CULP - Culp Announces Results for Third Quarter Fiscal 2023

Culp, Inc. (NYSE: CULP) (together with its consolidated subsidiaries, “CULP”) today reported financial and operating results for the third quarter ended January 29, 2023.

Fiscal 2023 Third Quarter Financial Summary

• Net sales were $52.5 million, down 34.6 percent compared with the prior-year period, with mattress fabrics sales down 35.8 percent and upholstery fabrics sales down 33.5 percent compared with the third quarter of last year.
• Loss from operations was $(7.8) million, in line with expectations, as compared with income from operations of $1.1 million for the prior-year period.
• The loss from operations for the third quarter of fiscal 2023 includes $711,000 in restructuring expense relating to a rationalization of the upholstery fabrics cut and sew platform located in Ouanaminthe, Haiti.
• Net loss was $(9.0) million, or $(0.73) per diluted share, compared with a net loss of $(289,000), or $(0.02) per diluted share, for the prior-year period. The effective tax rate for the third quarter was negative (3.3)%, reflecting the company’s mix of taxable income between its U.S. and foreign jurisdictions during the period.
• The company maintained a solid balance sheet, with total cash and investments of $16.7 million and no outstanding borrowings as of January 29, 2023. (See summary of cash and investments table at the back of this press release.)
• Cash flow from operations and free cash flow were $4.6 million and $2.5 million, respectively, for the first nine months of fiscal 2023, compared with cash flow from operations and free cash flow of negative $(12.4) million and negative $(18.5) million, respectively, for the first nine months of fiscal 2022. (See reconciliation table at the back of this press release.)
• On January 19, 2023, the company closed on a new three-year asset-based revolving credit facility of up to $35 million.

Financial Outlook

• The company continues to navigate a difficult demand environment as a result of elevated inventory levels at manufacturers and retailers, as well as shifting consumer spending trends and weakening consumer confidence. The company is also experiencing operating inefficiencies due to this reduced demand as well as an improving but still inexperienced labor force. Although CULP remains well-positioned over the long term with its product-driven strategy and flexible global platform, current conditions are likely to continue pressuring results through at least the end of fiscal 2023.
• Due to the continued volatility in the macro environment, the company is providing only limited sequential financial guidance for the fourth quarter of fiscal 2023. The company’s consolidated net sales for the fourth quarter are expected to be moderately higher as compared to the $52.5 million in net sales for the third quarter of fiscal 2023, driven largely by strong improvement in the mattress fabrics segment and comparable performance in the upholstery fabrics segment. The company expects a consolidated operating loss (loss from operations) for the fourth quarter of fiscal 2023 that is meaningfully lower than the $(7.8) million operating loss for the third quarter of fiscal 2023. The company also expects its cash position as of the end of the fourth quarter of fiscal 2023 to remain comparable to the $14.6 million at the end of fiscal 2022.

• The company’s expectations 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.

Commenting on the results, Iv Culp, president and chief executive officer of Culp, Inc., said, “As expected, our sales and operating results for the third quarter reflected demand weakness in the domestic mattress and residential home furnishings industries, specifically related to unit volume. Our performance was affected by fewer billing days during the quarter due to our customers taking longer than normal holiday shutdowns in the face of high retail inventories and reduced consumer demand. Sales were also affected by the timing of the Chinese New Year holiday, which this year fell primarily within the third quarter, rather than the fourth quarter.

"Despite the headwinds, we continued our focus on cash preservation and working capital management, including inventory reductions, throughout the quarter. We have generated cash flow from operations of $4.6 million and free cash flow of $2.5 million for the first nine months of the fiscal year, a significant improvement compared to the same period last year, ending the quarter with $16.7 million in cash and no outstanding borrowings. We also completed the closing of a new credit facility that supplements our strong balance sheet by providing enhanced liquidity and flexibility as we navigate the ongoing market volatility.

