial statements for further details on our discontinued operations.
Other Income Statement Categories
Twelve Months Ended
May 3, April 28,
(dollars in thousands) 2020 2019 % Change
Selling, general, and administrative expenses $ 34,424 $ 33,243 3.6 %
Asset impairments 13,712 - 100.0 %
Interest expense 106 35 202.9 %
Interest income 897 789 13.7 %
Other expense 902 1,383 (34.8 )%
Selling, General, and Administrative Expenses
SG&A expense increased during fiscal 2020, as compared to the prior year, due
primarily to change in estimate adjustments that were recorded during fiscal
2019 that lowered share-based compensation expense in fiscal 2019, an increase
in professional fees during fiscal 2020 that was attributable to the adoption of
ASC Topic 842 Leases, our recent acquisitions and disposal of businesses, and
our comprehensive response to the COVID-19 global pandemic.
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Asset Impairments
We recorded non-cash asset impairment charges totaling$13.7 million associated with goodwill and certain intangible assets, of which$11.5 million related to the mattress fabrics segment and$2.2 million related to the upholstery fabrics segment. These asset impairment charges were the result of our annual assessments of impairment regarding our goodwill and certain intangible assets that were performed as ofMay 3, 2020 , in accordance with ASC Topic 350 Intangibles -Goodwill and Other. See Notes 8 and 9 to the consolidated financial statements for further details regarding our assessments of impairment, conclusions reached, and the performance of our quantitative impairment tests.
Interest Expense
The increase in our interest expense is attributable to interest paid on amounts borrowed during the fourth quarter of fiscal 2020 in connection with the disruption from the COVID-19 global pandemic. As a result of the uncertainty relating to the duration of the pandemic and its overall effect on our business, we proactively borrowed$29.8 million , the maximum amount available, under our domestic line of credit and also borrowed an additional$1.0 million under our line of credit associated with ourChina operations. In addition, we applied for and received a$7.6 million in loan under the SBA's Paycheck Protection Program. As previously disclosed, during the first quarter of fiscal 2021, we repaid in full the PPP Loan and all borrowings that were outstanding under our lines of credit atMay 3, 2020 , and currently we have no outstanding borrowings under our line of credit agreements. Interest Income Interest income reflects our current investments of excess cash held inU.S. money market funds, short-term bond funds, mutual funds associated with our Rabbi Trust that funds our deferred compensation plan, and investment gradeU.S. corporate, foreign, and government bonds.
Other Expense
The decrease in other expense during fiscal 2020, as compared with fiscal 2019, is due mostly to the$500,000 charitable contribution made during the fourth quarter of fiscal 2019 for an endowed scholarship to theUniversity of North Carolina at Chapel Hill in honor of our co-founder and former chairman of the board. There was no comparable contribution made during fiscal 2020, resulting in a decrease in other expense as compared to the prior year. The charitable contribution will be paid over a period of three years.
Income Taxes
Effective Income Tax Rate
We recorded income tax expense of$3.4 million , or (43.7%) of loss before income tax expense from continuing operations, in fiscal 2020, compared with income tax expense of$6.5 million , or 51.4% of income before income tax expense from continuing operations, in fiscal 2019. The following schedule summarizes the principal differences between income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements: 2020 2019 federal income tax rate 21.0 % 21.0 % global intangible low taxed income tax (GILTI) (24.4 )
16.9
foreign tax rate differential (16.1 )
13.0
income tax effects of impairment of nondeductible goodwill (11.3 )
-
uncertain income tax positions (4.8 )
0.5
income tax effects of Chinese foreign exchange gains and losses
(5.0 ) 2.2
write-off ofU.S. foreign income tax credits -
35.1
valuation allowance (1.6 ) (35.0 )
income tax effects of the 2017 Tax Cuts and Jobs Act - (4.3 )
other (1.5 ) 2.0
(43.7 )% 51.4 %
Our effective income tax rates for both fiscal 2020 and 2019 reflected the mix
of our pre-tax earnings from continuing operations that adversely affected our
effective income tax rates for the year, as we had higher income tax rates
associated with the pre-tax income earned by our foreign operations in China and
Canada , as compared to a lower income tax rate on our U.S. pre-tax loss in
fiscal 2020 and our U.S. pre-tax income in fiscal 2019. Additionally, the
current mix of taxable income that favors our foreign operations, led to a
significant increase in the effective income tax rates that are associated with
our Global Intangible Low Taxed Income (GILTI) Tax, which represents a U.S.
income tax on foreign earnings.
