NORTH CAROLINA | 56-1001967 | |||
incorporation or other organization) | ||||
1823 Eastchester Drive | ||||
High Point, North Carolina | 27265-1402 | |||
(Address of principal executive offices) | | |||
Title of Each Class | Trading Symbol(s) | Name of Each Exchange On Which Registered |
Common Stock, par value $.05/ Share | CULP | New York Stock Exchange |
Page |
Part I - Financial Statements | ||
Financial Statements: (Unaudited) | ||
I-1 | ||
I-5 | ||
I-6 | ||
I-7 | ||
I-33 | ||
I-34 | ||
I-55 | ||
I-56 | ||
Part II - Other Information | ||
II-1 | ||
II-2 | ||
Item 1: Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
THREE MONTHS ENDED | |||||||||
October 28, | October 29, | ||||||||
2018 | 2017 | ||||||||
Net sales | $ | 77,006 | 80,698 | ||||||
Cost of sales | 63,680 | 64,894 | |||||||
Gross profit | 13,326 | 15,804 | |||||||
Selling, general and | |||||||||
administrative expenses | 10,103 | 9,415 | |||||||
Restructuring credit | (1,061 | ) | - | ||||||
Income from operations | 4,284 | 6,389 | |||||||
Interest expense | 18 | 37 | |||||||
Interest income | (151 | ) | (128 | ) | |||||
Other expense | 142 | 321 | |||||||
Income before income taxes | 4,275 | 6,159 | |||||||
Income taxes | 1,276 | 2,108 | |||||||
Loss from investment in unconsolidated joint venture | 55 | 75 | |||||||
Net income | $ | 2,944 | 3,976 | ||||||
Less: Net income attributable to non-controlling interest | (11 | ) | - | ||||||
Net income attributable to Culp, Inc. common shareholders | $ | 2,933 | 3,976 | ||||||
Net income attributable to Culp Inc. common shareholders per share - basic | $ | 0.23 | 0.32 | ||||||
Net income attributable to Culp Inc. common shareholders per share - diluted | $ | 0.23 | 0.32 | ||||||
Average shares outstanding, basic | 12,515 | 12,440 | |||||||
Average shares outstanding, diluted | 12,551 | 12,580 | |||||||
SIX MONTHS ENDED | |||||||||
October 28, | October 29, | ||||||||
2018 | 2017 | ||||||||
Net sales | $ | 148,479 | 160,230 | ||||||
Cost of sales | 124,594 | 127,962 | |||||||
Gross profit | 23,885 | 32,268 | |||||||
Selling, general and | |||||||||
administrative expenses | 18,136 | 18,916 | |||||||
Restructuring credit | (610 | ) | - | ||||||
Income from operations | 6,359 | 13,352 | |||||||
Interest expense | 38 | 37 | |||||||
Interest income | (301 | ) | (259 | ) | |||||
Other expense | 399 | 674 | |||||||
Income before income taxes | 6,223 | 12,900 | |||||||
Income taxes | 2,182 | 3,748 | |||||||
Loss from investment in unconsolidated joint venture | 132 | 193 | |||||||
Net income | $ | 3,909 | 8,959 | ||||||
Less: Net income attributable to non-controlling interest | (19 | ) | - | ||||||
Net income attributable to Culp, Inc. common shareholders | $ | 3,890 | 8,959 | ||||||
Net income attributable to Culp Inc. common shareholders per share - basic | $ | 0.31 | 0.72 | ||||||
Net income attributable to Culp Inc. common shareholders per share - diluted | $ | 0.31 | 0.71 | ||||||
Average shares outstanding, basic | 12,512 | 12,420 | |||||||
Average shares outstanding, diluted | 12,612 | 12,613 | |||||||
See accompanying notes to consolidated financial statements. |
CULP, INC. | ||||||||
FOR THE THREE MONTHS ENDED AUGUST 4, 2019 AND JULY 29, 2018 | ||||||||
(UNAUDITED) | ||||||||
(AMOUNTS IN THOUSANDS) | ||||||||
THREE MONTHS ENDED | ||||||||
August 4, | July 29, | |||||||
2019 | 2018 | |||||||
Net income | $ | 1,174 | $ | 965 | ||||
Other comprehensive income | ||||||||
Unrealized gain on investments, net of tax | ||||||||
