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)
(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. ☒
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). ☒
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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☒ |
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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 March 8, 2023:
Par Value: $0.05 per share
INDEX TO FORM 10-Q
For the period ended January 29, 2023
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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-3 |
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Consolidated Balance Sheets — January 29, 2023, January 30 2022, and May 1, 2022 |
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I-4 |
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Consolidated Statements of Cash Flows — Nine Months Ended January 29, 2023, and January 30, 2022 |
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I-5 |
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Consolidated Statements of Shareholders’ Equity – Nine Months Ended January 29, 2023 |
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I-6 |
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Consolidated Statements of Shareholders’ Equity – Nine Months Ended January 30, 2022 |
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I-7 |
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I-8 |
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I-31 |
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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-32 |
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Item 3. |
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I-47 |
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Item 4. |
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I-47 |
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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 |
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Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF NET LOSS
FOR THE THREE MONTHS ENDED JANUARY 29, 2023, AND JANUARY 30, 2022
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
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THREE MONTHS ENDED |
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January 29, |
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January 30, |
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2023 |
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2022 |
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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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Restructuring expense |
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— |
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(Loss) income from operations |
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Interest income |
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Other expense |
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(Loss) income before income taxes |
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( |
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Income tax expense |
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Net loss |
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( |
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Net loss per share - basic |
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$ |
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$ |
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Net 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 NET (LOSS) INCOME
FOR THE NINE MONTHS ENDED JANUARY 29, 2023, AND JANUARY 30, 2022
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
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NINE MONTHS ENDED |
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January 29, |
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January 30, |
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2023 |
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2022 |
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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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Restructuring expense |
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( |
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— |
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(Loss) income from operations |
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( |
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Interest income |
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Other expense |
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( |
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(Loss) income before income taxes |
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Income tax expense |
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( |
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Net (loss) income |
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$ |
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$ |
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Net (loss) income per share - basic |
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$ |
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$ |
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Net (loss) 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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See accompanying notes to consolidated financial statements.
I-2
CULP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE AND NINE MONTHS ENDED JANUARY 29, 2023, AND JANUARY 30, 2022
UNAUDITED
(Amounts in Thousands)
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THREE MONTHS ENDED |
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January 29, |
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January 30, |
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2023 |
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2022 |
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Net loss |
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$ |
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$ |
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Unrealized holding gain (loss) on investments, net of tax |
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Reclassification adjustment for realized loss on sale of investments |
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— |
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Comprehensive loss |
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$ |
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$ |
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NINE MONTHS ENDED |
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January 29, |
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January 30, |
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2023 |
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2022 |
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Net (loss) income |
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$ |
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$ |
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Unrealized holding loss on investments, net of tax |
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Reclassification adjustment for realized loss on investments |
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— |
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Comprehensive (loss) income |
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$ |
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$ |
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See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 29, 2023, JANUARY 30, 2022, AND MAY 1, 2022
UNAUDITED
(Amounts in Thousands)
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January 29, |
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January 30, |
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* May 1, |
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2023 |
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2022 |
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2022 |
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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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— |
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— |
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Short-term investments - available for sale |
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— |
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— |
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Short-term investments - rabbi trust |
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— |
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— |
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Accounts receivable, net |
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Inventories |
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Assets held for sale |
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— |
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— |
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Current income taxes receivable |
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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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— |
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— |
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Deferred income taxes |
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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 compensation |
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— |
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— |
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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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Shareholders' equity |
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— |
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— |
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— |
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Common stock, $ |
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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-4
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 29, 2023, AND JANUARY 30, 2022
UNAUDITED
(Amounts in Thousands)
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NINE MONTHS ENDED |
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January 29, |
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January 30, |
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2023 |
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2022 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
( |
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Adjustments to reconcile net (loss) income to net cash provided by |
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Depreciation |
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Non-cash inventory charges |
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Amortization |
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Stock-based compensation |
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Deferred income taxes |
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Realized loss from the sale of short-term investments available for sale |
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— |
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Gain sale of equipment |
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( |
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— |
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Non-cash restructuring expenses |
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— |
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Foreign currency exchange (gain) loss |
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( |
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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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( |
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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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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 provided by (used in) 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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Proceeds from the maturity of short-term investments (Held to Maturity) |
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— |
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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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— |
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Proceeds from the sale of long-term investments (rabbi trust) |
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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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Proceeds associated with lines of credit |
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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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Increase (decrease) in cash and cash equivalents |
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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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See accompanying notes to consolidated financial statements.
I-5
CULP, INC.
NINE-MONTHS ENDED JANUARY 29, 2023
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 (Loss) |
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Equity |
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Balance, May 1, 2022 * |
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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 loss |
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— |
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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 loss on investments |
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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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Common stock issued in connection with the |
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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 issued in connection with the |
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( |
) |
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— |
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— |
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— |
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Common stock surrendered in connection with |
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( |
) |
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— |
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( |
) |
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— |
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— |
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( |
) |
Fully vested common stock award |
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( |
) |
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— |
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— |
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— |
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||
Balance, July 31, 2022 |
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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 loss |
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— |
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— |
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— |
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( |
) |
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— |
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|
( |
) |
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized loss on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Common stock issued in connection with the |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock surrendered in connection with |
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Fully vested common stock award |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Balance, October 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized gain on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Fully vested common stock award |
|
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
||
Balance, January 29, 2023 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
*
See accompanying notes to consolidated financial statements
I-6
CULP, INC.
NINE-MONTHS ENDED JANUARY 30, 2022
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 |
|
|
Income |
|
|
Equity |
|
||||||
Balance, May 2, 2021 * |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized gain on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Common stock issued in connection with the |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock surrendered in connection |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Fully vested common stock award |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock repurchased |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, August 1, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
||
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized loss on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Fully vested common stock award |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Common stock repurchased |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, October 31, 2021 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
( |
) |
|
|
— |
|
|
|
( |
) |
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Unrealized loss on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Fully vested common stock award |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, January 30, 2022 |
|
|
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
* Derived from audited financial statements.
See accompanying notes to consolidated financial statements.
I-7
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 that 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 that are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 15, 2022, for the fiscal year ended May 1, 2022.
Certain amounts presented in the prior period have been reclassified to conform to the current period financial statement presentation. A non-cash charge totaling $
The company’s nine months ended January 29, 2023, and January 30, 2022, each represent 39-week periods.
2. Significant Accounting Policies
As of January 29, 2023, 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 1, 2022.
Recently Adopted Accounting Pronouncements
There were not any recently adopted accounting pronouncements during the first nine months of fiscal 2023.
Recently Issued Accounting Pronouncements
Currently, there are no new recent accounting pronouncements that are expected to have a material effect on our consolidated financial statements.
3. Allowance for Doubtful Accounts
A summary of the activity in the allowance for doubtful accounts follows:
|
|
Nine Months Ended |
|
|||||
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Provision for bad debts |
|
|
|
|
|
|
||
Write-offs, net of recoveries |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
$ |
|
||
During the nine-month periods ended January 29, 2023, and January 30, 2022, we assessed the credit risk of our customers within our accounts receivable portfolio. Our risk assessment includes the respective customers' (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. 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 $
On June 25, 2022, a significant customer and its affiliates associated with our mattress fabrics segment announced that they filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Our customer and its affiliates entered into an asset purchase agreement for the sale of substantially all of their assets and they are now conducting normal business operations. We did not record a credit loss associated with outstanding accounts receivable dated on or prior to May 1, 2022, for this customer and its affiliates, as we received payment in full regarding these invoices. We did not record a credit loss associated with outstanding accounts receivable dated after May 1, 2022, relating to products sold prior to the bankruptcy filing, as we received payment in full regarding these invoices.
On January 23, 2023, a significant customer and its affiliates associated with our mattress fabrics segment filed pre-planned voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Our customer and its affiliates are operating
I-8
as normal as a debtor-in-possession and subject to and within the provisions of the petitions as approved by the U.S. Bankruptcy Court. We did not record a credit loss with associated outstanding accounts receivable dated prior to January 29, 2023, for this customer and its affiliates, as mostly all of the outstanding receivables were paid during the fourth quarter of fiscal 2023, and based on information available to us at this time, we do not believe there is a risk of material loss on the remaining accounts receivable. We continue to sell to the customer on credit terms and are being paid in the normal course of business.
4. Revenue from Contracts with Customers
Nature of Performance Obligations
Our operations are classified into
Our primary performance obligations include the sale of mattress fabrics and upholstery fabrics, as well as the performance of customized fabrication and installation services for Read’s 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 in the Consolidated Balance Sheets as deferred revenue. Our terms are customary within the industries in which we operate and are not considered financing arrangements. There were
A summary of the activity associated with deferred revenue follows:
|
|
Nine months ended |
|
|||||
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
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 January 29, 2023:
|
|
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 January 30, 2022:
|
|
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 nine-month period ending January 29, 2023:
I-9
|
|
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 nine-month period ending January 30, 2022:
|
|
Mattress |
|
|
Upholstery |
|
|
|
|
|||
(dollars in thousands) |
|
Fabrics |
|
|
Fabrics |
|
|
Total |
|
|||
Products transferred at a point in time |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Services transferred over time |
|
|
— |
|
|
|
|
|
|
|
||
Total Net Sales |
|
$ |
|
|
$ |
|
|
$ |
|
|||
5. 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) |
|
January 29, |
|
|
January 30, |
|
|
May 1, |
|
|||
Raw materials |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Work-in-process |
|
|
|
|
|
|
|
|
|
|||
Finished goods |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Substantial and Unusual Losses Resulting from Subsequent Measurement of Inventory
We incurred non-cash inventory charges totaling $
We incurred a non-cash inventory charge of $
Mattress Fabrics Segment - Net Realizable Value
During the second quarter of fiscal 2023, our mattress fabrics segment experienced a
As of January 29, 2023, we reviewed our mattress fabrics inventory to determine if additional write-downs of inventory that were not recorded based on our policy for aged inventory were necessary. Based on this assessment, no additional write-downs of inventory to their net realizable value were recorded during the third quarter of fiscal 2023.
Based on the current unfavorable macroeconomic conditions, it is possible that the estimates used by management to determine the write down of inventory to its net realizable value could be materially different from the actual amounts or its results. These
I-10
differences could result in higher than expected inventory provisions, which could adversely affect the company's results of operations and financial condition in the near term.