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2017 Tax Cuts and Jobs Act
OnDecember 22, 2017 (the "Enactment Date"), the Tax Cuts and Jobs Act (the "TCJA") was signed into law. The TCJA contained significant changes to corporate taxation, including (i) the reduction of the corporate income tax rate to 21%, (ii) the acceleration of expensing certain business assets, (iii) a one-time mandatory repatriation tax (the "Transition Tax") related to the transition ofU.S. international tax from a worldwide tax system to a territorial tax system, (iv) limitations on the use of foreign tax credits to reduce theU.S. income tax liability, (v) the repeal of the domestic production activities deduction, (vi) additional limitations on the deductibility of interest expense and executive compensation, and (vii) the creation of the Global Intangible Low Taxed Income ("GILTI") tax. The corporate income tax rate reduction was effective as ofJanuary 1, 2018 . Since we have a fiscal year rather than a calendar year, we were subject toIRS rules relating to transitional income tax rates for fiscal 2018. As a result, our fiscal 2018 U.S. federal income tax rate was a blended income tax rate of 30.4% compared with a fully reducedU.S. federal income tax rate of 21.0% during fiscal 2019 and 2020. The re-measurement of ourU.S. deferred income tax balances to the newU.S. federal corporate income tax rate and the determination of the income tax effects of the Transition Tax on our accumulated earnings and profits associated with our foreign subsidiaries were components of the TCJA that significantly affected our financial statements during fiscal 2019 and 2018. In order to determine the effects of the newU.S. federal corporate income tax rate on ourU.S. deferred income tax balances during fiscal 2019 and 2018, ASC Topic 740 "Income Taxes" (ASC Topic 740), requires the re-measurement of ourU.S. deferred income tax balances as of the Enactment Date of the TCJA, based on income tax rates at which ourU.S. deferred income tax balances are expected to reverse in the future. As a result, we recorded an income tax charge of$2.2 million for the re-measurement of ourU.S. net deferred income taxes during fiscal 2018. During the third quarter of fiscal 2019, we completed our assessment of the remeasurement of ourU.S. deferred income tax balances and recorded an income tax benefit of$268,000 . The Transition Tax was based on our total post-1986 foreign earnings and profits ("E&P") that were previously deferred fromU.S. income tax and applicable income tax rates associated with E&P held in cash and other specified assets (the "aggregate foreign cash position"). Also, E&P was not permanently reinvested prior to the TCJA. As a result, we recorded an income tax benefit of$4.3 million for the income tax effects of the Transition Tax during fiscal 2018. This$4.3 million income tax benefit related to an income tax benefit of$18.0 million for the release of deferred income tax liabilities related to E&P, an income tax benefit of$11.7 million related to the reduction in ourU.S. Federal income tax rate pursuant to the TCJA on the effective settlement of anIRS exam related to E&P, partially offset by an income tax charge for the write-off and the establishment of a valuation allowance against our unused foreign tax credits totaling$25.4 million . During the third quarter of fiscal 2019, we completed our assessment of the income tax effects of the Transition Tax and recorded an income tax benefit of$282,000 . Additionally, we elected to pay the Transition Tax over a period of eight years in accordance with the TCJA.
GILTI
In addition to the above components of the TJCA, GILTI was effective during fiscal 2020 and fiscal 2019. Our policy to account for GILTI is to expense this tax in the period incurred. As a result, we recorded income tax charges of$1.9 million and$2.1 million during fiscal 2020 and 2019, respectively. OnJune 14, 2019 , theU.S. Treasury Department and Internal Revenue Service issued proposed regulations regarding the GILTI provisions of theU.S. income tax code. The proposed regulations contain a provision for an exclusion from treatment as GILTI if taxable income amounts are subject to a high rate of foreign income tax, as defined in the proposed regulations (the "GILTI High-Tax exception"). If an entity were to qualify for this GILTI High-Tax exception, the high-taxed income earned that would otherwise be subject to GILTI andU.S. income tax may be excluded fromU.S. income tax. However, since these regulations are in proposed form, an entity is not allowed to record an income tax benefit under these provisions until these proposed regulations have been finalized and effective. There is no guarantee that the proposed regulations will be enacted, or that there won't be changes to the final regulations that would reduce or eliminate the relief we would otherwise benefit from under the proposed regulations.