Unrealized holding gains on investments | 6 | 40 | ||||||
Reclassification adjustment for realized loss on investments | - | 94 | ||||||
Total unrealized gain on investments | 6 | 134 | ||||||
Unrealized gain on foreign currency cash flow hedge, net of tax | ||||||||
Unrealized holding loss on foreign currency cash flow hedge | - | (25 | ) | |||||
Reclassification adjustment for realized loss on foreign currency cash flow hedge | - | 40 | ||||||
Total unrealized gain on foreign currency cash flow hedge | - | 15 | ||||||
Total other comprehensive income | 6 | 149 | ||||||
Comprehensive income | $ | 1,180 | $ | 1,114 | ||||
Comprehensive loss (income) attributable to non-controlling interest | 164 | (8 | ) | |||||
Comprehensive income attributable to Culp, Inc. common shareholders | $ | 1,344 | $ | 1,106 |
CULP, INC. | ||||||||||||
AUGUST 4, 2019, JULY 29, 2018 AND APRIL 28, 2019 | ||||||||||||
UNAUDITED | ||||||||||||
(Amounts in Thousands) | ||||||||||||
August 4, | July 29, | * April 28, | ||||||||||
2019 | 2018 | 2019 | ||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 44,236 | 8,593 | 40,008 | ||||||||
Short-term investments - Held-To-Maturity | - | 30,756 | 5,001 | |||||||||
Accounts receivable, net | 24,090 | 23,225 | 23,751 | |||||||||
Inventories | 50,660 | 54,989 | 50,860 | |||||||||
Current income taxes receivable | 776 | - | 776 | |||||||||
Assets held for sale | 100 | - | - | |||||||||
Other current assets | 2,578 | 3,852 | 2,849 | |||||||||
Total current assets | 122,440 | 121,415 | 123,245 | |||||||||
Property, plant and equipment, net | 47,289 | 53,178 | 48,389 | |||||||||
Goodwill | 27,222 | 27,222 | 27,222 | |||||||||
Intangible assets | 10,354 | 10,730 | 10,448 | |||||||||
Long-term investments - Rabbi Trust | 7,347 | 7,671 | 7,081 | |||||||||
Right of use assets | 6,530 | - | - | |||||||||
Noncurrent income taxes receivable | 733 | - | 733 | |||||||||
Deferred income taxes | 486 | 3,721 | 457 | |||||||||
Investment in unconsolidated joint venture | 1,520 | 1,525 | 1,508 | |||||||||
Other assets | 526 | 910 | 643 | |||||||||
Total assets | $ | 224,447 | 226,372 | 219,726 | ||||||||
Current liabilities: | ||||||||||||
Accounts payable-trade | $ | 22,628 | 25,070 | 24,377 | ||||||||
Accounts payable - capital expenditures | 60 | 862 | 78 | |||||||||
Operating lease liability - current | 2,456 | - | - | |||||||||
Deferred revenue | 684 | 634 | 399 | |||||||||
Accrued expenses | 8,566 | 8,176 | 9,192 | |||||||||
Accrued restructuring costs | 42 | 445 | 124 | |||||||||
Income taxes payable - current | 1,116 | 1,244 | 1,022 | |||||||||
Total current liabilities | 35,552 | 36,431 | 35,192 | |||||||||
Line of credit | - | 4,000 | - | |||||||||
Accrued expenses - long-term | 333 | 749 | 333 | |||||||||
Subordinated loan payable | 925 | - | 675 | |||||||||
Operating lease liability - noncurrent | 3,955 | - | - | |||||||||
Contingent consideration - earn-out obligation | 5,931 | 5,600 | 5,856 | |||||||||
Income taxes payable - long-term | 3,640 | 3,733 | 3,249 | |||||||||
Deferred income taxes | 2,543 | 2,150 | 3,176 | |||||||||
Deferred compensation | 7,232 | 7,679 | 6,998 | |||||||||
Total liabilities | 60,111 | 60,342 | 55,479 | |||||||||
Commitments and Contingencies (Notes 12, 19 and 20) | ||||||||||||
Shareholders' equity | ||||||||||||
Preferred stock, $0.05 par value, authorized | ||||||||||||
10,000,000 | - | - | - | |||||||||
Common stock, $0.05 par value, authorized | ||||||||||||
40,000,000 shares, issued and outstanding | ||||||||||||
