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 have mattress fabric operations located inStokesdale, NC ,High Point, NC , andQuebec, Canada . Additionally, we acquired the remaining fifty percent ownership interest in our former unconsolidated joint venture in Ouanaminthe,Haiti , during the fourth quarter of fiscal 2021. As a result, we are now the sole owner with full control of this cut and sewn mattress cover operation (see Note 3 of the consolidated financial statements for further details regarding this business combination). The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. We have upholstery fabric operations located inShanghai, China , andBurlington, NC . We also commenced construction on a new leased facility inHaiti during the fourth quarter of last fiscal year. This new operation will be dedicated to production of cut and sewn upholstery kits and is expected to begin operating during the second quarter of this fiscal year. Additionally,Read Window Products, LLC ("Read"), a wholly-owned subsidiary with operations located inKnoxville, TN , provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read's products, to customers in the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.
Executive Summary
We evaluate the operating performance of our business segments based upon income (loss) from operations before certain unallocated corporate expenses, asset impairments, restructuring credit (expense) 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 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.
Results of Continuing Operations
Three Months Ended
(dollars in thousands) August 1, 2021 August 2, 2020 Change
Net sales $ 83,047 $ 64,464 28.8%
Gross profit 12,499 9,901 26.2%
Gross profit margin 15.1 % 15.4 % (30)bp
Selling, general, and administrative expenses 9,181 8,018 14.5%
Income from operations 3,318 1,883 76.2%
Operating margin 4.0 % 2.9 % 110bp
Income before income taxes 3,155 1,524 107.0%
Income tax expense 905 4,324 (79.1)%
Net income (loss) 2,250 (2,733 ) N.M.
Net Sales
Overall, our net sales for the first quarter of fiscal 2022 increased by 28.8%
compared with the same period a year ago, with mattress fabrics sales increasing
19.3% and upholstery fabrics sales increasing 41.0%. The first quarter of fiscal
2021 was negatively affected by the economic disruption caused by the COVID-19
pandemic, especially during the early part of the quarter.
The increase in net sales in both segments reflects increased demand for both
our mattress and residential upholstery fabric products, as well as our ability
to meet this demand and respond quickly to the needs of our customers through
our flexible global platform and the support of our long-term supplier
relationships. It also reflects a price increase that was effective during the
quarter for both divisions, which increased our consolidated net sales by
approximately 2.5%.
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See the Segment Analysis section below for further details.
Income Before Income Taxes
Our income before income taxes for the first quarter of fiscal 2022 was
Our improved operating performance for the first quarter of fiscal 2022 primarily reflects higher sales as compared with the same period a year ago, partially offset by higher freight and raw material costs, unfavorable foreign exchange rate fluctuations associated with our operations inChina andCanada , and operating inefficiencies due to labor shortages in theU.S. andCanada .
See the Segment Analysis section below for further details.
Income Taxes
We recorded income tax expense of$905,000 , or 28.7% of income before income taxes, for the three-month period endedAugust 1, 2021 , compared with income tax expense of$4.3 million , or 283.7% of income before income taxes, for the three-month period endedAugust 2, 2020 . Our effective income tax rate during the first quarter of fiscal 2022 was negatively affected, but not nearly to the extent as in the first quarter of fiscal 2021, by the mix of taxable income that is mostly earned by our foreign operations located inChina andCanada , which have higher income tax rates than theU.S. This is due mostly to higher annual forecasted taxable income from ourU.S. operations as of the end of the first quarter of fiscal 2022 compared with the annual forecasted taxable income as of the end of the first quarter of fiscal 2021, which was affected by the ongoing disruption and uncertain economic conditions relating to the COVID-19 pandemic during the first quarter of fiscal 2021. Income tax expense during the first quarter of fiscal 2021 was also affected by a$3.7 million net income tax charge, which consisted of a$7.2 million non-cash income tax charge to record a full valuation allowance against the company'sU.S. net deferred income tax assets, partially offset by a$3.5 million non-cash income tax benefit that re-established certainU.S. federal net operating loss carryforwards in connection withU.S. Treasury regulations regarding the Global Intangible Low Taxed Income ("GILTI") tax provisions of the Tax Cuts and Jobs Act of 2017.
Refer to Note 13 of the consolidated financial statements for further details regarding our provision for income taxes.
Liquidity
As of
The decrease in our cash and investments from the end of fiscal 2021 was mostly due to (i)$2.0 million of capital expenditures primarily related to our mattress fabrics segment and our innovation campus located in downtownHigh Point, NC , (ii) a cash payment of$1.4 million for a regular quarterly dividend payment to shareholders, and (iii) common stock repurchases totaling$723,000 , partially offset by (iv) net cash provided by operating activities totaling$1.6 million . Our net cash provided by operating activities was$1.6 million during the first quarter of fiscal 2022, compared with$10.6 million during the first quarter of fiscal 2021. This decrease was mostly due to (i) increased inventory purchases due to increased sales volume, (ii) annual incentive plan award payments made during the first quarter of fiscal 2022 (compared with minimal payments made during the first quarter of fiscal 2021), (iii) an increase in income tax payments due primarily to an Alternative Minimum Tax credit refund of$745,000 received during the first quarter of fiscal 2021 that did not recur during fiscal 2022, and a withholding tax payment made to the Chinese government of$533,000 during the first quarter (such payment was not made until the third quarter of fiscal 2021), and (iv) payments relating to our new building lease associated with our upholstery cut and sewn operation located inHaiti , partially offset by (v) improved cash collections on accounts receivable resulting from more customers taking advantage of early payment discounts and their continuing return to making payments based on normal credit terms, rather than the extended terms previously granted in response to the COVID-19 pandemic.
