Culp Announces Results for Third Quarter Fiscal 2021

Culp, Inc. (NYSE: CULP) (together with its consolidated subsidiaries, “CULP”) today reported financial and operating results from continuing operations for the third quarter ended January 31, 2021.

Fiscal 2021 Third Quarter Financial Summary(1)

• Net sales were $79.3 million, up 15.8 percent over the prior-year period, with mattress fabrics sales up 15.1 percent and upholstery fabrics sales up 16.4 percent compared with the third quarter of last year.
• Pre-tax income from continuing operations was $3.1 million, which included $1.0 million in other expense relating mostly to foreign exchange rate fluctuations associated with our operations located in China, compared with pre-tax income from continuing operations of $2.7 million for the prior-year period, which included $282,000 in other expense.
• Net income from continuing operations was $2.1 million, or $0.17 per diluted share, compared with net income from continuing operations of $1.0 million, or $0.08 per diluted share, for the prior-year period.
• The company’s financial position reflected total cash and investments of $51.8 million and no outstanding borrowings as of January 31, 2021. This compares with a net cash position of $38.7 million as of the end of the fourth quarter of fiscal 2020. (See summary of cash and investments table on page 9.)
• Cash flow from operations and free cash flow for the first nine months of fiscal 2021 were $21.7 million and $17.1 million, respectively, compared with negative cash flow from operations and negative free cash flow of $519,000 and $4.7 million, respectively, for the prior-year period. (See reconciliation table on page 11.)
• The company announced a quarterly cash dividend of $0.11 per share, payable in April. At an annual indicated dividend of $0.44 per share, the yield is 2.56 percent, based upon yesterday’s closing stock price of $17.18 per share.
• The company’s Board of Directors has reinstated the company’s share repurchase program, which was previously suspended in April 2020 due to uncertainty surrounding the COVID-19 pandemic. There is $5.0 million available under the share repurchase program authorized by the Board in March 2020.

(1)During the fourth quarter of fiscal 2020, the company sold its majority ownership interest in eLuxury, LLC, resulting in the elimination of its home accessories segment. Accordingly, the financial results for this segment are excluded from the reported financial performance of the company’s continuing operations and are presented as a discontinued operation in the company’s consolidated financial statements.

Financial Outlook

• Although subject to uncertainties related to the COVID-19 pandemic and potential disruption in customers’ supply chains, the company is encouraged by the execution of its product-driven strategy and continued strength in demand for home furnishing products, as well as its opportunities for market share growth. The company expects sales and operating income from continuing operations for the fourth quarter of fiscal 2021 to be dramatically improved compared to the prior-year period. The fourth quarter of last year was materially affected by global shutdowns relating to the COVID-19 pandemic.
• The company’s net sales for the fourth quarter of fiscal 2021 are expected to be up approximately 40 percent compared to the prior-year period, with the increase in mattress fabrics sales expected to be moderately higher than this percentage and the increase in upholstery fabrics sales expected to be moderately lower than this percentage.
• Notably, operating performance for the upholstery fabrics segment is being affected by the timing of holiday shutdowns for the Chinese New Year holiday, which falls entirely in company’s fourth quarter. Recognizing this impact, consolidated operating income is expected to be in the range of $1.2 million to $1.7 million for the fourth quarter of fiscal 2021. This compares to an $18.0 million operating loss from continuing operations for the fourth quarter of fiscal 2020, which included $13.7 million in asset impairment charges. Excluding these charges, adjusted operating loss from continuing operations for the fourth quarter of fiscal 2020 was $4.3 million. (See reconciliation table on page 16.)
• Due to the continued economic impact of the COVID-19 pandemic and the lack of visibility as to its duration, the company is not committing to provide this level of forward-looking guidance regularly.