Deferred Income Taxes - Valuation Allowance
Summary
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a "more likely than not" standard with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.
Refer to Note 14 of the consolidated financial statements for disclosures
regarding our assessments of our recorded valuation allowance as of
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Deferred Income Taxes - Undistributed Earnings from Foreign Subsidiaries
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to ourU.S. parent company. AtMay 3, 2020 , we assessed the liquidity requirements of ourU.S. parent company and determined that our undistributed earnings from our foreign subsidiaries would not be reinvested indefinitely and would be eventually distributed to ourU.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Also, we assess the recognition ofU.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time. Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with our undistributed earnings from our foreign subsidiaries as ofMay 3, 2020 andApril 28, 2019 , respectively.
Uncertainty in Income Taxes
AtMay 3, 2020 , we had a$1.3 million total gross unrecognized income tax benefit that relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. At this time, significant change associated with this income tax benefit is not expected within the next fiscal year.United States federal income tax returns filed by us remain subject to examination for income tax years 2017 and subsequent. Canadian federal income tax returns filed by us remain subject to examination for income tax years 2016 and subsequent. Canadian provincial (Quebec ) income tax returns filed by us remain subject to examination for income tax years 2017 and subsequent. Income tax returns associated with our operations located inChina are subject to examination for income tax year 2015 and subsequent. In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the reporting period, or is effectively settled through examination, negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.
Refer to Note 14 of the consolidated financial statements for disclosures and additional information regarding our uncertain income tax positions.
Income Taxes Paid
Our income tax payments totaled$5.0 million during fiscal 2020, compared with$6.7 million during fiscal 2019, which are mostly associated with our subsidiaries located inCanada andChina . Currently, we expect our fiscal 2021 income tax payments associated with operations inCanada andChina to be comparable to fiscal 2020 and 2019. Pursuant to the TCJA, we elected to pay the Transition Tax described above over a period of eight years and made our first installment payment inAugust 2018 . As a result of this fact, coupled withU.S Federal net operating loss carryforwards totaling$4,4 million as ofMay 3, 2020 , and the immediate expensing ofU.S. capital expenditures next fiscal year, we are currently expecting to have minimalU.S. cash income taxes payments during fiscal 2021.
2019 compared with 2018
For a comparison of our results of operations for the fiscal years endedApril 28, 2019 andApril 29, 2018 , see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our annual report on Form 10-K for the fiscal year endedApril 28, 2019 , filed with theSEC onJuly 12, 2019 . The elimination of our home accessories segment and reclassification of this segment as a discontinued operation for all prior periods of comparison does not have any material impact on the comparison of our results of operations for the fiscal years endedApril 20, 2019 , andApril 29, 2018 , because reporting for our home accessories segment did not commence until we acquired a majority ownership interest in eLuxury onJune 22, 2018 , the first quarter of our 2019 fiscal year, such that there was no prior period of comparison with respect to the 2018 fiscal year. Additionally, this reclassification did not have any material impact on our continuing operations and the trends described in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of such report. 43
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Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents, cash flow from operations, and amounts available under our revolving credit lines. These sources have been adequate for day-to-day operations, capital expenditures, debt payments, common stock repurchases, and dividend payments. We believe our cash and cash equivalents of$69.8 million atMay 3, 2020 and cash flow from operations will be sufficient to fund our business needs and our contractual obligations (see commitments table below). The increase in cash and cash equivalents from the end of fiscal 2019 is attributable to$38.4 million in total proceeds received during the fourth quarter of fiscal 2020 from borrowings under our lines of credit and receipt of a loan under theU.S. Small Business Administration ("SBA") Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act of 2020 (such loan, the "PPP loan"). As a result of the COVID-19 global pandemic and the uncertainty relating to its duration and overall effect on our business, we proactively borrowed$29.8 million , the maximum amount available, under our domestic line of credit, an also borrowed an additional$1.0 million from our line of credit associated with ourChina operations, as a precautionary measure to increase balance sheet flexibility during the COVID-19 crisis. In addition, we applied for and received$7.6 million in cash proceeds from the PPP Loan (which, as noted below, we subsequently repaid in full onMay 13, 2020 following new guidance issued by theU.S. Treasury