As of
Dividend Program
On
I-29 -------------------------------------------------------------------------------- During the first quarter of fiscal 2022, dividend payments totaled$1.4 million , which represented a quarterly dividend payment of$0.11 per share. During the first quarter of fiscal 2021, dividend payments totaled$1.3 million , which represented a quarterly dividend payment of$0.105 per share.
Common Stock Repurchases
InMarch 2020 , 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 the 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 the first quarter of fiscal 2022, we repurchased 48,686 shares of common
stock at a cost of
During the first quarter of fiscal 2021, we did not repurchase any shares of our
common stock.
Segment Analysis
Mattress Fabrics Segment
Three Months Ended
(dollars in thousands) August 1, 2021 August 2, 2020 Change
Net sales $ 43,058 $ 36,103 19.3%
Gross profit 6,795 4,608 47.5%
Gross profit margin 15.8 % 12.8 % 300bp
Selling, general, and administrative expenses 3,184 2,763 15.2%
Income from operations 3,611 1,845 95.7%
Operating margin 8.4 % 5.1 % 330bp
Net Sales
Mattress fabrics sales increased 19.3% in the first quarter of fiscal 2022 compared to the prior-year period, which was adversely affected by disruption from the COVID-19 pandemic.
The increase in mattress fabrics net sales for the quarter reflects an increase in demand driven by the continued strength of our product offerings. It was also supplemented by a price increase implemented during the quarter to help offset certain inflationary pressures, which increased net sales by approximately 3.0%. During the quarter, the strength and flexibility of our global manufacturing and sourcing operations in theU.S. ,Canada ,Haiti ,Asia , andTurkey enabled us to support current demand levels and serve the needs of our mattress fabrics and cover customers. We maintained our focus on product innovation, creative designs, and customer marketing during the quarter, and we further expanded our digital design platform to offer enhanced accessibility for our customers. Demand trends for sewn mattress covers also remained strong, as our on-shore, near-shore, and off-shore supply chain strategy, as well as our fabric-to-cover model, continued to provide a preferred platform that provides customers with the agility and value they need for their business. Looking ahead, we are faced with some continued near-term pressures relating to labor shortages and ongoing customer capacity limitations due to supply chain disruption for non-fabric components, but we expect that most of these headwinds are temporary. Additionally, the ongoing impact of the COVID-19 pandemic remains unknown and depends 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, the short- and long-term disruption of 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, Selling, General & Administrative Expenses, and Operating Income
The increase in mattress fabrics profitability during the first quarter of fiscal 2022, as compared to the prior-year period, was primarily due to the higher mattress fabrics sales noted above, somewhat offset by increased raw material prices, freight costs, unfavorable foreign currency fluctuations inCanada andChina , and inefficiencies due to labor shortages at our facilities in theU.S. andCanada . Our previously implemented price increase helped cover some inflationary pressures. However, with the continued rapid rise in labor, freight, and raw material costs, we are implementing a surcharge during the second quarter toI-30
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further mitigate these pressures. This surcharge will not take effect until midway through the second quarter, resulting in a temporary cost-price lag that will affect our profitability during the period.
We expect continued near-term inflationary pressures relating to increasing
labor, freight, and raw material costs, as well as ongoing foreign currency
fluctuations in
CLASS
EffectiveJanuary 1, 2017 ,Culp International Holdings, Ltd. ("Culp International "), a wholly-owned subsidiary of the company, entered into a joint venture agreement pursuant to whichCulp International owned 50% ofClass International Holdings, Ltd. ("CIH"). During the fourth quarter of fiscal 2021,Culp International acquired the remaining 50% ownership interest in CIH from its former joint venture partner, such that we are now the sole owner with full control of CIH. CIH produces cut and sewn mattress covers and is housed in two facilities totaling 120,000 square feet, located in a modern industrial park on the northeastern border ofHaiti . We believe having sole ownership of this operation enhances our capacity and increases our flexibility by having near-shore capabilities that help us meet the needs of our mattress cover customers. See Note 3 of the consolidated financial statements for further details regarding this business combination.
Segment assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and investment in unconsolidated joint venture.
(dollars in thousands) August 1, 2021 August 2, 2020 May 2, 2021 Accounts receivable$ 18,016 $ 15,585 $ 20,427 Inventory 31,778 20,070 30,047 Property, plant & equipment 40,881 39,597 41,264 Right of use assets 4,058 832 4,278 Investment in unconsolidated joint venture - 1,759 -$ 94,733 $ 77,843 $ 96,016
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As ofAugust 1, 2021 , accounts receivable increased by$2.4 million , or 15.6%, compared withAugust 2, 2020 . This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. Although we experienced a substantial increase in net sales during the first quarter of fiscal 2022, the increase in accounts receivable was partially offset by improved cash collections during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. The improved cash collections are due to more customers taking advantage of early payment discounts, as well as their continued return to making payments based on normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic. As ofAugust 1, 2021 , accounts receivable decreased by$2.4 million , or 11.8%, compared withMay 2, 2021 . This decrease reflects improved cash collections during the first quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, as more customers started taking advantage of early payment discounts and also continued their return to making payments based on normal credit terms, as opposed to extended terms previously granted in response to the COVID-19 pandemic.
