UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
Commission File No.
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA |
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(State or other jurisdiction of incorporation or other organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(zip code) |
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange |
Title of Each Class |
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Trading Symbol(s) |
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On Which Registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ☒ YES NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period after the registrant was required to submit such files). ☒ YES NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common shares outstanding as of December 8, 2021:
Par Value: $0.05 per share
INDEX TO FORM 10-Q
For the period ended October 31, 2021
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Part I - Financial Statements |
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Page |
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Item 1. |
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I-1 |
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I-1 |
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I-2 |
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Consolidated Balance Sheets — October 31, 2021, November 1, 2020 and May 2, 2021 |
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I-3 |
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Consolidated Statements of Cash Flows — Six Months Ended October 31, 2021, and November 1, 2020 |
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I-4 |
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Consolidated Statements of Shareholders’ Equity – Six Months Ended October 31, 2021 |
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I-5 |
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Consolidated Statements of Shareholders’ Equity – Six Months Ended November 1, 2020 |
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I-6 |
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I-7 |
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I-28 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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I-28 |
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Item 3. |
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I-44 |
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Item 4. |
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I-44 |
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Part II - Other Information |
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Item 1. |
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II-1 |
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Item 1A. |
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II-1 |
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Item 2. |
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II-1 |
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Item 6. |
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II-2 |
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II-3 |
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2021, AND NOVEMBER 1, 2020
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
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THREE MONTHS ENDED |
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October 31, |
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November 1, |
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2021 |
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2020 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Income from operations |
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Interest income |
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Other expense |
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Income before income taxes |
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Income tax expense |
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Income from investment in unconsolidated joint venture |
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— |
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Net income |
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Net income per share - basic |
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$ |
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$ |
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Net income per share - diluted |
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$ |
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$ |
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Average shares outstanding, basic |
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Average shares outstanding, diluted |
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SIX MONTHS ENDED |
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October 31, |
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November 1, |
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2021 |
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2020 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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( |
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Gross profit |
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Selling, general and administrative expenses |
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( |
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( |
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Income from operations |
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Interest expense |
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— |
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( |
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Interest income |
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Other expense |
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( |
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( |
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Income before income taxes |
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Income tax expense |
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( |
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( |
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Income from investment in unconsolidated joint venture |
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— |
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Net income (loss) |
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Net income (loss) per share - basic |
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$ |
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$ |
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Net income (loss) per share - diluted |
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$ |
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$ |
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Average shares outstanding, basic |
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Average shares outstanding, diluted |
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See accompanying notes to consolidated financial statements.
I-1
CULP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2021, AND NOVEMBER 1, 2020
UNAUDITED
(Amounts in Thousands)
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THREE MONTHS ENDED |
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October 31, |
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November 1, |
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2021 |
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2020 |
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Net income |
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$ |
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$ |
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Unrealized holding losses on investments, net of tax |
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Reclassification adjustment for realized (gain) loss on sale of investments |
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Comprehensive income |
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$ |
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$ |
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SIX MONTHS ENDED |
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October 31, |
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November 1, |
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2021 |
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2020 |
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Net income (loss) |
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$ |
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$ |
( |
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Unrealized holding gains on investments, net of tax |
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Reclassification adjustment for realized (gain) loss on investments |
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( |
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Comprehensive income (loss) |
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$ |
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$ |
( |
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See accompanying notes to consolidated financial statements.
I-2
CULP, INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2021, NOVEMBER 1, 2020, AND MAY 2, 2021
UNAUDITED
(Amounts in Thousands)
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October 31, |
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November 1, |
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* May 2, |
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2021 |
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2020 |
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2021 |
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Current assets: |
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Cash and cash equivalents |
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$ |
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Short-term investments - held-to-maturity |
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Short-term investments - available for sale |
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Accounts receivable |
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Inventories |
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Current income taxes receivable |
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— |
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— |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Right of use assets |
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Intangible assets |
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Long-term investments - rabbi trust |
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Long-term investments - held-to-maturity |
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Deferred income taxes |
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Investment in unconsolidated joint venture |
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— |
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— |
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Other assets |
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Total assets |
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$ |
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Current liabilities: |
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Accounts payable - trade |
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$ |
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Accounts payable - capital expenditures |
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Operating lease liability - current |
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Deferred revenue |
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Accrued expenses |
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Income taxes payable - current |
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Total current liabilities |
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Operating lease liability - long-term |
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Income taxes payable - long-term |
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Deferred income taxes |
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Deferred compensation |
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Total liabilities |
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Commitments and Contingencies (Notes 3, 9, 15, and 16) |
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Shareholders' equity |
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Preferred stock, $ |
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Common stock, $ and outstanding 2020; and |
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Capital contributed in excess of par value |
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Accumulated earnings |
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Accumulated other comprehensive income |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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*
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2021, AND NOVEMBER 1, 2020
UNAUDITED
(Amounts in Thousands)
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SIX MONTHS ENDED |
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October 31, |
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November 1, |
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2021 |
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2020 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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( |
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Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |
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Depreciation |
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Amortization |
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Stock-based compensation |
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Deferred income taxes |
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( |
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Realized (gain) loss from the sale of short-term investments (Available for Sale) |
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( |
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Income from investment in unconsolidated joint venture |
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— |
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( |
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Foreign currency exchange loss |
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Changes in assets and liabilities: |
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Accounts receivable |
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( |
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Inventories |
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( |
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Other current assets |
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( |
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Other assets |
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( |
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( |
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Accounts payable – trade |
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( |
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Deferred revenue |
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( |
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Accrued expenses and deferred compensation |
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( |
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Income taxes |
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( |
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Net cash (used in) provided by operating activities |
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( |
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Cash flows from investing activities: |
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Capital expenditures |
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( |
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( |
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Proceeds from the sale of equipment |
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— |
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Investment in unconsolidated joint venture |
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— |
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( |
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Proceeds from the maturity of short-term investments (Held to Maturity) |
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Purchase of short-term and long-term investments (Held to Maturity) |
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( |
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( |
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Purchase of short-term investments (Available for Sale) |
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( |
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( |
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Proceeds from the sale of short-term investments (Available for Sale) |
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Proceeds from the sale of long-term investments (rabbi trust) |
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— |
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Purchase of long-term investments (rabbi trust) |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Payments associated with lines of credit |
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— |
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( |
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Payment associated with Paycheck Protection Program Loan |
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— |
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( |
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Dividends paid |
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( |
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( |
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Common stock repurchased |
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( |
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— |
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Common stock surrendered for withholding taxes payable |
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( |
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( |
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Payments of debt issuance costs |
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— |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
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Decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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I-4
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
SIX-MONTHS ENDED OCTOBER 31, 2021
UNAUDITED
(Dollars in thousands, except share data)
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Capital |
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Accumulated |
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Contributed |
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Other |
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Total |
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Common Stock |
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in Excess |
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Accumulated |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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of Par Value |
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Earnings |
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Income |
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Equity |
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Balance, May 2, 2021 * |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Unrealized gain on investments |
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— |
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— |
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— |
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— |
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Common stock issued in connection with vesting of performance-based restricted stock units |
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— |
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— |
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— |
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— |
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— |
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Common stock surrendered for withholding taxes payable |
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( |
) |
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— |
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( |
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— |
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— |
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( |
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Immediately vested common stock award |
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— |
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— |
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— |
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— |
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— |
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Common stock repurchased |
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( |
) |
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( |
) |
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( |
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— |
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— |
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( |
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Dividends paid |
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— |
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|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, August 1, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized loss on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Immediately vested common stock award |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock repurchased |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, October 31, 2021 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
* |
Derived from audited financial statements. |
See accompanying notes to consolidated financial statements
I-5
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
SIX-MONTHS ENDED NOVEMBER 1, 2020
UNAUDITED
(Dollars in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
Contributed |
|
|
|
|
|
|
Other |
|
|
Total |
|
|||
|
|
Common Stock |
|
|
in Excess |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Shareholders' |
|
|||||||||
|
|
Shares |
|
|
Amount |
|
|
of Par Value |
|
|
Earnings |
|
|
(Loss) Income |
|
|
Equity |
|
||||||
Balance, May 3, 2020 * |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized gain on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Immediately vested common stock award |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, August 2, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Unrealized loss on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Immediately vested common stock award |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock issued in connection with vesting of performance-based restricted stock units |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock surrendered for withholding taxes payable |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, November 1, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
* |
Derived from audited financial statements. |
See accompanying notes to consolidated financial statements.
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Culp, Inc. and its majority-owned subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 16, 2021, for the fiscal year ended May 2, 2021.
The company’s six-months ended October 31, 2021, and November 1, 2020, each represent 26-week periods.
2. Significant Accounting Policies
As of October 31, 2021, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended May 2, 2021.
Recently Adopted Accounting Pronouncements
Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects of accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. This guidance was effective for fiscal years, and periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. As a result, we adopted the provisions of ASU 2019-12 on
Recently Issued Accounting Pronouncements
Currently, there are no new recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements.
3. |
BUSINESS COMBINATION ACHIEVED IN STAGES |
Overview
Effective January 1, 2017, Culp International Holdings, Ltd. (“Culp International”), a wholly-owned subsidiary of the company, entered into a joint venture agreement pursuant to which Culp International owned
Prior to the acquisition of the remaining
The consideration transferred for our now-
I-7
Assets Acquired and Liabilities Assumed
The following table presents the final allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values:
(dollars in thousands) |
|
Fair Value |
|
|
Cash and cash equivalents |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Inventory |
|
|
|
|
Right of use assets |
|
|
|
|
Equipment and leasehold improvements |
|
|
|
|
Accounts payable |
|
|
( |
) |
Gain on bargain purchase |
|
|
( |
) |
|
|
$ |
|
|
Equipment and leasehold improvements are being depreciated on a straight-line basis over their remaining useful lives ranging from
Gain on Bargain Purchase
Concurrent with our acquisition of the remaining 50% ownership interest in CIH, our former joint venture partner sold its mattress business to a third party. Our acquisition of the remaining 50% ownership interest in CIH was undertaken due to this sale and the terms negotiated in connection therewith. As a result, the $
Supply and Rebate Agreements
In connection with the Share Purchase Agreement, we entered into supply and rebate agreements with an affiliated company of our former joint venture partner to secure plant capacity utilization and preserve sales channels of certain mattress fabric products. The supply and rebate agreements are effective as of the acquisition date and are based on future sales orders consistent with current market conditions.
