CULP - Culp Announces Results for Third Quarter Fiscal 2022

Culp, Inc. (NYSE: CULP) (together with its consolidated subsidiaries, “CULP”) today reported financial and operating results for the third quarter ended January 30, 2022.

Fiscal 2022 Third Quarter Financial Summary

• Net sales were $80.3 million, up 1.2 percent over the prior-year period, with mattress fabrics sales down 0.4 percent and upholstery fabrics sales up 2.7 percent compared with the third quarter of last year.
• Income from operations (operating income) was near expectations at $1.1 million, as compared with income from operations of $4.0 million for the prior-year period.
• Net loss was $(289,000), or $(0.02) per diluted share, compared with net income of $2.1 million, or $0.17 per diluted share, for the prior-year period. Net loss and earnings per diluted share for the third quarter of fiscal 2022 were significantly impacted by an abnormally high tax rate due to the company’s mix of income between the U.S. and its foreign jurisdictions for the quarter.

• The company’s financial position reflected total cash and investments of $22.2 million and no outstanding borrowings as of January 30, 2022. (See summary of cash and investments table at the back of this press release.)

• The company announced a quarterly cash dividend of 11.5 cents per share, payable in April 2022. At an annual indicated dividend of 46 cents per share, the yield is 5.67 percent, based upon yesterday’s closing stock price of $8.11 per share.
• Through the first nine months of fiscal 2022, the company has returned $5.9 million to shareholders through quarterly dividends and share repurchases.

Financial Outlook

• Although CULP is well positioned over the long term with its product-driven strategy and flexible global platform, the company continues to navigate near-term uncertainty in the macroeconomic environment, including significant inflationary pressures, a challenging labor market, fluctuation in foreign currency exchange rates, and customer supply chain disruption.

• The company’s net sales for the fourth quarter of fiscal 2022 are expected to be slightly lower as compared to the fourth quarter of fiscal 2021. The company’s consolidated operating income (income from operations) for the fourth quarter of fiscal 2022 is expected to be comparable to the fourth quarter of fiscal 2021.

• The company’s expectations for the fourth quarter of fiscal 2022 are based on information available at the time of this press release and reflect certain assumptions by management regarding the company’s business and trends and the projected impact of the ongoing headwinds. The outlook assumes there will be no further pandemic-related shutdowns or material disruption, including due to new variants or employee absenteeism, and further assumes no greater-than-expected changes in freight and raw material costs, foreign currency exchange rates, labor availability, recent consumer trends, world events (including the Russia-Ukraine war), or other circumstances beyond the company’s control.

Commenting on the results, Iv Culp, president and chief executive officer of Culp, Inc., said, “As expected, the third quarter was significantly challenged by a convergence of factors that affected our sales and operating performance. While sales were generally in line with expectations and reflected stable demand for our products as compared to the prior-year period, revenue for our mattress fabric segment was affected by a variety of factors, including lower demand for sewn mattress covers due to high customer inventory levels; customer delays of new product rollouts; and some weakening in the U.S. mattress industry due to traditional seasonal slowdowns, the impact of the Omicron variant, and inflationary pressures affecting consumer spending.

“With respect to our operating performance, profitability was pressured more than expected, particularly for our mattress fabrics business. We incurred operating inefficiencies within our mattress fabrics global platform due to an unfavorable product mix impacting our U.S. and Canadian locations. Also, the continued rapid rise in freight, raw material, and labor costs, as well as ongoing labor challenges, affected profitability for the quarter. While additional pricing action was taken during the third quarter to help further offset inflationary pressures to some extent, we did not receive the full benefit of those actions throughout the quarter due to the timing of implementation.

“Despite the headwinds, the fundamentals of our business remain solid, and we have the financial strength to support our business in the current environment. In each of our segments, we continue to execute our product-driven strategy with an emphasis on design creativity, innovation, and servicing the evolving needs of our customers. Our diversified global platform and robust supply chain have enabled us to meet our customer delivery commitments in the face of numerous challenges, and we are well positioned to capitalize on planned new programs and expanding market opportunities. Notably, we opened our new Haiti facility during the third quarter, which will allow us to expand our near-shore capacity for cut and sewn upholstery kits to support future growth and build supply chain resiliency.

“We have also made considerable investments in our business during the past nine months, including a third cut and sew facility in Haiti, a new innovation campus in High Point, North Carolina, and higher inventory balances to protect against supply chain disruption, support our valued customers, and get ahead of rising raw material costs. As a result of these strategic investments, our cash position has declined during fiscal 2022, but we now expect our cash position to stabilize during the fourth quarter. Importantly, while it is always our intent and desire to grow our revenues and profits, we understand that we are facing an uncertain demand and cost environment. We will be laser focused on generating cash and keeping our expense structure in line with current demand trends.