Days' sales outstanding was 37 days for the first quarter of fiscal 2022, compared with 39 days for the first quarter of fiscal 2021 and 43 days for the fourth quarter of fiscal 2021.
Inventory
As ofAugust 1, 2021 , inventory increased by$11.7 million , or 58.3%, comparedAugust 2, 2020 . This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. As ofAugust 1, 2021 , inventory modestly increased by$1.7 million , or 5.8%, compared withMay 2, 2021 . This increase represents management's ability to maintain a consistent level of inventory that reflects our focus on inventory management andI-31
-------------------------------------------------------------------------------- aligning our inventory purchases to reflect current demand trends. Net sales during the first quarter of fiscal 2022 and the fourth quarter of fiscal 2021 were$43.1 million and$42.9 million , respectively. Inventory turns were 4.7 for the first quarter of fiscal 2022, compared with 5.9 for the first quarter of fiscal 2021 and 4.2 for the fourth quarter of fiscal 2021. Property, Plant, & Equipment The$40.9 million as ofAugust 1, 2021 , represents property, plant, and equipment of$27.6 million ,$12.4 million , and$875,000 located in theU.S. ,Canada , andHaiti , respectively. The$39.6 million as ofAugust 2, 2020 , represents property, plant, and equipment of$27.0 million and$12.6 million located in theU.S. andCanada , respectively. The$41.3 million as ofMay 2, 2021 , represents property, plant, and equipment of$28.4 million ,$12.0 million , and$855,000 located in theU.S. ,Canada , andHaiti , respectively.
Property, plant, and equipment amounts are comparable for the periods presented as capital expenditures have been made commensurate with depreciation expense.
Right of Use Assets
The$4.1 million as ofAugust 1, 2021 , represents right of use assets of$2.3 million ,$1.4 million , and$355,000 locatedHaiti , theU.S. , andCanada , respectively. The$832,000 as ofAugust 2, 2020 , represents right of use assets of$535,000 and$297,000 located inCanada and theU.S. , respectively. The$4.3 million as ofMay 2, 2021 , represents right of use assets of$2.4 million ,$1.4 million , and$400,000 located inHaiti , theU.S. , andCanada , respectively.
As of
Investment in Unconsolidated Joint Venture
As ofAugust 2, 2020 , our investment in unconsolidated joint venture represented our 50% ownership in CIH and was accounted for under the equity method in accordance with ASC Topic 823. Accordingly, the carrying value of our investment in CIH was reported as a single line item in the Consolidated Balance Sheets titled "Investment in unconsolidated joint venture". EffectiveFebruary 1, 2021 , we entered into an agreement with our former joint venture partner to acquire the remaining 50% interest in CIH. Pursuant to this transaction, we are now the sole owner with full control over CIH. Accordingly, our consolidated financial statements now include all of the accounts of CIH, and any significant intercompany balances and transactions have been eliminated. Furthermore, the equity method will no longer be used and the former investment in unconsolidated joint venture is now included in the net assets of our now 100% interest in CIH
See Note 3 to the consolidated financial statements for further details.
Upholstery Fabrics SegmentNet Sales Three Months Ended (dollars in thousands) August 1, 2021 August 2, 2020 % Change Non-U.S. Produced$ 38,222 96 %$ 26,011 92 % 46.9 % U.S. Produced 1,767 4 % 2,350 8 % (24.8 )% Total$ 39,989 100 %$ 28,361 100 % 41.0 % Upholstery fabrics sales increased 41.0% in the first quarter of fiscal 2022 compared to the prior-year period, which was adversely affected by disruption from the COVID-19 pandemic. The increase in upholstery fabrics net sales for the quarter reflects a significant increase in demand for our residential upholstery business compared to the prior-year period, partially offset by lower sales forRead Window Products in our hospitality business, which remained under significant pressure from the ongoing COVID-19 disruption that continues to affect the travel and leisure industries. The increase in net sales for the first quarter also reflects a price increase that was implemented on products sold in theU.S. to help offset unfavorable foreign currency exchange rate fluctuations associated with our operations inChina . This price increase accounted for approximately 1.5% of net sales for the quarter. . I-32
-------------------------------------------------------------------------------- Our residential upholstery fabrics business continued to benefit from growth in our market reach, the flexibility of our Asian platform, and the success of our product innovation strategy, including the continued popularity of our LiveSmart® product portfolio. Our highly durable, stain-resistant LiveSmart® performance fabrics, as well as our LiveSmart Evolve® performance plus sustainability fabrics, are important drivers of growth in our residential business. These product lines continued to experience strong demand trends amidst consumer desire for cleanability, ease of maintenance, and environmentally-conscious products. Looking ahead, we are encouraged by the demand trends in our residential upholstery business. We expect that certain near-term headwinds, including customer supply chain constraints and ongoing pandemic-related disruptions such as quarantine and shutdown requirements currently affecting our sourcing partners inVietnam , may temporarily pressure our business during fiscal 2022. However, we believe that our flexible Asian platform and the addition of our