The transactions associated with the supply and rebate agreements are accounted for in accordance with ASC Topic 606 Revenue from Contract with Customers. During the three-month and six-month periods ending October 31, 2021, shipments pursuant to the supply agreement were $
Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the three-month and six-month periods ending October 31, 2021, and November 1, 2020, have been prepared as if this acquisition had occurred on May 4, 2020.
|
|
|
|
|
|
Three Months Ended |
|
|
|
(dollars in thousands, except per share data) |
|
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Net Sales |
|
|
$ |
|
|
|
$ |
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
Net income per share - basic |
|
|
$ |
|
|
|
$ |
|
|
Net income per share - diluted |
|
|
$ |
|
|
|
$ |
|
|
I-8
|
|
|
|
|
|
Six Months Ended |
|
|
|
(dollars in thousands, except per share data) |
|
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Net Sales |
|
|
$ |
|
|
|
$ |
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
( |
) |
Net income (loss) per share - basic |
|
|
$ |
|
|
|
$ |
( |
) |
Net income (loss) per share - diluted |
|
|
$ |
|
|
|
$ |
( |
) |
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
Equity Method of Accounting
In accordance with the equity method of accounting, we reported our previous 50% proportionate share of net income of CIH as a separate line titled “income from investment in unconsolidated joint venture” in the accompanying Consolidated Statements of Net Income (Loss). Our 50% proportionate share of the net income of the unconsolidated joint venture was $
The following table summarizes assets, liabilities, and members’ equity for our equity method investment in CIH:
(dollars in thousands) |
|
|
November 1, 2020 |
|
|
total assets |
|
|
$ |
|
|
total liabilities |
|
|
$ |
|
|
total members’ equity |
|
|
$ |
|
|
As of November 1, 2020, our investment in unconsolidated joint venture totaled $
4. Allowance for Doubtful Accounts
A summary of the activity in the allowance for doubtful accounts follows:
|
|
Six Months Ended |
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Provision for bad debts |
|
|
( |
) |
|
|
|
|
Write-offs, net of recoveries |
|
|
( |
) |
|
$ |
— |
|
Ending balance |
|
$ |
|
|
|
$ |
|
|
During the six-month periods ended October 31, 2021, and November 1, 2020, we assessed the credit risk of our customers within our accounts receivable portfolio. Our risk assessment includes the respective customer’s (i) financial position; (ii) past payment history; (iii) management’s general ability; and (iv) historical loss experience; as well as (v) any other ongoing economic conditions (i.e., COVID-19). After our risk assessment was completed, we assigned credit grades to our customers, which in turn, were used to determine our allowance for doubtful accounts totaling $
5. Revenue from Contracts with Customers
Nature of Performance Obligations
Our operations are classified into
I-9
of upholstery fabrics and other products, as well as measuring and installation services for 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.
Our primary performance obligations include the sale of mattress fabrics and upholstery fabrics, as well as the performance of customized fabrication and installation services of our own products associated with window treatments.
Contract Assets & Liabilities
Certain contracts, primarily those for customized fabrication and installation services associated with Read, require upfront customer deposits that result in a contract liability which is recorded on the Consolidated Balance Sheets as deferred revenue. If upfront deposits or prepayments are not required, customers may be granted credit terms which generally range from
A summary of the activity associated with deferred revenue follows:
|
|
Six months ended |
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Revenue recognized on contract liabilities |
|
|
( |
) |
|
|
( |
) |
Payments received for services not yet rendered |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
|
|
Disaggregation of Revenue
The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending October 31, 2021:
|
|
Mattress |
|
|
Upholstery |
|
|
|
|
|
||
(dollars in thousands) |
|
Fabrics |
|
|
Fabrics |
|
|
Total |
|
|||
Products transferred at a point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services transferred over time |
|
|
— |
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending October 31, 2021:
|
|
Mattress |
|
|
Upholstery |
|
|
|
|
|
||
(dollars in thousands) |
|
Fabrics |
|
|
Fabrics |
|
|
Total |
|
|||
Products transferred at a point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services transferred over time |
|
|
— |
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending November 1, 2020:
|
|
Mattress |
|
|
Upholstery |
|
|
|
|
|
||
(dollars in thousands) |
|
Fabrics |
|
|
Fabrics |
|
|
Total |
|
|||
Products transferred at a point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services transferred over time |
|
|
— |
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
I-10
The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending November 1, 2020:
|
|
Mattress |
|
|
Upholstery |
|
|
|
|
|
||
(dollars in thousands) |
|
Fabrics |
|
|
Fabrics |
|
|
Total |
|
|||
Products transferred at a point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services transferred over time |
|
|
— |
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
6. Inventories
Inventories are carried at the lower of cost or net realizable value. Cost is determined using the FIFO (first-in, first-out) method.
A summary of inventories follows:
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Work-in-process |
|
|
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
7. Intangible Assets
A summary of intangible assets follows:
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
Tradename |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Customer relationships, net |
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreement, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Tradename
Our tradename totaling $
Customer Relationships
A summary of the change in the carrying amount of our customer relationships follows:
|
|
Six months ended |
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Amortization expense |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
|
$ |
|
|
Our customer relationships are amortized on a straight-line basis over useful lives ranging from
The gross carrying amount of our customer relationships was $
The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2022 - $
The weighted average amortization period for our customer relationships was 6.2 as of October 31, 2021.
I-11
Non-Compete Agreement
A summary of the change in the carrying amount of our non-compete agreement follows:
|
|
Six months ended |
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Amortization expense |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
|
$ |
|
|
Our non-compete agreement is amortized on a straight-line basis over the
life of the agreement.The gross carrying amount of our non-compete agreement was $
The remaining amortization expense for the next five years and thereafter follows: FY 2022 - $
The weighted average amortization period for the non-compete agreement was
8. Accrued Expenses
A summary of accrued expenses follows:
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
Compensation, commissions and related benefits |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other accrued expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
9. Lines of Credit
Revolving Credit Agreement – United States
Our Credit Agreement (“Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $
Interest is charged at a rate (applicable interest rate of
As of October 31, 2021, November 1, 2020, and May 2, 2021, there were $
There were
Revolving Credit Agreements – China Operations
Denominated in Chinese Yuan Renminbi (“RMB”)
We have an unsecured credit agreement denominated in RMB with a bank located in China that provides for a line of credit of up to
On November 15, 2021, we renewed this agreement, which renewal maintains our borrowing capacity of
There were
I-12
Denominated in United States Dollar (“USD”)
As of May 2, 2021, we had an unsecured credit agreement denominated in USD with another bank located in China that provided for a line of credit up to $
There were
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of October 31, 2021, we complied with our financial covenants.
10. Fair Value
ASC Topic 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.
The hierarchy consists of three broad levels as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable, and
Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.
The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors, and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.
Recurring Basis
The following tables present information about assets measured at fair value on a recurring basis:
|
|
Fair value measurements as of October 31, 2021, using: |
|
|||||||||
|
|
Quoted prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in active |
|
|
other |
|
Significant |
|
|
|
|
|
|
|
markets for |
|
|
observable |
|
unobservable |
|
|
|
|
|
|
|
identical assets |
|
|
inputs |
|
inputs |
|
|
|
|
|
(amounts in thousands) |
|
Level 1 |
|
|
Level 2 |
|
Level 3 |
|
Total |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Money Market Fund |
|
$ |
|
|
|
N/A |
|
N/A |
|
$ |
|
|
Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Inflation Protected Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Mortgage Securities Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Large Cap Equity Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Growth Allocation Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Preferred Securities Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
U.S. Event Driven Equity Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Moderate Allocation Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Other |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
I-13
|
|
Fair value measurements as of November 1, 2020, using: |
|
|||||||||
|
|
Quoted prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in active |
|
|
other |
|
Significant |
|
|
|
|
|
|
|
markets for |
|
|
observable |
|
unobservable |
|
|
|
|
|
|
|
identical assets |
|
|
inputs |
|
inputs |
|
|
|
|
|
(amounts in thousands) |
|
Level 1 |
|
|
Level 2 |
|
Level 3 |
|
Total |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Premier Money Market Fund |
|
$ |
|
|
|
N/A |
|
N/A |
|
$ |
|
|
Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Growth Allocation Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Moderate Allocation Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Other |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
|
|
Fair value measurements as of May 2, 2021, using: |
|
|||||||||
|
|
Quoted prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in active |
|
|
other |
|
Significant |
|
|
|
|
|
|
|
markets for |
|
|
observable |
|
unobservable |
|
|
|
|
|
|
|
identical assets |
|
|
inputs |
|
inputs |
|
|
|
|
|
(amounts in thousands) |
|
Level 1 |
|
|
Level 2 |
|
Level 3 |
|
Total |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Premier Money Market Fund |
|
$ |
|
|
|
N/A |
|
N/A |
|
$ |
|
|
Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Inflation Protected Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Mortgage Securities Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Growth Allocation Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Moderate Allocation Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Other |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Short-Term Investments – Available for Sale
Our short-term investments classified as available for sale consisted of various types of bond and equity mutual funds and had an accumulated unrealized gain totaling $
Short-Term and Long-Term Investments - Held-To-Maturity
Our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds with remaining maturities of less than
As of October 31, 2021, November 1, 2020, and May 2, 2021, our held-to-maturity investments recorded at amortized cost totaled $
Our bond investments were classified as level 2 within the fair value hierarchy as they were traded over the counter within a broker network and not on an active market. The fair value of our bond investments was determined based on a published source that provided an average bid price. The average bid price was based on various broker prices that were determined based on market conditions, interest rates, and the rating of the respective bond investment.
Current Expected Credit Loses (“CECL”)- Available for Sale and Held-To-Maturity Investments
As of October 31, 2021, November 1, 2020, and May 2, 2021, we did
We determined that our credit loss exposure was immaterial as we have experienced historically low unrealized losses and gains during past reporting periods. In addition, it is not our intention to sell, and it is not likely that we will be required to sell, our held-to-maturity investments before the recovery of their amortized cost basis.
I-14
As of October 31, 2021, we reported an accumulated unrealized gain of $
Long-Term Investments - Rabbi Trust
We have a rabbi trust for the participants of our deferred compensation plan (the “Plan”), that enables our participants to credit their contributions to various investment options of the Plan. The investments associated with the rabbi trust consist of a U.S. Government money market fund and various equity related mutual funds that are classified as available for sale.
Our long-term investments associated with our rabbi trust are classified as available for sale and recorded at their fair values of $
Other
The carrying amount of our cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximate their fair value because of the short maturity of these financial instruments.
Nonrecurring Basis – Fourth Quarter of Fiscal 2021
During the three-month period ending May 2, 2021, we had assets and liabilities that were required to be measured at fair value on a nonrecurring basis that pertained to assets acquired and certain liabilities that were assumed in connection with the CIH business combination effective February 1, 2021. See Note 3 of the consolidated financial statements for further details regarding this business combination.
|
|
Fair value measurements on February 1, 2021, using: |
|
|||||||||||
|
|
Quoted prices |
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
in active |
|
other |
|
|
Significant |
|
|
|
|
|
||
|
|
markets for |
|
observable |
|
|
unobservable |
|
|
|
|
|
||
|
|
identical assets |
|
inputs |
|
|
inputs |
|
|
|
|
|
||
(amounts in thousands) |
|
Level 1 |
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets |
|
N/A |
|
|
|
|
|
N/A |
|
|
$ |
|
|
|
Equipment and leasehold improvements |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
Inventory |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
The fair value of our right of use assets was based on our analysis of a recent appraisal of annual lease rates per square foot for industrial buildings that are similar in nature and within the same locale. We believe the annual lease rates per square foot presented in our recent appraisal represent significant observable inputs and therefore the right of use assets were classified as level 2.