Department and SBA raising questions regarding the eligibility of publicly traded companies to receive loans under the Paycheck Protection Program). Excluding the cash proceeds from our lines of credit and the PPP Loan, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) as of the end of fiscal 2020 would have decreased$6.3 million from the end of fiscal 2019. The decrease was mostly due to (i) cash payments of$6.8 million returned to shareholders in the form of regular quarterly dividend payments and common stock repurchases; (ii)$4.6 million of capital expenditures that were mostly associated with our mattress fabrics segment; and (iii)$1.5 million for additional purchase price payments on our recent acquisitions, partially offset by (iv)$5.0 million in net cash provided by operating activities; and (v)$1.5 million in proceeds from a long-term note receivable associated with a discontinued operation. Our net cash provided by operating activities of$5.0 million in fiscal 2020 decreased$8.9 million compared with$13.9 million in fiscal 2019. The decrease in our net cash provided by our operating activities is mostly due to lower earnings and slower cash collections on accounts receivable stemming from the COVID-19 global pandemic. Our net cash provided by operating activities in fiscal 2020 and fiscal 2019 reflects cash flows from operating activities for both our continuing operations and our discontinued operation. Our discontinued operation had net cash used in operating activities totaling$(2.3) million and$(1.5) million for fiscal 2020 and 2019, respectively. Our discontinued operation had net cash used in investing activities totaling$(134,000) and$(54,000) for fiscal 2020 and 2019, respectively. Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions fromCulp, Inc. and the owner of the noncontrolling interest of eLuxury totaling$2.4 million and$1.5 million during fiscal 2020 and 2019, respectively. We believe our liquidity will improve in the absence of our home accessories segment due to the significant losses that were incurred and the funding of working capital requirements through loans and capital contributions. AtMay 3, 2020 , our outstanding borrowings totaled$38.4 million , which consisted of$29.8 million outstanding under our domestic bank credit facility,$1.0 million outstanding under ourChina credit facility, and the$7.6 million PPP Loan. During the first quarter of fiscal 2021, we repaid in full the PPP Loan and all of the borrowings that were outstanding under our lines of credit atMay 3, 2020 , and currently we have no outstanding borrowings under our line of credit agreements.
Our cash and cash equivalents and short-term investments may be adversely affected by factors beyond our control, such as weakening industry demand and delays in receipt of payments on accounts receivable.
By Geographic Area
We currently hold cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) in theU.S. and our foreign jurisdictions to support operational requirements, to mitigate our risk related to foreign exchange rate fluctuations, and forU.S. and foreign income tax planning purposes. 44
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A summary of our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) by geographic area follows:
May 3, April 28,
(dollars in thousands) 2020 2019
United States $ 65,327 $ 33,078
China 10,531 9,670
Canada 1,160 2,196
Cayman Islands 42 64
$ 77,060 $ 45,008
As discussed above, the increase in our cash investments, specifically in the
U.S. , as of May 3, 2020 , compared with April 28, 2019 , is attributable to
proceeds received during the fourth quarter of fiscal 2020 from borrowings taken
under our domestic line of credit and receipt of the PPP Loan totaling $29.8
million and $7.6 million , respectively. These amounts were borrowed in response
to the disruption from the COVID-19 global pandemic and the uncertainty relating
to its duration and overall effect on our business.
Dividend Program
OnJuly 1, 2020 , we announced that our board of directors approved a regular quarterly cash dividend payment of$0.105 per share. This payment will be made on or aboutJuly 17, 2020 , to shareholders of record as ofJuly 10, 2020 .
During fiscal 2020, dividend payments totaled
During fiscal 2019, dividend payments totaled
During fiscal 2018, dividend payments totaled$6.8 million , of which$2.6 million represented a special cash dividend payment of$0.21 per share, and$4.2 million represented our regular quarterly cash dividend payments ranging from$0.08 to$0.09 per share. Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. Future dividend payments are subject to final determination by our board of directors and will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market conditions, and other factors we consider relevant.
Common Stock Repurchases
OnSeptember 5, 2019 , we announced that our board of directors approved an authorization for us to acquire up to$5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased, and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities. During fiscal 2020, we purchased 142,496 shares of our common stock at a cost of$1.7 million , leaving approximately$3.3 million available under the share repurchase program approved by the board of directors inSeptember 2019 . The board of directors subsequently approved an increase in the company's share repurchase authorization back up to a total of$5.0 million inMarch 2020 . However, as part of our comprehensive response to the COVID-19 pandemic, we announced onApril 3, 2020 , that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty.