6. Intangible Assets
A summary of intangible assets follows:
(dollars in thousands) |
|
January 29, |
|
|
January 30, |
|
|
May 1, |
|
|||
Tradename |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Customer relationships, net |
|
|
|
|
|
|
|
|
|
|||
Non-compete agreement, net |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Tradename
Our tradename pertains to Read, a separate reporting unit within the upholstery fabrics segment. This tradename was determined to have an indefinite useful life at the time of its acquisition, and therefore is not being amortized. However, we are required to assess this tradename annually or between annual tests if we believe indicators of impairment exist. Based on our assessment as of January 29, 2023, no indicators of impairment existed, and therefore we did
Customer Relationships
A summary of the change in the carrying amount of our customer relationships follows:
|
|
Nine months ended |
|
|||||
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Amortization expense |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
$ |
|
||
Our customer relationships are amortized on a straight-line basis over useful lives ranging from to
The gross carrying amount of our customer relationships was $
The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2023 - $
The weighted average amortization period for our customer relationships was
Non-Compete Agreement
A summary of the change in the carrying amount of our non-compete agreement follows:
|
|
Nine months ended |
|
|||||
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
Beginning balance |
|
$ |
|
|
$ |
|
||
Amortization expense |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
$ |
|
||
Our non-compete agreement is associated with a prior acquisition by our mattress fabrics segment and is amortized on a straight-line basis over the
The gross carrying amount of our non-compete agreement was $
The remaining amortization expense for the next five years and thereafter follows: FY 2023 - $
The weighted average amortization period for the non-compete agreement was
I-11
Impairment
As of January 29, 2023, management reviewed the long-lived assets associated with our mattress fabrics segment, which consisted of property, plant, and equipment, right of use assets, and finite-lived intangible assets (collectively known as the "Asset Group"), for impairment, as events and changes in circumstances occurred that indicated the carrying amount of the Asset Group may not be recoverable. During the third quarter of fiscal 2023, the decline in net sales and profitability continued for our mattress fabrics segment. During the first nine months of fiscal 2023, net sales for our mattress fabrics segment declined by
Based on the above evidence, we were required to determine the recoverability of the Asset Group, which is classified as held and used, by comparing the carrying amount of the Asset Group to the sum of the future undiscounted cash flows expected to result from its use and eventual disposition. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized for the excess of the carrying amount over the fair value (i.e., the sum of undiscounted future cash flows) of the asset. The carrying amount of the Asset Group totaled $
7. Accrued Expenses
A summary of accrued expenses follows:
(dollars in thousands) |
|
January 29, |
|
|
January 30, |
|
|
May 1, |
|
|||
Compensation, commissions and related benefits |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Other accrued expenses |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
8. Upholstery Fabrics Segment Restructuring Activities
Second Quarter of Fiscal 2023
During the second quarter of fiscal 2023, we closed our cut and sew upholstery fabrics operation located in Shanghai, China, which included the termination of an agreement to lease a building. This strategic action, along with the further use of our Asian supply chain, was our response to adjust our operating costs to better align with the declining consumer demand for cut and sewn products. As a result of this strategic action, we recorded restructuring expense and restructuring related charges during the second quarter of fiscal 2023 totaling $
Third Quarter of Fiscal 2023
Effective January 24, 2023, Culp Upholstery Fabrics Haiti, Ltd. ("CUF Haiti") entered into an agreement to terminate a lease associated with a facility located in Ouanaminthe, Haiti ("Haiti"), that was used solely for the production of cut and sewn kits associated with our upholstery fabrics segment. As a result, CUF Haiti's production of cut and sewn kits will be moved to an existing facility leased by Culp Home Fashions Haiti, Ltd. ("CHF Haiti"). Both CUF Haiti and CHF Haiti are indirect wholly-owned subsidiaries of Culp, Inc. CHF Haiti's facility, which is also located in Haiti, will now produce not only cut and sewn kits associated with our upholstery fabrics segment, but will also continue to produce cut and sewn mattress covers associated with our
I-12
mattress fabrics segment. We believe this restructuring action will reduce the costs of our operations located in Haiti to better align with the declining consumer demand for cut and sewn products by consolidating existing facilities and reducing headcount.
This restructuring action will be completed during the fourth quarter of fiscal 2023.
As mentioned above, CUF Haiti entered into an agreement to terminate the lease ("the Termination Agreement") of a facility ("right of use asset"). Pursuant to the terms of the original lease agreement (the "Original Lease"), CUF Haiti was required to pay in advance $
In connection with the Termination Agreement, CUF Haiti's right of use asset was classified as held for sale and is presented separately as assets held for sale on the Consolidated Balance Sheet as of January 29, 2023. As a result, CUF Haiti's right of use asset was recorded at its fair value of $
As a result of this strategic action, we recorded restructuring expense of $
The following summarizes our restructuring expense and restructuring related charges from both our restructuring activities noted above for the nine months ending January 29, 2023:
|
|
|
Nine Months Ended |
|
|
(dollars in thousands) |
|
|
January 29, 2023 |
|
|
Lease termination costs |
|
|
$ |
|
|
Employee termination benefits |
|
|
|
|
|
Impairment loss - leasehold improvements and equipment |
|
|
|
|
|
Loss on disposal and markdowns of inventory |
|
|
|
|
|
Other associated costs |
|
|
|
|
|
Restructuring expense and restructuring related charges (1) |
|
|
$ |
|
|
(1) Of the total $
The following summarizes the activity in accrued restructuring for the nine-month period ending January 29, 2023:
|
|
|
Employee |
|
Lease |
|
Other |
|
|
|
||||
|
|
|
Termination |
|
Termination |
|
Associated |
|
|
|
||||
(dollars in thousands) |
|
|
Benefits |
|
Costs |
|
Costs |
|
Total |
|
||||
Beginning balance |
|
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Accrual established in fiscal 2023 |
|
|
|
|
|
|
|
— |
|
|
|
|||
Expenses incurred |
|
|
|
— |
|
|
— |
|
|
|
|
|
||
Payments |
|
|
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Ending balance |
|
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
I-13
9. Lines of Credit
Revolving Credit Agreement – United States
Existing Credit Agreement
As of May 1, 2022, we had a Credit Agreement (the “Existing Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”) that provided a revolving loan commitment of $
Amended Agreement
Effective June 24, 2022, we entered into an Amended and Restated Credit Agreement (“the Amended Agreement”) with Wells Fargo. The Amended Agreement amended, restated, superseded, and served as a replacement for the Existing Credit Agreement. The Amended Agreement provided a revolving credit facility of up to $
The company’s available borrowings under the Amended Agreement were based on a borrowing base calculation using certain accounts receivable and inventory of the company, subject to certain sub-limits as defined in the Amended Agreement, to be calculated on a monthly basis. Similar to the Existing Credit Agreement, the Amended Agreement contained a sub-facility that allows the company to issue letters of credit in an aggregate amount not to exceed $
Borrowings under the Amended Agreement incurred interest at a rate calculated using a margin (the “Applicable Margin”) over the Federal Reserve Bank of New York’s secured overnight funding rate (SOFR). The Applicable Margin was set initially at
First Amendment
On August 19, 2022, we entered into a First Amendment to the Amended Agreement (“the First Amendment”) with Wells Fargo. The terms of the First Amendment amended the time period in which the financial covenant for the minimum ratio of consolidated EBITDA to consolidated net interest expense applied, such that this EBITDA to interest expense covenant does not apply during any of the four quarters of the Company’s fiscal 2023. During that time period, we were still required to maintain minimum “access to liquidity” of $
Second Amended and Restated Agreement
On January 19, 2023, Culp, Inc., as borrower (the “Company”), and Read as guarantor (the “Guarantor”), entered into a Second Amended and Restated Credit Agreement (the “ABL Credit Agreement”), by and among the Company, the Guarantor and Wells Fargo Bank, National Association, as lender (the “Lender”), to establish an asset-based revolving credit facility (the “ABL Facility”), the proceeds of which may be used to pay fees and expenses related to the ABL Facility and to provide funding for ongoing working capital and general corporate purposes. The ABL Credit Agreement amends, restates and supersedes, and serves as a replacement for, the Amended Agreement, dated as of June 24, 2022, as amended, by and between the Company and the Lender.
The ABL Facility may be used for revolving credit loans and letters of credit from time to time up to a maximum principal amount of $
I-14
In each case, the net-orderly-liquidation value is calculated based on the lower of (i) a first-in first-out basis and (ii) market value, and is (A) net of intercompany profits, (B) net of write-ups and write-downs in value with respect to currency exchange rates and (C) consistent with most recent appraisals received and acceptable to Lender.
minus
The ABL Facility matures on
The Company’s obligations under the ABL Facility (and certain related obligations) are (a) guaranteed by the Guarantor and each of the Company’s future domestic subsidiaries is required to guarantee the ABL Facility on a senior secured basis (such guarantors and the Company, the “Loan Parties”) and (b) secured by all assets of the Loan Parties, subject to certain exceptions. The liens and other security interests granted by the Loan Parties on the collateral for the benefit of the Lender under the ABL Facility are, subject to certain permitted liens, first-priority.
Cash Dominion. Under the terms of the ABL Facility, if (i) an event of default has occurred or (ii) excess borrowing availability under the ABL Facility (based on the lesser of $
Financial Covenants. The ABL Facility contains a springing covenant requiring that the Company’s fixed charge coverage ratio be no less than
I-15
Facility falls below $
Affirmative and Restrictive Covenants. The ABL Credit Agreement governing the ABL Facility contains customary representations and warranties, affirmative and negative covenants (subject, in each case, to exceptions and qualifications) and events of defaults, including covenants that limit the Company’s ability to, among other things:
Overall
Effective January 19, 2023, interest was charged under the ABL Agreement at a rate (applicable interest rate of
There were $
There were
As of January 29, 2023, our available borrowings calculated under the provisions of the ABL Agreement totaled $
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 24, 2022, we renewed this agreement, which renewal maintains our borrowing capacity of
There were
Denominated in United States Dollar (“USD”)
We had an unsecured credit agreement denominated in USD with another bank located in China that provided for a line of credit of up to $
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of January 29, 2023, we complied with our financial covenants.
I-16
Interest paid during the first nine months of fiscal 2023 totaled $
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 January 29, 2023, 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 |
|
$ |
|
||
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 January 30, 2022, 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 |
|
$ |
|
||
Growth Allocation Mutual Funds |
|
|
|
|
N/A |
|
N/A |
|
|
|
||
Bond Mutual Funds |
|
|
|
|
N/A |
|
N/A |
|
|
|
||
Moderate Allocation Mutual Fund |
|
|
|
|
N/A |
|
N/A |
|
|
|
||
Large Cap Equity Mutual Funds |
|
|
|
|
N/A |
|
N/A |
|
|
|
||
Other |
|
|
|
|
N/A |
|
N/A |
|
|
|
||
|
|
Fair value measurements as of May 1, 2022, 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 |
|
$ |
|
||
Growth Allocation Mutual Funds |
|
|
|
|
N/A |
|
N/A |
|
|
|
||
Moderate Allocation Mutual Fund |
|
|
|
|
N/A |
|
N/A |
|
|
|
||
Other |
|
|
|
|
N/A |
|
N/A |
|
|
|
||
I-17
Short-Term Investments – Available for Sale
During the fourth quarter of fiscal 2022, we sold all of our remaining short-term investments classified as available-for-sale, and therefore we did not report short-term investments classified as available-for-sale in the accompanying Consolidated Balance Sheets as of January 29, 2023, and May 1, 2022. As of January 30, 2022, our short-term investments classified as available-for-sale (i) consisted of various types of bond and equity mutual funds, (ii) were recorded at their fair value totaling $
Short-Term and Long-Term Investments - Held-To-Maturity
During the fourth quarter of fiscal 2022, we sold all of our remaining investments classified as held-to-maturity, and therefore we did not report short-term or long-term investments classified as held-to-maturity in the accompanying Consolidated Balance Sheets as of January 29, 2023, and May 1, 2022. As of January 30, 2022, our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds. These investments were classified as held-to-maturity as we had the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments were recorded as either current or noncurrent in our Consolidated Balance Sheets, based on the maturity date in relation to the respective reporting period and were recorded at amortized cost.
As of January 30, 2022, our held-to-maturity investments (i) were recorded at amortized cost totaling $
Our held-to-maturity 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 held-to-maturity 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.
Investments - Rabbi Trust
We have a rabbi trust for the participants of our deferred compensation plan (the “Plan”), that enables participants to credit their contributions to various investment options under 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.
As of January 29, 2023, our investments associated with our rabbi trust totaled $
The fair value of our long-term investments associated with our rabbi trust approximates their cost basis.
Other
The carrying amount of our cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximated their fair value because of the short maturity of these financial instruments.
Non-Recurring Basis
In connection with the restructuring activity associated with our upholstery fabrics cut and sew operation located in Haiti (which is described more fully in Note 8 of the consolidated financial statements), we classified a right of use asset associated with a leased facility as held for sale in the accompanying Consolidated Balance Sheet as of January 29, 2023. This right of use asset classified as held for sale was recorded at its fair value of $
I-18
assumptions to determine the fair value of this right of use asset, this right of use asset is classified as level 3 within the fair value hierarchy defined above.
11. Net (Loss) Income Per Share
Basic net (loss) income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net (loss) income 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.