Additionally, in connection with the CIH business combination effective February 1, 2021, we acquired cash, accounts receivable, and certain other current assets, and we assumed accounts payable. Based on the nature of these items and their short-term maturity, the carrying amount of these items approximated their fair values. See Note 3 of the consolidated financial statements for the final allocation of the acquisition cost to assets acquired and liabilities assumed based on their fair values.
11. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income (loss) per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.
I-15
Weighted average shares used in the computation of basic and diluted net income (loss) per share are as follows:
|
|
Three months ended |
|
|||||
(amounts in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
|
|
Dilutive effect of stock-based compensation |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
|
|
During the second quarter of fiscal 2022 and 2021,
|
|
Six months ended |
|
|||||
(amounts in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
|
|
Dilutive effect of stock-based compensation |
|
|
|
|
|
|
— |
|
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
|
|
During the first half of fiscal 2022,
During the second half of fiscal 2021,
12. Segment Information
Overall
Our operations are classified into
Financial Information
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 items that are not expected to occur on a regular basis. Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods 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. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. The mattress fabrics segment also included in segment assets its investment in an unconsolidated joint venture as of November 1, 2020.
I-16
Statements of operations for our operating segments are as follows:
|
|
Three months ended |
|
|||||
|
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
net sales by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
net sales |
|
$ |
|
|
|
$ |
|
|
gross profit: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
gross profit |
|
$ |
|
|
|
$ |
|
|
selling, general, and administrative expenses by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
unallocated corporate expenses |
|
|
|
|
|
|
|
|
selling, general, and administrative expenses |
|
$ |
|
|
|
$ |
|
|
income (loss) from operations by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
unallocated corporate expenses |
|
|
( |
) |
|
|
( |
) |
income from operations |
|
|
|
|
|
|
|
|
interest income |
|
|
|
|
|
|
|
|
other expense |
|
|
( |
) |
|
|
( |
) |
income before income taxes |
|
$ |
|
|
|
$ |
|
|
|
|
Six months ended |
|
|||||
|
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
net sales by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
net sales |
|
$ |
|
|
|
$ |
|
|
gross profit by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
gross profit |
|
$ |
|
|
|
$ |
|
|
selling, general, and administrative expenses by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
unallocated corporate expenses |
|
|
|
|
|
|
|
|
selling, general, and administrative expenses |
|
$ |
|
|
|
$ |
|
|
income (loss) from operations by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
unallocated corporate expenses |
|
|
( |
) |
|
|
( |
) |
income from operations |
|
|
|
|
|
|
|
|
interest expense |
|
|
— |
|
|
|
( |
) |
interest income |
|
|
|
|
|
|
|
|
other expense |
|
|
( |
) |
|
|
( |
) |
income before income taxes |
|
$ |
|
|
|
$ |
|
|
I-17
Balance sheet information for our operating segments follows:
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
Segment assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Mattress Fabrics: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Inventory |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated joint venture |
|
|
— |
|
|
|
|
|
|
|
— |
|
Total mattress fabrics assets |
|
|
|
|
|
|
|
|
|
|
|
|
Upholstery Fabrics: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (3) |
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets (4) |
|
|
|
|
|
|
|
|
|
|
|
|
Total upholstery fabrics assets |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
|
|
|
|
|
|
|
|
|
|
|
Non-segment assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments - available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments - held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Current income taxes receivable |
|
|
|
|
|
|
— |
|
|
|
— |
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (5) |
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets (6) |
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments - rabbi trust |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments - held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Six months ended |
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Capital expenditures (7): |
|
|
|
|
|
|
|
|
Mattress Fabrics |
|
$ |
|
|
|
$ |
|
|
Upholstery Fabrics |
|
|
|
|
|
|
|
|
Unallocated Corporate |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
|
|
|
$ |
|
|
Depreciation expense: |
|
|
|
|
|
|
|
|
Mattress Fabrics |
|
$ |
|
|
|
$ |
|
|
Upholstery Fabrics |
|
|
|
|
|
|
|
|
Total depreciation expense |
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
(3) |
|
I-18
(4) |
|
(5) |
|
(6) |
|
(7) |
|
13. Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $
Our effective income tax rates for the six-month periods ended October 31, 2021, and November 1, 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 six-month periods ended October 31, 2021, and November 1, 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 our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it is determined that no income 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 our U.S. operations and foreign subsidiaries located in China, Canada, and Haiti versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.
The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the six-month periods ending October 31, 2021, and November 1, 2020:
|
|
October 31, |
|
|
November 1, |
|
||
|
|
2021 |
|
|
2020 |
|
||
U.S. federal income tax rate |
|
|
|
% |
|
|
|
% |
U.S. valuation allowance |
|
|
( |
) |
|
|
|
|
U.S. income tax law change |
|
|
— |
|
|
|
( |
) |
Withholding taxes associated with foreign jurisdictions |
|
|
|
|
|
|
|
|
Foreign income tax rate differential |
|
|
|
|
|
|
|
|
Global Intangible Low Taxed Income Tax ("GILTI") |
|
|
|
|
|
|
— |
|
Tax effects of deductible foreign exchange rate losses |
|
|
( |
) |
|
|
( |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
Our effective income tax rate during the first half of fiscal 2022 was negatively affected, but not nearly to the extent as in the first half of fiscal 2021, by the mix of taxable income that is mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. This is due mostly to higher annual forecasted taxable income from our U.S. operations as of the end of the second quarter of fiscal 2022, compared with lower annual forecasted taxable from our U.S. operations as of the end of the second quarter of fiscal 2021.
GILTI
Fiscal 2021
Effective July 20, 2020, the U.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
I-19
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
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 $
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 second quarter of fiscal 2022, we believe we will not meet the requirements for the GILTI High-Tax exception regarding our foreign subsidiaries located in Canada and Haiti, and therefore, will be subject to GILTI tax for the 2022 fiscal year.
Based on our assessment associated with our operation located in Canada, 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
Based on our assessment associated with our operations located in Haiti, we expect to earn taxable income that is not subject to income tax, as we are located in an economic zone that permits a
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 the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income taxes as of the end of the first quarter of fiscal 2021. GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and 2020 that offset our U.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 cumulative U.S. taxable losses during our last two fiscal years, and we expected at the time of this assessment that our history of U.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 our U.S. net deferred income tax assets would not be fully realizable. Accordingly, we recorded a non-cash income tax charge of $
As of October 31, 2021, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was still required. Based on our assessment, we determined we still have a recent history of cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the fiscal years 2020 and 2021. In addition, as of October 31, 2021, we are currently expecting U.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 the U.S. taxable income expected during fiscal 2022. As a result of the significant weight of this negative evidence, we
I-20
believe it is more likely than not that our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.
Based on our assessments as of October 31, 2021, November 1, 2020, and May 2, 2021, valuation allowances against our U.S. net deferred income taxes pertain to the following:
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
U.S. federal and state net deferred income tax assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
U.S. capital loss carryforward |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Undistributed Earnings
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred income tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As of October 31, 2021, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings and profits from our foreign subsidiaries would not be reinvested indefinitely and would be eventually distributed to our U.S. parent company. The conclusion reached from this assessment was consistent with prior years.
As a result of the TCJA, a U.S. corporation is allowed a
Uncertain Income Tax Positions
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 end of the reporting period, or is effectively settled through examination, negotiation, 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.
As of October 31, 2021, November 1, 2020, and May 2, 2021, we had a $
Our gross unrecognized income tax benefit of $
Income Taxes Paid (Refunded)
The following table sets forth taxes paid (refunded) by jurisdiction:
|
|
Six Months Ended |
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
United States Federal - Alternative Minimum Tax (AMT) credit refunds (1) |
|
$ |
— |
|
|
$ |
( |
) |
United States Transition Tax Payment |
|
|
|
|
|
|
|
|
China - Income Taxes |
|
|
|
|
|
|
|
|
China - Withholding Taxes Associated with Earnings and Profits Distribution to U.S. Parent |
|
|
|
|
|
|
— |
|
Canada - Income Taxes |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
( |
) |
(1) |
In accordance with the provisions of the TCJA, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable. We received our $ |
I-21
14. Stock-Based Compensation
Equity Incentive Plan Description
On September 16, 2015, our shareholders approved an equity incentive plan titled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of
As of October 31, 2021, there were
Performance-Based Restricted Stock Units
Senior Executives
We grant performance-based restricted stock units to senior executives which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. The number of shares of common stock that are earned based on performance targets that have been achieved may be adjusted based on a market-based total shareholder return component as defined in the related restricted stock unit agreements.
Our performance-based restricted stock units granted to senior executives were measured based on their fair market value on the date of grant. The fair market value per share was determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock for the performance-based component.
The following table provides assumptions used to determine the fair market value of the market-based total shareholder return component using the Monte Carlo simulation model on our outstanding performance-based restricted stock units granted to senior executives on July 22, 2021:
|
July 22, |
|
|
|
2021 |
|
|
Closing price of our common stock |
|
|
|
Expected volatility of our common stock |
|
|
% |
Expected volatility of peer companies (1) |
|
|
|
Risk-free interest rate |
|
|
% |
Dividend yield |
|
|
% |
Correlation coefficient of peer companies (1) |
|
|
(1)
Key Employees
We grant performance-based restricted stock units which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. Our performance-based restricted stock units granted to key employees were measured based on the fair market value (the closing price of our common stock) on the date of grant. No market-based total shareholder return component was included in these awards.