During fiscal 2019, we purchased 160,823 shares of our common stock at a cost of
At
Working Capital Accounts receivable atMay 3, 2020 , were$25.1 million , an increase of$1.7 million , or 7%, compared with$23.4 million atApril 29, 2019 . This trend reflects slower cash collections on accounts receivable and a decrease in net sales that emerged during the fourth quarter of fiscal 2020 as a result of the COVID-19 global pandemic. We experienced slower cash collections during the fourth quarter of fiscal 2020 because we granted extended credit terms to certain customers in response to the challenging business conditions stemming from the pandemic. Days' sales in accounts receivable were 47 days and 30 days during the fourth quarters of fiscal 2020 and 2019, respectively. Net sales for the fourth quarter of fiscal 2020 were$47.4 million , a decrease of$19.6 million , or 29%, compared with$67.0 million for the fourth quarter of fiscal 2019. 45
-------------------------------------------------------------------------------- Inventories as ofMay 3, 2020 , were$47.9 million , which is comparable with$47.6 million as ofApril 28, 2019 . Our inventories were consistent despite the significant decrease in net sales during the fourth quarter of fiscal 2020 compared with the fourth quarter of fiscal 2019. This is due mostly to excess inventory purchases compared with actual demand trends, which were significantly lower than expected due to the COVID-19 pandemic. Accounts payable - trade as ofMay 3, 2020 , were$23.0 million , which is comparable with$22.7 million as ofApril 28, 2019 . This trend is consistent with our static inventory balances noted above. Inventory turns were 3.6 during the fourth quarter of fiscal 2020 compared with 4.6 during the fourth quarter of fiscal 2019. Operating working capital (accounts receivable and inventories, less deferred revenue and accounts payable-trade and capital expenditures) was$49.4 million atMay 3, 2020 , compared with$47.7 million atApril 28, 2019 . Operating working capital turnover was 5.1 in fiscal 2020 compared with 5.7 in fiscal 2019.
Financing Arrangements
Revolving Credit Agreements
Currently, we have revolving credit agreements with banks for ourU.S. parent company and our operations located inChina . The purposes of our revolving lines of credit are to support potential short-term cash needs in different jurisdictions, mitigate our risk associated with foreign currency exchange rate fluctuations, and ultimately repatriate earnings and profits from our foreign subsidiaries to theU.S. to take advantage of the TCJA, which allows aU.S. corporation a 100% dividend received income tax deduction on earnings and profits repatriated to theU.S. from 10% owned foreign corporations.
Overall
Our loan agreements require, among amount other things, that we maintain
compliance with certain financial covenants. As of
Refer to Note 13 of the consolidated financial statements for further details of our credit agreements.
Commitments The following table summarizes our contractual payment obligations and commitments for each of the next five fiscal years and thereafter (in thousands) as ofMay 3, 2020 : 2021 2022 2023 2024 2025 Thereafter Total Capital expenditures$ 2,199 - - - - -$ 2,199 Accounts payable - capital expenditures 107 - - - - - 107 Operating lease liabilities 1,831 978 541 432 253 - 4,035 Line of credit -China Operations (1) 1,015 - - - - - 1,015 Line of credit -U.S. Operations (2) - - 29,750 - - - 29,750 Paycheck Protection Plan Loan (3) 7,606 - - - - - 7,606 Interest expense 9 - - - - - 9 Total (4)$ 12,767 978 30,291 432 253 -$ 44,721
(1) Credit agreement expires on
under this credit agreement as of
2020.
(2) Credit agreement expires on
this credit agreement as of
(3) This loan was repaid in full on
(4) As of
that was classified as income taxes-payable long-term in the fiscal 2020
Consolidated Balance Sheet. The outcome of these income tax uncertainties is
dependent upon various matters including tax examinations, legal proceedings,
competent authority proceedings, changes in regulatory tax laws, or
interpretations of those tax laws, or expiration of statutes of limitation.
As a result of these inherent uncertainties, we cannot reasonably estimate
the timing of payment on this amount, if any.