“Looking ahead, we expect the current pressures to continue near-term, but we are assertively working to mitigate these challenges. We have additional pricing actions taking effect in both of our businesses during the fourth quarter to help further offset rising costs. We are also focused on controlling costs; diligently managing and capitalizing on our strategic investment in inventory; retaining existing and newly trained employees; and improving our operating efficiencies. Our market position remains solid with new planned placements and product development opportunities, and we expect to see a more normalized product mix in our business during the fourth quarter.

“I remain very optimistic about CULP’s future as we continue to demonstrate the competitive strength of our innovative product offerings and diversified global platform. We look forward to the opportunities ahead to deliver long-term profitable growth and value for our shareholders,” added Culp.

Segment Update

Mattress Fabrics Segment

Sales for this segment were $38.4 million for the third quarter, down 0.4 percent compared with sales of $38.6 million in the third quarter of fiscal 2021.

“Our third quarter results reflected ongoing headwinds pressuring profitability more than anticipated,” said Sandy Brown, president of the company’s mattress fabrics division. “Sales for the quarter, which included pricing and surcharge actions that were in effect during the period, were relatively stable as compared to the third quarter of fiscal 2021. However, top line performance was tempered by significant weakness in mattress cover sales as our customers continued to work through their existing inventory levels, as well as customer delays in launching new products. Sales were also affected by traditional seasonal slowdowns over the holidays, the widespread resurgence of COVID, the impact of inflationary pressures on consumer spending, and weather disruptions at some of our facilities.

“Our operating performance for the third quarter of fiscal 2022 was significantly pressured by operating inefficiencies within our global platform due to an unfavorable product mix impacting our U.S. and Canadian locations. Operating performance was also affected by higher freight, raw material, and labor costs; ongoing labor challenges, including inefficiencies due to hiring and training new employees in the U.S. and Canada and record levels of COVID absenteeism in January; and inefficiencies due to normal holiday shutdowns at certain of our locations.

“Despite the convergence of near-term headwinds, we remained focused on product innovation, creative designs, and personalized customer attention. We had a very favorable showing at the recent Las Vegas market, and we are excited about the positive response from customers. Also, the strength and flexibility of our global manufacturing and sourcing operations enabled us to support the evolving needs of our customers throughout the quarter. This platform continues to provide us with a competitive advantage for opportunities to expand our market reach across new and existing customers. Additionally, while we experienced lower demand in our mattress cover business during the quarter, we firmly believe our on-shore, near-shore, and off-shore supply chain strategy, as well as our fabric-to-cover model, remains a preferred platform for sewn mattress cover customers.

“Looking ahead, we are enthusiastic about our strong new placements and product development opportunities for fiscal 2023. However, some weakening in the domestic mattress industry may impact demand and lead to additional temporary delays of new product rollouts. Rising costs also continue to pressure our profitability, but we took selective pricing action during the third quarter, and we are implementing additional targeted price increases during the fourth quarter to further mitigate these higher costs. We also expect a more normalized product mix during the fourth quarter, and we remain committed to controlling costs, managing and reducing our inventory, retaining talent, and improving our operating efficiencies,” added Brown.

Upholstery Fabrics Segment

Sales for this segment were $41.9 million for the third quarter, up 2.7 percent compared with sales of $40.7 million in the third quarter of fiscal 2021.

“We were pleased by the better-than-expected growth in our sales for the third quarter,” said Boyd Chumbley, president of the company’s upholstery fabrics division. “This was driven by solid demand for our products, even when compared to an especially strong sales performance during the prior-year period. Demand remained well above pre-pandemic levels, and we continued to benefit from our robust platform in Asia, our stable, long-term supplier relationships, and the success of our product innovation strategy, including the continued popularity of our LiveSmart® portfolio of performance products. Our sales results were also supplemented by the pricing and surcharge actions that were effective during the quarter.

“Our operating performance for the third quarter of fiscal 2022 reflected meaningful sequential improvement as compared to the second quarter of fiscal 2022. However, as compared to the prior-year period, our results reflected higher freight and raw material costs, start-up costs for our new Haiti facility, unfavorable foreign currency fluctuations in China, and a lower contribution from our Read Window Products business. We took additional pricing action during the third quarter to help cover a portion of the continued rise in our operating costs, and this action began to favorably impact our results during the latter part of the quarter. Although the temporary cost-price lag affected operating performance for the third quarter, we will benefit during the fourth quarter from the full realization of this additional pricing action.

“Top line performance in our hospitality business continued to recover from pandemic-related impacts during the third quarter, with higher sales in both our hospitality/contract fabric business and our Read Window Products business. We were also excited to open our new Haiti facility during the third quarter. Although the ramp up for this facility has taken longer than expected due to travel restrictions that delayed our training timeline, we are pleased to have commenced product shipments in January, and we look forward to increasing production and reducing start-up costs over the upcoming months.