I-22
Overall
The following table summarizes information related to our grants of performance-based restricted stock units associated with senior executives and key employees that are unvested as of October 31, 2021:
|
|
(3) |
|
|
(4) |
|
|
|
|
|
|
|
|
||
|
|
Performance-Based |
|
|
Restricted Stock |
|
|
|
|
|
|
|
|
||
|
|
Restricted Stock |
|
|
Units Expected |
|
|
|
|
|
|
|
|
||
Date of Grant |
|
Units Awarded |
|
|
to Vest |
|
|
Price Per Share |
|
|
|
Vesting Period |
|||
July 22, 2021 (1) |
|
|
|
|
|
|
|
|
|
$ |
|
|
(5) |
|
|
July 22, 2021 (2) |
|
|
|
|
|
|
|
|
|
$ |
|
|
(7) |
|
|
July 18, 2019 (1) |
|
|
|
|
|
|
|
|
|
$ |
|
|
(6) |
|
|
July 18, 2019 (2) |
|
|
|
|
|
|
|
|
|
$ |
|
|
(7) |
|
|
(1) |
|
(2) |
|
(3) |
|
(4) |
|
(5) |
|
(6) |
|
(7) |
|
The following table summarizes information related to our performance-based restricted stock units that vested during the six-month periods ending October 31, 2021, and November 1, 2020:
|
|
Performance-Based |
|
|
|
|
|
|
(4) |
|
||
|
|
Restricted Stock |
|
|
(3) |
|
|
Price |
|
|||
Fiscal Year |
|
Units Vested |
|
|
Fair Value |
|
|
Per Share |
|
|||
Fiscal 2022 (1) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Fiscal 2022 (2) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Fiscal 2021 (1) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Fiscal 2021 (2) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
(3) |
|
(4) |
|
We recorded compensation expense of $
I-23
As of October 31, 2021, the remaining unrecognized compensation cost related to our performance-based restricted stock units was $
Time-Based Restricted Stock Units
The following table summarizes information related to our grants of time-based restricted stock unit awards associated with senior executives and key members of management that are unvested as of October 31, 2021:
|
|
Time-Based |
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
|
(1) |
|
|
|
|
||
Date of Grant |
|
Units Awarded |
|
|
Price Per Share |
|
Vesting Period |
||||
July 22, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
August 6, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
July 18, 2019 |
|
|
|
|
|
$ |
|
|
|
|
|
August 2, 2018 |
|
|
|
|
|
$ |
|
|
|
|
|
(1) |
|
Overall
We recorded compensation expense of $
As of October 31, 2021, the remaining unrecognized compensation cost related to our time-based restricted stock units was $
Common Stock Award
We granted a total of
We granted a total of
We recorded $
15. Leases
Overview
We lease manufacturing facilities, showroom and office space, distribution centers, and equipment under operating lease arrangements. Our operating leases have remaining noncancellable lease terms of
Balance Sheet
The right of use assets and lease liabilities associated with our operating leases as of October 31, 2021, November 1, 2020, and May 2, 2021, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
Right of use assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating lease liability - current |
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability – noncurrent |
|
|
|
|
|
|
|
|
|
|
|
|
I-24
Supplemental Cash Flow Information
|
|
Six Months Ended |
|
|
Six Months Ended |
|
||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
Operating lease liability payments |
|
$ |
|
|
|
$ |
|
|
Right of use assets exchanged for lease liabilities |
|
|
|
|
|
|
|
|
Operating lease expense for the three-month periods ended October 31, 2021, and November 1, 2020, was $
Other Information
Maturity of our operating lease liabilities for the remainder of fiscal 2022, the subsequent next four fiscal years, and thereafter follows:
(dollars in thousands) |
|
|
|
|
2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
|
Less: interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
As of October 31, 2021, the weighted average remaining lease term and discount rate for our operating leases follows:
|
|
October 31, 2021 |
|
|
Weighted average lease term |
|
|
|
|
Weighted average discount rate |
|
|
|
% |
As of November 1, 2020, the weighted average remaining lease term and discount rate for our operating leases follows:
|
|
November 1, 2020 |
|
|
Weighted average lease term |
|
|
|
|
Weighted average discount rate |
|
|
|
% |
Lease Contracts
Culp Upholstery Fabrics – Haiti, Ltd.
Effective April 9, 2021, we entered into an agreement to lease a
I-25
High Point, NC – Design and Innovation Campus
Effective May 7, 2021, we entered into an agreement to lease showroom and office space encompassing
In addition to the required lease payments, we invested $
16. Commitments, Contingencies, and Guarantees
Litigation
The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
Accounts Payable – Capital Expenditures
As of October 31, 2021, November 1, 2020, and May 2, 2021, we had total amounts due regarding capital expenditures totaling $
Purchase Commitments – Capital Expenditures
As of October 31, 2021, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $
Discontinued Operations
Supply and Royalty Agreements
In connection with the sale of our entire ownership interest in eLuxury, LLC (“eLuxury”) on March 31, 2020, 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 all its requirements at fair market prices for mattress and upholstery fabric products of the type we were supplying to eLuxury at the time of the sale transaction, as well as certain home accessories and soft good 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 which 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 provide an additional sales channel for eLuxury to grow its business-to-business sales platform.
During the three-month and six-month periods ending October 31, 2021, shipments to eLuxury under the supply agreement totaled $
During the three-month and six-month periods ending October 31, 2021, we received payments pursuant to the royalty agreement totaling $
I-26
Financial Guarantee
Currently, we have an agreement that guarantees
17. Statutory Reserves
Our subsidiary located in China was required to transfer
The transfer to this reserve must be made before distributions of any dividend to shareholders. As of October 31, 2021, the company’s statutory surplus reserve was $
The company’s subsidiary located in China can transfer funds to the parent company, except for the statutory surplus reserve of $
18. Common Stock Repurchase Program
In March 2020, our board of directors approved an authorization for us to acquire up to $
During the first half of fiscal 2022, we repurchased
During the first half of fiscal 2021, we did
19. Dividend Program
On December 1, 2021, our board of directors approved a quarterly cash dividend of $
During the first half of fiscal 2022, dividend payments totaled $
Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. 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.
I-27
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties that may cause actual events and results to differ materially from such statements. Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update or alter such statements to reflect any changes in management’s expectations or any change in the assumptions or circumstances on which such statements are based, whether due to new information, future events, or otherwise. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often but not always characterized by qualifying words such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan,” “project,” and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, new product launches, sales, profit margins, profitability, operating income, capital expenditures, working capital levels, income taxes, SG&A or other expenses, pre-tax income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding potential acquisitions, future economic or industry trends, public health epidemics, or future developments. There can be no assurance that we will realize these expectations or meet our guidance, or that these beliefs will prove correct.
Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses into our existing operations. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in tariffs or trade policy, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and the strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. Also, economic or political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. The impact of public health epidemics on employees, customers, suppliers, and the global economy, such as the global coronavirus pandemic currently affecting countries around the world, could also adversely affect our operations and financial performance. In addition, the impact of potential goodwill or intangible asset impairments or valuation allowances could affect our financial results. Increases in freight costs, labor costs, and raw material prices, including increases in market prices for petrochemical products, can also significantly affect the prices we pay for shipping, labor, and raw materials, respectively, and in turn, increase our operating costs and decrease our profitability. Finally, disruption in our customers’ supply chains for non-fabric components may cause declines in new orders and/or delayed shipping of existing orders while our customers wait for other components, which could adversely affect our financial results. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, are included in Item 1A “Risk Factors” section in our most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 April 30. The six months ended October 31, 2021, and November 1, 2020, both represent 26-week periods.
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 in Stokesdale, NC, High Point, NC, and Quebec, 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).
I-28
The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. We have upholstery fabric operations located in Shanghai, China, and Burlington, NC. We also commenced construction on a new leased facility in Haiti during the fourth quarter of last fiscal year. This new operation will be dedicated to production of cut and sewn upholstery kits and is now expected to begin operating during the third quarter of this fiscal year. Additionally, Read Window Products, LLC (“Read”), a wholly-owned subsidiary with operations located in Knoxville, 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 items that are not expected to occur on a regular basis. 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) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
Change |
|
|||
Net sales |
|
$ |
74,561 |
|
|
$ |
76,851 |
|
|
(3.0)% |
|
|
Gross profit |
|
|
10,727 |
|
|
|
14,261 |
|
|
(24.8)% |
|
|
Gross profit margin |
|
|
14.4 |
% |
|
|
18.6 |
% |
|
(420)bp |
|
|
Selling, general, and administrative expenses |
|
|
9,087 |
|
|
|
9,743 |
|
|
(6.7)% |
|
|
Income from operations |
|
|
1,640 |
|
|
|
4,518 |
|
|
(63.7)% |
|
|
Operating margin |
|
|
2.2 |
% |
|
|
5.9 |
% |
|
(370)bp |
|
|
Income before income taxes |
|
|
1,295 |
|
|
|
3,897 |
|
|
(66.8)% |
|
|
Income tax expense |
|
|
444 |
|
|
|
1,613 |
|
|
(72.5)% |
|
|
Net income |
|
|
851 |
|
|
|
2,384 |
|
|
(64.3)% |
|
|
|
Six Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
Change |
|
|||
Net sales |
|
$ |
157,608 |
|
|
$ |
141,315 |
|
|
11.5% |
|
|
Gross profit |
|
|
23,226 |
|
|
|
24,162 |
|
|
(3.9)% |
|
|
Gross profit margin |
|
|
14.7 |
% |
|
|
17.1 |
% |
|
(240)bp |
|
|
Selling, general, and administrative expenses |
|
|
18,268 |
|
|
|
17,761 |
|
|
2.9% |
|
|
Income from operations |
|
|
4,958 |
|
|
|
6,401 |
|
|
(22.5)% |
|
|
Operating margin |
|
|
3.1 |
% |
|
|
4.5 |
% |
|
(140)bp |
|
|
Income before income taxes |
|
|
4,450 |
|
|
|
5,421 |
|
|
(17.9)% |
|
|
Income tax expense |
|
|
1,349 |
|
|
|
5,937 |
|
|
(77.3)% |
|
|
Net income (loss) |
|
|
3,101 |
|
|
|
(349 |
) |
|
N.M. |
|
Net Sales
Overall, our net sales for the second quarter of fiscal 2022 decreased by 3.0% compared with the same period a year ago, with mattress fabrics sales increasing 2.1% and upholstery fabrics sales decreasing 8.5%. Our net sales for the first half of fiscal 2022 increased by 11.5%, compared with the same period a year ago, with mattress fabrics sales increasing 10.3% and upholstery fabrics sales increasing 13.0%. The first half of fiscal 2021 was negatively affected by the economic disruption caused by the COVID-19 pandemic during the early months of the period.
The increase in net sales for our mattress fabrics segment for the second quarter reflects continued solid demand for our products compared to strong sales during the prior-year period, although sales were affected somewhat by our customers’ supply chain constraints for non-fabric components and their existing inventory levels for mattress fabrics and covers. It also reflects a price increase that was effective during the quarter, as well as a surcharge that was implemented during the quarter, which together increased net sales for the division by approximately 4.6%. The decrease in net sales for our upholstery fabrics segment for the second quarter reflects lower sales in our residential fabrics business due to COVID-19-related shutdowns of our sourcing partners and customers in Vietnam throughout most of the quarter, as well as our customers’ supply chain constraints for non-fabric components and labor shortages at their U.S. facilities, which reduced our ability to ship prepared fabric orders. The decrease was partially offset by a price increase and freight surcharge that were effective during the quarter, which increased net sales for the division by approximately 2.3%.
I-29
The increase in net sales in both segments for the first half of fiscal 2022 reflects increased demand for both our mattress and residential upholstery fabric products during the first quarter, as compared to the prior-year first quarter, which was negatively affected by disruption from the COVID-19 pandemic. It also reflects our ability to meet this increased demand and respond quickly to the needs of our customers through our flexible global platform and the support of our long-term supplier relationships. The increase in net sales for the first half of fiscal 2022 was supplemented by a price increase that was effective during the first half of fiscal 2022 for both divisions, as well as a surcharge that was implemented and effective during most of the second quarter for both divisions, which collectively increased our consolidated net sales by approximately 2.8% for the six-month period.
See the Segment Analysis section below for further details.
Income Before Income Taxes
Overall, our income before income taxes for the second quarter of fiscal 2022 was $1.3 million, compared with $3.9 million for the prior-year period, while income before income taxes for the first six months of fiscal 2022 was $4.5 million, compared with $5.4 million for the prior-year period.
Operating performance for the second quarter of fiscal 2022 was materially affected by lower sales as compared with the same period a year ago, as well as higher freight, raw material, and labor costs; unfavorable foreign exchange rate fluctuations associated with our operations in China and Canada; start-up costs for the new Haiti facility for our upholstery fabrics segment; and operating inefficiencies due to labor shortages in the U.S. and Canada for our mattress fabrics segment. Operating performance for the first half of fiscal 2022 was also materially pressured by the same factors, but partially offset by higher sales for the six-month period, as compared with the same period a year ago.