Commenting on the results, Iv Culp, president and chief executive officer of Culp, Inc., said, “We are energized by our financial performance for the third quarter of fiscal 2021. These results reflect strong growth in sales and operating performance compared to the prior-year period, as well as exceptional execution of our product-driven strategy and the continued resilience of our robust global platform. These results would not have been possible without the hard work and perseverance of our dedicated team of associates around the world. Their determination and diligence, including strict adherence to safety protocols to help minimize the spread of COVID-19, have enabled us to continue operating our business with minimal disruption while meeting the rapidly changing needs of our customers. We are tremendously grateful for their tireless efforts and unwavering commitment to operational excellence during this unprecedented time.

“We are encouraged by the performance of both our mattress fabrics and upholstery fabrics segments during the quarter. Our growth in both segments was driven by a combination of strong demand for our products and the benefits of market share gains and product innovation. As consumers have remained focused on the home environment, our diversified manufacturing and sourcing capabilities, along with our stable supply chain, have allowed us to effectively service the increased demand from both new and existing customers.

“In addition to our positive momentum in sales and operating performance, our cash flows and balance sheet also remained strong, and we ended the quarter with $51.8 million in total cash and investments, with no outstanding debt. We are also pleased to announce that our Board of Directors has reinstated our share repurchase program, which was previously suspended in April 2020 due to pandemic-related uncertainty.

“Looking ahead, we are optimistic about the ongoing strength of industry demand trends, and we believe our business will continue its solid performance during the fourth quarter of fiscal 2021 and extending into fiscal 2022. We are also pleased with the recent fourth-quarter acquisition of the remaining fifty percent ownership interest in our Haiti sewn mattress cover platform, which has proven to be an ideal location for this growing business. Although we expect further near-term pressures relating to foreign currency fluctuations in China, pandemic-related disruption in the travel and leisure industries, and our customers’ supply chain constraints for non-fabric components, we are confident in our ability to withstand these headwinds. In the current demand environment, we expect to have additional opportunities to capture market share. We believe we are well-positioned for growth and look forward to the opportunities ahead for our business,” added Culp.

Segment Update

Mattress Fabrics Segment

Sales for this segment were $38.6 million for the third quarter, up 15.1 percent compared with sales of $33.5 million in the third quarter of fiscal 2020.

“We were very pleased by the strong growth in sales and operating performance for the mattress fabric segment during the third quarter, which is historically our most challenging quarter due to seasonality within the mattress industry and holiday shutdowns in certain of our locations,” said Sandy Brown, president of the company’s mattress fabrics division. “Our significant increase in sales compared to the prior-year period, was driven by an ongoing consumer focus on the at-home experience and overall comfort. We also benefitted from market share gains across a diversified group of new and existing customers, including further growth in our sewn mattress cover business and the success of our fabric-to-cover model.

“Our improved operating performance for the third quarter of fiscal 2021, as compared to the prior-year period, primarily reflects our solid increase in sales, offset somewhat by unfavorable China foreign exchange rate fluctuations for mattress covers and our customers’ supply chain constraints resulting from non-fabric components.

“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 and serve the needs of our mattress fabric and cover customers. We also maintained our relentless focus on product innovation, creative designs, and dedicated customer attention. In addition, we believe the domestic mattress industry and, in turn, our business, began to realize some benefits during the quarter from the preliminary antidumping duties imposed in October 2020 by the U.S. Department of Commerce on mattress imports from seven countries. We are cautiously optimistic that this tailwind will continue during the fourth quarter of fiscal 2021 and beyond.

“We are also excited about our recent strategic investment to acquire the remaining fifty percent ownership interest in our sewn mattress cover joint venture in Haiti, which was completed at the beginning of the fiscal 2021 fourth quarter. By gaining full ownership of the Haiti platform, we have increased our flexibility and enhanced our capacity to meet growing customer demand, while also maintaining certain commitments to our previous joint venture partner through a supply agreement.

“Barring additional shutdowns or significant disruption in our customers’ supply chain for raw materials other than fabric, we believe we are well positioned to increase market share during the fourth quarter of fiscal 2021. We have a compelling business model supported by innovative products, creative designs, dedicated service, and an efficient global platform,” added Brown.

Upholstery Fabrics Segment

Sales for this segment were $40.7 million for the third quarter, up 16.4 percent compared with sales of $35.0 million in the third quarter of fiscal 2020.

“We were especially encouraged by the better than expected growth in our upholstery fabric sales for the third quarter,” said Boyd Chumbley, president of the company’s upholstery fabrics division. “This growth was driven by a significant increase in our residential business compared to the prior-year period, partially offset by lower sales for our hospitality business, which remained under pressure due to pandemic-related disruptions that continued to affect the travel and leisure industries.

“The increased demand in our residential upholstery fabrics business was fueled by strong consumer focus on the home. We also benefitted from the success of our product innovation strategy, including the continued popularity of our LiveSmart® product portfolio, which has remained aligned with consumer preferences by focusing on cleanability, ease of maintenance, sustainability, and antimicrobial technology.

“Our residential business also continued to benefit from our robust platform in Asia, including our expanded cut and sew capabilities in Vietnam and our stable, long-term supplier relationships. The strength and flexibility of this platform allowed us to respond quickly to meet increased demand from our customers and grow our market share. The backlog in our residential upholstery business remains historically strong, reflecting the favorable demand trends for this business.

“Our improved operating performance for the third quarter of fiscal 2021, as compared to the prior-year period, reflects the significant increase in sales for our residential business and lower SG&A costs due to cost containment, offset somewhat by unfavorable China foreign exchange rate fluctuations and sales mix.

“Looking ahead, we expect the strong performance in our residential upholstery business to continue, absent additional pandemic-related shutdowns or material disruption in our customers’ supply chain, and we are confident in our ability to meet this demand. We are also cautiously optimistic that as vaccine rollouts continue, pent up demand for travel and leisure activities will ultimately benefit our hospitality business, although the timing of this return still remains uncertain,” added Chumbley.

Balance Sheet

“As the future impact of the COVID-19 pandemic is uncertain, maintaining a strong financial position continues to be one of the company’s top priorities,” added Ken Bowling, executive vice president and chief financial officer of Culp, Inc. “As of January 31, 2021, we reported $51.8 million in total cash and investments and no outstanding borrowings, up from our $38.7 million net cash position as of the end of fiscal 2020. For the first nine months of fiscal 2021, we incurred $4.3 million in capital expenditures and spent $3.9 million on regular quarterly dividends. We also generated cash flow from operations of $21.7 million and free cash flow of $17.1 million for the first nine months of fiscal 2021, compared with negative cash flow from operations of $519,000 and negative free cash flow of $4.7 million for the prior-year period. (See reconciliation table on page 11.) This year-over-year improvement reflects higher earnings and a focused attention on working capital management during the first nine months of the year. While we are very pleased with our fortified balance sheet going into the fourth quarter of fiscal 2021, it is important to note that our cash position will be affected by our strategic investments in working capital and planned capital expenditures during this period.”

Dividends and Share Repurchases

The company announced that its Board of Directors has approved the payment of a quarterly cash dividend of 11 cents per share. This compares with 10.5 cents per share paid for the same period last year, reflecting an increase of five percent. At an annual indicated dividend of $0.44 per share, the yield is 2.56 percent, based upon yesterday’s closing stock price of $17.18 per share. The next quarterly payment will be made on April 16, 2021, to shareholders of record as of April 9, 2021.

On March 2, 2021, the Board of Directors reinstated the company’s share repurchase plan, which was previously suspended in April 2020 due to economic uncertainty relating to the COVID-19 pandemic. The company did not repurchase any shares during the third quarter of fiscal 2021, leaving the full $5.0 million available under the share repurchase program approved by the Board in March 2020.

Conference Call

Culp, Inc. will hold a conference call to discuss financial results for the third quarter of fiscal 2021 on March 4, 2021, at 11:00 a.m. Eastern Time. A live webcast of this call can be accessed on the investor relations section of the company’s website, www.culp.com. A replay of the webcast will be available for 30 days on the investor relations section of the company’s website, beginning at 2:00 p.m. Eastern Time on March 4, 2021.

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 the company will realize these expectations, meet its 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 and 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. 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, 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.