"We remain focused on the long term and continue to diligently manage the aspects of our business we can control. We are especially pleased with the business transformation plan underway in our mattress fabrics segment, and we expect sustained sequential improvement in this business as we implement management changes and new processes tailored to improve operational efficiencies, optimize our supply chain, and strengthen customer relationships. Additionally, it was encouraging to see the activity level at the January Las Vegas market. The industry has previously been in a cycle of deferring new product introductions, which affects our unit volume, so we were pleased to see many new products and innovations presented at this market featuring CULP mattress fabrics and sewn covers that are launching throughout calendar 2023.

"Based on demand trends and customer sentiment, we began a rationalization and consolidation of our cut and sew upholstery kit platform in Haiti near the end of the quarter. This restructuring, which will be completed during the fourth quarter, realigns our capacity and costs with current demand levels for upholstery kits, while still allowing us to support our customers and scale for additional capacity if conditions improve. We expect annualized savings of approximately $1.5 million from this initiative, and will recoup $2.4 million in prepaid rent expense over the next six and half years.

"Looking ahead, while we expect current macro conditions will affect our business through at least the end of this fiscal year, our market position remains solid, and we continue to gain new product opportunities with customers. We are diligently focused on returning to profitability and taking the necessary steps to withstand the current market challenges, while also engaging in a holistic business improvement strategy that will position us to emerge stronger when conditions normalize,” added Culp.

Segment Update

Mattress Fabrics Segment (“CHF”) Summary

• Sales for this segment were $24.7 million for the third quarter, down 35.8 percent compared with sales of $38.4 million in the third quarter of fiscal 2022. Sequentially, sales were down 5.8 percent compared with sales of $26.2 million for the second quarter of fiscal 2023.

• Sales for CHF were pressured during the quarter by reduced demand, with mattress industry analysis reflecting significant unit contraction.

• Operating performance for the third quarter was primarily pressured by operating inefficiencies driven by lower sales volume and holiday shutdowns across CHF's locations.

• CHF continued its short-term focus on inventory reduction and cash generation during the quarter, while also engaging in an ongoing business transformation plan focused on long-term improvement in every facet of the business, including quality, sales, marketing, and operational processes; supply chain optimization; employee engagement; and organizational management structure.

• At the end of the third quarter, CHF began the roll out for some new customer programs, which are priced in-line with current market costs, and expects to benefit as these new programs expand across more sales channels and retail floors, and as additional new product rollouts launch during calendar 2023.

• The CHF team continues to execute its product driven strategy, with an emphasis on innovation, design creativity, and customer relationships. Management remains diligently focused on controlling costs, and will continue to make operational adjustments to align with demand conditions.

Upholstery Fabrics Segment (“CUF”) Summary

• Sales for this segment were $27.8 million for the third quarter, down 33.5 percent compared with sales of $41.9 million in the third quarter of fiscal 2022, which was the segment's strongest quarterly sales performance since fiscal 2006. Sequentially, sales were down 13.5 percent compared with sales of $32.2 million for the second quarter of fiscal 2023.

• Sales for CUF’s residential fabric business remained under pressure during the quarter by reduced demand, driven by high inventory levels for the residential home furnishings industry. This pressure is expected to continue through at least the first quarter of fiscal 2024 as retailers and manufacturers work through their inventory positions.

• Demand remained solid for CUF’s hospitality business during the third quarter, with sales for the hospitality/contract business accounting for approximately 30 percent of CUF's total sales.

• Operating performance for the third quarter, as compared to the prior-year period, was pressured primarily by lower residential sales, as well as operating inefficiencies in CUF's cut and sew facility in Haiti and in its Read Window Products business. These pressures were partially offset by a significantly more favorable foreign exchange rate associated with CUF's operations in China, as well as lower costs resulting from the restructuring of CUF's cut and sew platform in China during the prior quarter.