See the Segment Analysis section below for further details.
Income Taxes
We recorded income tax expense of $1.3 million, or 30.3% of income before income taxes, for the six-month period ending October 31, 2021, compared with income tax expense of $5.9 million, or 109.5% of income before income taxes, for the prior-year period. Our effective income tax rate during the first half of fiscal 2022 was negatively affected, but not nearly to the extent as in the first half of fiscal 2021, by the mix of taxable income that is mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. This is due mostly to higher annual forecasted taxable income from our U.S. operations as of the end of the second quarter of fiscal 2022, compared with lower annual forecasted taxable from our U.S. operations as of the end of the second quarter of fiscal 2021.
Income tax expense during the first half of fiscal 2021 was also affected by a $4.2 million net income tax charge, which consisted of a $7.7 million non-cash income tax charge to record a full valuation allowance against the company’s U.S. net deferred income tax assets, partially offset by a $3.5 million non-cash income tax benefit that re-established certain U.S. federal net operating loss carryforwards in connection with U.S. Treasury regulations regarding the Global Intangible Low Taxed Income (“GILTI”) tax provisions of the Tax Cuts and Jobs Act of 2017. The $7.7 million non-cash income tax charge represents $7.0 million to provide for a full valuation allowance against our U.S. net deferred income tax assets that existed at the beginning of fiscal 2021 and $713,000 to provide for a full valuation allowance against the U.S. income tax loss carryforward that originated during fiscal 2021.
Refer to Note 13 of the consolidated financial statements for further details regarding our provision for income taxes.
Liquidity
As of October 31, 2021, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively “cash and investments”) totaled $36.6 million compared with $46.9 million as of May 2, 2021.
The decrease in our cash and investments from the end of fiscal 2021 was mostly due to (i) $3.9 million of capital expenditures primarily related to our mattress fabrics segment, our innovation campus located in downtown High Point, NC, and equipment associated with information technology, (ii) cash payments totaling $2.7 million for regular quarterly dividend payments to shareholders, (iii) common stock repurchases totaling $1.8 million, and (iv) net cash used in operating activities totaling $1.3 million.
Our net cash used in operating activities was $1.3 million during the first half of fiscal 2022 compared with net cash provided by operating activities of $22.7 million during the first half of fiscal 2021. This difference was mostly due to (i) a net increase in
I-30
cash that was generated during the first half of fiscal 2021 due to a significant surge in customer demand as a result of the focus-on-the-home trend that occurred as businesses began to re-open coming out of pandemic-related closures, which surge did not recur during the first half of fiscal 2022; (ii) a decrease in accounts payable related to our return to normal credit terms with our vendors, as opposed to the extended terms previously granted in response to the COVID-19 pandemic; (iii) an increase in inventory to support our customers by accommodating their need to slow order uptake due to their supply chain constraints for non-fabric components, as well an increase in inventory purchases to strategically get ahead of anticipated increases in raw material costs and improve our in-stock position in anticipation of customer demand ahead of the upcoming Chinese New Year holiday; (iv) a decrease in accrued expenses primarily due to annual incentive bonus compensation paid during the first quarter of fiscal 2022; (v) $1.4 million in payments for the new building lease and start-up expenses associated our upholstery fabrics cut and sew operation located in Haiti; (vi) an increase in income tax payments mostly related to U.S. Alternative Minimum Tax credit refunds totaling $1.5 million received during fiscal 2021 that will not recur during fiscal 2022; partially offset by (vii) a decrease in accounts receivable related to our customers’ return to normal credit terms, rather than the extended terms previously granted in response to the COVID-19 pandemic.
As of October 31, 2021, there were no outstanding borrowings under our lines of credit.
Dividend Program
On December 1, 2021, our board of directors approved a quarterly cash dividend of $0.115 per share, or $0.46 per share on an annualized basis. This payment will be made on January 19, 2022, to shareholders of record as of January 11, 2022.
During the first half of fiscal 2022, dividend payments totaled $2.7 million, which represented quarterly dividend payments of $
Common Stock Repurchases
In March 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 half of fiscal 2022, we repurchased 121,688 shares of our common stock at a cost of $1.8 million. As a result, as of October 31, 2021, we had $3.2 million available for additional repurchases of our common stock.
During the first half of fiscal 2021, we did not repurchase any shares of our common stock.
Segment Analysis
Mattress Fabrics Segment
|
|
Three Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
Change |
|
|||
Net sales |
|
$ |
40,883 |
|
|
$ |
40,030 |
|
|
2.1% |
|
|
Gross profit |
|
|
6,146 |
|
|
|
7,584 |
|
|
(19.0)% |
|
|
Gross profit margin |
|
|
15.0 |
% |
|
|
18.9 |
% |
|
(390)bp |
|
|
Selling, general, and administrative expenses |
|
|
3,007 |
|
|
|
3,202 |
|
|
(6.1)% |
|
|
Income from operations |
|
|
3,139 |
|
|
|
4,382 |
|
|
(28.4)% |
|
|
Operating margin |
|
|
7.7 |
% |
|
|
10.9 |
% |
|
(320)bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
Change |
|
|||
Net sales |
|
$ |
83,941 |
|
|
$ |
76,133 |
|
|
10.3% |
|
|
Gross profit |
|
|
12,941 |
|
|
|
12,191 |
|
|
6.2% |
|
|
Gross profit margin |
|
|
15.4 |
% |
|
|
16.0 |
% |
|
(60)bp |
|
|
Selling, general, and administrative expenses |
|
|
6,191 |
|
|
|
5,964 |
|
|
3.8% |
|
|
Income from operations |
|
|
6,750 |
|
|
|
6,227 |
|
|
8.4% |
|
|
Operating margin |
|
|
8.0 |
% |
|
|
8.2 |
% |
|
(20)bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
I-31
Net Sales
Mattress fabrics sales increased 2.1% in the second quarter of fiscal 2022, as compared to the prior-year period. Mattress fabrics sales increased 10.3% for the first half of fiscal 2022, as compared to the first half of fiscal 2021, which was adversely affected during the early months by disruption from the COVID-19 pandemic.
The increase in mattress fabrics net sales for the second quarter reflects continued solid demand for our products compared to strong sales during the prior-year period, although sales were affected somewhat during the second quarter by our customers’ supply chain constraints for non-fabric components and their existing inventory levels for mattress fabrics and covers. It also reflects a price increase that was in effect throughout the quarter, as well as a surcharge that was implemented during the quarter, which together increased net sales for the division by approximately 4.6% for the quarter.
During the quarter, we relied on our product-driven strategy with a focus on design creativity and innovation, supported by the utilization of our flexible, global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey, which enabled us to support current demand levels and serve the needs of our mattress fabrics and cover customers. Demand trends for sewn mattress covers were negatively affected by our customers’ supply chain constraints and existing levels of cover inventory. However, we continue to believe our on-shore, near-shore, and off-shore supply chain strategy, as well as our fabric-to-cover model, remains a preferred platform for our customers and continues to support our business.
The increase in mattress fabrics net sales for the first half of fiscal 2022 reflects an increase in demand primarily during the first quarter, as compared to the prior-year first quarter, which was negatively affected by disruption from the COVID-19 pandemic. This sales increase was also supplemented by a price increase that was effective throughout the first half of fiscal 2022, as well as a surcharge that was implemented and in effect during much of the second quarter, to help offset certain inflationary pressures. These pricing actions increased net sales by approximately 3.8% for the first half of fiscal 2022.
Looking ahead, we believe our market position remains solid, with strong new placements and product developments for fiscal 2023. We expect some continued near-term pressures relating to our customers’ capacity limitations due to supply chain disruption for non-fabric components, but we expect that most of these headwinds are temporary. Additionally, the impact of the COVID-19 pandemic, including the new Omicron variant, 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 decrease in mattress fabrics profitability during the second quarter, as compared to the prior-year period, was primarily due to higher freight, raw material, and labor costs; inefficiencies due to labor shortages at our facilities in the U.S. and Canada; and unfavorable foreign currency fluctuations in China and Canada. Mattress fabrics profitability for the first half of fiscal 2022 was pressured by the same factors that affected the second quarter, partially offset by higher sales for the six-month period, as compared with the same period a year ago.
Our previously implemented price increase and surcharge have helped us offset a portion of the current inflationary pressures we are facing. However, the lag in cost-price realization, along with some competitive market pressures that limit us from immediately passing on all of our cost increases, are expected to continue affecting our profitability during fiscal 2022.
We expect inflationary pressures relating to increasing labor, freight, and raw material costs, as well as ongoing foreign currency fluctuations in China and Canada, to continue over the near-term. We believe most of these headwinds are temporary and will be mitigated to some extent by the pricing actions we have already implemented, as noted above, as well as our ongoing efforts to control our internal costs, improve efficiencies, and consider additional reasonable pricing actions to mitigate and manage inflation.
CLASS International Holdings, Ltd. (“CIH”)
Effective January 1, 2017, Culp International Holdings, Ltd. (“Culp International”), a wholly-owned subsidiary of the company, entered into a joint venture agreement pursuant to which Culp International owned 50% of Class 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 of Haiti. 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.
I-32
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) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
Accounts receivable |
|
$ |
16,639 |
|
|
$ |
15,914 |
|
|
$ |
20,427 |
|
Inventory |
|
|
34,498 |
|
|
|
24,200 |
|
|
|
30,047 |
|
Property, plant & equipment |
|
|
40,243 |
|
|
|
38,818 |
|
|
|
41,264 |
|
Right of use assets |
|
|
3,838 |
|
|
|
1,186 |
|
|
|
4,278 |
|
Investment in unconsolidated joint venture |
|
|
— |
|
|
|
1,859 |
|
|
|
— |
|
|
|
$ |
95,218 |
|
|
$ |
81,977 |
|
|
$ |
96,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As of October 31, 2021, accounts receivable increased by $725,000, or 4.6%, compared with November 1, 2020. This increase reflects the slight increase in net sales during the second quarter of fiscal 2022, as compared with the second quarter of fiscal 2021.
As of October 31, 2021, accounts receivable decreased by $3.8 million, or 18.5%, compared with May 2, 2021. This decrease reflects improved cash collections during the second quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, as customers 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. In addition, this decrease reflects the decrease in net sales during the second quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021. Net sales of $40.9 million during the second quarter of fiscal 2022 decreased by $2.0 million, or 4.8%, compared with net sales of $42.9 million during the fourth quarter of fiscal 2021.
Days’ sales outstanding was 37 days for the second quarter of fiscal 2022, compared with 36 days for the second quarter of fiscal 2021 and 43 days for the fourth quarter of fiscal 2021.