new facility inHaiti near the end of the second quarter, as well as our long-term supplier relationships and product-driven strategy, will benefit us as we navigate these challenges. Notably, the ongoing economic and health effects of the COVID-19 pandemic, as well as the duration of such effects, remain unknown and depend on factors beyond our control. At this time, we cannot reasonably estimate the ongoing impact of the pandemic on our upholstery fabrics segment, but note that if conditions worsen, the impact on our employees, suppliers, consumers, and the global economy could adversely affect our operations and financial performance. Gross Profit, Selling, General & Administrative Expenses, and Operating Income Three Months Ended (dollars in thousands) August 1, 2021 August 2, 2020 Change Gross profit 5,704 5,293 7.8% Gross profit margin 14.3 % 18.7 % (440)bp Selling, general, and administrative expenses 3,437 3,180 8.1% Income from operations 2,267 2,113 7.3% Operating margin 5.7 % 7.5 % (180)bp The decrease in upholstery fabrics profitability for the first quarter of fiscal 2022, as compared to the prior-year period, primarily reflects a dramatic increase in freight costs, unfavorable foreign currency fluctuations associated with our operations inChina , lower sales in Read, and start-up costs for our newHaiti facility. Looking ahead, we expect that further pressures relating to rising freight andU.S. labor costs, as well as ongoingChina foreign exchange rate fluctuations and additional start-up costs for our new facility inHaiti , may temporarily pressure our profitability during fiscal 2022. Our previously implemented price increase has helped offset foreign currency exchange rate fluctuations to some extent, as intended, but we are implementing an additional freight surcharge during the second quarter to help mitigate a continued rise in freight costs.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
(dollars in thousands) August 1, 2021 August 2, 2020 May 2, 2021 Accounts receivable$ 16,992 $ 14,308 $ 17,299 Inventory 26,835 20,332 25,870 Property, plant & equipment 2,080 1,634 1,925 Right of use assets 5,984 3,802 5,945$ 51,891 $ 40,076 $ 51,039
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As ofAugust 1, 2021 , accounts receivable increased by$2.7 million , or 18.8%, compared withAugust 2, 2020 . This increase reflects the significant increase in net sales during the first quarter of fiscal 2022, as compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. Although we experienced a substantial increase in net sales during the first quarter of fiscal 2022, the increase in accounts receivable was partially offset by improved cash collections during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. The improved cash collections were due to our customers' continuing return to making payments based on normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic.I-33
-------------------------------------------------------------------------------- As ofAugust 1, 2021 , accounts receivable modestly decreased by 1.8%, as compared withMay 2, 2021 . This decrease reflects improved cash collections due to our customers' continuing return to making payments based on normal credit terms as opposed to extended terms previously granted in response to the COVID-19 pandemic. Although we experienced a substantial improvement in cash collections during the first quarter of fiscal 2022, the decrease in accounts receivable was partially offset by an increase in net sales during the first quarter of fiscal 2022, as compared with the fourth quarter of fiscal 2021, due to plant shutdowns for theChinese New Year holiday that occurred during the fourth quarter of fiscal 2021. Net sales were$40.0 million during the first quarter of fiscal 2022, an increase of$3.9 million , or 10.8%, compared with$36.1 million during the fourth quarter of fiscal 2021. Days' sales outstanding were 38 days during the first quarter of fiscal 2022, as compared with 44 days during the first quarter of fiscal 2021 and 42 days during the fourth quarter of fiscal 2021.
Inventory
As ofAugust 1, 2021 , inventory increased by$6.5 million , or 32.0%, compared withAugust 2, 2020 . This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. As ofAugust 1, 2021 , inventory increased by$1.0 million , or 3.7%, compared withMay 2, 2021 . This increase reflects the increase in net sales during the first quarter of fiscal 2022, compared with the fourth quarter of fiscal 2021, due to plant shutdowns for theChinese New Year holiday that occurred during that period, as noted above. Net sales were$40.0 million during the first quarter of fiscal 2022, an increase of$3.9 million , or 10.8%, compared with$36.1 million during the fourth quarter of fiscal 2021.
Inventory turns were 4.9 for the first quarter of fiscal 2022, as compared with 4.3 for the first quarter of fiscal 2021 and 4.6 for the fourth quarter of fiscal 2021.
Property, Plant, & Equipment
The$2.1 million as ofAugust 1, 2021 , represents property, plant, and equipment of$1.1 million ,$830,000 , and$130,000 located in theU.S. ,China , andHaiti , respectively. The$1.6 million as ofAugust 2, 2020 , represents property, plant, and equipment of$1.2 million and$456,000 located in theU.S. andChina , respectively. The$1.9 million as ofMay 2, 2021 , represents property, plant, and equipment of$1.1 million and$850,000 located in theU.S. andChina , respectively.
Property, plant, and equipment amounts are comparable for the periods presented as capital expenditures have been made commensurate with depreciation expense.