Weighted average shares used in the computation of basic and diluted net (loss) income per share are as follows:
|
|
Three months ended |
|
|||||
(amounts in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
||
Dilutive effect of stock-based compensation |
|
|
— |
|
|
|
— |
|
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
||
During the third quarter of fiscal 2023,
During the third quarter of fiscal 2022,
|
|
Nine months ended |
|
|||||
(amounts in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
||
Dilutive effect of stock-based compensation |
|
|
— |
|
|
|
|
|
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
||
During the nine-month period ending January 29, 2023,
During the nine-month period ending January 30, 2022,
12. Segment Information
Overall
Our operations are classified into
I-19
Financial Information
We evaluate the operating performance of our business segments based upon (loss) income from operations before certain unallocated corporate expenses and other items that are not expected to occur on a regular basis. Cost of sales for each 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 executives and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. Also, total assets related to our upholstery fabrics segment include a right of use asset classified as held for sale as of January 29, 2023.
Statements of operations for our operating segments are as follows:
|
|
Three months ended |
|
|||||
|
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
net sales by segment: |
|
|
|
|
|
|
||
mattress fabrics |
|
$ |
|
|
$ |
|
||
upholstery fabrics |
|
|
|
|
|
|
||
net sales |
|
$ |
|
|
$ |
|
||
gross (loss) 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 |
|
$ |
|
|
$ |
|
||
(loss) income from operations by segment: |
|
|
|
|
|
|
||
mattress fabrics |
|
$ |
( |
) |
|
$ |
|
|
upholstery fabrics |
|
|
( |
) |
|
|
|
|
unallocated corporate expenses |
|
|
( |
) |
|
|
( |
) |
total segment (loss) income from operations |
|
$ |
( |
) |
|
$ |
|
|
restructuring expense (1) |
|
|
( |
) |
|
|
— |
|
(loss) income from operations |
|
$ |
( |
) |
|
$ |
|
|
interest income |
|
|
|
|
|
|
||
other expense |
|
|
( |
) |
|
|
( |
) |
(loss) income before income taxes |
|
$ |
( |
) |
|
$ |
|
|
I-20
(1) Restructuring expense of $
|
|
Nine months ended |
|
|||||
|
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
net sales by segment: |
|
|
|
|
|
|
||
mattress fabrics |
|
$ |
|
|
$ |
|
||
upholstery fabrics |
|
|
|
|
|
|
||
net sales |
|
$ |
|
|
$ |
|
||
gross (loss) profit: |
|
|
|
|
|
|
||
mattress fabrics |
|
$ |
( |
) |
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
||
total segment gross profit |
|
$ |
|
|
$ |
|
||
restructuring related charge (1) |
|
|
( |
) |
|
|
— |
|
gross profit |
|
$ |
|
|
$ |
|
||
selling, general, and administrative expenses by segment: |
|
|
|
|
|
|
||
mattress fabrics |
|
$ |
|
|
$ |
|
||
upholstery fabrics |
|
|
|
|
|
|
||
unallocated corporate expenses |
|
|
|
|
|
|
||
selling, general, and administrative expenses |
|
$ |
|
|
$ |
|
||
(loss) income from operations by segment: |
|
|
|
|
|
|
||
mattress fabrics |
|
$ |
( |
) |
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
||
unallocated corporate expenses |
|
|
( |
) |
|
|
( |
) |
total segment (loss) income from operations |
|
$ |
( |
) |
|
$ |
|
|
restructuring expense (2) |
|
|
( |
) |
|
|
— |
|
restructuring related charge (1) |
|
|
( |
) |
|
|
— |
|
(loss) income from operations |
|
$ |
( |
) |
|
$ |
|
|
interest income |
|
|
|
|
|
|
||
other expense |
|
|
( |
) |
|
|
( |
) |
(loss) income before income taxes |
|
$ |
( |
) |
|
$ |
|
|
I-21
(1) Restructuring related charge of $
(2) Restructuring expense of $
Balance sheet information for our operating segments follows:
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
|
May 1, 2022 |
|
|||
Segment assets: |
|
|
|
|
|
|
|
|
|
|||
Mattress Fabrics: |
|
|
|
|
|
|
|
|
|
|||
Accounts receivable |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Inventory |
|
|
|
|
|
|
|
|
|
|||
Property, plant and equipment (1) |
|
|
|
|
|
|
|
|
|
|||
Right of use assets (2) |
|
|
|
|
|
|
|
|
|
|||
Total mattress fabrics assets |
|
|
|
|
|
|
|
|
|
|||
Upholstery Fabrics: |
|
|
|
|
|
|
|
|
|
|||
Accounts receivable |
|
|
|
|
|
|
|
|
|
|||
Inventory |
|
|
|
|
|
|
|
|
|
|||
Property, plant and equipment (3) |
|
|
|
|
|
|
|
|
|
|||
Right of use assets (4) |
|
|
|
|
|
|
|
|
|
|||
Assets held for sale (5) |
|
|
|
|
|
— |
|
|
|
— |
|
|
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 |
|
|
— |
|
|
|
|
|
|
— |
|
|
Short-term investments - rabbi trust |
|
|
|
|
|
— |
|
|
|
— |
|
|
Current income taxes receivable |
|
|
|
|
|
|
|
|
|
|||
Other current assets |
|
|
|
|
|
|
|
|
|
|||
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|||
Property, plant and equipment (6) |
|
|
|
|
|
|
|
|
|
|||
Right of use assets (7) |
|
|
|
|
|
|
|
|
|
|||
Intangible assets |
|
|
|
|
|
|
|
|
|
|||
Long-term investments - rabbi trust |
|
|
|
|
|
|
|
|
|
|||
Long-term investments - held-to-maturity |
|
|
— |
|
|
|
|
|
|
— |
|
|
Other assets |
|
|
|
|
|
|
|
|
|
|||
Total assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Nine months ended |
|
|||||
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
Capital expenditures (8): |
|
|
|
|
|
|
||
Mattress Fabrics |
|
$ |
|
|
$ |
|
||
Upholstery Fabrics |
|
|
|
|
|
|
||
Unallocated Corporate |
|
|
|
|
|
|
||
Total capital expenditures |
|
$ |
|
|
$ |
|
||
Depreciation expense: |
|
|
|
|
|
|
||
Mattress Fabrics |
|
$ |
|
|
$ |
|
||
Upholstery Fabrics |
|
|
|
|
|
|
||
Total depreciation expense |
|
$ |
|
|
$ |
|
||
I-22
I-23
13. Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $
Our effective income tax rates for the nine-month periods ended January 29, 2023, and January 30, 2022, 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 rates for the nine-month periods ended January 29, 2023, and January 30, 2022, we were subject to loss limitation rules. These loss limitation rules require 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 was 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 nine-month periods ending January 29, 2023, and January 30, 2022:
|
|
January 29, |
|
|
January 30, |
|
||
|
|
2023 |
|
|
2022 |
|
||
U.S. federal income tax rate |
|
|
% |
|
|
% |
||
U.S. valuation allowance |
|
|
( |
) |
|
|
( |
) |
Withholding taxes associated with foreign jurisdictions |
|
|
( |
) |
|
|
|
|
Capital expenditure deduction - Quebec, Canada |
|
|
( |
) |
|
|
— |
|
Foreign income tax rate differential |
|
|
|
|
|
|
||
Tax effects of local currency foreign exchange gains (losses) |
|
|
|
|
|
( |
) |
|
Global Intangible Low Taxed Income Tax ("GILTI") |
|
|
— |
|
|
|
|
|
Other |
|
|
( |
) |
|
|
|
|
|
|
( |
|
|
|
% |
||
Our consolidated effective income tax rate during the first nine months of fiscal 2023 was much more negatively affected by the mix of earnings between our U.S. operations and our foreign subsidiaries, as compared to the first nine months of fiscal 2022. During the first nine months of fiscal 2023, we incurred a significantly higher pre-tax loss from our U.S. operations totaling $(
During the first nine months of fiscal 2023, we incurred a significantly higher consolidated pre-tax loss totaling $(
U.S. Valuation Allowance
We evaluate the realizability of our U.S. net deferred income tax assets to determine if a valuation allowance is required. We assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.
As of January 29, 2023, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the last three fiscal years from 2020 through 2022, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2023. 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.
I-24
Based on our assessments as of January 29, 2023, January 30, 2022, and May 1, 2022, valuation allowances against our net deferred income tax assets pertain to the following:
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
|
May 1, 2022 |
|
|||
U.S. federal and state net deferred income tax assets |
|
$ |
|
|
|
|
|
|
|
|||
U.S. capital loss carryforward |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
|
|
|
|
|
|||
Undistributed Earnings
We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company and whether we are required to record a deferred income tax liability for those undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As of January 29, 2023, 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 eventually be distributed to our U.S. parent company. The conclusion reached from this assessment was consistent with prior reporting periods.
As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a
Uncertain Income Tax Positions
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, or negotiation, or litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.
As of January 29, 2023, we had a $
Our gross unrecognized income tax benefit of $
Income Taxes Paid
The following table sets forth taxes paid by jurisdiction:
|
|
Nine Months |
|
|
Nine Months |
|
||
|
|
Ended |
|
|
Ended |
|
||
|
|
January 29, |
|
|
January 30, |
|
||
(dollars in thousands) |
|
2023 |
|
|
2022 |
|
||
United States Transition Tax Payment |
|
$ |
|
|
$ |
|
||
China Income Taxes, Net of Refunds |
|
|
|
|
|
|
||
China - Withholding Taxes Associated With |
|
|
— |
|
|
|
|
|
Canada - Income Taxes, Net of Refunds |
|
|
( |
) |
|
|
|
|
|
|
$ |
|
|
$ |
|
||
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-based units, and other equity and cash related
I-25
awards as determined by the Compensation Committee of our board of directors. An aggregate of
As of January 29, 2023, 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 award 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 award 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 August 10, 2022 and July 22, 2021:
|
|
August 10, |
|
|
July 22, |
|
||
|
|
2022 |
|
|
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) |
|
|
|
|
||||
Key Employees
We grant performance-based restricted stock units to key employees 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 award 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.