Inventory
As of October 31, 2021, inventory increased by $10.3 million, or 42.6%, compared with November 1, 2020. As of October 31, 2021, inventory increased by $4.5 million, or 14.8%, compared with May 2, 2021. The increases in inventory reflects (i) support for our customers by accommodating their need to slow order uptake due to their supply chain constraints for non-fabric components, (ii) an increase in inventory purchase to strategically get ahead of anticipated increases in raw material costs, and (iii) an increase in inventory purchases to strategically improve our inventory position to support expected customer demand ahead of the upcoming Chinese New Year holiday.
Inventory turns were 4.2 for the second quarter of fiscal 2022, compared with 5.7 for the second quarter of fiscal 2021 and 4.2 for the fourth quarter of fiscal 2021.
Property, Plant, & Equipment
The $40.2 million as of October 31, 2021, represents property, plant, and equipment of $26.8 million, $12.6 million, and $836,000 located in the U.S., Canada, and Haiti, respectively. The $38.8 million as of November 1, 2020, represents property, plant, and equipment of $26.5 million and $12.3 million located in the U.S. and Canada, respectively. The $41.3 million as of May 2, 2021, represents property, plant, and equipment of $28.4 million, $12.0 million, and $855,000 located in the U.S., Canada, and Haiti, 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 $3.8 million as of October 31, 2021, represents right of use assets of $2.2 million, $1.3 million, and $309,000 located Haiti, the U.S., and Canada, respectively. The $1.2 million as of November 1, 2020, represents right of use assets of $696,000 and $490,000 located in the U.S. and Canada., respectively. The $4.3 million as of May 2, 2021, represents right of use assets of $2.4 million, $1.4 million, and $400,000 located in Haiti, the U.S., and Canada, respectively.
I-33
As of October 31, 2021, and May 2, 2021, right of use assets have increased significantly from November 1, 2020. This increase primarily represents (i) $2.5 million that related to building leases acquired from CIH during the fourth quarter of fiscal 2021; (ii) $879,000 that related to the renewal and amendment of a building lease located in the U.S. associated with our mattress cover operation during the fourth quarter of fiscal 2021; partially offset by (iii) rent expense associated with executed lease agreements.
Investment in Unconsolidated Joint Venture
As of November 1, 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”. Effective February 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 Segment
Net Sales
|
|
Three Months Ended |
|
|
|
|
|
|||||||||||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
|
|
|
|
November 1, 2020 |
|
|
|
|
|
|
% Change |
|
|||
Non-U.S. Produced |
|
$ |
31,306 |
|
|
|
93 |
% |
|
$ |
34,473 |
|
|
|
94 |
% |
|
|
(9.2 |
)% |
U.S. Produced |
|
|
2,372 |
|
|
|
7 |
% |
|
|
2,348 |
|
|
|
6 |
% |
|
|
1.0 |
% |
Total |
|
$ |
33,678 |
|
|
|
100 |
% |
|
$ |
36,821 |
|
|
|
100 |
% |
|
|
(8.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|||||||||||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
|
|
|
|
November 1, 2020 |
|
|
|
|
|
|
% Change |
|
|||
Non-U.S. Produced |
|
$ |
69,528 |
|
|
|
94 |
% |
|
$ |
60,484 |
|
|
|
93 |
% |
|
|
15.0 |
% |
U.S. Produced |
|
|
4,139 |
|
|
|
6 |
% |
|
|
4,698 |
|
|
|
7 |
% |
|
|
(11.9 |
)% |
Total |
|
$ |
73,667 |
|
|
|
100 |
% |
|
$ |
65,182 |
|
|
|
100 |
% |
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upholstery fabrics sales decreased 8.5% in the second quarter of fiscal 2022 compared to the prior-year period. Upholstery fabric sales increased 13.0% for the first half of fiscal 2022, as compared to the first half of fiscal 2021, which was adversely affected during the early months by disruption from the COVID-19 pandemic.
The decrease in upholstery fabrics net sales for the second quarter was primarily driven by lower sales in our residential business due to COVID-19-related shutdowns of our sourcing partners and customers in Vietnam throughout most of the quarter. Residential sales were also pressured by our customers’ supply chain constraints for non-fabric components and labor shortages at their U.S. facilities, which significantly reduced our ability to ship prepared fabric orders. The decrease in sales was partially offset by a price increase and freight surcharge that were in effect during the quarter, which increased net sales for the division by approximately 2.3%.
Despite the headwinds in our residential business, we were encouraged by the recovery in our hospitality business during the second quarter, led by our hospitality/contract fabric business. We also saw a measurable improvement in our Read business during the last month of the quarter. We are pleased the shutdowns that affected our Vietnam customers and sourcing partners during the quarter have now been lifted, and we have resumed shipping at normalized capacity. Additionally, we now expect to begin production at our new facility in Haiti during the third quarter, which will expand our capacity for cut and sewn upholstery kits.
The increase in upholstery fabrics net sales for the first half of fiscal 2022 reflects a significant increase in demand for our residential upholstery business during the first quarter, as compared to the first quarter of fiscal 2021, partially offset by lower sales for Read 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 half of fiscal 2022 also reflects a price increase that was effective during the period on products sold in the U.S. to help offset unfavorable foreign currency exchange rate fluctuations associated with our operations in China, as well as a freight surcharge implemented during the second quarter. Together, this price increase and freight surcharge accounted for approximately 1.7% of net sales for the first half of fiscal 2022.
I-34
Looking ahead, there are lingering near-term challenges related to our customers’ supply chain constraints and existing levels of fabric inventory for our residential business, which may temporarily pressure our business during the remainder of fiscal 2022. Also, while we believe demand trends remain favorable for the home furnishings industry, there is an expected slowdown in new business from the peak experienced during the post-COVID stay-at-home surge. Despite the headwinds, we believe our product-driven strategy and innovative product offerings, including our popular portfolio of LiveSmart® performance products, as well as our flexible Asian platform, our long-term supplier relationships, and our expanded capacity in Haiti, will benefit us as we navigate these challenges.
Notably, the ongoing economic and health effects of the COVID-19 pandemic, including the new Omicron variant, 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 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) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
Change |
|
|||
Gross profit |
|
|
4,581 |
|
|
|
6,677 |
|
|
(31.4)% |
|
|
Gross profit margin |
|
|
13.6 |
% |
|
|
18.1 |
% |
|
(450)bp |
|
|
Selling, general, and administrative expenses |
|
|
3,553 |
|
|
|
3,390 |
|
|
4.8% |
|
|
Income from operations |
|
|
1,028 |
|
|
|
3,287 |
|
|
(68.7)% |
|
|
Operating margin |
|
|
3.1 |
% |
|
|
8.9 |
% |
|
(580)bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
Change |
|
|||
Gross profit |
|
|
10,285 |
|
|
|
11,971 |
|
|
(14.1)% |
|
|
Gross profit margin |
|
|
14.0 |
% |
|
|
18.4 |
% |
|
(440)bp |
|
|
Selling, general, and administrative expenses |
|
|
6,990 |
|
|
|
6,570 |
|
|
6.4% |
|
|
Income from operations |
|
|
3,295 |
|
|
|
5,401 |
|
|
(39.0)% |
|
|
Operating margin |
|
|
4.5 |
% |
|
|
8.3 |
% |
|
(380)bp |
|
The decrease in upholstery fabrics profitability for the second quarter and the first half of fiscal 2022, as compared to the applicable prior-year periods, primarily reflects lower sales in our residential business during the second quarter, as well as higher freight and material costs, start-up costs for our new Haiti cut and sew facility, unfavorable foreign currency fluctuations associated with our operations in China, lower sales from Read, and higher selling, general, and administrative expenses. The increase in selling, general, and administrative expenses during the second quarter and first half of fiscal 2022, as compared to the prior-year periods, is mostly due to higher salary, marketing, and design expenses, partially offset by lower incentive compensation expense reflecting unfavorable financial results in relation to pre-established performance targets and lower sales commissions reflecting the decrease in net sales.
Looking ahead, we expect that further pressures relating to rising freight costs, material prices, and U.S. labor costs, as well as ongoing China foreign exchange rate fluctuations and additional start-up costs for our new facility in Haiti, may temporarily pressure our profitability during the remainder of fiscal 2022. Our previously implemented price increase and freight surcharge have helped offset foreign currency exchange rate fluctuations and rising freight costs to some extent, as intended, but due to the continued rapid rise in operating and material costs, we are instituting an additional price increase during the third quarter to help cover a portion of these inflationary pressures.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
Accounts receivable |
|
$ |
15,677 |
|
|
$ |
17,046 |
|
|
$ |
17,299 |
|
Inventory |
|
|
29,283 |
|
|
|
23,526 |
|
|
|
25,870 |
|
Property, plant & equipment |
|
|
2,110 |
|
|
|
2,014 |
|
|
|
1,925 |
|
Right of use assets |
|
|
5,472 |
|
|
|
3,269 |
|
|
|
5,945 |
|
|
|
$ |
52,542 |
|
|
$ |
45,855 |
|
|
$ |
51,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
I-35
Accounts Receivable
As of October 31, 2021, accounts receivable decreased by $1.4 million, or 8.0%, compared with November 1, 2020. This decrease primarily reflects the decrease in net sales during the second quarter of fiscal 2022 compared with the second quarter of fiscal 2021, as noted above.
As of October 31, 2021, accounts receivable decreased by $1.6 million, or 9.4%, as compared with May 2, 2021. This decrease reflects the decrease in net sales during the second quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021. Net sales were $33.7 million during the second quarter of fiscal 2022, a decrease of $2.4 million, or 6.8%, compared with net sales of $36.1 million during the fourth quarter of fiscal 2021.
Days’ sales outstanding was 41 days during the second quarter of fiscal 2022, compared with 41 days during the second quarter of fiscal 2021 and 42 days during the fourth quarter of fiscal 2021.
Inventory
As of October 31, 2021, inventory increased by $5.8 million, or 24.5%, compared with November 1, 2020. As of October 31, 2021, inventory increased by $3.4 million, or 13.2%, compared with May 2, 2021. The increases in inventory reflects (i) support for our customers by accommodating their need to slow order uptake due to their supply chain constraints for non-fabric components, (ii) an increase in inventory purchase to strategically get ahead of anticipated increases in material costs, and (iii) an increase in inventory purchases to strategically improve our inventory position to support expected customer demand ahead of the upcoming Chinese New Year holiday.
Inventory turns were 4.3 for the second quarter of fiscal 2022, compared with 5.3 for the second quarter of fiscal 2021 and 4.6 for the fourth quarter of fiscal 2021.
Property, Plant, & Equipment
The $2.1 million as of October 31, 2021, represents property, plant, and equipment of $1.1 million, $798,000, and $242,000 located in the U.S., China, and Haiti, respectively. The $2.0 million as of November 1, 2020, represents property, plant, and equipment of $1.1 million and $904,000 located in the U.S. and China, respectively. The $1.9 million as of May 2, 2021, represents property, plant, and equipment of $1.1 million and $850,000 located in the U.S. and China, 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 $5.5 million as of October 31, 2021, represents right of use assets of $4.3 million and $1.2 million located in China and the U.S., respectively. The $3.3 million as of November 1, 2020, represents right of use assets of $2.7 million and $561,000 located in China and the U.S., respectively. The $5.9 million as of May 2, 2021, represents right of use assets of $5.0 million and $952,000 located in China and the U.S., respectively.