Right of Use Assets
The$6.0 million as ofAugust 1, 2021 , represents right of use assets of$4.6 million and$1.4 million located inChina and theU.S. , respectively. The$3.8 million as ofAugust 2, 2020 , represents right of use assets of$3.1 million and$710,000 located inChina and theU.S. , respectively. The$5.9 million as ofMay 2, 2021 , represents right of use assets of$5.0 million and$952,000 located inChina and theU.S. , respectively. EffectiveApril 9, 2021 , we entered into an agreement to lease a 90,000 square foot facility located in a modern industrial park on the northeastern border ofHaiti . The lease term is expected to commence during the second quarter of fiscal 2022, after construction of the facility has been completed, and at such time, we will have control of the facility based on the terms of the lease. As a result, right of use assets are expected to increase by$2.8 million at the commencement of the lease.
Other Income Statement Categories
Three Months Ended
(dollars in thousands) August 1, 2021 August 2, 2020 % Change
SG&A expenses $ 9,181 $ 8,018 14.5 %
Interest expense - 51 (100.0 )%
Interest income 74 58 27.6 %
Other expense 237 366 (35.2 )%
Selling, General, and Administrative Expenses
The increase in selling, general, and administrative expenses during the first
quarter of fiscal 2022, as compared with the first quarter of fiscal 2021, is
mostly due to our significant cost cutting measures during the fourth quarter of
fiscal 2020 that continued into the first quarter of fiscal 2021 as part of our
comprehensive response to the COVID-19 global pandemic. These
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cost cutting measures primarily related to compensation and included (i)
temporary salary reductions, (ii) workforce adjustments to align with demand,
(iii) suspended merit pay increases, and (iv) aggressively reduced discretionary
spending such as professional fees and travel and entertainment expenses.
Interest Expense
During the first quarter of fiscal 2022, we did not incur any interest expense, as we did not have any borrowings outstanding during such time.
During the first quarter of fiscal 2021, interest expense was attributable to interest paid on amounts borrowed during the fourth quarter of fiscal 2020 in connection with the economic uncertainty and disruption associated with the COVID-19 global pandemic. During the fourth quarter of fiscal 2020, we borrowed$30.8 million under our lines of credit and applied for and received a$7.6 million loan under the SBA's Paycheck Protection Program. The total amount of these borrowings was repaid during the first quarter of fiscal 2021.
Interest Income
Interest income reflects interest earned on our current investments of excess cash held in (i) money market funds, (ii) bond, other fixed income, and equity-related mutual funds, and (iii) investment-gradeU.S. corporate, foreign, and government bonds, as well as (iv) interest earned on a money market fund and equity-related mutual fund investment associated with our rabbi trust that funds our deferred compensation plan. The increase in interest income during the first quarter of fiscal 2022, as compared with the first quarter of fiscal 2021, reflects an increase in our investments during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Our investments include short-term investments (available for sale), short-term and long-term investments (held-to-maturity), and long-term investments associated with our rabbi trust. These investments totaled$26.8 million and$15.3 million as ofAugust 1, 2021 , andAugust 2, 2020 , respectively.
Other Expense
The decrease in other expense during the first quarter of fiscal 2022, as compared with the first quarter of fiscal 2021, was due mostly to more favorable foreign currency exchange rates applied against balance sheet accounts denominated in Chinese Renminbi to determine the correspondingU.S. dollar financial reporting amounts. During the first quarter of fiscal 2022, we reported a foreign exchange loss associated with our operations located inChina of$9,000 compared with$139,000 for the first quarter of fiscal 2021.
Income Taxes
Effective Income Tax Rate & Income Tax Expense
We recorded income tax expense of$905,000 , or 28.7% of income before income taxes, for the three-month period endingAugust 1, 2021 , compared with income tax expense of$4.3 million , or 283.7% of income before income taxes, for the three-month period endingAugust 2, 2020 . Our effective income tax rates for the three-month periods endedAugust 1, 2021 , andAugust 2, 2020 , were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. When calculating the annual estimated effective income tax rate for the three-month periods endedAugust 1, 2021 , andAugust 2, 2020 , we were subject to a loss limitation rule in accordance with ASC Topic 740-270-30-36(a). This loss limitation rule requires any taxable loss associated with ourU.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no tax benefit could be recognized during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from ourU.S. operations and foreign subsidiaries located inChina ,Canada , andHaiti versus annual projections, as well as changes in foreign currency exchange rates in relation to theU.S. dollar. I-35 -------------------------------------------------------------------------------- The following schedule summarizes the principal differences between income tax expense at theU.