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Capital Expenditures
Capital expenditures on a cash basis were$4.6 million for fiscal 2020, compared with$4.7 million (of which$1.4 million was vendor financed) for fiscal 2019. Capital expenditures for fiscal 2020 and 2019 mostly related to our mattress fabrics segment. Depreciation expense was$7.8 million for fiscal 2020 compared with$8.1 million for fiscal 2019. Depreciation expense for fiscal 2020 and 2019 mostly related to our mattress fabrics segment. We are currently projecting capital expenditures on a consolidated basis to be approximately$5.0 million for fiscal 2021. Additionally, we are currently projecting depreciation expense on a consolidated basis to be approximately$7.0 million for fiscal 2021. The estimated capital expenditures and depreciation expense for fiscal 2021 primarily relate to our mattress fabrics segment. These are management's current expectations only, and changes in our business and the unknown duration and financial impact of the COVID-19 global pandemic could cause changes in our capital expenditure plans and expectations for related depreciation expense. Funding for capital expenditures is expected to be primarily from cash provided by operating activities.
Accounts Payable - Capital Expenditures
Refer to Note 15 of the consolidated financial statements for further details of our accounts payable - capital expenditures.
Commitments
Refer to Note 15 of the consolidated financial statements for further details of our lease and purchase commitments - capital expenditures.
Handling Costs
We record warehousing costs in SG&A expenses. These costs were$4.0 million ,$4.2 million , and$4.6 million in fiscal 2020, fiscal 2019, and fiscal 2018, respectively. Warehousing costs include the operating expenses of our various finished goods distribution centers, such as personnel costs, utilities, building rent and material handling equipment, and lease expense. Had these costs been included in cost of sales, gross profit would have been$36.5 million , or 14.2% of net sales, in fiscal 2020,$41.6 million , or 14.8% of net sales, in fiscal 2019, and$60.0 million , or 18.5% of net sales, in fiscal 2018.
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 increases on to customers.
Critical Accounting Policies
U.S. generally accepted accounting principles require us to make estimates and assumptions that affect our reported amounts in the consolidated financial statements and accompanying notes. Some of these estimates require difficult, subjective and/or complex judgments about matters that are inherently uncertain, and as a result actual results could differ significantly from those estimates. Due to the estimation processes involved, management considers the following summarized accounting policies and their application to be critical to understanding the company's business operations, financial condition and results of operations.
Accounts Receivable - Allowance for Doubtful Accounts
As ofMay 3, 2020 , accounts receivable totaled$25.1 million , of which$12.2 million and$12.9 million pertained to our mattress fabrics segment and upholstery fabrics segment, respectively. Additionally, as ofMay 3, 2020 , the aggregate accounts receivable balance of our ten largest customers was$11.8 million , or 47% of trade accounts receivable. No customers within any of our business segments accounted for more than 10% of our consolidated accounts receivable balance as ofMay 3, 2020 . We continuously perform credit evaluations of our customers, considering numerous factors including customers' financial position, past payment history, cash flows, and management ability; historical loss experience; and economic conditions and prospects. Once evaluated, each customer is assigned a credit grade, which may be adjusted as warranted. Significant management judgment and estimates must be used in connection with establishing the reserve for allowance for doubtful accounts. While management believes that adequate allowances for doubtful accounts have been provided in the consolidated financial statements, it is possible that we could experience additional unexpected credit losses.
The reserve balance for doubtful accounts was
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Inventory Valuation
We operate as a "make-to-order" and "make-to-stock" business. Although management closely monitors demand in each product to decide which patterns and styles to hold in inventory, the increasing availability of low-cost imports and shifts in consumer preferences expose the company to markdowns of inventory. Management continually examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value. Experience has shown that the most significant indicator of the need for inventory markdowns is the age of the inventory and the planned discontinuance of certain fabric patterns. As a result, the company provides inventory valuation markdowns based upon set percentages for inventory aging categories, generally using six, nine, twelve, and fifteen-month categories. We also provide inventory valuation write-downs based on the planned discontinuance of certain products based on current market values at that time as compared to their current carrying values. While management believes that adequate markdowns for excess and obsolete inventory have been made in the consolidated financial statements, significant unanticipated changes in demand or changes in consumer tastes and preferences could result in additional excess and obsolete inventory in the future.
