CULP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

Published: 2021-09-10 13:14:06 ET CULP

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.

Executive Summary

Results of Continuing Operations

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.

See the Segment Analysis section below for further details.

Income Taxes

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.

As of August 1, 2021, there were no outstanding borrowings under our lines of credit.

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.

Common Stock Repurchases

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.

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.

Gross Profit, Selling, General & Administrative Expenses, and Operating Income

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")

Segment assets

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and investment in unconsolidated joint venture.

Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

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

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

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

See Note 3 to the consolidated financial statements for further details.

Segment Assets

Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.

Refer to Note 12 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

Inventory

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

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

Other Income Statement Categories

Selling, General, and Administrative 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.

Interest Income

Other Expense

Income Taxes

Effective Income Tax Rate & Income Tax Expense

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.

Valuation Allowance

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:

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.

Income Taxes Paid

The following table sets forth taxes paid (refunded) by jurisdiction:

United States Federal - Alternative Minimum Tax

Future Liquidity

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

As of August 1, 2021, there were no outstanding borrowings under our lines of credit.

By Geographic Area

A summary of our cash and investments by geographic area follows:

Common Stock Repurchase Program

During the first quarter of fiscal 2021, we did not repurchase any shares of our common stock.

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.

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

Accounts Receivable

Inventory

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

Financing Arrangements

As of August 1, 2021, we did not have any outstanding borrowings associated with our revolving credit agreements.

Refer to Note 9 of the consolidated financial statements for further details of our revolving credit agreements.

Capital Expenditures and Depreciation

Overall

Accounts Payable - Capital Expenditures

Purchase Commitments - Capital Expenditures

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.

There were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended May 2, 2021.

Inflation

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