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the three-month periods endingAugust 1, 2021 , andAugust 2, 2020 : Three Months Ended August 1, 2021 August 2, 2020 U.S. federal income tax rate 21.0 % 21.0 % U.S. valuation allowance (3.9 ) 474.4 U.S. income tax law change - (232.5 ) Withholding taxes associated with foreign jurisdictions 6.2 10.1 Foreign income tax rate differential 1.6 9.1 Global Intangible Low Taxed Income Tax ("GILTI") 3.4 - Other 0.4 1.6 28.7 % 283.7 % Our effective income tax rate during the first quarter of fiscal 2022 was negatively affected, but not nearly to the extent as in the first quarter of fiscal 2021, by the mix of taxable income that is mostly earned by our foreign operations located inChina andCanada , which have higher income tax rates than theU.S. This is due mostly to higher annual forecasted taxable income from ourU.S. operations as of the end of the first quarter of fiscal 2022, as compared with lower annual forecasted taxable income as of the end of the first quarter of fiscal 2021. The annual forecasted taxable income at the end of the first quarter of fiscal 2021 was significantly affected by the ongoing disruption and uncertain economic conditions relating to the COVID-19 pandemic. As a result of the increase in forecasted taxable income, the principal differences in the above table are not as pronounced during the first quarter of fiscal 2022 as compared with those differences during the first quarter of fiscal 2021. GILTI Fiscal 2021 EffectiveJuly 20, 2020 , theU.S. Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the Tax Cuts and Jobs Act of 2017 ("TCJA"). With the enactment of these final regulations, we became eligible for an exclusion from GILTI if we meet the provisions of the GILTI High-Tax exception included in these final regulations. To meet the provisions of the GILTI high tax exception, the tested foreign entity's effective income tax rate related to current year's earnings must be higher than 90% of theU.S. Federal income tax rate of 21% (i.e., 18.9%). In addition, the enactment of the new regulations and the provisions for the GILTI High-Tax exception are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years. Since we met the requirements for the High-Tax exception for our 2019 and 2020 fiscal years, we recorded a non-cash income tax benefit of$3.5 million resulting from the re-establishment of certainU.S. federal net operating loss carryforwards. This$3.5 million income tax benefit was recorded as a discrete event in which its full income tax effects were recorded in the first quarter of fiscal 2021.
Additionally, we met the requirements for the High-Tax exception for our 2021 fiscal year, and therefore, were not subject to GILTI tax.
Fiscal 2022
As of the end of the first quarter of fiscal 2022, we believe we will not meet
the requirements for the GILTI High-Tax exception regarding our foreign
subsidiaries located in
Based on our assessment associated with our operation located inCanada , we expect that several significant capital projects will be placed into service during fiscal 2022, and therefore we will be eligible for a significant amount of deductible accelerated depreciation. As a result, our current year's income tax expense is expected to be much lower than prior fiscal years', and therefore, our projected current effective income tax rate is expected to be lower than the required 18.9% current effective income tax rate to meet the GILTI High-Tax exception provision.I-36
-------------------------------------------------------------------------------- Based on our assessment associated with our operations located inHaiti , we expect to earn taxable income that is not subject to income tax, as we are located in an economic zone that permits a 0% income tax rate for the first fifteen years of operations, for which we have ten years remaining. Since our operations located inHaiti are not expected to be subject to income tax, our projected current effective income tax rate of 0% will be lower than the required 18.9% current effective income tax rate to meet the GILTI High-Tax exception. Fiscal 2022 is the first fiscal year in which we expect to earn taxable income from our operations located inHaiti .
Valuation Allowance
In accordance with ASC Topic 740, we evaluate the realizability of 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. As a result of theU.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against ourU.S. net deferred income taxes as of the end of the first quarter of fiscal 2021. GILTI represented a significant source of ourU.S. taxable income during fiscal 2019 and 2020 that offset ourU.S. pre-tax losses during such years, and which offset was reversed as a result of the retroactivity of the new GILTI regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulativeU.S. taxable losses during our last two fiscal years, and we expected at the time of this assessment that our history ofU.S. pre-tax losses would continue into fiscal 2021. As a result of the significant weight of this negative evidence, we believed it was more-likely-than-not that ourU.S. net deferred income tax assets would not be fully realizable. Accordingly, we recorded a non-cash income tax charge of$7.0 million to provide for a full valuation allowance against ourU.S. net deferred income tax assets. This$7.0 million income tax charge was recorded as a discrete event in which its full income tax effects were recorded during the first quarter of fiscal 2021. As ofAugust 1, 2021 , we evaluated the realizability of ourU.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined we have a recent history of cumulativeU.S. taxable losses, in that we experiencedU.S. taxable losses during each of the fiscal years 2020 and 2021. In addition, as ofAugust 1, 2021 , we are currently expectingU.S. taxable income during fiscal 2022 stemming from the source of taxable income provided by GILTI noted above. However, the cumulative losses that we have experienced during fiscal years 2020 and 2021 significantly exceed theU.S. taxable income expected during fiscal 2022. As a result of the significant weight of this negative evidence, we believe it is more likely than not that ourU.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against ourU.S. net deferred income tax assets.