Overall
The following table summarizes information related to our grants of performance-based restricted stock units associated with senior executives and key employees that were unvested as of January 29, 2023:
|
|
(3) |
|
|
(4) |
|
|
|
|
|
|
|
|||
|
|
Performance-Based |
|
|
Restricted Stock |
|
|
|
|
|
|
|
|||
|
|
Restricted Stock |
|
|
Units Expected |
|
|
|
|
|
|
|
|||
Date of Grant |
|
Units Awarded |
|
|
to Vest |
|
|
Price Per Share |
|
|
|
Vesting Period |
|||
August 10, 2022 (1) |
|
|
|
|
|
— |
|
|
$ |
|
(5) |
|
|||
July 22, 2021 (1) |
|
|
|
|
|
— |
|
|
$ |
|
(6) |
|
|||
July 22, 2021 (2) |
|
|
|
|
|
— |
|
|
$ |
|
(7) |
|
|||
I-26
The following table summarizes information related to our performance-based restricted stock units that vested during the nine-month periods ending January 29, 2023, and January 30, 2022:
|
|
Performance-Based |
|
|
|
|
|
(4) |
|
|||
|
|
Restricted Stock |
|
|
(3) |
|
|
Price |
|
|||
Fiscal Year |
|
Units Vested |
|
|
Fair Value |
|
|
Per Share |
|
|||
Fiscal 2023 (1) |
|
|
|
|
$ |
|
|
$ |
|
|||
Fiscal 2023 (2) |
|
|
|
|
$ |
|
|
$ |
|
|||
Fiscal 2022 (1) |
|
|
|
|
$ |
|
|
$ |
|
|||
Fiscal 2022 (2) |
|
|
|
|
$ |
|
|
$ |
|
|||
We recorded a charge of $
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 were unvested as of January 29, 2023:
|
|
Time-Based |
|
|
|
|
|
|
|
||
|
|
Restricted Stock |
|
|
(1) |
|
|
|
|
||
Date of Grant |
|
Units Awarded |
|
|
Price Per Share |
|
Vesting Period |
||||
September 6, 2022 |
|
|
|
|
$ |
|
|
|
|||
August 10, 2022 |
|
|
|
|
$ |
|
|
|
|||
July 22, 2021 |
|
|
|
|
$ |
|
|
|
|||
August 6, 2020 |
|
|
|
|
$ |
|
|
|
|||
August 2, 2018 |
|
|
|
|
$ |
|
|
|
|||
The following table summarizes information related to our time-based restricted stock units that vested during the nine-month period ending January 29, 2023:
I-27
|
|
Time-Based |
|
|
|
|
|
(4) |
|||||
|
|
Restricted Stock |
|
|
(3) |
|
|
Price |
|||||
Fiscal Year |
|
Units Vested |
|
|
Fair Value |
|
|
Per Share |
|||||
Fiscal 2023 (1) |
|
|
|
|
$ |
|
|
$ |
|
|
|||
Fiscal 2023 (2) |
|
|
|
|
$ |
|
|
$ |
|
|
|||
We recorded compensation expense of $
As of January 29, 2023, the remaining unrecognized compensation expense related to our time-based restricted stock units was $
Common Stock Awards
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 lease terms of to
Balance Sheet
The right of use assets and lease liabilities associated with our operating leases as of January 29, 2023, January 30, 2022, and May 1, 2022, are as follows:
|
|
|
|
|
|
|
|
|
|
|||
(dollars in thousands) |
|
January 29, |
|
|
January 30, |
|
|
May 1, |
|
|||
Right of use assets |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Operating lease liability - current |
|
|
|
|
|
|
|
|
|
|||
Operating lease liability – noncurrent |
|
|
|
|
|
|
|
|
|
|||
Supplemental Cash Flow Information
|
|
Nine Months |
|
|
Nine Months |
|
||
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
||
Operating lease liability payments |
|
$ |
|
|
$ |
|
||
Right of use assets exchanged for lease liabilities |
|
|
|
|
|
|
||
I-28
Operating lease expense for the three-month periods ended January 29, 2023, and January 30, 2022, was $
Other Information
Maturity of our operating lease liabilities for the remainder of fiscal 2023, the subsequent next four fiscal years, and thereafter follows:
(dollars in thousands) |
|
|
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
|
Less: interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
As of January 29, 2023, the weighted average remaining lease term and discount rate for our operating leases follows:
|
|
January 29, 2023 |
|
|
Weighted average lease term |
|
|
||
Weighted average discount rate |
|
|
% |
|
16. Commitments and Contingencies
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 January 29, 2023, January 30, 2022, and May 1, 2022, we had total amounts due regarding capital expenditures totaling $
Purchase Commitments – Capital Expenditures
As of January 29, 2023, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $
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 January 29, 2023, 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 $
I-29
18. Common Stock Repurchase Program
In March 2020, our board of directors approved an authorization for us to acquire up to $
During the nine-month period ending January 29, 2023, we did
As of January 29, 2023, $
19. Dividend Program
On June 29, 2022, our board of directors announced the decision to suspend the company’s quarterly cash dividend. Considering the current and expected macroeconomic conditions, we believe that preserving capital and managing our liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders. Accordingly, we did not make any dividend payments during first nine months of fiscal 2023.
During the nine-month period ending January 30, 2022, dividend payments totaled $
I-30
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, projections, or trends for our future operations, strategic initiatives and plans, production levels, new product launches, sales, profit margins, profitability, operating income, capital expenditures, working capital levels, cost savings, 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 dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, 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, including changes in U.S. trade enforcement priorities, 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 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 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. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial results.
I-31
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 nine months ended January 29, 2023, and January 30, 2023, both represent 39-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 currently have mattress fabric operations located in Stokesdale, NC, Quebec, Canada, and Ouanaminthe, Haiti. During the third quarter of fiscal 2023, we completed a rationalization of our U.S.-based mattress fabrics cut and sew platform, which included the closure of our two High Point, NC, facilities associated with this business.
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, as well as cut and sewn kit production in Ouanaminthe Haiti. During the third quarter of fiscal 2023, we began a rationalization and consolidation of our upholstery cut and sewn kit production in Ouanaminthe, Haiti, which includes closing a leased facility and relocating into an existing facility used by our mattress fabrics segment in Ouanaminthe, Haiti (See Note 8 to the consolidated financial statements for further details). 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 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.
Executive Summary
We evaluate the operating performance of our business segments based upon (loss) income from operations before certain unallocated corporate expenses and other items that are not expected to occur on a regular basis. Cost of sales for each business segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses.
Results of Operations
|
|
Three Months Ended |
|
|
||||
(dollars in thousands) |
|
January 29, |
|
January 30, |
|
Change |
||
Net sales |
|
$ |
52,523 |
|
$ |
80,291 |
|
(34.6)% |
Gross profit |
|
|
2,093 |
|
|
9,110 |
|
(77.0)% |
Gross margin |
|
|
4.0 |
% |
|
11.3 |
% |
(730)bp |
Selling, general, and administrative expenses |
|
|
9,165 |
|
|
8,007 |
|
14.5% |
Restructuring expense |
|
|
711 |
|
|
— |
|
100.0% |
(Loss) income from operations |
|
|
(7,783 |
) |
|
1,103 |
|
N.M. |
Operating margin |
|
|
(14.8 |
)% |
|
1.4 |
% |
(1620)bp |
(Loss) income before income taxes |
|
|
(8,682 |
) |
|
995 |
|
N.M. |
Income tax expense |
|
|
286 |
|
|
1,284 |
|
(77.7)% |
Net (loss) income |
|
|
(8,968 |
) |
|
(289 |
) |
N.M. |
I-32
|
|
Nine Months Ended |
|
|
||||
(dollars in thousands) |
|
January 29, |
|
January 30, |
|
Change |
||
Net sales |
|
$ |
173,508 |
|
$ |
237,899 |
|
(27.1)% |
Gross profit |
|
|
4,008 |
|
|
32,336 |
|
(87.6)% |
Gross margin |
|
|
2.3 |
% |
|
13.6 |
% |
(1130)bp |
Selling, general, and administrative expenses |
|
|
27,133 |
|
|
26,275 |
|
3.3% |
Restructuring expense |
|
|
1,326 |
|
|
— |
|
100.0% |
(Loss) income from operations |
|
|
(24,451 |
) |
|
6,061 |
|
N.M. |
Operating margin |
|
|
(14.1 |
)% |
|
2.5 |
% |
(1660)bp |
(Loss) income before income taxes |
|
|
(24,507 |
) |
|
5,445 |
|
N.M. |
Income tax expense |
|
|
2,332 |
|
|
2,633 |
|
(11.4)% |
Net (loss) income |
|
|
(26,839 |
) |
|
2,812 |
|
N.M. |
Net Sales
Overall, our net sales for the third quarter of fiscal 2023 decreased by 34.6% compared with the same period a year ago, with mattress fabrics sales decreasing 35.8% and upholstery fabrics sales decreasing 33.5%. Our net sales for the first nine months of fiscal 2023 decreased by 27.1% compared with the same period a year ago, with mattress fabrics sales decreasing 34.4% and upholstery fabrics sales decreasing 19.3%.
The decrease in net sales in our mattress fabrics segment for both the third quarter and the first nine months of fiscal 2023 primarily reflects an ongoing slowdown in consumer demand in the domestic mattress industry. The impact of this industry softness has been exacerbated by mattress manufacturers and retailers continuing to work through an excess of inventory, delaying the timing of shipments and new product rollouts. The decrease in net sales during both periods was partially offset by certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 1.3% during the third quarter and by approximately 3.0% during the first nine months of fiscal 2023.
The decrease in net sales for our upholstery fabrics segment for both the third quarter and the first nine months of fiscal 2023 primarily reflects reduced demand for our residential upholstery fabrics products, driven by a slowdown in new retail business in the residential home furnishings industry and high inventory levels at manufacturers and retailers. The decrease in net sales during the nine month period was partially offset by higher sales in our hospitality/contract fabric business, as compared to the prior-year period, as well as certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 1.7% during the third quarter and by approximately 2.9% during the first nine months of fiscal 2023.
See the Segment Analysis section below for further details.
Income Before Income Taxes
Overall, our loss before income taxes for the third quarter of fiscal 2023 was $(8.7) million, compared with income before income taxes of $1.0 million for the prior-year period, while our loss before income taxes for the first nine months of fiscal 2023 was $(24.5) million, compared with income before income taxes of $5.4 million for the prior-year period.
Operating performance for the third quarter of fiscal 2023, as compared to the prior-year period, was primarily affected by lower sales; operating inefficiencies due to these lower sales and holiday shutdowns in both of our businesses; operating inefficiencies within the upholstery fabrics segment's cut and sew facility in Haiti due to lower demand; labor challenges and inflationary pressures affecting our Read business; and restructuring charges associated with the rationalization of our upholstery fabrics cut and sew platform located in Ouanaminthe, Haiti during the quarter. Operating performance for the first nine months of fiscal 2023 was also materially pressured by the same factors, as well as continued inflationary pressures; labor challenges within our mattress fabrics business that resulted in increased employee training costs and operating inefficiencies, including quality issues within our mattress fabrics segment; impairment charges during the second quarter of fiscal 2023 due to the write down of inventory to its net realizable value and inventory closeout sales for our mattress fabrics segment; markdowns of inventory due to our aged inventory policy for both our mattress fabrics and upholstery fabrics segment; and restructuring and related charges associated with the closure of our upholstery fabric segment's cut and sew facility located in Shanghai, China, during the second quarter. Performance for the first nine months of fiscal 2023 was favorably affected by the foreign exchange rate associated with our upholstery fabric operations in China.
See the Segment Analysis section below for further details.
I-33
Income Taxes
We recorded income tax expense of $2.3 million, or (9.5%) of loss before income taxes, for the nine-month period ended January 29, 2023, compared with income tax expense of $2.6 million, or 48.4% of income before income taxes, for the nine-month period ended January 30, 2022.
Our consolidated effective income tax rate during the first nine months of fiscal 2023 was much more negatively affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as compared to the first nine months of fiscal 2022. During the first nine months of fiscal 2023, we incurred a significantly higher pre-tax loss from our U.S. operations totaling $(28.8) million, compared with $(2.3) million during the first nine months of fiscal 2022. As a result, a significantly higher income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets during the first nine months of fiscal 2023, as compared with the first nine months of fiscal 2022. In addition, almost all of our taxable income in the first nine months of both fiscal 2023 and fiscal 2022 was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.
Refer to Note 13 of the consolidated financial statements for further details regarding our provision for income taxes.
Liquidity
As of January 29, 2023, our cash and cash equivalents (collectively, “cash”) totaled $16.7 million, an increase of $2.2 million, compared with $14.6 million as of May 1, 2022. This increase was primarily due to (i) net cash provided by operating activities totaling $4.6 million, partially offset by (ii) capital expenditures of $1.6 million and (iii) contributions totaling $870,000 to our rabbi trust that funds our deferred compensation plan.
Our net cash provided by operating activities was $4.6 million during the first nine months of fiscal 2023, an increase of $17.0 million compared with net cash used in operating activities of $12.4 million during the first nine months of fiscal 2022. This trend mostly reflects (i) a reduction of inventory related to the significant decline in net sales, improved alignment of inventory purchases with current customer demand trends, and promotional programs to reduce aged raw materials and finished goods inventory; (ii) annual incentive payments made during the first quarter of fiscal 2022 that did not recur during the first nine months of fiscal 2023, partially offset by (iii) a decrease in net cash earnings during the first nine months of fiscal 2023 as compared with the first nine months of fiscal 2022.
As of January 29, 2023, there were no outstanding borrowings under our lines of credit.
Dividend Program
On June 29, 2022, our board of directors announced the decision to suspend the company’s quarterly cash dividend. Considering the current and expected macroeconomic conditions, we believe that preserving capital and managing our liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders. Accordingly, we did not make any dividend payments during the first nine months of fiscal 2023.
During the first nine months of fiscal 2022, dividend payments totaled $4.1 million, which represented quarterly cash dividend payments ranging from $0.11 per share to $0.115 per share.
Our board of directors has sole authority to determine if and when we will declare future dividends, and on what terms. We will continue to reassess our dividend policy each quarter. Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.
Common Stock Repurchases
In 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 are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.
During the first nine months of fiscal 2023, we did not purchase any shares of our common stock. As a result, as of January 29, 2023, $3.2 million is available for additional repurchases of our common stock. Despite the current share repurchase authorization, the company does not expect to repurchase any shares through at least the fourth quarter of fiscal 2023.
During the first nine months of fiscal 2022, we repurchased 121,688 shares of our common stock at a cost of $1.8 million.
I-34
Segment Analysis
Mattress Fabrics Segment
|
|
Three Months Ended |
|
|
||||
(dollars in thousands) |
|
January 29, |
|
January 30, |
|
Change |
||
Net sales |
|
$ |
24,697 |
|
$ |
38,439 |
|
(35.8)% |
Gross (loss) profit |
|
|
(1,237 |
) |
|
3,164 |
|
(139.1)% |
Gross profit margin |
|
|
(5.0 |
)% |
|
8.2 |
% |
(1320)bp |
Selling, general, and administrative expenses |
|
|
2,992 |
|
|
2,800 |
|
6.9% |
(Loss) income from operations |
|
|
(4,229 |
) |
|
364 |
|
N.M. |
Operating margin |
|
|
(17.1 |
)% |
|
0.9 |
% |
(1800)bp |
|
|
|
|
|
|
|
||
|
|
Nine Months Ended |
|
|
||||
(dollars in thousands) |
|
January 29, |
|
January 30, |
|
Change |
||
Net sales |
|
$ |
80,299 |
|
$ |
122,380 |
|
(34.4)% |
Gross (loss) profit |
|
|
(7,330 |
) |
|
16,106 |
|
(145.5)% |
Gross margin |
|
|
(9.1 |
)% |
|
13.2 |
% |
(2230)bp |
Selling, general, and administrative expenses |
|
|
8,821 |
|
|
8,991 |
|
(1.9)% |
(Loss) income from operations |
|
|
(16,151 |
) |
|
7,115 |
|
N.M. |
Operating margin |
|
|
(20.1 |
)% |
|
5.8 |
% |
(2590)bp |
|
|
|
|
|
|
|
||
Net Sales
Mattress fabrics sales decreased 35.8% in the third quarter of fiscal 2023 compared to the prior-year period. Mattress fabrics sales decreased 34.4% in the first nine months of fiscal 2023 compared to the first nine months of fiscal 2022.
The decrease in mattress fabrics net sales for the third quarter and for the first nine months of fiscal 2023 reflects an ongoing slowdown in consumer demand in the domestic mattress industry. We believe this slowdown is primarily due to inflationary pressures affecting consumer spending, as well as a shift in demand from home goods to travel, leisure, and entertainment following a pulling forward of demand for home goods during the early years of the COVID-19 pandemic. The impact of this industry softness has been exacerbated by mattress manufacturers and retailers continuing to work through an excess of inventory, delaying the timing of shipments and new product rollouts. However, we did begin the roll out of some new customer programs during the third quarter. The decrease in net sales during both periods was partially offset by certain pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These pricing actions increased net sales for the division by approximately 1.3% during the third quarter and by approximately 3.0% during the first nine months of fiscal 2023.
Despite the headwinds, we remained focused on inventory reductions and cash generation during the quarter, while also engaging in an ongoing business transformation plan focused on long-term improvement in the business in areas that include quality, sales, marketing, and operational processes; supply chain optimization; employee engagement; and our organizational management structure. We continued to execute our product-driven strategy during the quarter, with an emphasis on innovation, design creativity, and customer relationships. Additionally, the strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey continued to enable us to support the evolving needs of our mattress fabrics and cover customers during the period. We believe our market position remains solid, with strong new placements, although the timing for new product rollouts continues to be affected by customers working through their existing excess inventory.
Looking ahead, we expect the current macroeconomic environment will continue to affect consumer spending trends for some time, resulting in ongoing industry softness that may reduce demand for our mattress fabrics and cover products and continue to delay the timing of new product rollouts. We expect these conditions are likely to pressure results through at least the end of fiscal 2023. Additionally, the ongoing impacts of the COVID-19 pandemic, as well as Russia’s invasion of Ukraine, including its effect on petrochemical pricing and consumer spending, remain unknown and depend on factors beyond our knowledge or control. At this time, we cannot reasonably estimate the ongoing impact of the COVID-19 pandemic or the evolving impact of the Russia-Ukraine war on our mattress fabrics segment; however, either of these situations could cause disruption that 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 third quarter of fiscal 2023, as compared to the prior-year period, was primarily due to lower sales and operating inefficiencies arising from these lower sales volumes and from holiday shutdowns across our locations.
I-35
Mattress fabrics profitability for the first nine months of fiscal 2023 was pressured by the same factors that affected the third quarter, as well as labor challenges that resulted in increased employee training costs and operating inefficiencies, including quality issues; higher raw material costs; $2.9 million in impairment charges due to the write down of inventory to its net realizable value; $2.6 million in losses from closeout sales of raw material and finished goods inventory; and $1.0 million in markdowns of inventory based on our policy for aged inventory.
We completed the previously announced restructuring and rationalization of our U.S.-based cut and sewn cover platform during the third quarter of fiscal 2023, moving our R&D and prototyping capabilities from our High Point, North Carolina, location to our facility in Stokesdale, North Carolina. The result of this move is the discontinuation of our higher-cost on-shore production capabilities, with closures of our two leased facilities in High Point, North Carolina, during the quarter. We believe this move will allow us to generate cost savings by utilizing our lower-cost mattress cover production and sourcing capabilities in Haiti and Asia, where we can scale operations to align with demand and continue to support the needs of our customers.
We expect the ongoing industry softness affecting sales volumes, as well as continued inflationary pressures, will affect profitability through at least the end of fiscal 2023, although we believe these headwinds will be mitigated to some extent by our ongoing efforts to control internal costs and improve efficiencies. We will consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, as well as additional reasonable pricing actions as necessary to further mitigate and manage inflation.
Segment assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
(dollars in thousands) |
|
January 29, 2023 |
|
January 30, 2022 |
|
May 1, 2022 |
|
|||
Accounts receivable |
|
$ |
8,314 |
|
$ |
17,617 |
|
$ |
9,865 |
|
Inventory |
|
|
28,757 |
|
|
39,544 |
|
|
39,028 |
|
Property, plant & equipment |
|
|
34,661 |
|
|
39,913 |
|
|
38,731 |
|
Right of use assets |
|
|
2,476 |
|
|
3,706 |
|
|
3,469 |
|
|
|
$ |
74,208 |
|
$ |
100,780 |
|
$ |
91,093 |
|
|
|
|
|
|
|
|
|
|||
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As of January 29, 2023, accounts receivable significantly decreased by $9.3 million, or 52.8%, compared with January 30, 2022. These declines reflect the significant decrease in net sales during third quarter of fiscal 2023 compared with the third quarter of fiscal 2022, as described in the Net Sales section above. In addition, we experienced faster cash collections from certain significant customers we had on shorter credit terms due to their financial condition, during the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022, which led to a decline in days’ sales outstanding to 31 days for the third quarter of fiscal 2023, down from 42 days for the third quarter of fiscal 2022.
As of January 29, 2023, accounts receivable decreased by $1.6 million, or 15.7%, compared with May 1, 2022. This trend reflects a decrease in net sales during the third quarter of fiscal 2023 compared with the fourth quarter of fiscal 2022. Net sales during the third quarter of fiscal 2023 were $24.7 million, a decrease of $5.1 million, or 17.1%, compared with net sales of $29.8 million during the fourth quarter of fiscal 2022. Days’ sales outstanding was 31 days and 30 days for the third quarter of fiscal 2023 and the fourth quarter of fiscal 2022, respectively.
Inventory
As of January 29, 2023, inventory significantly decreased by $10.8 million, or 27.3%, compared with January 30, 2022, and significantly decreased by $10.3 million, or 26.3%, compared with May 1, 2022. This trend reflects (i) a decline in inventory purchases reflecting the 35.8% decrease in net sales during the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022 and a 17.1% decrease in net sales during the third quarter of fiscal 2023 compared with the fourth quarter of fiscal 2022; (ii) $3.9 million of non-cash charges recorded in the first nine months of fiscal 2023, which includes $2.9 million related to a write down of inventory to its net realizable value and $1.0 million related to markdowns of inventory estimated based on our policy for aged inventory; and (iii) promotional programs to reduce aged raw materials and finished goods inventory; partially offset by (iv) higher raw material, labor, and overhead costs stemming from inflationary pressures.
Inventory turns were 3.5 for the third quarter of fiscal 2023, compared with 3.4 for the third quarter of fiscal 2022 and 2.9 for the fourth quarter of fiscal 2022.
I-36
Property, Plant, & Equipment
The $34.7 million as of January 29, 2023, represents property, plant, and equipment of $23.1 million, $10.9 million, and $651,000 located in the U.S., Canada, and Haiti, respectively. The $39.9 million as of January 30, 2022 represents property, plant, and equipment of $26.6 million, $12.5 million, and $796,000 located in the U.S., Canada, and Haiti, respectively. The $38.7 million as of May 1, 2022, represents property, plant, and equipment of $25.6 million, $12.4 million, and $757,000 located in the U.S., Canada, and Haiti, respectively.
As of January 29, 2023, property, plant, and equipment has steadily decreased compared with January 30, 2022, as we have reduced our capital spending as a result of current and expected macroeconomic conditions.
Right of Use Assets
The $2.5 million as of January 29, 2023, represents right of use assets of $1.6 million and $833,000 located in Haiti and Canada, respectively. The $3.7 million as of January 30, 2022, represents right of use assets of $2.1 million, $1.3 million, and $352,000 located in Haiti, the U.S., and Canada, respectively. The $3.5 million as of May 1, 2022, represents right of use assets of $2.0 million, $1.2 million, and $291,000 located in Haiti, the U.S., and Canada, respectively.
As of January 29, 2023, right of use assets have steadily decreased compared with January 30, 2022, due to rent expense recognized over the terms of the respective lease agreements, as well as the termination of one lease agreement and the significant reduction in the lease term associated with another lease agreement, both of which are related to the closure of our mattress cover operation located in High Point, NC, during the third quarter of fiscal 2023.
Upholstery Fabrics Segment
Net Sales
|
|
Three Months Ended |
|
|
||||||||
(dollars in thousands) |
|
January 29, |
|
|
January 30, |
|
|
% Change |
|
|||
Non-U.S. Produced |
|
$ |
25,514 |
|
92% |
$ |
39,286 |
|
94% |
|
(35.1 |
)% |
U.S. Produced |
|
|
2,312 |
|
8% |
|
2,566 |
|
6% |
|
(9.9 |
)% |
Total |
|
$ |
27,826 |
|
100% |
$ |
41,852 |
|
100% |
|
(33.5 |
)% |
|
|
Nine Months Ended |
|
|
||||||||
(dollars in thousands) |
|
January 29, |
|
|
January 30, |
|
|
% Change |
|
|||
Non-U.S. Produced |
|
$ |
86,633 |
|
93% |
$ |
108,814 |
|
94% |
|
(20.4 |
)% |
U.S. Produced |
|
|
6,576 |
|
7% |
|
6,705 |
|
6% |
|
(1.9 |
)% |
Total |
|
$ |
93,209 |
|
100% |
$ |
115,519 |
|
100% |
|
(19.3 |
)% |
Upholstery fabrics sales decreased 33.5% in the third quarter of fiscal 2023 compared to the prior-year period, which was an especially strong sales period. Upholstery fabrics sales decreased by 19.3% for the first nine months of fiscal 2023, as compared to the first nine months of fiscal 2022.
The decrease in upholstery fabrics net sales for the third quarter and for the first nine months of fiscal 2023 reflects reduced demand for our residential upholstery fabrics products compared to the prior-year periods, driven by high inventory levels and a slowdown in new retail business for the residential home furnishings industry. It also reflects slightly lower sales for our Read business during both periods, as compared to the prior-year periods. For the first nine months of fiscal 2023, the decrease in net sales was partially offset by higher sales in our hospitality/contract fabric business, as compared to the prior year period, as well as pricing and surcharge actions in effect that were not in effect during the same periods a year ago. These actions increased net sales for the division by approximately 1.7% during the quarter and by approximately 2.9% during the first nine months of fiscal 2023.
Looking ahead, we expect the high inventory levels and the slowdown in new retail business for the residential home furnishings industry may affect demand for our residential business for some period of time. Despite this challenge, we believe our business is well positioned for the long term with our product-driven strategy and innovative product offerings, as well as our flexible Asian platform and our long-term supplier relationships.
Notably, the ongoing economic and health effects of the COVID-19 pandemic, as well as the impact of Russia’s invasion of Ukraine, including its effect on petrochemical pricing and consumer spending, remain unknown and depend on factors beyond our control. At this time, we cannot reasonably estimate the impact on our upholstery fabrics segment, but we note that if conditions worsen in either of these situations, including additional COVID-19-related shutdowns of our China operations, the impact on our operations, and/or on our suppliers, customers, consumers, and the global economy, could adversely affect our financial performance.
I-37
Gross Profit, Selling, General & Administrative Expenses, and Operating Income
|
|
Three Months Ended |
|
|
|
|||||
(dollars in thousands) |
|
January 29, |
|
|
January 30, |
|
|
Change |
||
Gross profit |
|
|
3,330 |
|
|
|
5,946 |
|
|
(44.0)% |
Gross margin |
|
|
12.0 |
% |
|
|
14.2 |
% |
|
(220)bp |
Selling, general, and administrative expenses |
|
|
3,750 |
|
|
|
3,500 |
|
|
7.1% |
Restructuring expense |
|
|
711 |
|
|
|
— |
|
|
100.0% |
(Loss) income from operations |
|
|
(420 |
) |
|
|
2,446 |
|
|
(117.2)% |
Operating margin |
|
|
(1.5 |
)% |
|
|
5.8 |
% |
|
(730)bp |
|
|
|
|
|
|
|
|
|
||
|
|
Nine Months Ended |
|
|
|
|||||
(dollars in thousands) |
|
January 29, |
|
|
January 30, |
|
|
Change |
||
Gross profit |
|
|
11,436 |
|
|
|
16,230 |
|
|
(29.5)% |
Gross margin |
|
|
12.3 |
% |
|
|
14.0 |
% |
|
(170)bp |
Selling, general, and administrative expenses |
|
|
11,053 |
|
|
|
10,491 |
|
|
5.4% |
Restructuring expense |
|
|
1,326 |
|
|
|
— |
|
|
100.0% |
Income from operations |
|
|
383 |
|
|
|
5,739 |
|
|
(93.3)% |
Operating margin |
|
|
0.4 |
% |
|
|
5.0 |
% |
|
(460)bp |
The decrease in upholstery fabrics profitability for the third quarter of fiscal 2023, as compared to the prior-year period, primarily reflects lower residential sales, as well as operating inefficiencies in our cut and sew operation in Haiti due to reduced demand, and labor challenges and inflationary pressures affecting our Read business during the quarter. These pressures were partially offset by a significantly more favorable foreign exchange rate associated with our operations in China, as well as lower costs resulting from the restructuring of our cut and sew platform in China completed during the second quarter of fiscal 2023.
Upholstery fabrics profitability for the first nine months of fiscal 2023 was affected by the same factors that affected the third quarter, as well as $2.3 million inventory markdowns due to our policy for aged inventory.
Based on demand trends, we began a rationalization and consolidation of our cut and sew upholstery kit platform in Haiti near the end of the third quarter of fiscal 2023. This restructuring, which will be completed during the fourth quarter of fiscal 2023, better aligns our capacity and costs with current demand levels for upholstery kits. We believe this move, which includes terminating a lease and relocating into an existing facility for our mattress cover business, will allow us to reduce our operating costs without sacrificing our ability to support our customers.
Looking ahead, we expect lower sales volumes in our residential business will continue to pressure our profitability. We will continue our ongoing cost reduction efforts and will consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, while maintaining our ability to service our customers.
Restructuring Activities
Second Quarter of Fiscal 2023
During the second quarter of fiscal 2023, we closed our cut and sew upholstery fabrics operation located in Shanghai, China, which included the termination of an agreement to lease a building. This strategic action, along with the further use of our Asian supply chain, was our response to adjust our operating costs to better align with the declining consumer demand for cut and sewn products. As a result of this strategic action, we recorded restructuring expense and restructuring related charges totaling $713,000. These charges represent employee termination benefits of $468,000, loss from the disposal and markdowns of inventory of $98,000, impairment loss associated with equipment of $80,000, lease termination costs of $47,000, and other associated costs of $20,000. Of the total $713,000, $615,000 and $98,000 were recorded to restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the three-month period ending October 30, 2022, and the nine-month period ending January 29, 2023.
Third Quarter of Fiscal 2023
During the third quarter of fiscal 2023, we entered into an agreement to terminate the lease ("the Termination Agreement") of a facility (the "Terminated Facility") located in Ouanaminthe, Haiti, that was used solely for the production of cut and sewn kits associated with our upholstery fabrics segment. As a result, we are relocating production of cut and sewn upholstery kits into another existing facility that is also located in Ouanaminthe, Haiti, and leased by an affiliate that produces mattress covers at this
I-38
facility. As a result, we will produce both upholstery cut and sewn kits and mattress covers in this location. We believe this strategic action will realign our capacity and costs with current demand levels, while still allowing us to support our customers and scale for additional capacity if conditions improve.
Based on the terms of the Termination Agreement, once we vacate and return possession of the Terminated Facility to the lessor (which has now occurred), a third party lessee will take possession of the Terminated Facility and has agreed to pay us $2.4 million over a period commencing April 1, 2023, through December 31, 2029, for the right to use the building. The terms of the Termination Agreement fully and unconditionally release and discharge us from all of our obligations under the original lease for the Terminated Facility.
As a result of this strategic action, we recorded restructuring expense of $711,000 during the third quarter of fiscal 2023, which represents lease termination costs of $434,000 and an impairment loss regarding leasehold improvements totaling $277,000.
The following summarizes our restructuring expense and restructuring related charges that were associated with both our restructuring activities noted above for the nine-months ending January 29, 2023:
|
|
|
Nine Months Ended |
|
|
(dollars in thousands) |
|
|
January 29, 2023 |
|
|
Lease termination costs |
|
|
$ |
481 |
|
Employee termination benefits |
|
|
|
468 |
|
Impairment loss - leasehold improvements and equipment |
|
|
|
357 |
|
Loss on disposal and markdowns of inventory |
|
|
|
98 |
|
Other associated costs |
|
|
|
20 |
|
Restructuring expense and restructuring related charges (1) |
|
|
$ |
1,424 |
|
(1) Of the total $1.4 million, $1.3 million and $98,000 were recorded to restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ending January 29, 2023.
See Note 8 to the consolidated financial statements for further details regarding our restructuring activities associated with our upholstery fabrics segment.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets and assets held for sale:
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
|
May 1, 2022 |
|
|||
Accounts receivable |
|
$ |
12,927 |
|
|
$ |
21,381 |
|
|
$ |
12,361 |
|
Inventory |
|
|
18,870 |
|
|
|
33,589 |
|
|
|
27,529 |
|
Property, plant & equipment |
|
|
1,794 |
|
|
|
2,018 |
|
|
|
2,030 |
|
Right of use assets |
|
|
2,995 |
|
|
|
8,727 |
|
|
|
8,124 |
|
Assets held for sale |
|
|
1,950 |
|
|
|
— |
|
|
|
— |
|
|
|
$ |
38,536 |
|
|
$ |
65,715 |
|
|
$ |
50,044 |
|
|
|
|
|
|
|
|
|
|
|
|||
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivablec
As of January 29, 2023, accounts receivable significantly decreased by $8.5 million, or 39.5%, compared with January 30, 2022. This trend reflects the decrease in net sales during the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022, as described in the Net Sales section above. In addition, we experienced faster cash collections as we had a favorble mix of higher sales volume with customers with shorter credit terms during the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022. As a result, days’ sales outstanding for this segment declined to 38 days for the third quarter of fiscal 2023, down from 45 days for the third quarter of fiscal 2022.
As of January 29, 2023, and May 1, 2022, accounts receivable were lower than normal, as we experienced a significant decline in net sales during the third quarter of fiscal 2023 and the fourth quarter of fiscal 2022. As described in the Net Sales section above, net sales significantly declined during the third quarter of fiscal 2023 due primarily to reduced customer demand and higher than normal inventory levels held by our residential furniture customers. During the fourth quarter of fiscal 2022, net sales significantly declined due to the mandated COVID-19 related shutdowns associated with our upholstery fabrics operations located in China. Days’ sales outstanding were 38 days and 40 days during the third quarter of fiscal 2023 and the fourth quarter of fiscal 2022, respectively.
I-39
Inventory
As of January 29, 2023, inventory decreased by $14.7 million, or 43.8%, compared with January 30, 2022. This trend reflects (i) a decline in inventory purchases reflecting the decrease in net sales during the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022, as described in the Net Sales section above; (ii) a $2.4 million non-cash charge recorded during the first nine months of fiscal 2023, which includes $2.3 million of markdowns of inventory estimated based on our policy for aged inventory and $98,000 that was associated with the loss on disposal and markdowns of inventory related to the exit from our cut and sew upholstery fabrics operation located in Shanghai, China; and (iii) promotional programs to reduce aged raw materials and finished goods inventory; partially offset by (iv) higher raw material, labor, and overhead costs stemming from inflationary pressures.
As of January 29, 2023, inventory decreased by $8.7 million, or 31.5%, compared with May 1, 2022. This trend reflects (i) the reduction in inventory, despite the modest increase in net sales during the third quarter of fiscal 2023 compared with net sales during the fourth quarter of fiscal 2022, due to improved alignment of inventory purchases with current customer demand trends; (ii) a $2.4 million non-cash charge recorded during the first nine months fiscal 2023, which includes $2.3 million of markdowns of inventory estimated based on our policy for aged inventory and $98,000 that was associated with the loss on disposal and markdowns of inventory related to the exit from our cut and sew upholstery fabrics operation located in Shanghai, China, and (iii) promotional programs to reduce aged raw materials and finished goods inventory; partially offset by (iv) higher raw material, labor, and overhead costs stemming from inflationary pressures.
Inventory turns were 3.8 for the third quarter of fiscal 2023, compared with 3.8 for the third quarter of fiscal 2022, and 3.0 for the fourth quarter of fiscal 2022.
Property, Plant, & Equipment
The $1.8 million as of January 29, 2023, represents property, plant, and equipment of $1.0 million, $630,000, and $121,000 located in the U.S., Haiti, and China, respectively. The $2.0 million as of January 30, 2022, represents property, plant, and equipment of $1.1 million, $585,000, and $344,000 located in the U.S., Haiti, and China, respectively. The $2.0 million as of May 1, 2022, represents property, plant, and equipment of $1.0 million, $756,000, and $255,000 located in the U.S., Haiti, and China, respectively.
As of January 29, 2023, property, plant, and equipment decreased compared with January 30, 2022, and May 1, 2022, due to a reduction in capital spending as a result of current and expected macroeconomic conditions.
Right of Use Assets
The $3.0 million as of January 29, 2023, represents right of use assets of $1.7 million and $1.3 million located in China and the U.S., respectively. The $8.7 million as of January 30, 2022, represents right of use assets of $4.1 million, $2.7 million, and $1.9 million located in China, Haiti, and the U.S., respectively. The $8.1 million as of May 1, 2022, represents right of use assets of $3.7 million, $2.6 million, and $1.8 million located in China, Haiti, and the U.S., respectively.