• CUF began a rationalization and restructuring of its Haiti cut and sew platform near the end of the quarter to align the capacity and cost structure of this operation with reduced demand. This platform adjustment, which includes terminating a lease and relocating into an existing mattress cover facility, will be completed during the fourth quarter.

• Despite high inventory levels affecting manufacturer demand in the residential home furnishings industry, CUF's business remains well-positioned for the long term with its scalable global platform and innovative product offerings, including its popular portfolio of LiveSmart® performance products and new product technologies.

Balance Sheet and Cash Flow

• As of January 29, 2023, the company reported $16.7 million in total cash and investments and no outstanding debt. This compares with $14.6 million in total cash and investments and no outstanding debt as of the end of fiscal 2022.

• Cash flow from operations and free cash flow were $4.6 million and $2.5 million, respectively, for the first nine months of fiscal 2023, compared with cash flow from operations and free cash flow of negative $(12.4) million and negative $(18.5) million, respectively, for the first nine months of fiscal 2022. (See reconciliation table at the back of this press release.)

• The company’s cash flow from operations and free cash flow during the first nine months of fiscal 2023 were favorably affected by working capital management, namely reductions in inventory. Importantly, since the end of the third quarter of fiscal 2022, inventory reduction has contributed approximately $18.2 million to the company's cash position.

• Capital expenditures through the third quarter of fiscal 2023 were $1.6 million compared with $5.3 million for the same period for fiscal 2022. The company continues to manage capital investments, focusing on projects that will increase efficiencies and improve quality.

• The company completed the closing of a new three-year asset-based revolving credit facility of up to $35 million during the third quarter of fiscal 2023. Borrowing availability under this new asset-based revolving facility is based on a calculation using certain of the company's accounts receivable and inventory, determined on a monthly basis, and, as compared to the company's prior credit facility, provides enhanced liquidity and more flexibility with minimal financial covenants.

• As of January 29, 2023, the company had approximately $40 million in liquidity, consisting of $16.7 million in total cash and investments and approximately $23 million in borrowing availability under the company's new credit facility.

Dividends and Share Repurchases

To preserve liquidity and support future growth opportunities, the company’s Board of Directors suspended the company’s quarterly cash dividend on its common stock in June of 2022.

The company did not repurchase any shares during the third quarter of fiscal 2023, leaving approximately $3.2 million available under the current share repurchase program as of January 29, 2023. Despite the current share repurchase authorization, the company does not expect to repurchase any shares during the fourth quarter of fiscal 2023.

Conference Call

Culp, Inc. will hold a conference call to discuss financial results for the third quarter of fiscal 2023 on March 2, 2023, at 11:00 a.m. Eastern Time. A live webcast of this call can be accessed on 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 2, 2023.

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, projections, or trends for our future operations, strategic initiatives and plans, production levels, new product launches, sales, profit margins, profitability, operating income, capital expenditures, working capital levels, cost savings, income taxes, SG&A or other expenses, pre-tax income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, potential acquisitions, future economic or industry trends, public health epidemics, or future developments. There can be no assurance that we will realize these expectations or meet our guidance, or that these beliefs will prove correct.

Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses into our existing operations. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in tariffs or trade policy, including changes in U.S. trade enforcement priorities, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. Also, economic or political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. The impact of public health epidemics on employees, customers, suppliers, and the global economy, such as the global coronavirus pandemic currently affecting countries around the world, could also adversely affect our operations and financial performance. In addition, the impact of potential goodwill or intangible asset impairments could affect our financial results. Increases in freight costs, labor costs, and raw material prices, including increases in market prices for petrochemical products, can also significantly affect the prices we pay for shipping, labor, and raw materials, respectively, and in turn, increase our operating costs and decrease our profitability. Finally, disruption in our customers’ supply chains for non-fabric components may cause declines in new orders and/or delayed shipping of existing orders while our customers wait for other components, which could adversely affect our financial results. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, 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. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial results.

Reconciliation of Free Cash Flow: