UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
Commission File No.
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA |
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(State or other jurisdiction of incorporation or other organization) |
(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
(zip code) |
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange |
Title of Each Class |
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Trading Symbol(s) |
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On Which Registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ☒ YES NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period after the registrant was required to submit such files). ☒ YES NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Non-accelerated filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common shares outstanding as of September 8, 2021:
Par Value: $0.05 per share
INDEX TO FORM 10-Q
For the period ended August 1, 2021
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Part I - Financial Statements |
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Item 1. |
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I-1 |
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Consolidated Statements of Net Income (Loss) — Three Months Ended August 1, 2021, and August 2, 2020 |
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I-1 |
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I-2 |
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Consolidated Balance Sheets — August 1, 2021, August 2, 2020 and May 2, 2021 |
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I-3 |
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Consolidated Statements of Cash Flows — Three Months Ended August 1, 2021, and August 2, 2020 |
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I-4 |
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Consolidated Statements of Shareholders’ Equity – Three Months Ended August 1, 2021 |
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I-5 |
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Consolidated Statements of Shareholders’ Equity – Three Months Ended August 2, 2020 |
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I-6 |
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I-7 |
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I-27 |
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Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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I-28 |
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Item 3. |
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I-42 |
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Item 4. |
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I-42 |
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Part II - Other Information |
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Item 1. |
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II-1 |
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Item 1A. |
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II-1 |
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Item 2. |
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II-1 |
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Item 6. |
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II-2 |
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II-3 |
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)
FOR THE THREE MONTHS ENDED AUGUST 1, 2021, AND AUGUST 2, 2020
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)
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THREE MONTHS ENDED |
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August 1, |
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August 2, |
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2021 |
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2020 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Income from operations |
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Interest expense |
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— |
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Interest income |
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Other expense |
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Income before income taxes |
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Income tax expense |
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Income from investment in unconsolidated joint venture |
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— |
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Net income (loss) |
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Net income (loss) per share - basic |
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$ |
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$ |
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Net income (loss) per share - diluted |
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$ |
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$ |
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Average shares outstanding, basic |
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Average shares outstanding, diluted |
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See accompanying notes to consolidated financial statements.
I-1
CULP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED AUGUST 1, 2021, AND AUGUST 2, 2020
UNAUDITED
(Amounts in Thousands)
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THREE MONTHS ENDED |
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August 1, |
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August 2, |
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2021 |
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2020 |
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Net income (loss) |
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$ |
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$ |
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Unrealized holding gains on investments, net of tax |
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Comprehensive income (loss) |
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$ |
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$ |
( |
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See accompanying notes to consolidated financial statements.
I-2
CULP, INC.
CONSOLIDATED BALANCE SHEETS
AUGUST 1, 2021, AUGUST 2, 2020, AND MAY 2, 2021
UNAUDITED
(Amounts in Thousands)
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August 1, |
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August 2, |
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* May 2, |
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2021 |
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2020 |
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2021 |
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Current assets: |
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Cash and cash equivalents |
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$ |
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Short-term investments - held-to-maturity |
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Short-term investments - available for sale |
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Accounts receivable |
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Inventories |
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Current income taxes receivable |
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— |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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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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Right of use assets |
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Deferred income taxes |
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Investment in unconsolidated joint venture |
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— |
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— |
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Other assets |
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Total assets |
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$ |
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Current liabilities: |
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Accounts payable - trade |
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$ |
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Accounts payable - capital expenditures |
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Operating lease liability - current |
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Deferred revenue |
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Accrued expenses |
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Income taxes payable - current |
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Total current liabilities |
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Accrued expenses - long-term |
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— |
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— |
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Operating lease liability - long-term |
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Income taxes payable - long-term |
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Deferred income taxes |
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Deferred compensation |
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Total liabilities |
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Commitments and Contingencies (Notes 3, 9, 15, and 16) |
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Shareholders' equity |
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Preferred stock, $ |
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Common stock, $ and outstanding 2020; and |
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Capital contributed in excess of par value |
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Accumulated earnings |
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Accumulated other comprehensive income |
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Total shareholders' equity |
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Total liabilities and shareholders' equity |
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$ |
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*
See accompanying notes to consolidated financial statements.
I-3
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 1, 2021, AND AUGUST 2, 2020
UNAUDITED
(Amounts in Thousands)
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THREE MONTHS ENDED |
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August 1, |
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August 2, |
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2021 |
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2020 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
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( |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation |
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Amortization |
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Stock-based compensation |
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Deferred income taxes |
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( |
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Income from investment in unconsolidated joint venture |
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— |
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( |
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Foreign currency exchange loss |
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Changes in assets and liabilities: |
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Accounts receivable |
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( |
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Inventories |
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( |
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Other current assets |
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( |
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( |
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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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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 operating activities |
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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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Investment in unconsolidated joint venture |
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— |
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( |
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Proceeds from the maturity of short-term investments (Held to Maturity) |
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Purchase of short-term and long-term investments (Held to Maturity) |
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( |
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( |
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Purchase of short-term investments (Available for Sale) |
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( |
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( |
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Proceeds from the sale of long-term investments (rabbi trust) |
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— |
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Purchase of long-term investments (rabbi trust) |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Payments associated with lines of credit |
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— |
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( |
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Payment associated with Paycheck Protection Program Loan |
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— |
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( |
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Dividends paid |
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( |
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( |
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Common stock repurchased |
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( |
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— |
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Common stock surrendered for withholding taxes payable |
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( |
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— |
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Payments of debt issuance costs |
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— |
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( |
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Net cash used in financing activities |
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( |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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Decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
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$ |
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I-4
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
THREE-MONTH PERIOD ENDED AUGUST 1, 2021
UNAUDITED
(Dollars in thousands, except share data)
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Capital |
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Accumulated |
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Contributed |
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Other |
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Total |
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Common Stock |
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in Excess |
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Accumulated |
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Comprehensive |
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Shareholders' |
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Shares |
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Amount |
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of Par Value |
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Earnings |
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Income |
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Equity |
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Balance, May 2, 2021 * |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Unrealized gain on investments |
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— |
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— |
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— |
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— |
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Common stock issued in connection with vesting of performance-based restricted stock units |
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— |
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— |
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— |
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— |
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— |
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Common stock surrendered for withholding taxes payable |
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( |
) |
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— |
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( |
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— |
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— |
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( |
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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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— |
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Common stock repurchased |
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( |
) |
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( |
) |
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( |
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— |
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— |
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( |
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Dividends paid |
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— |
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— |
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— |
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( |
) |
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— |
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( |
) |
Balance, August 1, 2021 |
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$ |
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$ |
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$ |
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$ |
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$ |
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* |
Derived from audited financial statements. |
See accompanying notes to consolidated financial statements
I-5
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
THREE-MONTH PERIOD ENDED AUGUST 2, 2020
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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(Loss) Income |
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Equity |
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Balance, May 3, 2020 * |
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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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|
|
— |
|
|
|
|
|
Unrealized gain on investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Fully vested common stock award |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Dividends paid |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
Balance, August 2, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
* |
Derived from audited financial statements. |
See accompanying notes to consolidated financial statements.
I-6
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Culp, Inc. and its majority-owned subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 16, 2021, for the fiscal year ended May 2, 2021.
The company’s three-months ended August 1, 2021, and August 2, 2020, each represent 13-week periods.
2. Significant Accounting Policies
As of August 1, 2021, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended May 2, 2021.
Recently Adopted Accounting Pronouncements
Income Taxes
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. This guidance was effective for fiscal years, and periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. As a result, we adopted the provisions of ASU 2019-12 on May 3, 2021 (the beginning of fiscal 2022). The adoption of ASU 2019-12 did not affect our financial position, results of operations, or cash flows.
Recently Issued Accounting Pronouncements
Currently, there are no new recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements.
3. |
BUSINESS COMBINATION ACHIEVED IN STAGES |
Overview
Effective January 1, 2017, Culp International Holdings, Ltd. (“Culp International”), a wholly-owned subsidiary of the company entered into a joint venture agreement pursuant to which Culp International owned
Prior to the acquisition of the remaining
The consideration transferred for our now-
I-7
Assets Acquired and Liabilities Assumed
The following table presents the final allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values:
(dollars in thousands) |
|
Fair Value |
|
|
Cash and cash equivalents |
|
$ |
|
|
Accounts receivable |
|
|
|
|
Inventory |
|
|
|
|
Right of use assets |
|
|
|
|
Equipment and leasehold improvements |
|
|
|
|
Accounts payable |
|
|
( |
) |
Gain on bargain purchase |
|
|
( |
) |
|
|
$ |
|
|
Equipment and leasehold improvements is being depreciated on a straight-line basis over their remaining useful lives ranging from
Gain on Bargain Purchase
Concurrent with our acquisition of the remaining 50% ownership interest in CIH, our former joint venture partner sold its mattress business to a third party. Our acquisition of the remaining 50% ownership interest in CIH was undertaken due to this sale and the terms negotiated in connection therewith. As a result, the $
Supply and Rebate Agreements
In connection with the Share Purchase Agreement, we entered into a supply agreement and rebate agreement with an affiliated company of our former joint venture partner to secure plant capacity utilization and preserve sales channels of certain mattress fabric products. The supply and rebate agreements are effective as of the acquisition date and are based on future sales orders consistent with current market conditions.
The transactions associated with the supply and rebate agreements are accounted for in accordance with ASC Topic 606 Revenue from Contract with Customers. During the first quarter of fiscal 2022, shipments pursuant to the supply agreement were $
Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the three-month periods ending August 1, 2021, and August 2, 2020, have been prepared as if this acquisition had occurred on April 29, 2019.
(dollars in thousands, except per share data) |
|
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
Net Sales |
|
|
$ |
|
|
|
$ |
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
( |
) |
Net income (loss) per share - basic |
|
|
$ |
|
|
|
$ |
( |
) |
Net income (loss) per share - diluted |
|
|
$ |
|
|
|
$ |
( |
) |
I-8
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
Equity Method of Accounting
In accordance with the equity method of accounting, we reported our previous 50% proportionate share of net income of CIH as a separate line titled “income from investment in unconsolidated joint venture” in the accompanying Consolidated Statements of Net Income (Loss). Our 50% proportionate share of the net income of the unconsolidated joint venture was $
The following table summarizes assets, liabilities, and members’ equity for our equity method investment in CIH:
(dollars in thousands) |
|
|
August 2, 2020 |
|
|
total assets |
|
|
$ |
|
|
total liabilities |
|
|
$ |
|
|
total members’ equity |
|
|
$ |
|
|
As of August 2, 2020, our investment in unconsolidated joint venture totaled $
4. Allowance for Doubtful Accounts
A summary of the activity in the allowance for doubtful accounts follows:
|
|
Three Months Ended |
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Provision for bad debts |
|
|
( |
) |
|
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
|
|
During the three-month periods ended August 1, 2021, and August 2, 2020, we assessed the credit risk of our customers within our accounts receivable portfolio. Our risk assessment includes the respective customer’s (i) financial position; (ii) past payment history; (iii) management’s general ability; and (iv) historical loss experience; as well as (v) any other ongoing economic conditions (i.e., COVID-19). After our risk assessment was completed, we assigned credit grades to our customers, which in turn, were used to determine our allowance for doubtful accounts totaling $
5. Revenue from Contracts with Customers
Nature of Performance Obligations
Our operations are classified into
Our primary performance obligations include the sale of mattress fabrics and upholstery fabrics, as well as the performance of customized fabrication and installation services of our own products associated with window treatments.
I-9
Contract Assets & Liabilities
Certain contracts, primarily those for customized fabrication and installation services associated with Read, require upfront customer deposits that result in a contract liability which is recorded on the Consolidated Balance Sheets as deferred revenue. If upfront deposits or prepayments are not required, customers may be granted credit terms which generally range from 15 –
A summary of the activity associated with deferred revenue follows:
|
|
Three months ended |
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Revenue recognized on contract liabilities |
|
|
( |
) |
|
|
( |
) |
Payments received for services not yet rendered |
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
|
|
|
$ |
|
|
Disaggregation of Revenue
The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending August 1, 2021:
|
|
Mattress |
|
|
Upholstery |
|
|
|
|
|
||
(dollars in thousands) |
|
Fabrics |
|
|
Fabrics |
|
|
Total |
|
|||
Products transferred at a point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services transferred over time |
|
|
— |
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending August 2, 2020:
|
|
Mattress |
|
|
Upholstery |
|
|
|
|
|
||
(dollars in thousands) |
|
Fabrics |
|
|
Fabrics |
|
|
Total |
|
|||
Products transferred at a point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Services transferred over time |
|
|
— |
|
|
|
|
|
|
|
|
|
Total Net Sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
6. Inventories
Inventories are carried at the lower of cost or net realizable value. Cost is determined using the FIFO (first-in, first-out) method.
A summary of inventories follows:
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Work-in-process |
|
|
|
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
7. Intangible Assets
A summary of intangible assets follows:
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
Tradename |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Customer relationships, net |
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreement, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
I-10
Tradename
Our tradename totaling $
Customer Relationships
A summary of the change in the carrying amount of our customer relationships follows:
|
|
Three months ended |
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Amortization expense |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
|
$ |
|
|
Our customer relationships are amortized on a straight-line basis over useful lives ranging from
The gross carrying amount of our customer relationships was $
The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2022 - $
The weighted average amortization period for our customer relationships was
Non-Compete Agreement
A summary of the change in the carrying amount of our non-compete agreement follows:
|
|
Three months ended |
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
Beginning balance |
|
$ |
|
|
|
$ |
|
|
Amortization expense |
|
|
( |
) |
|
|
( |
) |
Ending balance |
|
$ |
|
|
|
$ |
|
|
Our non-compete agreement is amortized on a straight-line basis over the
life of the agreement.The gross carrying amount of our non-compete agreement was $
The remaining amortization expense for the next five years and thereafter follows: FY 2022 - $
The weighted average amortization period for the non-compete agreement was
8. Accrued Expenses
A summary of accrued expenses follows:
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
Compensation, commissions and related benefits |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other accrued expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Our entire accrued expense balances totaling $
I-11
expenses totaling $
9. Lines of Credit
Revolving Credit Agreement – United States
Our Credit Agreement (“Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $
Interest is charged at a rate (applicable interest rate of
As of August 1, 2021, August 2, 2020, and May 2, 2021, there were $
There were
Revolving Credit Agreements – China Operations
Denominated in Chinese Yuan Renminbi (“RMB”)
We have an unsecured credit agreement denominated in RMB with a bank located in China that provides for a line of credit of up to
There were
Denominated in United States Dollar (“USD”)
As of May 2, 2021, we had an unsecured credit agreement denominated in USD with another bank located in China that provided for a line of credit up to $
There were
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of August 1, 2021, we complied with our financial covenants.
10. Fair Value
ASC Topic 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy.
The hierarchy consists of three broad levels as follows:
Level 1 – Quoted market prices in active markets for identical assets or liabilities.
I-12
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 August 1, 2021, using: |
|
|||||||||
|
|
Quoted prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in active |
|
|
other |
|
Significant |
|
|
|
|
|
|
|
markets for |
|
|
observable |
|
unobservable |
|
|
|
|
|
|
|
identical assets |
|
|
inputs |
|
inputs |
|
|
|
|
|
(amounts in thousands) |
|
Level 1 |
|
|
Level 2 |
|
Level 3 |
|
Total |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Money Market Fund |
|
$ |
|
|
|
N/A |
|
N/A |
|
$ |
|
|
Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Inflation Protected Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Mortgage Securities Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Large Cap Equity Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Growth Allocation Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
U.S. Event Driven Equity Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Moderate Allocation Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Other |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
|
|
Fair value measurements as of August 2, 2020, using: |
|
|||||||||
|
|
Quoted prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in active |
|
|
other |
|
Significant |
|
|
|
|
|
|
|
markets for |
|
|
observable |
|
unobservable |
|
|
|
|
|
|
|
identical assets |
|
|
inputs |
|
inputs |
|
|
|
|
|
(amounts in thousands) |
|
Level 1 |
|
|
Level 2 |
|
Level 3 |
|
Total |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Premier Money Market Fund |
|
$ |
|
|
|
N/A |
|
N/A |
|
$ |
|
|
Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Growth Allocation Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Moderate Allocation Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Other |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
|
|
Fair value measurements as of May 2, 2021, using: |
|
|||||||||
|
|
Quoted prices |
|
|
Significant |
|
|
|
|
|
|
|
|
|
in active |
|
|
other |
|
Significant |
|
|
|
|
|
|
|
markets for |
|
|
observable |
|
unobservable |
|
|
|
|
|
|
|
identical assets |
|
|
inputs |
|
inputs |
|
|
|
|
|
(amounts in thousands) |
|
Level 1 |
|
|
Level 2 |
|
Level 3 |
|
Total |
|
||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Premier Money Market Fund |
|
$ |
|
|
|
N/A |
|
N/A |
|
$ |
|
|
Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Inflation Protected Bond Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Mortgage Securities Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Growth Allocation Mutual Funds |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Moderate Allocation Mutual Fund |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
Other |
|
|
|
|
|
N/A |
|
N/A |
|
|
|
|
I-13
Short-Term Investments – Available for Sale
Our short-term investments classified as available for sale consisted of various types of bond and equity mutual funds and had an accumulated unrealized gain totaling $
Short-Term and Long-Term Investments - Held-To-Maturity
Our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds with remaining maturities of less than
As of August 1, 2021, August 2, 2020, and May 2, 2021, our held-to-maturity investments recorded at amortized cost totaled $
Our bond investments were classified as level 2 within the fair value hierarchy as they were traded over the counter within a broker network and not on an active market. The fair value of our bond investments was determined based on a published source that provided an average bid price. The average bid price was based on various broker prices that were determined based on market conditions, interest rates, and the rating of the respective bond investment.
Current Expected Credit Loses (“CECL”)- Available for Sale and Held-To-Maturity Investments
As of August 1, 2021, August 2, 2020, and May 2, 2021, we did
We determined that our credit loss exposure was immaterial as we have experienced historically low unrealized losses and gains during past reporting periods. In addition, it is not our intention to sell, and it is not likely that we will be required to sell, our held-to-maturity investments before the recovery of their amortized cost basis.
As of August 1, 2021, we reported an accumulated unrealized gain of $
Long-Term Investments - Rabbi Trust
We have a rabbi trust for the participants of our deferred compensation plan (the “Plan”), that enables our participants to credit their contributions to various investment options of the Plan. The investments associated with the rabbi trust consist of a U.S. Government money market fund and various equity related mutual funds that are classified as available for sale.
Our long-term investments associated with our rabbi trust are classified as available for sale and recorded at their fair values of $
Other
The carrying amount of our cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximate their fair value because of the short maturity of these financial instruments.
I-14
Nonrecurring Basis – Fourth Quarter of Fiscal 2021
During the three-month period ending May 2, 2021, we had assets and liabilities that were required to be measured at fair value on a nonrecurring basis that pertained to assets acquired and certain liabilities that were assumed in connection with the CIH business combination effective February 1, 2021. See Note 3 of the consolidated financial statements for further details regarding this business combination.
|
|
Fair value measurements as of May 2, 2021, using: |
|
|||||||||||
|
|
Quoted prices |
|
Significant |
|
|
|
|
|
|
|
|
|
|
|
|
in active |
|
other |
|
|
Significant |
|
|
|
|
|
||
|
|
markets for |
|
observable |
|
|
unobservable |
|
|
|
|
|
||
|
|
identical assets |
|
inputs |
|
|
inputs |
|
|
|
|
|
||
(amounts in thousands) |
|
Level 1 |
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets |
|
N/A |
|
|
|
|
|
N/A |
|
|
$ |
|
|
|
Equipment and leasehold improvements |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
|
|
|
Inventory |
|
N/A |
|
N/A |
|
|
|
|
|
|
|
The fair value of our right of use assets was based on our analysis of a recent appraisal of annual lease rates per square foot for industrial buildings that are similar in nature and within the same locale. We believe the annual lease rates per square foot presented in our recent appraisal represent significant observable inputs and therefore the right of use assets were classified as level 2.
Additionally, in connection with the CIH business combination effective February 1, 2021, we acquired cash, accounts receivable, and certain other current assets, and we assumed accounts payable. Based on the nature of these items and their short-term maturity, the carrying amount of these items approximated their fair values. See Note 3 of the consolidated financial statements for the final allocation of the acquisition cost to assets acquired and liabilities assumed based on their fair values.
11. Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income (loss) per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted net income (loss) per share are as follows:
|
|
Three months ended |
|
|||||
(amounts in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
Weighted average common shares outstanding, basic |
|
|
|
|
|
|
|
|
Dilutive effect of stock-based compensation |
|
|
|
|
|
|
— |
|
Weighted average common shares outstanding, diluted |
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2022, all unvested shares of common stock were included in the computation of diluted net income per share.
During the first quarter of fiscal 2021,
12. Segment Information
Overall
Our operations are classified into
I-15
this segment includes Read, which 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.
Financial Information
We evaluate the operating performance of our business segments based upon income (loss) from operations before certain unallocated corporate expenses, asset impairments, restructuring credit (expense) and related charges, and other non-recurring items. Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. The mattress fabrics segment also included in segment assets its investment in an unconsolidated joint venture as of August 2, 2020.
Statements of operations for our operating segments are as follows:
|
|
Three months ended |
|
|||||
|
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
net sales by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
net sales |
|
$ |
|
|
|
$ |
|
|
gross profit: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
gross profit |
|
$ |
|
|
|
$ |
|
|
selling, general, and administrative expenses by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
unallocated corporate expenses |
|
|
|
|
|
|
|
|
selling, general, and administrative expenses |
|
$ |
|
|
|
$ |
|
|
income (loss) from operations by segment: |
|
|
|
|
|
|
|
|
mattress fabrics |
|
$ |
|
|
|
$ |
|
|
upholstery fabrics |
|
|
|
|
|
|
|
|
unallocated corporate expenses |
|
|
( |
) |
|
|
( |
) |
income from operations |
|
|
|
|
|
|
|
|
interest expense |
|
|
— |
|
|
|
( |
) |
interest income |
|
|
|
|
|
|
|
|
other expense |
|
|
( |
) |
|
|
( |
) |
income before income taxes |
|
$ |
|
|
|
$ |
|
|
I-16
Balance sheet information for our operating segments follows:
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
Segment assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Mattress Fabrics: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Inventory |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets (2) |
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated joint venture |
|
|
— |
|
|
|
|
|
|
|
— |
|
Total mattress fabrics assets |
|
|
|
|
|
|
|
|
|
|
|
|
Upholstery Fabrics: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (3) |
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets (4) |
|
|
|
|
|
|
|
|
|
|
|
|
Total upholstery fabrics assets |
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets |
|
|
|
|
|
|
|
|
|
|
|
|
Non-segment assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments - available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments - held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Current income taxes receivable |
|
|
|
|
|
|
|
|
|
|
— |
|
Other current assets |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment (5) |
|
|
|
|
|
|
|
|
|
|
|
|
Right of use assets (6) |
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments - rabbi trust |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments - held-to-maturity |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Three months ended |
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
Capital expenditures (7): |
|
|
|
|
|
|
|
|
Mattress Fabrics |
|
$ |
|
|
|
$ |
|
|
Upholstery Fabrics |
|
|
|
|
|
|
|
|
Unallocated Corporate |
|
|
|
|
|
|
|
|
Total capital expenditures |
|
$ |
|
|
|
$ |
|
|
Depreciation expense: |
|
|
|
|
|
|
|
|
Mattress Fabrics |
|
$ |
|
|
|
$ |
|
|
Upholstery Fabrics |
|
|
|
|
|
|
|
|
Total depreciation expense |
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
(3) |
|
I-17
(4) |
|
(5) |
|
(6) |
|
(7) |
|
13. Income Taxes
Effective Income Tax Rate
We recorded income tax expense of $
Our effective income tax rates for the three-month periods ended August 1, 2021, and August 2, 2020, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. When calculating the annual estimated effective income tax rate for the three-month periods ended August 1, 2021, and August 2, 2020, we were subject to a loss limitation rule in accordance with ASC Topic 740-270-30-36(a). This loss limitation rule requires any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no tax benefit could be recognized during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from 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 three-month periods ending August 1, 2021, and August 2, 2020:
|
|
August 1, |
|
|
August 2, |
|
||
|
|
2021 |
|
|
2020 |
|
||
U.S. federal income tax rate |
|
|
|
% |
|
|
|
% |
U.S. valuation allowance |
|
|
( |
) |
|
|
|
|
U.S. income tax law change |
|
|
— |
|
|
|
( |
) |
Withholding taxes associated with foreign jurisdictions |
|
|
|
|
|
|
|
|
Foreign income tax rate differential |
|
|
|
|
|
|
|
|
Global Intangible Low Taxed Income Tax ("GILTI") |
|
|
|
|
|
|
— |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
% |
|
|
|
% |
Our effective income tax rate during the first quarter of fiscal 2022 was negatively affected, but not nearly to the extent as in the first quarter of fiscal 2021, by the mix of taxable income that is mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. This is due mostly to higher annual forecasted taxable income from our U.S. operations as of the end of the first quarter of fiscal 2022, as compared with lower annual forecasted taxable as of the end of the first quarter of fiscal 2021. The annual forecasted taxable income at the end of the first quarter of fiscal 2021 was significantly affected by the ongoing disruption and uncertain economic conditions relating to the COVID-19 pandemic. As a result of the increase in forecasted taxable income, the principal differences in the above table are not as pronounced during the first quarter of fiscal 2022 as compared with those differences during the first quarter of fiscal 2021.
I-18
GILTI
Fiscal 2021
Effective July 20, 2020, the U.S. Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”). With the enactment of these final regulations, we became eligible for an exclusion from GILTI if we meet the provisions of the GILTI High-Tax exception included in these final regulations. To meet the provisions of the GILTI high tax exception, the tested foreign entity’s effective income tax rate related to current year’s earnings must be higher than
Since we met the requirements for the High-Tax exception for our 2019 and 2020 fiscal years, we recorded a non-cash income tax benefit of $
Additionally, we met the requirements for the High-Tax exception for our 2021 fiscal year, and therefore, were not subject to GILTI tax.
Fiscal 2022
As of the end of the first quarter of fiscal 2022, we believe we will not meet the requirements for the GILTI High-Tax exception regarding our foreign subsidiaries located in Canada and Haiti, and therefore, will be subject to GILTI tax for the 2022 fiscal year.
Based on our assessment associated with our operation located in Canada, we expect that several significant capital projects will be placed into service during fiscal 2022, and therefore we will be eligible for a significant amount of deductible accelerated depreciation. As a result, our current year’s income tax expense is expected to be much lower than prior fiscal years’, and therefore, our projected current effective income tax rate is expected to be lower than the required
Based on our assessment associated with our operations located in Haiti, we expect to earn taxable income that is not subject to income tax, as we are located in an economic zone that permits a
Valuation Allowance
In accordance with ASC Topic 740, we evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.
As a result of the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income taxes as of the end of the first quarter of fiscal 2021. GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and 2020 that offset our U.S. pre-tax losses during such years, and which offset was reversed as a result of the retroactivity of the new GILTI regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S. taxable losses during our last two fiscal years, and we expected at the time of this assessment that our history of U.S. pre-tax losses would continue into fiscal 2021. As a result of the significant weight of this negative evidence, we believed it was more-likely-than-not that our U.S. net deferred income tax assets would not be fully realizable. Accordingly, we recorded a non-cash income tax charge of $
As of August 1, 2021, 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 have a recent history of cumulative U.S. taxable losses, in
I-19
that we experienced U.S. taxable losses during each of the fiscal years 2020 and 2021. In addition, as of August 1, 2021, we are currently expecting U.S. taxable income during fiscal 2022 stemming from the source of taxable income provided by GILTI noted above. However, the cumulative losses that we have experienced during fiscal years 2020 and 2021 significantly exceed the U.S. taxable income expected during fiscal 2022. As a result of the significant weight of this negative evidence, we believe it is more likely than not that our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.
Based on our assessments as of August 1, 2021, August 2, 2020, and May 2, 2021, valuation allowances against our net deferred income taxes pertain to the following:
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
U.S. federal and state net deferred income tax assets |
|
$ |
|
|
|
|
|
|
|
|
|
|
U.S. capital loss carryforward |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Undistributed Earnings
In accordance with ASC Topic 740, we assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. ASC Topic 740 requires that a deferred income tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As of August 1, 2021, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings and profits from our foreign subsidiaries would not be reinvested indefinitely and would be eventually distributed to our U.S. parent company. The conclusion reached from this assessment was consistent with prior years.
As a result of the TCJA, a U.S. corporation is allowed a
Uncertain Income Tax Positions
In accordance with ASC Topic 740, an unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the end of the reporting period, or is effectively settled through examination, negotiation, litigation, or the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. If it is determined that any of the above conditions occur regarding our uncertain income tax positions, an adjustment to our unrecognized income tax benefit will be recorded at that time.
As of August 1, 2021, August 2, 2020, and May 2, 2021, we had a $
Our gross unrecognized income tax benefit of $
Income Taxes Paid
The following table sets forth taxes paid (refunded) by jurisdiction:
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
August 1, |
|
|
August 2, |
|
||
(dollars in thousands) |
|
2021 |
|
|
2020 |
|
||
United States Federal - Alternative Minimum Tax (AMT) credit refunds (1) |
|
$ |
— |
|
|
$ |
( |
) |
China |
|
|
|
|
|
|
|
|
Canada |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
In accordance with the provisions of the TCJA, corporate taxpayers were eligible to treat prior AMT credit carryforwards as refundable. Accordingly, we elected to treat our prior AMT credit carryforward balance of $ |
I-20
a result, |
14. Stock-Based Compensation
Equity Incentive Plan Description
On September 16, 2015, our shareholders approved an equity incentive plan titled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of
As of August 1, 2021, there were
Performance-Based Restricted Stock Units
Senior Executives
We have granted performance-based restricted stock units to senior executives which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. The number of shares of common stock that are earned based on performance targets that have been achieved may be adjusted based on a market-based total shareholder return component as defined in the related restricted stock unit agreements.
Our performance-based restricted stock units granted to senior executives were measured based on their fair market value on the date of grant. The fair market value per share was determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock for the performance-based component.
Key Employees
We have granted performance-based restricted stock units which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. Our performance-based restricted stock units granted to key employees were measured based on the fair market value (the closing price of our common stock) on the date of grant. No market-based total shareholder return component was included in these awards.
Overall
The following table summarizes information related to our grants of performance-based restricted stock units associated with senior executives and key employees that are unvested as of August 1, 2021:
|
|
(3) |
|
|
(4) |
|
|
|
|
|
|
|
|
||
|
|
Performance-Based |
|
|
Restricted Stock |
|
|
|
|
|
|
|
|
||
|
|
Restricted Stock |
|
|
Units Expected |
|
|
|
|
|
|
|
|
||
Date of Grant |
|
Units Awarded |
|
|
to Vest |
|
|
Price Per Share |
|
|
|
Vesting Period |
|||
July 22, 2021 (1) |
|
|
|
|
|
|
|
|
|
$ |
|
|
(6) |
|
|
July 22, 2021 (2) |
|
|
|
|
|
|
|
|
|
$ |
|
|
(6) |
|
|
July 18, 2019 (1) |
|
|
|
|
|
|
|
|
|
$ |
|
|
(5) |
|
|
July 18, 2019 (2) |
|
|
|
|
|
|
|
|
|
$ |
|
|
(6) |
|
|
(1) |
|
(2) |
|
I-21
(3) |
|
(4) |
|
(5) |
|
(6) |
|
The following table summarizes information related to our performance-based restricted stock units that vested during the three-month periods ending August 1, 2021, and August 2, 2020:
|
|
Performance-Based |
|
|
|
|
|
|
(4) |
|
||
|
|
Restricted Stock |
|
|
(3) |
|
|
Price |
|
|||
Fiscal Year |
|
Units Vested |
|
|
Fair Value |
|
|
Per Share |
|
|||
Fiscal 2022 (1) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Fiscal 2022 (2) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Fiscal 2021 (1) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Fiscal 2021 (2) |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
(3) |
|
(4) |
|
We recorded a charge or a (credit) to compensation expense of $
As of August 1, 2021, the remaining unrecognized compensation cost related to our performance-based restricted stock units was $
Time-Based Restricted Stock Units
The following table summarizes information related to our grants of time-based restricted stock unit awards associated with senior executives and key members of management that are unvested as of August 1, 2021:
|
|
Time-Based |
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
|
(1) |
|
|
|
|
||
Date of Grant |
|
Units Awarded |
|
|
Price Per Share |
|
Vesting Period |
||||
July 22, 2021 |
|
|
|
|
|
$ |
|
|
|
|
|
August 6, 2020 |
|
|
|
|
|
$ |
|
|
|
|
|
July 18, 2019 |
|
|
|
|
|
$ |
|
|
|
|
|
August 2, 2018 |
|
|
|
|
|
$ |
|
|
|
|
|
(1) |
|
I-22
Overall
We recorded compensation expense of $
As of August 1, 2021, the remaining unrecognized compensation cost related to our time-based restricted stock units was $
Common Stock Award
We granted a total of
We granted a total of
We recorded $
15. Leases
Overview
We lease manufacturing facilities, showroom and office space, distribution centers, and equipment under operating lease arrangements. Our operating leases have remaining lease terms of
Balance Sheet
The right of use assets and lease liabilities associated with our operating leases as of August 1, 2021, August 2, 2020, and May 2, 2021, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
Right of use assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Operating lease liability - current |
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liability – noncurrent |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
Three Months Ended |
|
|
Three Months Ended |
|
||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
Operating lease liability payments |
|
$ |
|
|
|
$ |
|
|
Right of use assets exchanged for lease liabilities |
|
|
|
|
|
|
|
|
Operating lease expense for the three-month periods ended August 1, 2021, and August 2, 2020, was $
I-23
Other Information
Maturity of our operating lease liabilities for the remainder of fiscal 2022, the subsequent next four fiscal years, and thereafter follows:
(dollars in thousands) |
|
|
|
|
2022 |
|
$ |
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
|
Less: interest |
|
|
( |
) |
Present value of lease liabilities |
|
$ |
|
|
As of August 1, 2021, the weighted average remaining lease term and discount rate for our operating leases follows:
|
|
August 1, 2021 |
|
|
Weighted average lease term |
|
|
|
|
Weighted average discount rate |
|
|
|
% |
Lease Contracts
Culp Upholstery Fabrics – Haiti, Ltd.
Effective April 9, 2021, we entered into an agreement to lease a
High Point, NC – Design and Innovation Campus
Effective May 7, 2021, we entered into an agreement to lease showroom and office space encompassing
As of August 1, 2021, we had a commitment for the construction of leasehold improvements associated with this lease totaling $
I-24
16. Commitments, Contingencies, and Guarantees
Litigation
The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that it is not reasonably possible that these actions, when ultimately concluded and settled, will have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
Accounts Payable – Capital Expenditures
As of August 1, 2021, August 2, 2020, and May 2, 2021, we had total amounts due regarding capital expenditures totaling $
Purchase Commitments – Capital Expenditures
As of August 1, 2021, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $
Discontinued Operations
Supply and Royalty Agreements
In connection with the sale of our entire ownership interest in eLuxury, LLC (“eLuxury”) on March 31, 2020, we entered into supply and royalty agreements with eLuxury to preserve an additional sales channel for our core products – upholstery and mattress fabrics. The supply agreement requires eLuxury to purchase all its requirements at fair market prices for mattress and upholstery fabric products of the type we were supplying to eLuxury at the time of the sale transaction, as well as certain home accessories and soft good products, subject to our ability to provide competitive pricing and delivery terms for such products. The royalty agreement requires eLuxury to pay us a royalty fee based on a percentage of sales, as defined in the royalty agreement, for sales of eLuxury’s products to certain business-to-business customers, including customers which we referred to eLuxury prior to the sale transaction and new customer relationships we develop for eLuxury going forward, as well as sales of eLuxury products generated by sales representatives that we develop or introduce to eLuxury.
There are no guarantees or provisions under either the supply or royalty agreements that require eLuxury to purchase a minimum amount of our products or sell a certain amount of eLuxury products to customers or through sales representatives developed or introduced by us. As a result, the success of these agreements and the period of time in which our involvement with eLuxury is expected to continue are based on eLuxury’s ability to sell products that require mattress and upholstery fabrics and our ability to provide an additional sales channel for eLuxury to grow its business-to-business sales platform.
During the three-month periods ending August 1, 2021, and August 2, 2020, shipments to eLuxury under the supply agreement totaled $
Financial Guarantee
Currently, we have an agreement that guarantees
17. Statutory Reserves
Our subsidiary located in China was required to transfer 10% of its net income, as determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reached
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The transfer to this reserve must be made before distributions of any dividend to shareholders. As of August 1, 2021, the company’s statutory surplus reserve was $
The company’s subsidiary located in China can transfer funds to the parent company, except for the statutory surplus reserve of $
18. Common Stock Repurchase Program
In March 2020, our board of directors approved an authorization for us to acquire up to $
During the first quarter of fiscal 2022, we repurchased
During the first quarter of fiscal 2021, we did
19. Dividend Program
On September 1, 2021, our board of directors approved a quarterly cash dividend of $
During the first quarter of fiscal 2022, dividend payments totaled $
Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties that may cause actual events and results to differ materially from such statements. Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update or alter such statements to reflect any changes in management’s expectations or any change in the assumptions or circumstances on which such statements are based, whether due to new information, future events, or otherwise. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often but not always characterized by qualifying words such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “plan,” “project,” and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, new product launches, sales, profit margins, profitability, operating income, capital expenditures, working capital levels, income taxes, SG&A or other expenses, pre-tax income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding potential acquisitions, future economic or industry trends, public health epidemics, or future developments. There can be no assurance that we will realize these expectations or meet our guidance, or that these beliefs will prove correct.
Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses into our existing operations. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in tariffs or trade policy, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and the strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. Also, economic or political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. The impact of public health epidemics on employees, customers, suppliers, and the global economy, such as the global coronavirus pandemic currently affecting countries around the world, could also adversely affect our operations and financial performance. In addition, the impact of potential goodwill or intangible asset impairments or valuation allowances could affect our financial results. Finally, increases in market prices for petrochemical products can significantly affect the prices we pay for raw materials, and in turn, increase our operating costs and decrease our profitability. 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.
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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 three months ended August 1, 2021, and August 2, 2020, both represent 13-week periods.
Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. We have mattress fabric operations located in Stokesdale, NC, High Point, NC, and Quebec, Canada. Additionally, we acquired the remaining fifty percent ownership interest in our former unconsolidated joint venture in Ouanaminthe, Haiti, during the fourth quarter of fiscal 2021. As a result, we are now the sole owner with full control of this cut and sewn mattress cover operation (see Note 3 of the consolidated financial statements for further details regarding this business combination).
The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. We have upholstery fabric operations located in Shanghai, China, and Burlington, NC. We also commenced construction on a new leased facility in Haiti during the fourth quarter of last fiscal year. This new operation will be dedicated to production of cut and sewn upholstery kits and is expected to begin operating during the second quarter of this fiscal year. Additionally, Read Window Products, LLC (“Read”), a wholly-owned subsidiary with operations located in Knoxville, TN, provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read’s products, to customers in the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.
Executive Summary
We evaluate the operating performance of our business segments based upon income (loss) from operations before certain unallocated corporate expenses, asset impairments, restructuring credit (expense) and related charges, and other non-recurring items. Cost of sales in each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, and other miscellaneous expenses.
Results of Continuing Operations
|
|
Three Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
Change |
|
|||
Net sales |
|
$ |
83,047 |
|
|
$ |
64,464 |
|
|
28.8% |
|
|
Gross profit |
|
|
12,499 |
|
|
|
9,901 |
|
|
26.2% |
|
|
Gross profit margin |
|
|
15.1 |
% |
|
|
15.4 |
% |
|
(30)bp |
|
|
Selling, general, and administrative expenses |
|
|
9,181 |
|
|
|
8,018 |
|
|
14.5% |
|
|
Income from operations |
|
|
3,318 |
|
|
|
1,883 |
|
|
76.2% |
|
|
Operating margin |
|
|
4.0 |
% |
|
|
2.9 |
% |
|
110bp |
|
|
Income before income taxes |
|
|
3,155 |
|
|
|
1,524 |
|
|
107.0% |
|
|
Income tax expense |
|
|
905 |
|
|
|
4,324 |
|
|
(79.1)% |
|
|
Net income (loss) |
|
|
2,250 |
|
|
|
(2,733 |
) |
|
N.M. |
|
Net Sales
Overall, our net sales for the first quarter of fiscal 2022 increased by 28.8% compared with the same period a year ago, with mattress fabrics sales increasing 19.3% and upholstery fabrics sales increasing 41.0%. The first quarter of fiscal 2021 was negatively affected by the economic disruption caused by the COVID-19 pandemic, especially during the early part of the quarter.
The increase in net sales in both segments reflects increased demand for both our mattress and residential upholstery fabric products, as well as our ability to meet this demand and respond quickly to the needs of our customers through our flexible global platform and the support of our long-term supplier relationships. It also reflects a price increase that was effective during the quarter for both divisions, which increased our consolidated net sales by approximately 2.5%.
I-28
See the Segment Analysis section below for further details.
Income Before Income Taxes
Our income before income taxes for the first quarter of fiscal 2022 was $3.2 million, compared with $1.5 million for the prior-year period.
Our improved operating performance for the first quarter of fiscal 2022 primarily reflects higher sales as compared with the same period a year ago, partially offset by higher freight and raw material costs, unfavorable foreign exchange rate fluctuations associated with our operations in China and Canada, and operating inefficiencies due to labor shortages in the U.S. and Canada.
See the Segment Analysis section below for further details.
Income Taxes
We recorded income tax expense of $905,000, or 28.7% of income before income taxes, for the three-month period ended August 1, 2021, compared with income tax expense of $4.3 million, or 283.7% of income before income taxes, for the three-month period ended August 2, 2020. Our effective income tax rate during the first quarter of fiscal 2022 was negatively affected, but not nearly to the extent as in the first quarter of fiscal 2021, by the mix of taxable income that is mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. This is due mostly to higher annual forecasted taxable income from our U.S. operations as of the end of the first quarter of fiscal 2022 compared with the annual forecasted taxable income as of the end of the first quarter of fiscal 2021, which was affected by the ongoing disruption and uncertain economic conditions relating to the COVID-19 pandemic during the first quarter of fiscal 2021. Income tax expense during the first quarter of fiscal 2021 was also affected by a $3.7 million net income tax charge, which consisted of a $7.2 million non-cash income tax charge to record a full valuation allowance against the company’s U.S. net deferred income tax assets, partially offset by a $3.5 million non-cash income tax benefit that re-established certain U.S. federal net operating loss carryforwards in connection with U.S. Treasury regulations regarding the Global Intangible Low Taxed Income (“GILTI”) tax provisions of the Tax Cuts and Jobs Act of 2017.
Refer to Note 13 of the consolidated financial statements for further details regarding our provision for income taxes.
Liquidity
As of August 1, 2021, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively “cash and investments”) totaled $44.0 million compared with $46.9 million as of May 2, 2021.
The decrease in our cash and investments from the end of fiscal 2021 was mostly due to (i) $2.0 million of capital expenditures primarily related to our mattress fabrics segment and our innovation campus located in downtown High Point, NC, (ii) a cash payment of $1.4 million for a regular quarterly dividend payment to shareholders, and (iii) common stock repurchases totaling $723,000, partially offset by (iv) net cash provided by operating activities totaling $1.6 million.
Our net cash provided by operating activities was $1.6 million during the first quarter of fiscal 2022, compared with $10.6 million during the first quarter of fiscal 2021. This decrease was mostly due to (i) increased inventory purchases due to increased sales volume, (ii) annual incentive plan award payments made during the first quarter of fiscal 2022 (compared with minimal payments made during the first quarter of fiscal 2021), (iii) an increase in income tax payments due primarily to an Alternative Minimum Tax credit refund of $745,000 received during the first quarter of fiscal 2021 that did not recur during fiscal 2022, and a withholding tax payment made to the Chinese government of $533,000 during the first quarter (such payment was not made until the third quarter of fiscal 2021), and (iv) payments relating to our new building lease associated with our upholstery cut and sewn operation located in Haiti, partially offset by (v) improved cash collections on accounts receivable resulting from more customers taking advantage of early payment discounts and their continuing return to making payments based on normal credit terms, rather than the extended terms previously granted in response to the COVID-19 pandemic.
As of August 1, 2021, there were no outstanding borrowings under our lines of credit.
Dividend Program
On September 1, 2021, our board of directors approved a quarterly cash dividend of $0.11 per share. This payment will be made on October 18, 2021, to shareholders of record as of October 11, 2021.
I-29
During the first quarter of fiscal 2022, dividend payments totaled $1.4 million, which represented a quarterly dividend payment of $0.11 per share. During the first quarter of fiscal 2021, dividend payments totaled $1.3 million, which represented a quarterly dividend payment of $0.105 per share.
Common Stock Repurchases
In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased, and the timing of such purchases, will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.
During the first quarter of fiscal 2022, we repurchased 48,686 shares of common stock at a cost of $723,000. As a result, as of August 1, 2021, we had $4.3 million available for additional repurchases of our common stock.
During the first quarter of fiscal 2021, we did not repurchase any shares of our common stock.
Segment Analysis
Mattress Fabrics Segment
|
|
Three Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
Change |
|
|||
Net sales |
|
$ |
43,058 |
|
|
$ |
36,103 |
|
|
19.3% |
|
|
Gross profit |
|
|
6,795 |
|
|
|
4,608 |
|
|
47.5% |
|
|
Gross profit margin |
|
|
15.8 |
% |
|
|
12.8 |
% |
|
300bp |
|
|
Selling, general, and administrative expenses |
|
|
3,184 |
|
|
|
2,763 |
|
|
15.2% |
|
|
Income from operations |
|
|
3,611 |
|
|
|
1,845 |
|
|
95.7% |
|
|
Operating margin |
|
|
8.4 |
% |
|
|
5.1 |
% |
|
330bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
Mattress fabrics sales increased 19.3% in the first quarter of fiscal 2022 compared to the prior-year period, which was adversely affected by disruption from the COVID-19 pandemic.
The increase in mattress fabrics net sales for the quarter reflects an increase in demand driven by the continued strength of our product offerings. It was also supplemented by a price increase implemented during the quarter to help offset certain inflationary pressures, which increased net sales by approximately 3.0%.
During the quarter, the strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey enabled us to support current demand levels and serve the needs of our mattress fabrics and cover customers. We maintained our focus on product innovation, creative designs, and customer marketing during the quarter, and we further expanded our digital design platform to offer enhanced accessibility for our customers. Demand trends for sewn mattress covers also remained strong, as our on-shore, near-shore, and off-shore supply chain strategy, as well as our fabric-to-cover model, continued to provide a preferred platform that provides customers with the agility and value they need for their business.
Looking ahead, we are faced with some continued near-term pressures relating to labor shortages and ongoing customer capacity limitations due to supply chain disruption for non-fabric components, but we expect that most of these headwinds are temporary. Additionally, the ongoing impact of the COVID-19 pandemic remains unknown and depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, actions taken to contain its spread and mitigate the public health and economic effects, the short- and long-term disruption of the global economy, consumer confidence, unemployment, employee health, and the financial health of our customers, suppliers, and distribution channels. At this time, we cannot reasonably estimate the ongoing impact of the COVID-19 pandemic on our mattress fabrics segment; however, if conditions relating to the pandemic worsen, the disruption could adversely affect our operations and financial performance.
Gross Profit, Selling, General & Administrative Expenses, and Operating Income
The increase in mattress fabrics profitability during the first quarter of fiscal 2022, as compared to the prior-year period, was primarily due to the higher mattress fabrics sales noted above, somewhat offset by increased raw material prices, freight costs, unfavorable foreign currency fluctuations in Canada and China, and inefficiencies due to labor shortages at our facilities in the U.S. and Canada. Our previously implemented price increase helped cover some inflationary pressures. However, with the continued rapid rise in labor, freight, and raw material costs, we are implementing a surcharge during the second quarter to
I-30
further mitigate these pressures. This surcharge will not take effect until midway through the second quarter, resulting in a temporary cost-price lag that will affect our profitability during the period.
We expect continued near-term inflationary pressures relating to increasing labor, freight, and raw material costs, as well as ongoing foreign currency fluctuations in China and Canada. We believe most of these headwinds are temporary and will be mitigated to some extent by the surcharge noted above, as well as our ongoing efforts to control costs.
CLASS International Holdings, Ltd. (“CIH”)
Effective January 1, 2017, Culp International Holdings, Ltd. (“Culp International”), a wholly-owned subsidiary of the company, entered into a joint venture agreement pursuant to which Culp International owned 50% of Class International Holdings, Ltd. (“CIH”). During the fourth quarter of fiscal 2021, Culp International acquired the remaining 50% ownership interest in CIH from its former joint venture partner, such that we are now the sole owner with full control of CIH. CIH produces cut and sewn mattress covers and is housed in two facilities totaling 120,000 square feet, located in a modern industrial park on the northeastern border of Haiti. We believe having sole ownership of this operation enhances our capacity and increases our flexibility by having near-shore capabilities that help us meet the needs of our mattress cover customers. See Note 3 of the consolidated financial statements for further details regarding this business combination.
Segment assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and investment in unconsolidated joint venture.
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
Accounts receivable |
|
$ |
18,016 |
|
|
$ |
15,585 |
|
|
$ |
20,427 |
|
Inventory |
|
|
31,778 |
|
|
|
20,070 |
|
|
|
30,047 |
|
Property, plant & equipment |
|
|
40,881 |
|
|
|
39,597 |
|
|
|
41,264 |
|
Right of use assets |
|
|
4,058 |
|
|
|
832 |
|
|
|
4,278 |
|
Investment in unconsolidated joint venture |
|
|
— |
|
|
|
1,759 |
|
|
|
— |
|
|
|
$ |
94,733 |
|
|
$ |
77,843 |
|
|
$ |
96,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As of August 1, 2021, accounts receivable increased by $2.4 million, or 15.6%, compared with August 2, 2020. This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. Although we experienced a substantial increase in net sales during the first quarter of fiscal 2022, the increase in accounts receivable was partially offset by improved cash collections during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. The improved cash collections are due to more customers taking advantage of early payment discounts, as well as their continued return to making payments based on normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic.
As of August 1, 2021, accounts receivable decreased by $2.4 million, or 11.8%, compared with May 2, 2021. This decrease reflects improved cash collections during the first quarter of fiscal 2022 compared with the fourth quarter of fiscal 2021, as more customers started taking advantage of early payment discounts and also continued their return to making payments based on normal credit terms, as opposed to extended terms previously granted in response to the COVID-19 pandemic.
Days’ sales outstanding was 37 days for the first quarter of fiscal 2022, compared with 39 days for the first quarter of fiscal 2021 and 43 days for the fourth quarter of fiscal 2021.
Inventory
As of August 1, 2021, inventory increased by $11.7 million, or 58.3%, compared August 2, 2020. This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic.
As of August 1, 2021, inventory modestly increased by $1.7 million, or 5.8%, compared with May 2, 2021. This increase represents management’s ability to maintain a consistent level of inventory that reflects our focus on inventory management and
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aligning our inventory purchases to reflect current demand trends. Net sales during the first quarter of fiscal 2022 and the fourth quarter of fiscal 2021 were $43.1 million and $42.9 million, respectively.
Inventory turns were 4.7 for the first quarter of fiscal 2022, compared with 5.9 for the first quarter of fiscal 2021 and 4.2 for the fourth quarter of fiscal 2021.
Property, Plant, & Equipment
The $40.9 million as of August 1, 2021, represents property, plant, and equipment of $27.6 million, $12.4 million, and $875,000 located in the U.S., Canada, and Haiti, respectively. The $39.6 million as of August 2, 2020, represents property, plant, and equipment of $27.0 million and $12.6 million located in the U.S. and Canada, respectively. The $41.3 million as of May 2, 2021, represents property, plant, and equipment of $28.4 million, $12.0 million, and $855,000 located in the U.S., Canada, and Haiti, respectively.
Property, plant, and equipment amounts are comparable for the periods presented as capital expenditures have been made commensurate with depreciation expense.
Right of Use Assets
The $4.1 million as of August 1, 2021, represents right of use assets of $2.3 million, $1.4 million, and $355,000 located Haiti, the U.S., and Canada, respectively. The $832,000 as of August 2, 2020, represents right of use assets of $535,000 and $297,000 located in Canada and the U.S., respectively. The $4.3 million as of May 2, 2021, represents right of use assets of $2.4 million, $1.4 million, and $400,000 located in Haiti, the U.S., and Canada, respectively.
As of August 1, 2021, and May 2, 2021, right of use assets have increased significantly from August 2, 2020. This increase mostly represents (i) $2.5 million that related to building leases acquired from Class International Holdings, Ltd. (“CIH”); and (ii) $879,000 that related to the renewal and amendment of a building lease located in the U.S. associated with our mattress cover operation.
Investment in Unconsolidated Joint Venture
As of August 2, 2020, our investment in unconsolidated joint venture represented our 50% ownership in CIH and was accounted for under the equity method in accordance with ASC Topic 823. Accordingly, the carrying value of our investment in CIH was reported as a single line item in the Consolidated Balance Sheets titled “Investment in unconsolidated joint venture”. Effective February 1, 2021, we entered into an agreement with our former joint venture partner to acquire the remaining 50% interest in CIH. Pursuant to this transaction, we are now the sole owner with full control over CIH. Accordingly, our consolidated financial statements now include all of the accounts of CIH, and any significant intercompany balances and transactions have been eliminated. Furthermore, the equity method will no longer be used and the former investment in unconsolidated joint venture is now included in the net assets of our now 100% interest in CIH
See Note 3 to the consolidated financial statements for further details.
Upholstery Fabrics Segment
Net Sales
|
|
Three Months Ended |
|
|
|
|
|
|||||||||||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
|
|
|
|
August 2, 2020 |
|
|
|
|
|
|
% Change |
|
|||
Non-U.S. Produced |
|
$ |
38,222 |
|
|
|
96 |
% |
|
$ |
26,011 |
|
|
|
92 |
% |
|
|
46.9 |
% |
U.S. Produced |
|
|
1,767 |
|
|
|
4 |
% |
|
|
2,350 |
|
|
|
8 |
% |
|
|
(24.8 |
)% |
Total |
|
$ |
39,989 |
|
|
|
100 |
% |
|
$ |
28,361 |
|
|
|
100 |
% |
|
|
41.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upholstery fabrics sales increased 41.0% in the first quarter of fiscal 2022 compared to the prior-year period, which was adversely affected by disruption from the COVID-19 pandemic.
The increase in upholstery fabrics net sales for the quarter reflects a significant increase in demand for our residential upholstery business compared to the prior-year period, partially offset by lower sales for Read Window Products in our hospitality business, which remained under significant pressure from the ongoing COVID-19 disruption that continues to affect the travel and leisure industries. The increase in net sales for the first quarter also reflects a price increase that was implemented on products sold in the U.S. to help offset unfavorable foreign currency exchange rate fluctuations associated with our operations in China. This price increase accounted for approximately 1.5% of net sales for the quarter.
.
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Our residential upholstery fabrics business continued to benefit from growth in our market reach, the flexibility of our Asian platform, and the success of our product innovation strategy, including the continued popularity of our LiveSmart® product portfolio. Our highly durable, stain-resistant LiveSmart® performance fabrics, as well as our LiveSmart Evolve® performance plus sustainability fabrics, are important drivers of growth in our residential business. These product lines continued to experience strong demand trends amidst consumer desire for cleanability, ease of maintenance, and environmentally-conscious products.
Looking ahead, we are encouraged by the demand trends in our residential upholstery business. We expect that certain near-term headwinds, including customer supply chain constraints and ongoing pandemic-related disruptions such as quarantine and shutdown requirements currently affecting our sourcing partners in Vietnam, may temporarily pressure our business during fiscal 2022. However, we believe that our flexible Asian platform and the addition of our new facility in Haiti near the end of the second quarter, as well as our long-term supplier relationships and product-driven strategy, will benefit us as we navigate these challenges.
Notably, the ongoing economic and health effects of the COVID-19 pandemic, as well as the duration of such effects, remain unknown and depend on factors beyond our control. At this time, we cannot reasonably estimate the ongoing impact of the pandemic on our upholstery fabrics segment, but note that if conditions worsen, the impact on our employees, suppliers, consumers, and the global economy could adversely affect our operations and financial performance.
Gross Profit, Selling, General & Administrative Expenses, and Operating Income
|
|
Three Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
Change |
|
|||
Gross profit |
|
|
5,704 |
|
|
|
5,293 |
|
|
7.8% |
|
|
Gross profit margin |
|
|
14.3 |
% |
|
|
18.7 |
% |
|
(440)bp |
|
|
Selling, general, and administrative expenses |
|
|
3,437 |
|
|
|
3,180 |
|
|
8.1% |
|
|
Income from operations |
|
|
2,267 |
|
|
|
2,113 |
|
|
7.3% |
|
|
Operating margin |
|
|
5.7 |
% |
|
|
7.5 |
% |
|
(180)bp |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in upholstery fabrics profitability for the first quarter of fiscal 2022, as compared to the prior-year period, primarily reflects a dramatic increase in freight costs, unfavorable foreign currency fluctuations associated with our operations in China, lower sales in Read, and start-up costs for our new Haiti facility.
Looking ahead, we expect that further pressures relating to rising freight and U.S. labor costs, as well as ongoing China foreign exchange rate fluctuations and additional start-up costs for our new facility in Haiti, may temporarily pressure our profitability during fiscal 2022. Our previously implemented price increase has helped offset foreign currency exchange rate fluctuations to some extent, as intended, but we are implementing an additional freight surcharge during the second quarter to help mitigate a continued rise in freight costs.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
Accounts receivable |
|
$ |
16,992 |
|
|
$ |
14,308 |
|
|
$ |
17,299 |
|
Inventory |
|
|
26,835 |
|
|
|
20,332 |
|
|
|
25,870 |
|
Property, plant & equipment |
|
|
2,080 |
|
|
|
1,634 |
|
|
|
1,925 |
|
Right of use assets |
|
|
5,984 |
|
|
|
3,802 |
|
|
|
5,945 |
|
|
|
$ |
51,891 |
|
|
$ |
40,076 |
|
|
$ |
51,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As of August 1, 2021, accounts receivable increased by $2.7 million, or 18.8%, compared with August 2, 2020. This increase reflects the significant increase in net sales during the first quarter of fiscal 2022, as compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. Although we experienced a substantial increase in net sales during the first quarter of fiscal 2022, the increase in accounts receivable was partially offset by improved cash collections during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. The improved cash collections were due to our customers’ continuing return to making payments based on normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic.
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As of August 1, 2021, accounts receivable modestly decreased by 1.8%, as compared with May 2, 2021. This decrease reflects improved cash collections due to our customers’ continuing return to making payments based on normal credit terms as opposed to extended terms previously granted in response to the COVID-19 pandemic. Although we experienced a substantial improvement in cash collections during the first quarter of fiscal 2022, the decrease in accounts receivable was partially offset by an increase in net sales during the first quarter of fiscal 2022, as compared with the fourth quarter of fiscal 2021, due to plant shutdowns for the Chinese New Year holiday that occurred during the fourth quarter of fiscal 2021. Net sales were $40.0 million during the first quarter of fiscal 2022, an increase of $3.9 million, or 10.8%, compared with $36.1 million during the fourth quarter of fiscal 2021.
Days’ sales outstanding were 38 days during the first quarter of fiscal 2022, as compared with 44 days during the first quarter of fiscal 2021 and 42 days during the fourth quarter of fiscal 2021.
Inventory
As of August 1, 2021, inventory increased by $6.5 million, or 32.0%, compared with August 2, 2020. This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic.
As of August 1, 2021, inventory increased by $1.0 million, or 3.7%, compared with May 2, 2021. This increase reflects the increase in net sales during the first quarter of fiscal 2022, compared with the fourth quarter of fiscal 2021, due to plant shutdowns for the Chinese New Year holiday that occurred during that period, as noted above. Net sales were $40.0 million during the first quarter of fiscal 2022, an increase of $3.9 million, or 10.8%, compared with $36.1 million during the fourth quarter of fiscal 2021.
Inventory turns were 4.9 for the first quarter of fiscal 2022, as compared with 4.3 for the first quarter of fiscal 2021 and 4.6 for the fourth quarter of fiscal 2021.
Property, Plant, & Equipment
The $2.1 million as of August 1, 2021, represents property, plant, and equipment of $1.1 million, $830,000, and $130,000 located in the U.S., China, and Haiti, respectively. The $1.6 million as of August 2, 2020, represents property, plant, and equipment of $1.2 million and $456,000 located in the U.S. and China, respectively. The $1.9 million as of May 2, 2021, represents property, plant, and equipment of $1.1 million and $850,000 located in the U.S. and China, respectively.
Property, plant, and equipment amounts are comparable for the periods presented as capital expenditures have been made commensurate with depreciation expense.
Right of Use Assets
The $6.0 million as of August 1, 2021, represents right of use assets of $4.6 million and $1.4 million located in China and the U.S., respectively. The $3.8 million as of August 2, 2020, represents right of use assets of $3.1 million and $710,000 located in China and the U.S., respectively. The $5.9 million as of May 2, 2021, represents right of use assets of $5.0 million and $952,000 located in China and the U.S., respectively.
Effective April 9, 2021, we entered into an agreement to lease a 90,000 square foot facility located in a modern industrial park on the northeastern border of Haiti. The lease term is expected to commence during the second quarter of fiscal 2022, after construction of the facility has been completed, and at such time, we will have control of the facility based on the terms of the lease. As a result, right of use assets are expected to increase by $2.8 million at the commencement of the lease.
Other Income Statement Categories
|
|
Three Months Ended |
|
|
|
|
|
|||||
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
% Change |
|
|||
SG&A expenses |
|
$ |
9,181 |
|
|
$ |
8,018 |
|
|
|
14.5 |
% |
Interest expense |
|
|
— |
|
|
|
51 |
|
|
|
(100.0 |
)% |
Interest income |
|
|
74 |
|
|
|
58 |
|
|
|
27.6 |
% |
Other expense |
|
|
237 |
|
|
|
366 |
|
|
|
(35.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General, and Administrative Expenses
The increase in selling, general, and administrative expenses during the first quarter of fiscal 2022, as compared with the first quarter of fiscal 2021, is mostly due to our significant cost cutting measures during the fourth quarter of fiscal 2020 that continued into the first quarter of fiscal 2021 as part of our comprehensive response to the COVID-19 global pandemic. These
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cost cutting measures primarily related to compensation and included (i) temporary salary reductions, (ii) workforce adjustments to align with demand, (iii) suspended merit pay increases, and (iv) aggressively reduced discretionary spending such as professional fees and travel and entertainment expenses.
Interest Expense
During the first quarter of fiscal 2022, we did not incur any interest expense, as we did not have any borrowings outstanding during such time.
During the first quarter of fiscal 2021, interest expense was attributable to interest paid on amounts borrowed during the fourth quarter of fiscal 2020 in connection with the economic uncertainty and disruption associated with the COVID-19 global pandemic. During the fourth quarter of fiscal 2020, we borrowed $30.8 million under our lines of credit and applied for and received a $7.6 million loan under the SBA’s Paycheck Protection Program. The total amount of these borrowings was repaid during the first quarter of fiscal 2021.
Interest Income
Interest income reflects interest earned on our current investments of excess cash held in (i) money market funds, (ii) bond, other fixed income, and equity-related mutual funds, and (iii) investment-grade U.S. corporate, foreign, and government bonds, as well as (iv) interest earned on a money market fund and equity-related mutual fund investment associated with our rabbi trust that funds our deferred compensation plan.
The increase in interest income during the first quarter of fiscal 2022, as compared with the first quarter of fiscal 2021, reflects an increase in our investments during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Our investments include short-term investments (available for sale), short-term and long-term investments (held-to-maturity), and long-term investments associated with our rabbi trust. These investments totaled $26.8 million and $15.3 million as of August 1, 2021, and August 2, 2020, respectively.
Other Expense
The decrease in other expense during the first quarter of fiscal 2022, as compared with the first quarter of fiscal 2021, was due mostly to more favorable foreign currency exchange rates applied against balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts. During the first quarter of fiscal 2022, we reported a foreign exchange loss associated with our operations located in China of $9,000 compared with $139,000 for the first quarter of fiscal 2021.
Income Taxes
Effective Income Tax Rate & Income Tax Expense
We recorded income tax expense of $
Our effective income tax rates for the three-month periods ended August 1, 2021, and August 2, 2020, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. When calculating the annual estimated effective income tax rate for the three-month periods ended August 1, 2021, and August 2, 2020, we were subject to a loss limitation rule in accordance with ASC Topic 740-270-30-36(a). This loss limitation rule requires any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no tax benefit could be recognized during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from 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.
I-35
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 three-month periods ending August 1, 2021, and August 2, 2020:
|
|
Three Months Ended |
|
|||||
|
|
August 1, 2021 |
|
|
August 2, 2020 |
|
||
U.S. federal income tax rate |
|
|
21.0 |
% |
|
|
21.0 |
% |
U.S. valuation allowance |
|
|
(3.9 |
) |
|
|
474.4 |
|
U.S. income tax law change |
|
|
— |
|
|
|
(232.5 |
) |
Withholding taxes associated with foreign jurisdictions |
|
|
6.2 |
|
|
|
10.1 |
|
Foreign income tax rate differential |
|
|
1.6 |
|
|
|
9.1 |
|
Global Intangible Low Taxed Income Tax ("GILTI") |
|
|
3.4 |
|
|
|
— |
|
Other |
|
|
0.4 |
|
|
|
1.6 |
|
|
|
|
28.7 |
% |
|
|
283.7 |
% |
Our effective income tax rate during the first quarter of fiscal 2022 was negatively affected, but not nearly to the extent as in the first quarter of fiscal 2021, by the mix of taxable income that is mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. This is due mostly to higher annual forecasted taxable income from our U.S. operations as of the end of the first quarter of fiscal 2022, as compared with lower annual forecasted taxable income as of the end of the first quarter of fiscal 2021. The annual forecasted taxable income at the end of the first quarter of fiscal 2021 was significantly affected by the ongoing disruption and uncertain economic conditions relating to the COVID-19 pandemic. As a result of the increase in forecasted taxable income, the principal differences in the above table are not as pronounced during the first quarter of fiscal 2022 as compared with those differences during the first quarter of fiscal 2021.
GILTI
Fiscal 2021
Effective July 20, 2020, the U.S. Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”). With the enactment of these final regulations, we became eligible for an exclusion from GILTI if we meet the provisions of the GILTI High-Tax exception included in these final regulations. To meet the provisions of the GILTI high tax exception, the tested foreign entity’s effective income tax rate related to current year’s earnings must be higher than
Since we met the requirements for the High-Tax exception for our 2019 and 2020 fiscal years, we recorded a non-cash income tax benefit of $
Additionally, we met the requirements for the High-Tax exception for our 2021 fiscal year, and therefore, were not subject to GILTI tax.
Fiscal 2022
As of the end of the first quarter of fiscal 2022, we believe we will not meet the requirements for the GILTI High-Tax exception regarding our foreign subsidiaries located in Canada and Haiti, and therefore, will be subject to GILTI tax for the 2022 fiscal year.
Based on our assessment associated with our operation located in Canada, we expect that several significant capital projects will be placed into service during fiscal 2022, and therefore we will be eligible for a significant amount of deductible accelerated depreciation. As a result, our current year’s income tax expense is expected to be much lower than prior fiscal years’, and therefore, our projected current effective income tax rate is expected to be lower than the required
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Based on our assessment associated with our operations located in Haiti, we expect to earn taxable income that is not subject to income tax, as we are located in an economic zone that permits a 0% income tax rate for the first fifteen years of operations, for which we have ten years remaining. Since our operations located in Haiti are not expected to be subject to income tax, our projected current effective income tax rate of
Valuation Allowance
In accordance with ASC Topic 740, we evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more-likely-than-not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.
As a result of the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income taxes as of the end of the first quarter of fiscal 2021. GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and 2020 that offset our U.S. pre-tax losses during such years, and which offset was reversed as a result of the retroactivity of the new GILTI regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S. taxable losses during our last two fiscal years, and we expected at the time of this assessment that our history of U.S. pre-tax losses would continue into fiscal 2021. As a result of the significant weight of this negative evidence, we believed it was more-likely-than-not that our U.S. net deferred income tax assets would not be fully realizable. Accordingly, we recorded a non-cash income tax charge of $
As of August 1, 2021, 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 have a recent history of cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the fiscal years 2020 and 2021. In addition, as of August 1, 2021, we are currently expecting U.S. taxable income during fiscal 2022 stemming from the source of taxable income provided by GILTI noted above. However, the cumulative losses that we have experienced during fiscal years 2020 and 2021 significantly exceed the U.S. taxable income expected during fiscal 2022. As a result of the significant weight of this negative evidence, we believe it is more likely than not that our U.S. deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.
Based on our assessments as of August 1, 2021, August 2, 2020, and May 2, 2021, valuation allowances against our net deferred income taxes pertain to the following:
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
U.S. federal and state net deferred income tax assets |
|
$ |
9,221 |
|
|
|
7,830 |
|
|
|
9,344 |
|
U.S. capital loss carryforward |
|
|
2,330 |
|
|
|
2,281 |
|
|
|
2,330 |
|
|
|
$ |
11,551 |
|
|
|
10,111 |
|
|
|
11,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed Earnings
Refer to Note 13 of the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with undistributed earnings from our foreign subsidiaries as of August 1, 2021, August 2, 2020, and May 2, 2021, respectively.
Uncertain Income Tax Positions
Refer to Note 13 located of the consolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of August 1, 2021, August 2, 2020, and May 2, 2021, respectively.
I-37
Income Taxes Paid
The following table sets forth taxes paid (refunded) by jurisdiction:
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
August 1, |
|
|
August 2, |
|
||
(dollars in thousands) |
|
2021 |
|
|
2020 |
|
||
United States Federal - Alternative Minimum Tax (AMT) credit refunds (1) |
|
$ |
— |
|
|
$ |
(745 |
) |
China |
|
|
1,408 |
|
|
|
349 |
|
Canada |
|
|
280 |
|
|
|
405 |
|
|
|
$ |
1,688 |
|
|
$ |
9 |
|
(1) In accordance with the provisions of the TCJA, corporate taxpayers were eligible to treat prior AMT credit carryforwards as refundable. Accordingly, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable, and as a result, 50% of the $1.5 million refundable balance was received during the first quarter of fiscal 2021, with the remaining balance expected to be received in fiscal 2022. In accordance with the provisions of the U.S. federal Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020), 100% of AMT credit carryforwards for years beginning in the 2019 tax year were immediately refundable. Accordingly, we claimed credit for the remaining 50% installment of our refundable AMT credit carryforward in May 2020. We received our remaining 50% installment, plus interest, totaling $764,000 during the second quarter of fiscal 2021.
Future Liquidity
We are currently projecting annual cash income tax payments of approximately $4.2 million for fiscal 2022, compared with $3.0 million for fiscal 2021. The increase in our income tax payments mostly represents U.S. AMT credit refunds totaling $1.5 million that were received during fiscal 2021 that will not recur during fiscal 2022. Our estimated cash income tax payments for fiscal 2022 are management’s current projections only and can be affected over the year by actual earnings from our foreign subsidiaries located in China and Canada versus annual projections, as well as changes in the foreign exchange rates associated with our China operations in relation to the U.S. dollar.
Additionally, we currently expect to pay minimal income taxes in the U.S. on a cash basis during fiscal 2022 due to: (i) the immediate expensing of U.S. capital expenditures, and (ii) our existing U.S. federal net operating loss carryforwards totaling $19.4 million.
Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents, short-term investments (available for sale), cash flow from operations, and amounts available under our revolving credit lines. These sources have been adequate for day-to-day operations, capital expenditures, debt payments, common stock repurchases, and dividend payments. We believe our cash and cash equivalents of $26.0 million and short-term investments (available for sale) of $9.7 million as of August 1, 2021, cash flow from operations, and the current availability ($38.2 million) under our revolving credit lines will be sufficient to fund our foreseeable business needs and our contractual obligations.
As of August 1, 2021, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively “cash and investments”) totaled $44.0 million compared with $46.9 million as of May 2, 2021.
The decrease in our cash and investments from the end of fiscal 2021 was mostly due to (i) $2.0 million of capital expenditures primarily related to our mattress fabrics segment and our innovation campus located in downtown High Point, NC, (ii) a cash payment of $1.4 million for a regular quarterly dividend payment to shareholders, and (iii) common stock repurchases totaling $723,000, partially offset by (iv) net cash provided by operating activities totaling $1.6 million.
Our net cash provided by operating activities of $1.6 million decreased during the first quarter of fiscal 2022, as compared with $10.6 million during the first quarter of fiscal 2021. This decrease was mostly due to (i) increased inventory purchases due to increased sales volume, (ii) annual incentive plan award payments made during the first quarter of fiscal 2022 (compared with minimal payments made during the first quarter of fiscal 2021), (iii) an increase in income tax payments due primarily to an AMT credit refund of $745,000 received during the first quarter of fiscal 2021 that did not recur during fiscal 2022, and a
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withholding tax payment made to the Chinese government of $533,000 during the first quarter (such payment was not made until the third quarter of fiscal 2021), and (iv) payments relating to our new building lease associated with our upholstery cut and sewn operation located in Haiti, partially offset by (v) improved cash collections on accounts receivable resulting from more customers taking advantage of early payment discounts and their continuing return to making payments based on normal credit terms, rather than the extended terms previously granted in response to the COVID-19 pandemic.
As of August 1, 2021, there were no outstanding borrowings under our lines of credit.
Our cash and cash equivalents and short-term investments (available for sale) balance may be adversely affected by factors beyond our control, such as the continuing uncertainty of the COVID-19 global pandemic, lower net sales due to consumer demand, and delays in receipt of payment on accounts receivable. Additionally, we expect our cash liquidity to be affected by strategic investments in working capital, planned capital expenditures, and investments in our operations located in Haiti, with a significant portion of this spending occurring during the second quarter of fiscal 2022.
By Geographic Area
A summary of our cash and investments by geographic area follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
August 1, 2021 |
|
|
August 2, 2020 |
|
|
May 2, 2021 |
|
|||
United States |
|
$ |
35,727 |
|
|
$ |
41,598 |
|
|
$ |
34,465 |
|
China |
|
|
5,864 |
|
|
|
3,974 |
|
|
|
10,635 |
|
Canada |
|
|
2,031 |
|
|
|
1,761 |
|
|
|
1,525 |
|
Haiti |
|
|
416 |
|
|
|
— |
|
|
|
220 |
|
Cayman Islands |
|
|
11 |
|
|
|
42 |
|
|
|
8 |
|
|
|
$ |
44,049 |
|
|
$ |
47,375 |
|
|
$ |
46,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Repurchase Program
In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased, and the timing of such purchases, will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.
During the first quarter of fiscal 2022, we repurchased 48,686 shares of common stock at a cost of $723,000. As a result, as of August 1, 2021, we had $4.3 million available for additional repurchases of our common stock.
During the first quarter of fiscal 2021, we did not repurchase any shares of our common stock.
Dividend Program
On September 1, 2021, our board of directors approved a quarterly cash dividend of $0.11 per share. This payment will be made on October 18, 2021, to shareholders of record as of October 11, 2021.
During the first quarter of fiscal 2022, dividend payments totaled $1.4 million, which represented a quarterly dividend payment of $0.11 per share. During the first quarter of fiscal 2021, dividend payments totaled $1.3 million, which represented a quarterly dividend payment of $0.105 per share.
Our board of directors has sole authority to determine if and when we will declare future dividends, and on what terms. Future dividend payments will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.
Working Capital
Operating Working Capital
Operating working capital (accounts receivable and inventories, less accounts payable-trade, accounts payable-capital expenditures, and deferred revenue) was $47.6 million as of August 1, 2021, compared with $43.5 million as of August 2, 2020, and $50.2 million as of May 2, 2021. Operating working capital turnover was 6.9 during the first quarter of fiscal 2022, compared with 5.0 during the first quarter of fiscal 2021 and 6.4 during the fourth quarter of fiscal 2021.
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Accounts Receivable
Accounts receivable were $35.0 million as of August 1, 2021, and increased $5.1 million, or 17.1%, compared with $29.9 million as of August 2, 2020. This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic. Although we experienced a substantial increase in net sales during the first quarter of fiscal 2022, the increase in accounts receivable was partially offset by improved cash collections during the first quarter of fiscal 2022 compared with the first quarter of fiscal 2021. The improved cash collections are due to more customers taking advantage of early payment discounts, as well as their continuing return to making payments based on normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic.
Accounts receivable as of August 1, 2021, decreased $2.7 million, or 7.2%, compared with $37.7 million as of May 2, 2021. This decrease reflects improved cash collections due to more customers taking advantage of early payment discounts, as well as their continuing return to making payments based on normal credit terms as opposed to extended terms previously granted in response to the COVID-19 pandemic. Although we experienced a substantial improvement in cash collections during the first quarter of fiscal 2022, the decrease in accounts receivable was partially offset by an increase in net sales associated with our upholstery fabrics segment during the first quarter of fiscal 2022, as compared with the fourth quarter of fiscal 2021, due to plant shutdowns for the Chinese New Year holiday that occurred during the fourth quarter of fiscal 2021.
Days’ sales outstanding were 38 days for the first quarter of fiscal 2022, as compared with 41 days for the first quarter of fiscal 2021 and 43 days for the fourth quarter of fiscal 2021.
Inventory
Inventory was $58.6 million as of August 1, 2021, and increased by $18.2 million, or 45.1%, compared with $40.4 million as of August 2, 2020. This increase reflects the significant increase in net sales during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021. Net sales during the first quarter of fiscal 2021 were adversely affected by the economic disruption caused by the COVID-19 pandemic.
Inventories as of August 1, 2021, modestly increased by $2.7 million, or 4.8%, compared with $55.9 million as of May 2, 2021. This increase is due primarily to an increase in net sales associated with our upholstery fabrics segment during the first quarter of fiscal 2022, as compared with the fourth quarter of fiscal 2021, due to plant shutdowns for the Chinese New Year holiday that occurred during the fourth quarter of fiscal 2021.
Inventory turns were 4.9 for the first quarter of fiscal 2022, as compared with 5.3 for the first quarter of fiscal 2021 and 4.8 for the fourth quarter of fiscal 2021.
Accounts Payable
Accounts payable- trade, totaling $45.3 million as of August 1, 2021, increased by $19.5 million, or 75.9%, compared with $25.7 million as of August. 2, 2020. The increase in accounts payable- trade primarily reflects the significant increase in net sales during the first quarter of fiscal 2022 as compared with the first quarter of fiscal 2021.
Accounts payable- trade as of August 1, 2021, modestly increased by $2.7 million, or 6.5%, compared with $42.5 million as of May 2, 2021. This increase is due primarily to an increase in net sales associated with our upholstery fabrics segment during the first quarter of fiscal 2022, as compared with the fourth quarter of fiscal 2021, due to plant shutdowns for the Chinese New Year holiday that occurred during the fourth quarter of fiscal 2021.
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 August 1, 2021, 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 August 1, 2021, we complied with these financial covenants.
Refer to Note 9 of the consolidated financial statements for further details of our revolving credit agreements.
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Capital Expenditures and Depreciation
Overall
Capital expenditures on a cash basis were $2.0 million during the first quarter of fiscal 2022, compared with $500,000 for the same period a year ago. Capital expenditures mostly related to our mattress fabrics segment and our innovation campus located in downtown High Point, NC.
Depreciation expense was $1.7 million during the first quarter of fiscal 2022, compared with $1.8 million for the same period a year ago. Depreciation expense mostly related to our mattress fabrics segment for both periods.
For fiscal 2022, we are projecting cash capital expenditures to be in the range of $10.0 million to $10.5 million. The estimated capital expenditures primarily relate to the mattress fabrics segment. For fiscal 2022, we are projecting depreciation expense to be approximately $7.0 million, also primarily related to the mattress fabrics segment. These are management’s current expectations only, and changes in our business and the unknown duration and financial impact of the COVID-19 global pandemic could cause changes in plans for capital expenditures and expectations related to depreciation expense. Funding for capital expenditures is expected to be from cash provided by operating activities.
Accounts Payable – Capital Expenditures
As of August 1, 2021, we had total amounts due regarding capital expenditures totaling $48,000 that pertained to outstanding vendor invoices, none of which were financed. The total amount outstanding of $48,000 is required to be paid based on normal credit terms.
Purchase Commitments – Capital Expenditures
As of August 1, 2021, we had open purchase commitments (i) for the acquisition of equipment for our mattress fabrics segment totaling $1.2 million, and (ii) for the construction of leasehold improvements associated with our showroom and office space located in downtown High Point, NC totaling $865,000.
Critical Accounting Policies and Recent Accounting Developments
As of August 1, 2021, there were no changes in our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended May 2, 2021.
Refer to Note 2 of the consolidated financial statements for recently adopted and issued accounting pronouncements since the filing of our Form 10-K for the year ended May 2, 2021.
Contractual Obligations
There were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended May 2, 2021.
Effective May 7, 2021, we entered into an agreement to lease showroom and office space encompassing 21,000 square feet located in downtown High Point, NC. The lease term is expected to commence near the end of the second quarter of fiscal 2022, once certain lessor-owned leasehold improvements have been completed, and at such time we will have control of the facility based on the terms of the lease. As a result, right of use assets are expected to increase by $2.2 million at the commencement of the lease.
Inflation
Any significant increase in our raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating cost increases on to customers.
I-41
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates with regards to our revolving credit agreements.
Our U.S. revolving credit agreement requires interest to be charged at a rate (applicable interest rate of 1.69% as of August 1, 2021) calculated using a variable spread over LIBOR based on the company’s ratio of debt to EBITDA as defined in the U.S. revolving credit agreement. As of August 1, 2021, there were no outstanding borrowings under our U.S. revolving credit agreement. Our revolving credit lines associated with our operations located in China bear interest at a rate determined by the Chinese government at the time of borrowing. As of August 1, 2021, there were no outstanding borrowings under our revolving credit agreements associated with our operations located in China.
We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in Canada and China. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currencies of our subsidiaries domiciled in Canada and China. However, there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the United States dollar as their functional currency. A substantial portion of the company’s imports purchased outside the United States are denominated in U.S. dollars. A 10% change in the above exchange rates as of August 1, 2021, would not have materially affected our results of operations or financial position.
ITEM 4.CONTROLS AND PROCEDURES
As of August 1, 2021, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of such date, in all material respects, to ensure that information required to be disclosed in the reports filed by us and submitted under the Exchange Act, is recorded, processed, summarized, and reported as and when required, and that these disclosure controls and procedures were effective as of such date to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosure.
During the quarter ended August 1, 2021, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II – Other Information
Item 1.Legal Proceedings
There have not been any material changes to our legal proceedings during the three months ended August 1, 2021. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 16, 2021, for the fiscal year ended May 2, 2021.
Item 1A.Risk Factors
There have not been any material changes to our risk factors during the three months ended August 1, 2021. Our risk factors are disclosed in Item 1A “Risk Factors” of the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 16, 2021, for the fiscal year ended May 2, 2021.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
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(c) |
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(d) |
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Total Number of |
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Approximate |
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(a) |
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Shares Purchased |
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Dollar Value of |
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Total |
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(b) |
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as Part of |
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Shares that May |
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Number |
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Average |
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Publicly |
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Yet Be Purchased |
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of Shares |
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Price Paid |
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Announced Plans |
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Under the Plans or |
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Period |
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Purchased |
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per Share |
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or Programs |
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Programs (1) |
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May 3, 2021 to June 6, 2021 |
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— |
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— |
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— |
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$ |
5,000,000 |
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June 7, 2021 to July 4, 2021 |
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— |
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— |
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— |
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$ |
5,000,000 |
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July 5, 2021 to August 1, 2021 |
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48,686 |
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$ |
14.90 |
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48,686 |
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$ |
4,276,672 |
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Total |
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48,686 |
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$ |
14.90 |
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48,686 |
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$ |
4,276,672 |
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(1) |
In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. |
II-1
Item 6.Exhibits
The following exhibits are submitted as part of this report.
10.1 |
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10.2 |
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31.1 |
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
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31.2 |
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). |
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32.1 |
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
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32.2 |
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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101.INS |
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Inline XBRL Instance Document |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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104 |
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Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). |
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II-2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CULP, INC. (Registrant) |
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Date: September 10, 2021 |
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By: |
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/s/ Kenneth R. Bowling |
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Kenneth R. Bowling |
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Executive Vice President and Chief Financial Officer |
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(Authorized to sign on behalf of the registrant and also signing as principal financial officer) |
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By: |
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/s/ Thomas B. Gallagher, Jr. |
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Thomas B. Gallagher, Jr. |
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Vice President of Finance |
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(Authorized to sign on behalf of the registrant and also signing as principal accounting officer) |
II-3