In accordance with ASC Topic 350 Intangibles -Goodwill and Other, our business was classified into four reporting units during fiscal 2020: mattress fabrics, upholstery fabrics,Read Window Products, LLC , and home accessories. EffectiveMarch 31, 2020 , we sold our entire ownership interest in eLuxury to the holder of its noncontrolling interest, and our home accessories reporting unit was eliminated at such time. As a result of this sale, we met the criteria outlined in ASC Topic 205-20 for our goodwill to be classified as held for sale and the results of operations and assets and liabilities for our home accessories segment were excluded from our continuing operations and presented as a discontinued operation in our consolidated financial statements (see Note 3 to the consolidated financial statements for further details). ASC Topic 350 requires us to assess goodwill for impairment annually or between annual tests if we believe certain indicators of impairment exist. Such indicators could include, but are not limited to, (1) deterioration in the environment of the industry and markets in which we operate, (2) unanticipated competition, (3) a deterioration in general economic conditions, (4) overall decline in financial performance, such as negative and declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results or relevant prior periods, and (5) a decrease in the price per share of our common stock. We first assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If we conclude that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, we conduct a quantitative goodwill impairment test. The impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. We estimate the fair values of our reporting units using a combination of the income, discounted cash flows, and the market approach, which utilizes comparable companies' data. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, an impairment loss is recognized in an amount equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. See Notes 8 and 9 to the consolidated financial statements for further details of our assessments of impairment, conclusions reached, and the performance of our quantitative tests. Income Taxes
Deferred Income Taxes - Overall
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for temporary differences between the financial statement carrying amounts and the tax basis of our assets, liabilities, and ourU.S. loss carryforwards and foreign income tax credits at income tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred income taxes of a change in income tax rates is recognized in income tax expense (benefit) in the period that includes the enactment date.
Deferred Income Taxes - Valuation Allowance
In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that we assess whether a valuation allowance should be established based on the consideration of all available evidence using a "more-likely-than-not" standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law.
Refer to Note 14 of the consolidated financial statements for disclosures
regarding our assessments of our recorded valuation allowance as of
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Deferred Income Taxes - Undistributed Earnings from Foreign Subsidiaries
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to ourU.S. parent company. ASC Topic 740 requires that a deferred tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Also, we assess the recognition ofU.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time. For fiscal 2019 and beyond, the TCJA allows aU.S. corporation a 100% dividend received deduction for accumulated earnings and profits from a 10% owned foreign corporation. Therefore, a deferred tax liability will only be required for withholding taxes that are incurred by foreign subsidiaries at the time their accumulated earnings and profits are distributed. Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with our undistributed earnings from our foreign subsidiaries as ofMay 3, 2020 andApril 28, 2019 , respectively.
Uncertainty In Income Taxes
In accordance with ASC Topic 740, we must recognize the income tax effect from an uncertain income tax position only if it is more likely than not that the income tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The income tax effect recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain income tax positions are recorded as income tax expense. Significant judgment is required in the identification of uncertain income tax positions and in the estimation of penalties and interest on uncertain income tax positions.
Refer to Note 14 of the consolidated financial statements for disclosures and additional information regarding our uncertain income tax positions.
Stock-Based Compensation
ASC Topic 718, "Compensation-Stock Compensation," requires that all stock-based compensation be recognized as compensation expense in the financial statements and that such cost be measured at the grant date for awards issued to employees and our board of directors. Equity awards issued to non-employees are measured at the earlier date of when the performance criteria are met or at the end of each reporting period. Compensation expense for our time-based restricted stock awards are amortized on a straight-line basis over the remaining vesting periods. Our common stock awards issued to our board of directors vest immediately, and therefore, compensation cost was measured at the closing price of our common stock on the date of grant and recognized in full at that time. Compensation expense for performance- based restricted stock units is recorded based on an assessment each reporting period of the probability that certain performance goals will be met during the contingent vesting period. For performance goals that are not probable of occurrence, no compensation expense will be recognized. For performance goals that were previously deemed probable and subsequently were not or are not expected to be met, previously recognized compensation cost will be reversed. We recorded$614,000 ,$130,000 million , and$2.2 million of compensation expense within selling, general, and administrative expense for our equity-based awards in fiscal 2020, 2019, and 2018, respectively.
Our equity incentive plans are described more fully in Note 16 of the consolidated financial statements.
Adoption of New Accounting Pronouncements
Refer to Note 1 of the consolidated financial statements for recently adopted accounting pronouncements for fiscal 2020.
Recently Issued Accounting Standards
Refer to Note 1 of the consolidated financial statements for recently issued accounting pronouncements for fiscal 2021 and beyond.
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