Effective April 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 of Haiti. The lease term is now expected to commence during the third 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) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
% Change |
|
|||
SG&A expenses |
|
$ |
9,087 |
|
|
$ |
9,743 |
|
|
|
(6.7 |
)% |
Interest income |
|
|
59 |
|
|
|
59 |
|
|
|
0.0 |
% |
Other expense |
|
|
404 |
|
|
|
680 |
|
|
|
(40.6 |
)% |
|
|
Six Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
% Change |
|
|||
SG&A expenses |
|
$ |
18,268 |
|
|
$ |
17,761 |
|
|
|
2.9 |
% |
Interest expense |
|
|
— |
|
|
|
51 |
|
|
|
(100.0 |
)% |
Interest income |
|
|
132 |
|
|
|
117 |
|
|
|
12.8 |
% |
Other expense |
|
|
640 |
|
|
|
1,046 |
|
|
|
(38.8 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
I-36
Selling, General, and Administrative Expenses
The decrease in selling, general, and administrative expenses during the second quarter of fiscal 2022, as compared with the second quarter of fiscal 2021, is mostly due to (i) lower incentive compensation expense reflecting unfavorable financial results in relation to pre-established performance targets and (ii) lower sales commissions reflecting the decrease in net sales, partially offset by (iii) higher salary, marketing, and design expenses associated with our upholstery fabrics segment.
The increase in selling, general, and administrative expenses during the first half of fiscal 2022, as compared with the first half of fiscal 2021, is due mostly to (i) 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, and which trend did not recur during the first half of fiscal 2022, and (ii) higher salary, marketing, and design expenses associated with our upholstery fabrics segment, partially offset by (iii) lower incentive compensation expense reflecting unfavorable financial results in relation to pre-established performance targets.
Interest Expense
During the first half of fiscal 2022, we did not incur any interest expense, as we did not have any borrowings outstanding during such time.
During the first half 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 mostly reflects investment income 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-grade U.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.
Other Expense
In accordance with ASC Topic 830 Foreign Currency Matters, management assesses certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate. Based on our assessments, the U.S. dollar was determined to be the functional currency of our operations located in China and Canada.
The decreases in other expense during the three-month and six-month periods of fiscal 2022 compared with the three-month and six-month periods of fiscal 2021 were due mostly to more favorable foreign exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts. During the three-month and six-month periods of fiscal 2022, we reported foreign exchange rate losses associated with our operations located in China of $151,000 and $160,000, respectively. During the three-month and six-month periods of fiscal 2021, we reported foreign exchange rate losses associated with our operations located in China of $551,000 and $690,000, respectively.
In addition, the $160,000 and $690,000 foreign exchange losses for the six-month periods of fiscal 2022 and 2021, respectively, were partially offset by income tax benefits totaling $72,000 and $650,000 for the six-month periods of fiscal 2022 and 2021, respectively. These income tax benefits were associated with income tax deductible foreign exchange rate losses based on more unfavorable foreign exchange rates applied against balance sheet accounts denominated in U.S. dollars to determine the corresponding Chinese Renminbi local currency amounts. The foreign exchange rate losses incurred on our U.S. dollar denominated balance sheet accounts associated with our operations located in China are income tax deductible as we incur income tax expense and pay income taxes in China’s local currency.
See the Income Taxes – Effective Income Tax Rate & Income Tax Expense section below for further details on the income tax effects of the foreign exchange rate losses (gains) associated with our China operations on our consolidated effective income tax rate for the six-month periods ended October 31, 2021 and November 1, 2020, respectively.
Income Taxes
Effective Income Tax Rate & Income Tax Expense
We recorded income tax expense of $1.3 million, or 30.3% of income before income taxes, for the six-month period ending October 31, 2021, compared with income tax expense of $5.9 million, or 109.5% of income before income taxes, for the six-month period ending November 1, 2020.
I-37
Our effective income tax rates for the six-month periods ended October 31, 2021, and November 1, 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 six-month periods ended October 31, 2021, and November 1, 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 our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it is determined that no income 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 our U.S. operations and foreign subsidiaries located in China, Canada, and Haiti versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar
The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the six-month periods ending October 31, 2021, and November 1, 2020:
|
|
Six Months Ended |
|
|||||
|
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
U.S. federal income tax rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
U.S. valuation allowance |
|
|
(4.5 |
) |
|
|
141.6 |
|
U.S. income tax law change |
|
|
— |
|
|
|
(65.1 |
) |
Withholding taxes associated with foreign jurisdictions |
|
|
6.1 |
|
|
|
8.4 |
|
Foreign income tax rate differential |
|
|
3.9 |
|
|
|
6.6 |
|
Global Intangible Low Taxed Income Tax ("GILTI") |
|
|
3.3 |
|
|
|
— |
|
Tax effects of deductible foreign exchange rate losses |
|
|
(0.4 |
) |
|
|
(4.0 |
) |
Other |
|
|
0.9 |
|
|
|
1.0 |
|
|
|
|
30.3 |
% |
|
|
109.5 |
% |
Our effective income tax rate during the first half of fiscal 2022 was negatively affected, but not nearly to the extent as in the first half of fiscal 2021, by the mix of taxable income that is mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. This is due mostly to higher annual forecasted taxable income from our U.S. operations as of the end of the second quarter of fiscal 2022, compared with lower annual forecasted taxable from our U.S. operations as of the end of the second quarter of fiscal 2021.
GILTI
Fiscal 2021
Effective July 20, 2020, the U.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 the U.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 certain U.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 and the six-month year-to-date period 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 second quarter of fiscal 2022, we believe we will not meet the requirements for the GILTI High-Tax exception regarding our foreign subsidiaries located in Canada and Haiti, and therefore, will be subject to GILTI tax for the 2022 fiscal year.
Based on our assessment associated with our operation located in Canada, 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-38
Based on our assessment associated with our operations located in Haiti, 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 in Haiti 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 in Haiti.
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 the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income taxes as of the end of the first quarter of fiscal 2021. GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and 2020 that offset our U.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 cumulative U.S. taxable losses during our last two fiscal years, and we expected at the time of this assessment that our history of U.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 our U.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 our U.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 and the six-month year-to-date period of fiscal 2021.
As of October 31, 2021, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was still required. Based on our assessment, we determined we still have a recent history of cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the fiscal years 2020 and 2021. In addition, as of October 31, 2021, we are currently expecting U.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 the U.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 our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.
Based on our assessments as of October 31, 2021, November 1, 2020, and May 2, 2021, valuation allowances against our net deferred income taxes pertain to the following:
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
U.S. federal and state net deferred income tax assets |
|
$ |
9,155 |
|
|
|
8,543 |
|
|
|
9,344 |
|
U.S. capital loss carryforward |
|
|
2,330 |
|
|
|
2,281 |
|
|
|
2,330 |
|
|
|
$ |
11,485 |
|
|
|
10,824 |
|
|
|
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 October 31, 2021, November 1, 2020, and May 2, 2021, respectively.
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 October 31, 2021, November 1, 2020, and May 2, 2021, respectively.
I-39
Income Taxes Paid (Refunded)
The following table sets forth taxes paid (refunded) by jurisdiction:
|
|
Six Months Ended |
|
|||||
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
||
United States Federal - Alternative Minimum Tax (AMT) credit refunds (1) |
|
$ |
— |
|
|
$ |
(1,509 |
) |
United States Transition Tax Payment |
|
$ |
266 |
|
|
$ |
227 |
|
China - Income Taxes |
|
|
921 |
|
|
|
349 |
|
China - Withholding Taxes Associated with Earnings and Profits Distribution to U.S. Parent |
|
|
487 |
|
|
|
— |
|
Canada - Income Taxes |
|
|
427 |
|
|
|
377 |
|
|
|
$ |
2,101 |
|
|
$ |
(556 |
) |
(1) In accordance with the provisions of the TCJA, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable. We received our $1.5 million refundable balance in two separate installments totaling $746,000 and $764,000 during the first and second quarters of fiscal 2021, respectively.
Future Liquidity
We are currently projecting annual cash income tax payments of approximately $3.6 million for fiscal 2022, compared with $3.0 million for fiscal 2021. The increase mostly represents U.S. AMT credit refunds totaling $1.5 million that were received during fiscal 2021 that will not recur during fiscal 2022. This increase is expected to be partially offset by a significant decrease in income tax payments associated with our Canadian operation resulting from several significant capital projects that will be placed into service during fiscal 2022 that will be eligible for a significant amount of deductible accelerated depreciation. 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 in China and Canada versus annual projections, changes in the foreign exchange rates associated with our China operations in relation to the U.S. dollar, as well as the timing of when significant capital projects will be placed into service, which determines the deductibility of accelerated depreciation.
Additionally, we currently expect to pay minimal income taxes in the U.S. on a cash basis during fiscal 2022 due to: (i) the immediate expensing of U.S. capital expenditures, and (ii) our existing U.S. federal net operating loss carryforwards totaling $19.4 million.
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 $17.0 million and short-term investments (available for sale) of $9.7 million as of October 31, 2021, cash flow from operations, and the current availability ($38 million) under our revolving credit lines will be sufficient to fund our foreseeable business needs and our contractual obligations.
As of October 31, 2021, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively “cash and investments”) totaled $36.6 million compared with $46.9 million as of May 2, 2021.
The decrease in our cash and investments from the end of fiscal 2021 was mostly due to (i) $3.9 million of capital expenditures primarily related to our mattress fabrics segment, our innovation campus located in downtown High Point, NC, and equipment associated with information technology, (ii) cash payments totaling $2.7 million for regular quarterly dividend payments to shareholders, (iii) common stock repurchases totaling $1.8 million, and (iv) net cash used in operating activities totaling $1.3 million.
Our net cash used in operating activities was $1.3 million during the first half of fiscal 2022, compared with net cash provided by operating activities of $22.7 million during the first half of fiscal 2021. This difference was mostly due to a net increase in cash generated by a significant surge in customer demand as a result of the focus-on-the-home trend that occurred as businesses began to re-open coming out of pandemic-related closures, which surge did not recur during the first half of fiscal 2022; (ii) a decrease in accounts payable related to our return to normal credit terms with our vendors, as opposed to the extended terms previously
I-40
granted in response to the COVID-19 pandemic; (iii) an increase in inventory to support our customers by accommodating their need to slow order uptake due to their supply chain constraints for non-fabric components, as well as an increase in inventory purchases to strategically get ahead of anticipated increases in raw material costs and improve our in-stock position in anticipation of customer demand ahead of the upcoming Chinese New Year holiday; (iv) a decrease in accrued expenses primarily due to annual incentive bonus compensation paid during the first quarter of fiscal 2022; (v) $1.4 million in payments for the new building lease and start-up expenses associated our upholstery cut and sew operation located in Haiti; (vi) an increase in income tax payments mostly related to U.S. Alternative Minimum Tax credit refunds totaling $1.5 million received during fiscal 2021 that will not recur during fiscal 2022; partially offset by (vii) a decrease in accounts receivable related to our customers’ return to normal credit terms, rather than the extended terms previously granted in response to the COVID-19 pandemic.