As of January 29, 2023, our right of use assets decreased by $5.7 million, or 65.7%, compared with January 30, 2022, and decreased by $5.1 million, or 63.1%, compared with May 1, 2022. These decreases mostly resulted from (i) a six-month forgiveness of rent payments associated with COVID relief permitted by the Chinese government for all building lease agreements located in Shanghai, China, (ii) the termination of a building lease agreement in connection with the exit from our cut and sew upholstery fabrics operation located in Shanghai, China, and (iii) the termination of a building lease agreement in connection with the rationalization of our cut and sew upholstery fabrics operation located in Ouananminthe, Haiti.
Assets Held for Sale
As of January 29, 2023, we classified a right of use asset related to item (iii) in the above paragraph as held for sale. See Note 8 to the consolidated financial statements for further details.
Other Income Statement Categories
|
|
Three Months Ended |
|
|
|
|
||||||
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
|
% Change |
|
|||
SG&A expenses |
|
$ |
9,165 |
|
|
$ |
8,007 |
|
|
|
14.5 |
% |
Interest income |
|
|
196 |
|
|
|
214 |
|
|
|
(8.4 |
)% |
Other expense |
|
|
1,095 |
|
|
|
322 |
|
|
|
240.1 |
% |
|
|
|
|
|
|
|
|
|
|
|||
I-40
|
|
Nine Months Ended |
|
|
|
|
||||||
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
|
% Change |
|
|||
SG&A expenses |
|
$ |
27,133 |
|
|
$ |
26,275 |
|
|
|
3.3 |
% |
Interest income |
|
|
292 |
|
|
|
347 |
|
|
|
(15.9 |
)% |
Other expense |
|
|
348 |
|
|
|
963 |
|
|
|
(63.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|||
Selling, General, and Administrative Expenses
The increase in selling, general, and administrative expenses during the third quarter and first nine months of fiscal 2023, compared with the third quarter and the first nine months of fiscal 2022, is due mostly to change in estimate adjustments that were recorded during the third quarter of fiscal 2022, which adjustments were not required during fiscal 2023. The change in estimate adjustments recorded during the third quarter of fiscal 2022 lowered incentive compensation expense, reflecting unfavorable financial results in relation to pre-established targets.
Interest Income
The decrease in interest income during the third quarter and first nine months of fiscal 2023, compared with the third quarter and first nine months of fiscal 2022, is mostly due to the liquidation of all of our remaining short-term investments classified as available-for-sale and corporate bond investments classified as held-to-maturity during the fourth quarter of fiscal 2022, partially offset by a significant increase in market interest rates during fiscal 2023.
Other Expense
Management is required to assess certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate. Based on our assessments, the U.S. dollar was determined to be the functional currency of our operations located in China and Canada.
The increase in other expense during the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022 is due mostly to significantly less favorable exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts. During the third quarter of fiscal 2023, we reported a foreign exchange loss associated with our operations located in China totaling $757,000, compared with $108,000 during the third quarter of fiscal 2022.
The decrease in other expense for the first nine months of fiscal 2023 compared with the first nine months of fiscal 2022 is due mostly to significantly more favorable exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts. During the first nine months of fiscal 2023, we reported a foreign exchange gain associated with our operations located in China totaling $425,000, compared with a foreign exchange loss of $268,000 during the first nine months of fiscal 2022.
The $425,000 foreign exchange rate gain reported during the first nine months of fiscal 2023, which is mostly non-cash, was mostly offset by $315,000 of income tax expense that increased our income tax payments. This $315,000 of income tax expense was associated with taxable foreign exchange rate gains relating to more favorable 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 gains associated with our U.S. dollar denominated balance sheet accounts related to our operations located in China is taxable income, as we incur income tax expense and pay income taxes in China's local currency.
Income Taxes
Effective Income Tax Rate & Income Tax Expense
We recorded income tax expense of $2.3 million, or (9.5%) of loss before income taxes, for the nine-month period ending January 29, 2023, compared with income tax expense of $2.6 million, or 48.4% of income before income taxes, for the nine-month period ending January 30, 2022.
Our effective income tax rates for the nine-month periods ended January 29, 2023, and January 30, 2022, 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 rates for the nine-month periods ended January 29, 2023, and January 30, 2022, we were subject to loss limitation rules. These loss limitation rules require 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 was 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
I-41
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 nine-month periods ending January 29, 2023, and January 30, 2022:
|
|
January 29, |
|
|
January 30, |
|
||
|
|
2023 |
|
|
2022 |
|
||
U.S. federal income tax rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
U.S. valuation allowance |
|
|
(29.3 |
) |
|
|
(26.9 |
) |
Withholding taxes associated with foreign jurisdictions |
|
|
(2.0 |
) |
|
|
9.8 |
|
Capital expenditure deduction - Quebec, Canada |
|
|
(1.6 |
) |
|
|
— |
|
Foreign income tax rate differential |
|
|
1.4 |
|
|
|
7.9 |
|
Tax effects of local currency foreign exchange gains (losses) |
|
|
1.3 |
|
|
|
(1.0 |
) |
Global Intangible Low Taxed Income Tax ("GILTI") |
|
|
— |
|
|
|
37.4 |
|
Other |
|
|
(0.3 |
) |
|
|
0.2 |
|
|
|
(9.5)% |
|
|
|
48.4 |
% |
|
Our consolidated effective income tax rate during the first nine months of fiscal 2023 was much more negatively affected by the mix of earnings between our U.S. operations and our foreign subsidiaries, as compared to the first nine months of fiscal 2022. During the first nine months of fiscal 2023, we incurred a significantly higher pre-tax loss from our U.S. operations totaling $(28.8) million, compared with $(2.3) million during the first nine months of fiscal 2022. As a result, a significantly higher income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets during the first nine months of fiscal 2023, as compared with the first nine months of fiscal 2022. In addition, almost all of our taxable income in the first nine months of fiscal 2023 and fiscal 2022 was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.
During the first nine months of fiscal 2023, we incurred a significantly higher consolidated pre-tax loss totaling $(24.5) million, compared with a much lower pre-tax income totaling $5.4 million, during the first nine months of fiscal 2022. As a result, 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 were more pronounced during the first nine months of fiscal 2022, compared with the first nine months of fiscal 2023.
U.S. Valuation Allowance
We evaluate the realizability of our U.S. net deferred income tax assets to determine if a valuation allowance is required. We assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.
As of January 29, 2023, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was required. Based on our assessment, we determined that we still have a recent history of significant cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the last three fiscal years from 2020 through 2022, and we are currently expecting significant U.S. pre-tax losses to continue during fiscal 2023. 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 January 29, 2023, January 30, 2022, and May 1, 2022, valuation allowances against our net deferred income tax assets pertain to the following:
(dollars in thousands) |
|
January 29, 2023 |
|
|
January 30, 2022 |
|
|
May 1, 2022 |
|
|||
U.S. federal and state net deferred income tax assets |
|
$ |
15,741 |
|
|
|
7,802 |
|
|
|
9,527 |
|
U.S. capital loss carryforward |
|
|
2,330 |
|
|
|
2,330 |
|
|
|
2,330 |
|
|
|
$ |
18,071 |
|
|
|
10,132 |
|
|
|
11,857 |
|
Undistributed Earnings
Refer to Note 13 of the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with undistributed earnings from our foreign subsidiaries as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively.
I-42
Uncertain Income Tax Positions
Refer to Note 13 of the consolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of January 29, 2023, January 30, 2022, and May 1, 2022, respectively.
Income Taxes Paid
The following table sets forth taxes paid by jurisdiction:
|
|
Nine Months |
|
|
Nine Months |
|
||
|
|
Ended |
|
|
Ended |
|
||
|
|
January 29, |
|
|
January 30, |
|
||
(dollars in thousands) |
|
2023 |
|
|
2022 |
|
||
United States Transition Tax Payment |
|
$ |
265 |
|
|
$ |
266 |
|
China Income Taxes, Net of Refunds |
|
|
1,680 |
|
|
|
2,036 |
|
China - Withholding Taxes Associated With |
|
|
— |
|
|
|
487 |
|
Canada - Income Taxes, Net of Refunds |
|
|
(9 |
) |
|
|
256 |
|
|
|
$ |
1,936 |
|
|
$ |
3,045 |
|
Future Liquidity
We are currently projecting annual cash income tax payments of approximately $3.2 million for fiscal 2023, compared with $3.1 million for fiscal 2022. These estimated payments 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, and 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 2023 due to the immediate expensing of U.S. capital expenditures and our existing U.S. federal net operating loss carryforwards that totaled $23.7 million as of May 1, 2022, which are projected to increase as a result of the significant U.S. loss carryforward we expect to generate during fiscal 2023.
As of January 29, 2023, we will be required to pay annual U.S. federal transition tax payments, in accordance with the 2017 Tax Cuts and Jobs Act (“TCJA”), as follows: FY 2024 - $499,000; FY 2025 - $665,000; and FY 2026 - $831,000.
Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents (collectively, "cash"), cash flow from operations, and amounts available under our revolving credit lines. As of January 29, 2023, we believe our cash of $16.7 million, cash flow from operations, and the current availability under our revolving credit lines totaling $28.9 million (Refer to Note 9 of the consolidated financial statements for further details) will be sufficient to fund our foreseeable business needs, commitments, and contractual obligations.
As of January 29, 2023, our cash totaled $16.7 million, an increase of $2.2 million, compared with $14.6 million as of May 1, 2022. This increase was primarily due to (i) net cash provided by operating activities totaling $4.6 million, partially offset by (ii) capital expenditures of $1.6 million, and (iii) contributions totaling $870,000 to our rabbi trust that funds our deferred compensation plan.
Our net cash provided by operating activities was $4.6 million during the first nine months of fiscal 2023, an increase of $17.0 million compared with net cash used in operating activities of $12.4 million during the first nine months of fiscal 2022. This trend mostly reflects (i) a reduction of inventory related to the significant decline in net sales, improved alignment of inventory purchases with current customer demand trends, and promotional programs to reduce aged raw materials and finished goods inventory; (ii) annual incentive payments made during the first quarter of fiscal 2022 that did not recur during the first nine months of fiscal 2023, partially offset by (iii) a decrease in net cash earnings during the first nine months of fiscal 2023 as compared with the first nine months of fiscal 2022.
As of January 29, 2023, there were no outstanding borrowings under our lines of credit.
I-43
The income taxes we pay also affect our liquidity. See the above section titled “Income Taxes Paid” of this Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION for further detail.
Our cash balance may be adversely affected by factors beyond our control, such as (i) customer demand trends, (ii) supply chain disruptions, (iii) rising interest rates and inflation, (iv) world events (including the Russia-Ukraine war), and (v) the continuing uncertainty associated with COVID-19. These factors could cause delays in receipt of payment on accounts receivable and could increase cash disbursements due to rising prices.
By Geographic Area
A summary of our cash and investments by geographic area follows:
|
|
|
|
|
|
|
|
|
|
|||
(dollars in thousands) |
|
Janaury 29, 2023 |
|
|
January 30, 2022 |
|
|
May 1, 2022 |
|
|||
United States |
|
$ |
9,658 |
|
|
$ |
12,351 |
|
|
$ |
4,430 |
|
China |
|
|
6,114 |
|
|
|
8,838 |
|
|
|
9,502 |
|
Canada |
|
|
700 |
|
|
|
454 |
|
|
|
267 |
|
Haiti |
|
|
244 |
|
|
|
557 |
|
|
|
341 |
|
Cayman Islands |
|
|
9 |
|
|
|
10 |
|
|
|
10 |
|
|
|
$ |
16,725 |
|
|
$ |
22,210 |
|
|
$ |
14,550 |
|
|
|
|
|
|
|
|
|
|
|
|||
The total balance as of January 30, 2022, includes short-term investments classified as available-for-sale and short-term and long-term investments classified as held-to-maturity that were liquidated in their entirety during the fourth quarter of fiscal 2022, and therefore, the total balances as of January 29, 2023, and May 1, 2022, solely represent cash.
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 are based on our working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.
During the first nine months of fiscal 2023, we did not purchase any shares of our common stock. As a result, as of January 29, 2023, $3.2 million is available for additional repurchases of our common stock. Despite the current share repurchase authorization, the company does not expect to repurchase any shares through at least the fourth quarter of fiscal 2023.