Based on our assessments as of
(dollars in thousands) August 1, 2021 August 2, 2020 May 2, 2021U.S. federal and state net deferred income tax assets $ 9,221 7,830 9,344 U.S. capital loss carryforward 2,330 2,281 2,330$ 11,551 10,111 11,674 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
Uncertain Income Tax Positions
Refer to Note 13 located of the consolidated financial statements for
disclosures regarding our assessments of our uncertain income tax positions as
of
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Income Taxes Paid
The following table sets forth taxes paid (refunded) by jurisdiction:
Three
Months
Ended
August 1, August 2,
(dollars in thousands) 2021 2020United States Federal - Alternative Minimum Tax
(AMT) credit refunds (1) $ - $ (745 )
China 1,408 349
Canada 280 405
$ 1,688 $ 9
(1) In accordance with the provisions of the TCJA, corporate taxpayers were
eligible to treat prior AMT credit carryforwards as refundable. Accordingly, we
elected to treat our prior AMT credit carryforward balance of $1.5 million as
refundable, and as a result, 50% of the $1.5 million refundable balance was
received during the first quarter of fiscal 2021, with the remaining balance
expected to be received in fiscal 2022. In accordance with the provisions of the
U.S. federal Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020),
100% of AMT credit carryforwards for years beginning in the 2019 tax year were
immediately refundable. Accordingly, we claimed credit for the remaining 50%
installment of our refundable AMT credit carryforward in May 2020 . We received
our remaining 50% installment, plus interest, totaling $764,000 during the
second quarter of fiscal 2021.
Future Liquidity
We are currently projecting annual cash income tax payments of approximately$4.2 million for fiscal 2022, compared with$3.0 million for fiscal 2021. The increase in our income tax payments mostly representsU.S. AMT credit refunds totaling$1.5 million that were received during fiscal 2021 that will not recur during fiscal 2022. Our estimated cash income tax payments for fiscal 2022 are management's current projections only and can be affected over the year by actual earnings from our foreign subsidiaries located inChina andCanada versus annual projections, as well as changes in the foreign exchange rates associated with ourChina operations in relation to theU.S. dollar.
Additionally, we currently expect to pay minimal income taxes in the
Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents, short-term investments (available for sale), 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$26.0 million and short-term investments (available for sale) of$9.7 million as ofAugust 1, 2021 , cash flow from operations, and the current availability ($38.2 million ) under our revolving credit lines will be sufficient to fund our foreseeable business needs and our contractual obligations.
As of
The decrease in our cash and investments from the end of fiscal 2021 was mostly due to (i)$2.0 million of capital expenditures primarily related to our mattress fabrics segment and our innovation campus located in downtownHigh Point, NC , (ii) a cash payment of$1.4 million for a regular quarterly dividend payment to shareholders, and (iii) common stock repurchases totaling$723,000 , partially offset by (iv) net cash provided by operating activities totaling$1.6 million . Our net cash provided by operating activities of$1.6 million decreased during the first quarter of fiscal 2022, as compared with$10.6 million during the first quarter of fiscal 2021. This decrease was mostly due to (i) increased inventory purchases due to increased sales volume, (ii) annual incentive plan award payments made during the first quarter of fiscal 2022 (compared with minimal payments made during the first quarter of fiscal 2021), (iii) an increase in income tax payments due primarily to an AMT credit refund of$745,000 received during the first quarter of fiscal 2021 that did not recur during fiscal 2022, and aI-38
-------------------------------------------------------------------------------- withholding tax payment made to the Chinese government of$533,000 during the first quarter (such payment was not made until the third quarter of fiscal 2021), and (iv) payments relating to our new building lease associated with our upholstery cut and sewn operation located inHaiti , partially offset by (v) improved cash collections on accounts receivable resulting from more customers taking advantage of early payment discounts and their continuing return to making payments based on normal credit terms, rather than the extended terms previously granted in response to the COVID-19 pandemic.
As of
Our cash and cash equivalents and short-term investments (available for sale) balance may be adversely affected by factors beyond our control, such as the continuing uncertainty of the COVID-19 global pandemic, lower net sales due to consumer demand, and delays in receipt of payment on accounts receivable. Additionally, we expect our cash liquidity to be affected by strategic investments in working capital, planned capital expenditures, and investments in our operations located inHaiti , with a significant portion of this spending occurring during the second quarter of fiscal 2022.
By Geographic Area
A summary of our cash and investments by geographic area follows:
(dollars in thousands) August 1, 2021 August 2, 2020 May 2, 2021 United States$ 35,727 $ 41,598 $ 34,465 China 5,864 3,974 10,635 Canada 2,031 1,761 1,525 Haiti 416 - 220 Cayman Islands 11 42 8$ 44,049 $ 47,375 $ 46,853
Common Stock Repurchase Program
InMarch 2020 , 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 the 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 the first quarter of fiscal 2022, we repurchased 48,686 shares of common
stock at a cost of
During the first quarter of fiscal 2021, we did not repurchase any shares of our common stock.