As of October 31, 2021, there were no outstanding borrowings under our lines of credit.
The income taxes we pay also affects our liquidity. See the section titled “Income Taxes Paid” of this Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION section for further details.
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. Looking ahead, we expect our cash liquidity to be affected by strategic investments in working capital, planned capital expenditures, and investments in our operations located in Haiti, with a significant portion of this spending occurring during the second half of fiscal 2022.
By Geographic Area
A summary of our cash and investments by geographic area follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
October 31, 2021 |
|
|
November 1, 2020 |
|
|
May 2, 2021 |
|
|||
United States |
|
$ |
25,906 |
|
|
$ |
49,288 |
|
|
$ |
34,465 |
|
China |
|
|
9,101 |
|
|
|
5,778 |
|
|
|
10,635 |
|
Canada |
|
|
967 |
|
|
|
1,439 |
|
|
|
1,525 |
|
Haiti |
|
|
598 |
|
|
|
— |
|
|
|
220 |
|
Cayman Islands |
|
|
10 |
|
|
|
9 |
|
|
|
8 |
|
|
|
$ |
36,582 |
|
|
$ |
56,514 |
|
|
$ |
46,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Repurchase Program
In March 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 half of fiscal 2022, we repurchased 121,688 shares of our common stock at a cost of $1.8 million. As a result, as of October 31, 2021, we had $3.2 million available for additional repurchases of our common stock.
During the first half of fiscal 2021, we did not repurchase any shares of our common stock.
Dividend Program
On December 1, 2021, our board of directors approved a quarterly cash dividend of $0.115 per share. This payment will be made on January 19, 2022, to shareholders of record as of January 11, 2022.
During the first half of fiscal 2022, dividend payments totaled $2.7 million, which represented quarterly dividend payments of $
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.
I-41
Working Capital
Operating Working Capital
Operating working capital (accounts receivable and inventories, less accounts payable-trade, accounts payable-capital expenditures, and deferred revenue) was $54.7 million as of October 31, 2021, compared with $42.0 million as of November 1, 2020, and $50.2 million as of May 2, 2021. Operating working capital turnover was 6.5 during the second quarter of fiscal 2022, compared with 5.3 during the second quarter of fiscal 2021 and 6.4 during the fourth quarter of fiscal 2021.
Accounts Receivable
Accounts receivable were $32.3 million as of October 31, 2021, a decrease of $644,000, or 2.0%, compared with $33.0 million as of November 1, 2020. This decrease reflects the 3.0% decrease in net sales during the second quarter of fiscal 2022 compared with the second quarter of fiscal 2021.
Accounts receivable as of October 31, 2021, decreased $5.4 million, or 14.3%, compared with $37.7 million as of May 2, 2021. This decrease reflects improved cash collections during the second quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, as customers returned to making payments based on normal credit terms, as opposed to extended terms previously granted in response to the COVID-19 pandemic. In addition, this decrease reflects the decrease in net sales during the second quarter of fiscal 2022 as compared with the fourth quarter of fiscal 2021. Net sales of $74.6 million during the second quarter of fiscal 2022 decreased by $4.5 million, or 5.7%, as compared with net sales of $79.1 million during the fourth quarter of fiscal 2021.
Days’ sales outstanding was 39 days for the second quarter of fiscal 2022, compared with 39 days for the second quarter of fiscal 2021 and 43 days for the fourth quarter of fiscal 2021.
Inventory
Inventory was $63.8 million as of October 31, 2021 an increase of $16.1 million, or 33.6%, compared $47.7 million as of November 1, 2020. Inventory was $63.8 million as of October 31, 2021 an increase of $7.9 million, or 14.1%, compared $55.9 million as of November 1, 2020. The increases in inventory reflect an increase in inventory purchases to (i) support our customers and accommodate their need to slow order uptake due to their supply chain constraints for non-fabric components, (ii) strategically get ahead of anticipated increases in raw material costs, and (iii) strategically improve our in-stock position in anticipation of customer demand ahead of the upcoming Chinese New Year holiday.
Inventory turns were 4.2 for the second quarter of fiscal 2022, compared with 5.6 for the second quarter of fiscal 2021 and 4.8 for the fourth quarter of fiscal 2021.
Accounts Payable
Accounts payable- trade was $40.5 million as of October 31, 2021, an increase of $2.3 million, or 6.0%, compared with $38.2 million as of November 1, 2020. The increase in accounts payable-trade reflects the increase in inventory purchases noted above that were partially offset by a decrease related to our return to normal credit terms with our vendors as opposed to the extended terms previously granted in response to the COVID-19 pandemic
Accounts payable- trade was $40.5 million as of October 31, 2021, a decrease of $2.0 million, or 4.7%, compared with $42.5 million as of May 2, 2021. The decrease reflects the return to normal credit terms with our vendors as opposed to the extended terms previously granted in response to the COVID-19 pandemic, as well as the decrease in net sales during the second quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021. Net sales of $74.6 million during the second quarter of fiscal 2022 decreased by $4.5 million, or 5.7%, as compared to net sales of $79.1 million during the fourth quarter of fiscal 2021. These decreases were partially offset by the increased inventory purchases noted above.
Financing Arrangements
Currently, we have revolving credit agreements with banks for our U.S parent company and our operations located in China. 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 our U.S. parent company to take advantage of the TCJA, which allows a U.S. corporation a 100% dividend received income tax deduction on earnings and profits repatriated to the U.S. from 10% owned foreign corporations.
As of October 31, 2021, we did not have any outstanding borrowings associated with our revolving credit agreements.
I-42
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of October 31, 2021, we complied with these financial covenants.
Refer to Note 9 of the consolidated financial statements for further details of our revolving credit agreements.
Capital Expenditures and Depreciation
Overall
Capital expenditures on a cash basis were $3.9 million during the first half of fiscal 2022, compared with $2.0 million for the same period a year ago. Capital expenditures mostly related to our mattress fabrics segment and our innovation campus located in downtown High Point, NC.
Depreciation expense was $3.5 million during both the first half of fiscal 2022 and the first half of fiscal 2021. 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 $10.3 million to $10.7 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 of October 31, 2021, we had total amounts due regarding capital expenditures totaling $176,000 that pertained to outstanding vendor invoices, none of which were financed. The total amount outstanding of $176,000 is required to be paid based on normal credit terms.
Purchase Commitments – Capital Expenditures
As of October 31, 2021, we had open purchase commitments for the acquisition of equipment for our mattress fabrics segment totaling $810,000.
Critical Accounting Policies and Recent Accounting Developments
As of October 31, 2021, there were no changes in our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended May 2, 2021.
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 ended May 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 May 2, 2021.
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.
I-43
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates with regards to our revolving credit agreements.
Our U.S. revolving credit agreement requires interest to be charged at a rate (applicable interest rate of 1.74% as of October 31, 2021) calculated using a variable spread over LIBOR based on the company’s ratio of debt to EBITDA as defined in the U.S. revolving credit agreement. As of October 31, 2021, there were no outstanding borrowings under our U.S. revolving credit agreement. Our revolving credit lines associated with our operations located in China bear interest at a rate determined by the Chinese government at the time of borrowing. As of October 31, 2021, there were no outstanding borrowings under our revolving credit agreements associated with our operations located in China.
We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in Canada and China. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currencies of our subsidiaries domiciled in Canada and China. However, there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the United States dollar as their functional currency. A substantial portion of the company’s imports purchased outside the United States are denominated in U.S. dollars. A 10% change in the above exchange rates as of October 31, 2021, would not have materially affected our results of operations or financial position.
ITEM 4.CONTROLS AND PROCEDURES
As of October 31, 2021, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of such date, in all material respects, to ensure that information required to be disclosed in the reports filed by us and submitted under the Exchange Act, is recorded, processed, summarized, and reported as and when required, and that these disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosure.
During the quarter ended October 31, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II – Other Information
Item 1. |
Legal Proceedings |
There have not been any material changes to our legal proceedings during the three months ended October 31, 2021. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 16, 2021, for the fiscal year ended May 2, 2021.
Item 1A. |
Risk Factors |
There have not been any material changes to our risk factors during the three months ended October 31, 2021. Our risk factors are disclosed in Item 1A “Risk Factors” of the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 16, 2021, for the fiscal year ended May 2, 2021.
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
ISSUER PURCHASES OF EQUITY SECURITIES
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(c) |
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(d) |
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Total Number of |
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Approximate |
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(a) |
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Shares Purchased |
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Dollar Value of |
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Total |
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(b) |
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as Part of |
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Shares that May |
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Number |
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Average |
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Publicly |
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Yet Be Purchased |
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of Shares |
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Price Paid |
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Announced Plans |
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Under the Plans or |
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Period |
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Purchased |
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per Share |
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or Programs |
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Programs (1) |
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August 2, 2021 to September 5, 2021 |
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62,908 |
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$ |
14.15 |
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62,908 |
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$ |
3,386,299 |
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September 6, 2021 to October 3, 2021 |
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10,094 |
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$ |
13.69 |
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10,094 |
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$ |
3,248,094 |
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October 4, 2021 to October 31, 2021 |
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— |
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— |
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— |
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$ |
3,248,094 |
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Total |
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73,002 |
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$ |
14.09 |
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73,002 |
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$ |
3,248,094 |
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(1) |
In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. |
II-1
Item 6.Exhibits
The following exhibits are submitted as part of this report.
31.1 |
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
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32.1 |
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
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32.2 |
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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101.INS |
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Inline XBRL Instance Document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
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II-2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CULP, INC. (Registrant) |
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Date: December 10, 2021 |
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By: |
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/s/ Kenneth R. Bowling |
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Kenneth R. Bowling |
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Executive Vice President and Chief Financial Officer |
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(Authorized to sign on behalf of the registrant and also signing as principal financial officer) |
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By: |
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/s/ Thomas B. Gallagher, Jr. |
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Thomas B. Gallagher, Jr. |
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Vice President of Finance |
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(Authorized to sign on behalf of the registrant and also signing as principal accounting officer) |
II-3
Exhibit 31.1
CERTIFICATIONS
I, Robert G. Culp, IV, certify that:
1. |
I have reviewed this Form 10-Q of Culp, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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/s/ Robert G. Culp, IV |
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Robert G. Culp, IV |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
Date: December 10, 2021
Exhibit 31.2
CERTIFICATIONS
I, Kenneth R. Bowling, certify that:
1. |
I have reviewed this Form 10-Q of Culp, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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/s/ Kenneth R. Bowling |
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Kenneth R. Bowling |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
Date: December 10, 2021
Exhibit 32.1
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Culp, Inc. (the “Company”) on Form 10-Q for the period ended October 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert G. Culp, IV, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Robert G. Culp, IV |
Robert G. Culp, IV |
President and Chief Executive Officer |
December 10, 2021
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to Culp, Inc. and will be retained by Culp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Culp, Inc. (the “Company”) on Form 10-Q for the period ended October 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth R. Bowling, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Kenneth R. Bowling |
Kenneth R. Bowling |
Executive Vice President and Chief Financial Officer |
December 10, 2021
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to Culp, Inc. and will be retained by Culp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.