“Looking ahead, we expect that current near-term headwinds, including inflationary conditions, labor availability in our U.S. operations, and customer supply chain constraints, may continue to pressure our results during the fourth quarter. We also expect a slowdown in new business for the residential home furnishings industry, as compared to the peak experienced during the post-COVID stay-at-home surge, which may temper the level of growth in sales for our residential fabric products. Additionally, our sales and operating performance for the fourth quarter, as compared sequentially to the third quarter, will be affected by the timing of the Chinese New Year holiday, which falls substantially within the fourth quarter. Despite these external conditions, we remain encouraged by generally favorable demand trends. We are confident in our ability to navigate these pressures as we leverage our product-driven strategy and innovative products, along with our flexible Asian platform, stable supply chain partners, and expanded capacity in Haiti, to sustain our competitive advantage and expand our market reach. We are well positioned for the long term, and we look forward to the opportunities ahead as we continue to support our valued customers,” added Chumbley.

Balance Sheet

“We remain focused on maintaining a strong financial position and disciplined execution of our capital allocation strategy during these uncertain times,” added Ken Bowling, executive vice president and chief financial officer of Culp, Inc. “Over the course of this fiscal year, we have strategically committed significant funds for organic investment in our business to positively position CULP for future growth as external conditions normalize. As of January 30, 2022, we reported $22.2 million in total cash and investments and no debt outstanding under our $30 million unsecured line of credit. This compares with $46.9 million in total cash and investments and no outstanding debt as of the end of fiscal 2021. Notably, as mentioned earlier, we expect our cash position to stabilize during the fourth quarter of fiscal 2022.

“Our cash flow from operations and free cash flow were $(12.4) million and $(18.5) million, respectively, for the first nine months of fiscal 2022. (See reconciliation table at the back of this press release.) As we continue to invest in our business, our cash flow from operations and free cash flow during the first nine months of this fiscal year were affected by the following uses of cash: (i) an investment of $17.1 million in higher inventory levels to protect against supply chain disruption and support our valued customers, to get ahead of rising raw material costs, and to strategically improve our in-stock position ahead of the Chinese New Year holiday; (ii) $5.3 million investment in capital expenditures, including expenditures for machinery, equipment, and IT investments, as well as expenditures related to our new innovation campus; (iii) $1.9 million in payments for the new building lease and startup expenses associated with our Haiti upholstery cut and sew operation; and (iv) increased accounts payable payments related to our return to normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic.

“Additionally, during the first nine months of fiscal 2022, we paid $4.1 million in regular quarterly dividends and spent $1.8 million on share repurchases.”

Dividends and Share Repurchases

The company announced that its Board of Directors has approved the payment of a quarterly cash dividend of 11.5 cents per share. This compares with 11 cents per share paid for the same period last year, reflecting an increase of five percent. At an annual indicated dividend of 46 cents per share, the yield is 5.67 percent, based upon yesterday’s closing stock price of $8.11 per share. The next quarterly payment will be made on April 19, 2022, to shareholders of record as of April 11, 2022.

The company did not repurchase any shares during the third quarter of fiscal 2022, leaving approximately $3.2 million available under the current share repurchase program as of January 30, 2022.

Conference Call

Culp, Inc. will hold a conference call to discuss financial results for the third quarter of fiscal 2022 on March 3, 2022, at 11:00 a.m. Eastern Time. A live webcast of this call can be accessed under the “Upcoming Events” section on the investor relations page of the company’s website, www.culp.com . A replay of the webcast will be available for 30 days under the “Past Events” section on the investor relations page of the company’s website, beginning at 2:00 p.m. Eastern Time on March 3, 2022.

About the Company

Culp, Inc. is one of the world’s largest marketers of mattress fabrics for bedding and upholstery fabrics for residential and commercial furniture. The company markets a variety of fabrics to its global customer base of leading bedding and furniture companies, including fabrics produced at Culp’s manufacturing facilities and fabrics sourced through other suppliers. Culp has manufacturing and sourcing capabilities located in the United States, Canada, China, Haiti, Turkey, and Vietnam.

Forward-Looking Statements

This release contains “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 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 strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. Also, economic or political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. The impact of public health epidemics on employees, customers, suppliers, and the global economy, such as the global coronavirus pandemic currently affecting countries around the world, could also adversely affect our operations and financial performance. In addition, the impact of potential goodwill or intangible asset impairments could affect our financial results. Increases in freight costs, labor costs, and raw material prices, including increases in market prices for petrochemical products, can also significantly affect the prices we pay for shipping, labor, and raw materials, respectively, and in turn, increase our operating costs and decrease our profitability. Finally, disruption in our customers’ supply chains for non-fabric components may cause declines in new orders and/or delayed shipping of existing orders while our customers wait for other components, which could adversely affect our financial results. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, is included in Item 1A “Risk Factors” 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.

Reconciliation of Free Cash Flow (1):