During the first nine months of fiscal 2022, we repurchased 121,688 shares of our common stock at a cost of $1.8 million.
Dividend Program
On June 29, 2022, our board of directors announced the decision to suspend the company’s quarterly cash dividend. Considering the current and expected macroeconomic conditions, we believe that preserving capital and managing our liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders. Accordingly, we did not make any dividend payments during first nine months of fiscal 2023.
During the nine-month period ending January 30, 2022, dividend payments totaled $4.1 million, which represented quarterly dividend payments ranging from $0.11 per share to $0.115 per share.
Our board of directors has sole authority to determine if and when we will declare future dividends, and on what terms. We will continue to reassess our dividend policy each quarter. Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.
Working Capital
Operating Working Capital
Operating working capital (accounts receivable and inventories, less accounts payable-trade, accounts payable-capital expenditures, and deferred revenue) was $44.9 million as of January 29, 2023, compared with $64.9 million as of January 30, 2022, and $67.7 million as of May 1, 2022. Operating working capital turnover was 4.1 during the third quarter of fiscal 2023, compared with 6.0 during the third quarter of fiscal 2022 and 5.2 during the fourth quarter of fiscal 2022.
I-44
Accounts Receivable
Accounts receivable was $21.2 million as of January 29, 2023, a significant decrease of $17.8 million, or 45.5%, compared with $39.0 million as of January 30, 2022. This decrease reflects the significant decrease in net sales during the third quarter of fiscal 2023, as compared with the third quarter of fiscal 2022. Net sales were $52.5 million during the third quarter of fiscal 2023, a decrease of $27.8 million, or 34.6%, compared with net sales of $80.3 million during the third quarter of fiscal 2022. In addition, we experienced faster cash collections from certain significant customers that we had on shorter credit terms due to their financial condition and a more favorable mix of higher sales volume with customers who had shorter credit terms during the third quarter of fiscal 2023, as compared with the third quarter of fiscal 2022. As a result, we experienced a decline in days’ sales outstanding to 34 days for the third quarter of fiscal 2023, down from 44 days during the third quarter of fiscal 2022.
Accounts receivable was $21.2 million as of January 29, 2023, a decrease of $985,000, or 4.4%, compared with $22.2 million as of May 1, 2022. These accounts receivable balances were lower than normal, as we experienced a significant decline in net sales during the third quarter of fiscal 2023 and the fourth quarter of fiscal 2022. During the third quarter of fiscal 2023, net sales significantly declined due primarily to reduced consumer demand and higher than normal inventory levels held by our customers related to both our mattress and upholstery fabrics segments. During the fourth quarter of fiscal 2022, net sales significantly declined due to the mandated COVID-19 related shutdowns associated with our upholstery fabrics operations located in China. Days’ sales outstanding were 34 days and 35 days during the third quarter of fiscal 2023 and the fourth quarter of fiscal 2022, respectively.
Inventory
Inventory was $47.7 million as of January 29, 2023, a significant decrease of $25.5 million, or 34.9%, compared with $73.1 million as of January 30, 2022, and a significant decrease of $18.9 million, or 28.4% , compared with $66.6 million as of May 1, 2022. This trend reflects (i) a decline in inventory purchases reflecting the 34.6% decrease in net sales during the third quarter of fiscal 2023 compared with the third quarter of fiscal 2022, and a 7.8% decrease in net sales during the third quarter of fiscal 2023 compared with the fourth quarter of fiscal 2022; (ii) a $6.2 million non-cash charge recorded in the first nine months of fiscal 2023, which includes $2.9 million related to a write down of inventory to its net realizable value and $3.3 million related to markdowns of inventory estimated based on our policy for aged inventory; (iii) $98,000 for the loss on disposal and markdowns of inventory related to the exit from our cut and sew upholstery fabrics operation located in Shanghai, China; and (iv) promotional programs to reduce aged raw materials and finished goods inventory; partially offset by (v) higher raw material, labor, and overhead costs stemming from inflationary pressures.
Inventory turns were 4.0 for the third quarter of fiscal 2023, as compared with 3.4 for the third quarter of fiscal 2022 and 3.1 for the fourth quarter of fiscal 2022.
Accounts Payable - Trade
Accounts payable - trade was $22.5 million as of January 29, 2023, a significant decrease of $24.2 million, or 51.7%, compared with $46.7 million as of January 30, 2022. This significant decrease primarily reflects the significant decline in net sales during the third quarter of fiscal 2023, as compared with the third quarter of fiscal 2022. Net sales were $52.5 million during the third quarter of fiscal 2023, a decrease of $27.8 million, or 34.6%, compared with net sales of $80.3 million during the third quarter of fiscal 2022.
Accounts payable - trade was $22.5 million as of January 29, 2023, an increase of $2.4 million, or 12.1%, compared with $20.1 million as of May 1, 2022. These accounts payable balances were lower than normal, as we experienced a significant decline in net sales during the third quarter of fiscal 2023 and the fourth quarter of fiscal 2022. During the third quarter of fiscal 2023, net sales significantly declined due primarily to reduced consumer demand and higher than normal inventory levels held by our customers related to both our mattress and upholstery fabrics segments. During the fourth quarter of fiscal 2022, net sales significantly declined due to the mandated COVID-19 related shutdowns associated with our upholstery fabrics operations located in China.
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 January 29, 2023, we did not have any outstanding borrowings associated with our revolving credit agreements.
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of January 29, 2023, we were in compliance with these financial covenants.
I-45
Refer to Note 9 of the consolidated financial statements for further disclosure regarding our revolving credit agreements.
Capital Expenditures and Depreciation
Overall
Capital expenditures on a cash basis were $1.6 million during the first nine months of fiscal 2023, compared with $5.3 million for the same period a year ago. Capital expenditures on a cash basis during the first nine months of fiscal 2023 reflected a reduction in our capital spending as a result of current and expected macroeconomic conditions. Capital expenditures on a cash basis during the first nine months of fiscal 2022 mostly related to our mattress fabrics segment, our innovation campus located in downtown High Point, NC, and IT equipment.
Depreciation expense was $5.2 million during the first nine months of fisca1 2023 and fiscal 2022. Depreciation expense mostly related to our mattress fabrics segment for both periods.
Accounts Payable – Capital Expenditures
As of January 29, 2023, we had total amounts due regarding capital expenditures totaling $25,000 that pertained to outstanding vendor invoices, none of which were financed. The total amount outstanding of $25,000 is required to be paid based on normal credit terms.
Purchase Commitments – Capital Expenditures
As of January 29, 2023, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $738,000.
Critical Accounting Policies and Recent Accounting Developments
As of January 29, 2023, 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 1, 2022.
Refer to Note 2 of the consolidated financial statements for recently adopted and issued accounting pronouncements, if any, since the filing of our Form 10-K for the year ended May 1, 2022.
Contractual Obligations
There were no significant or new contractual obligations since those reported in our annual report on Form 10-K for the year ended May 1, 2022, except for those disclosed in Note 9 of the consolidated financial statements.
Inflation
Any significant increase in our raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating cost increases on to customers. During fiscal 2022 and continuing through the first nine months of fiscal 2023, higher freight costs, labor costs, and raw material prices have increased the prices we pay for shipping, labor, and raw materials. Inflationary pressures also began to affect consumer spending during the second half of fiscal 2022, and these pressures have continued through the first nine months of fiscal 2023. We are unable to predict how long these trends will last, or to what extent inflationary pressures may affect the economic and purchasing cycle for home furnishing products (and therefore affect demand for our products) over the short and long term.
I-46
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rates
We are exposed to market risk from changes in interest rates with regards to our revolving credit agreements.
Effective January 19, 2023, we entered into a second amended and restated U.S. revolving credit agreement (the “Amended Agreement”) to establish an asset-based revolving credit facility that required interest to be charged at a rate (applicable interest rate of 5.81% as of January 29, 2023) calculated using an applicable margin over the Federal Reserve Bank of New York’s secured overnight fund rate (SOFR), as defined in the Amended Agreement. As of January 29, 2023, there were no outstanding borrowings under the Amended Agreement.
Our revolving credit line associated with our operations located in China bears interest at a rate determined by the Chinese government at the time of borrowing. As of January 29, 2023, there were no borrowings outstanding under our revolving credit agreement associated with our operations located in China.
Foreign Currency
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 currency 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 January 29, 2023, would not have materially affected our results of operations or financial position.
ITEM 4. CONTROLS AND PROCEDURES
As of January 29, 2023, 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 January 29, 2023, 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.
I-47
Part II – Other Information
Item 1. Legal Proceedings
There have not been any material changes to our legal proceedings during the three months ended January 29, 2023. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 15, 2022, for the fiscal year ended May 1, 2022.
Item 1A. Risk Factors
There have not been any material changes to our risk factors during the three months ended January 29, 2023. 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 15, 2022, for the fiscal year ended May 1, 2022.
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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||||
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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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||||
October 31, 2022 to December 4, 2022 |
|
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— |
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|
|
— |
|
|
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— |
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$ |
3,248,094 |
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December 5, 2022 to January 1, 2023 |
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— |
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|
|
— |
|
|
|
— |
|
|
$ |
3,248,094 |
|
January 2, 2023 to January 29, 2023 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
3,248,094 |
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Total |
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— |
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— |
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— |
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|
$ |
3,248,094 |
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II-1
Item 6. Exhibits
The following exhibits are submitted as part of this report.
10.1 First Amendment to Second Amended and Restated Credit Agreement.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
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: March 9, 2023 |
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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 10.1
EXECUTION VERSION
FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT
This First Amendment to Second Amended and Restated Credit Agreement (this “Agreement”) dated as of February 21, 2023, is made by and among CULP, INC., a North Carolina corporation (“Borrower”), READ WINDOW PRODUCTS, LLC, a North Carolina limited liability company (“Guarantor”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Lender”).
W I T N E S S E T H :
WHEREAS, Borrower, Guarantor, and Lender are parties to that certain Second Amended and Restated Credit Agreement dated as of January 19, 2023 (as amended, restated, supplemented, or otherwise modified from time, the “Credit Agreement”); and
WHEREAS, Loan Parties have requested that Lender amend the Credit Agreement as set forth herein, and Lender is willing to do so on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows:
(n) Indebtedness owed to (i) any Person providing property, casualty, liability, or other insurance to any Loan Party or any of its Subsidiaries or (ii) any Person providing financing for the premiums of property, casualty, liability, or other insurance provided to any Loan Party or any of its Subsidiaries, so long as, in each case, the amount of such Indebtedness is not in excess of the amount of the unpaid cost of, and shall be incurred only to defer the cost of, such insurance for the year in which such Indebtedness is incurred and such Indebtedness is outstanding only during such year; and
(o) Liens granted on the unearned portion of insurance premiums and policy dividends securing the financing of insurance premiums to the extent the financing is permitted under the definition of Permitted Indebtedness; and
ACTIVE 685401513v2
ACTIVE 685401513v2 2
[Continued on following page.]
ACTIVE 685401513v2 3
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Credit Agreement to be duly executed as of the date first written above.
CULP, INC.
By:_________________________________
Name: Kenneth R. Bowling
Title: EVP, CFO, and Treasurer
READ WINDOW PRODUCTS, LLC
By: CULP, INC., its sole member and manager
By:_________________________________
Name: Kenneth R. Bowling
Title: EVP, CFO, and Treasurer
[CULP—FIRST AMENDMENT TO CREDIT AGREEMENT]
Wells Fargo Bank, National Association
By:
Name: Susan Carr
Title: Authorized Signatory
[CULP—FIRST AMENDMENT TO CREDIT AGREEMENT]
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:
(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;
(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;
(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
(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):
(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
(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: March 9, 2023
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:
(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;
(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;
(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
(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):
(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
(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: March 9, 2023
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 January 29, 2023, 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 |
March 9, 2023
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 January 29, 2023, 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 |
March 9, 2023
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.