Dividend Program
On
During the first quarter of fiscal 2022, dividend payments totaled$1.4 million , which represented a quarterly dividend payment of$0.11 per share. During the first quarter of fiscal 2021, dividend payments totaled$1.3 million , which represented a quarterly dividend payment of$0.105 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 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 Capital
Operating Working Capital
Operating working capital (accounts receivable and inventories, less accounts payable-trade, accounts payable-capital expenditures, and deferred revenue) was$47.6 million as ofAugust 1, 2021 , compared with$43.5 million as ofAugust 2, 2020 , and$50.2 million as ofMay 2, 2021 . Operating working capital turnover was 6.9 during the first quarter of fiscal 2022, compared with 5.0 during the first quarter of fiscal 2021 and 6.4 during the fourth quarter of fiscal 2021.I-39
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Accounts Receivable
Accounts receivable were$35.0 million as ofAugust 1, 2021 , and increased$5.1 million , or 17.1%, compared with$29.9 million as ofAugust 2, 2020 . This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. Although we experienced a substantial increase in net sales during the first quarter of fiscal 2022, the increase in accounts receivable was partially offset by improved cash collections during the first quarter of fiscal 2022 compared with the first quarter of fiscal 2021. The improved cash collections are due to more customers taking advantage of early payment discounts, as well as their continuing return to making payments based on normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic. Accounts receivable as ofAugust 1, 2021 , decreased$2.7 million , or 7.2%, compared with$37.7 million as ofMay 2, 2021 . This decrease reflects improved cash collections due to more customers taking advantage of early payment discounts, as well as their continuing return to making payments based on normal credit terms as opposed to extended terms previously granted in response to the COVID-19 pandemic. Although we experienced a substantial improvement in cash collections during the first quarter of fiscal 2022, the decrease in accounts receivable was partially offset by an increase in net sales associated with our upholstery fabrics segment during the first quarter of fiscal 2022, as compared with the fourth quarter of fiscal 2021, due to plant shutdowns for theChinese New Year holiday that occurred during the fourth quarter of fiscal 2021. Days' sales outstanding were 38 days for the first quarter of fiscal 2022, as compared with 41 days for the first quarter of fiscal 2021 and 43 days for the fourth quarter of fiscal 2021.
Inventory
Inventory was$58.6 million as ofAugust 1, 2021 , and increased by$18.2 million , or 45.1%, compared with$40.4 million as ofAugust 2, 2020 . This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. Inventories as ofAugust 1, 2021 , modestly increased by$2.7 million , or 4.8%, compared with$55.9 million as ofMay 2, 2021 . This increase is due primarily to an increase in net sales associated with our upholstery fabrics segment during the first quarter of fiscal 2022, as compared with the fourth quarter of fiscal 2021, due to plant shutdowns for theChinese New Year holiday that occurred during the fourth quarter of fiscal 2021.
Inventory turns were 4.9 for the first quarter of fiscal 2022, as compared with 5.3 for the first quarter of fiscal 2021 and 4.8 for the fourth quarter of fiscal 2021.
Accounts Payable
Accounts payable- trade, totaling$45.3 million as ofAugust 1, 2021 , increased by$19.5 million , or 75.9%, compared with$25.7 million as of August. 2, 2020. The increase in accounts payable- trade primarily reflects the significant increase in net sales during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Accounts payable- trade as ofAugust 1, 2021 , modestly increased by$2.7 million , or 6.5%, compared with$42.5 million as ofMay 2, 2021 . This increase is due primarily to an increase in net sales associated with our upholstery fabrics segment during the first quarter of fiscal 2022, as compared with the fourth quarter of fiscal 2021, due to plant shutdowns for theChinese New Year holiday that occurred during the fourth quarter of fiscal 2021.
Financing Arrangements
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 ourU.S. parent company 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.
As of
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As ofAugust 1, 2021 , we complied with these financial covenants.
Refer to Note 9 of the consolidated financial statements for further details of our revolving credit agreements.
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Capital Expenditures and Depreciation
Overall
Capital expenditures on a cash basis were$2.0 million during the first quarter of fiscal 2022, compared with$500,000 for the same period a year ago. Capital expenditures mostly related to our mattress fabrics segment and our innovation campus located in downtownHigh Point, NC . Depreciation expense was$1.7 million during the first quarter of fiscal 2022, compared with$1.8 million for the same period a year ago. Depreciation expense mostly related to our mattress fabrics segment for both periods. For fiscal 2022, we are projecting cash capital expenditures to be in the range of$10.0 million to$10.5 million . The estimated capital expenditures primarily relate to the mattress fabrics segment. For fiscal 2022, we are projecting depreciation expense to be approximately$7.0 million , also primarily related to the 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 plans for capital expenditures and expectations related to depreciation expense. Funding for capital expenditures is expected to be from cash provided by operating activities.
Accounts Payable - Capital Expenditures
As ofAugust 1, 2021 , we had total amounts due regarding capital expenditures totaling$48,000 that pertained to outstanding vendor invoices, none of which were financed. The total amount outstanding of$48,000 is required to be paid based on normal credit terms.
Purchase Commitments - Capital Expenditures
As ofAugust 1, 2021 , we had open purchase commitments (i) for the acquisition of equipment for our mattress fabrics segment totaling$1.2 million , and (ii) for the construction of leasehold improvements associated with our showroom and office space located in downtownHigh Point, NC totaling$865,000 .
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 since the filing of our Form 10-K for the year endedMay 2, 2021 . Contractual Obligations
There were no significant or new contractual obligations from those reported in
our annual report on Form 10-K for the year ended
EffectiveMay 7, 2021 , we entered into an agreement to lease showroom and office space encompassing 21,000 square feet located in downtownHigh Point, NC . The lease term is expected to commence near the end of the second quarter of fiscal 2022, once certain lessor-owned leasehold improvements have been completed, and at such time we will have control of the facility based on the terms of the lease. As a result, right of use assets are expected to increase by$2.2 million at the commencement of the lease.
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.
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