12,405,014 at August 4, 2019; 12,522,246 | ||||||||||||
at July 29, 2018; and 12,391,160 at | ||||||||||||
April 28, 2019 | 621 | 627 | 620 | |||||||||
Capital contributed in excess of par value | 43,803 | 46,334 | 43,694 | |||||||||
Accumulated earnings | 115,676 | 114,465 | 115,579 | |||||||||
Accumulated other comprehensive income | 46 | 64 | 40 | |||||||||
Total shareholders' equity attributable to Culp Inc. | 160,146 | 161,490 | 159,933 | |||||||||
Non-controlling interest | 4,190 | 4,540 | 4,314 | |||||||||
Total equity | 164,336 | 166,030 | 164,247 | |||||||||
Total liabilities and shareholders' equity | $ | 224,447 | 226,372 | 219,726 |
CULP, INC. | ||||||||
FOR THE THREE MONTHS ENDED AUGUST 4, 2019 AND JULY 29, 2018 | ||||||||
UNAUDITED | ||||||||
(Amounts in Thousands) | ||||||||
THREE MONTHS ENDED | ||||||||
August 4, | July 29, | |||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,174 | 965 | |||||
Adjustments to reconcile net income to net cash provided by | ||||||||
(used in) operating activities: | ||||||||
Depreciation | 1,905 | 2,015 | ||||||
Amortization of assets | 176 | 145 | ||||||
Stock-based compensation | 154 | (501 | ) | |||||
Deferred income taxes | (662 | ) | (2,263 | ) | ||||
Realized loss on sale of short-term investments (Available for Sale) | - | 94 | ||||||
(Gain) loss on disposal of equipment | (17 | ) | 35 | |||||
(Income) loss from investment in unconsolidated joint venture | (13 | ) | 77 | |||||
Foreign currency exchange gain | (47 | ) | (91 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (375 | ) | 2,837 | |||||
Inventories | (25 | ) | (429 | ) | ||||
Other current assets | 161 | (989 | ) | |||||
Other assets | 111 | 34 | ||||||
Accounts payable - trade | (1,468 | ) | (2,494 | ) | ||||
Deferred revenue | 285 | (175 | ) | |||||
Accrued expenses and deferred compensation | 222 | (1,566 | ) | |||||
Accrued restructuring costs | (82 | ) | 445 | |||||
Income taxes | 524 | (75 | ) | |||||
Net cash provided by (used in) operating activities | 2,023 | (1,936 | ) | |||||
Cash flows from investing activities: | ||||||||
Net cash paid for acquisition of businesses | - | (11,971 | ) | |||||
Capital expenditures | (935 | ) | (757 | ) | ||||
Proceeds from the sale of equipment | 209 | - | ||||||
Investment in unconsolidated joint venture | - | (100 | ) | |||||
Proceeds from the sale of short-term investments (Held to Maturity) | 5,000 | - | ||||||
Proceeds from the sale of short-term investments (Available for Sale) | - | 2,458 | ||||||
Purchase of short-term investments (Available for Sale) | - | (10 | ) | |||||
Purchase of long-term investments (Rabbi Trust) | (259 | ) | (302 | ) | ||||
Net cash used provided by (used in) investing activities | 4,015 | (10,682 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from line of credit | - | 11,000 | ||||||
Payments on line of credit | - | (7,000 | ) | |||||
Payments on vendor-financed capital expenditures | - | (1,412 | ) | |||||
Proceeds from subordinated loan payable | 250 | - | �� | |||||
Cash paid for acquisition of business | (763 | ) | - | |||||
Dividends paid | (1,241 | ) | (1,127 | ) | ||||
Common stock surrendered for withholding taxes payable | (44 | ) | (1,292 | ) | ||||
Captial contribution from non-controlling interest | 40 | - | ||||||
Common stock repurchased | - | (72 | ) | |||||
Net cash (used in) provided by financing activities | (1,758 | ) | 97 | |||||
Effect of exchange rate changes on cash and cash equivalents | (52 | ) | (114 | ) | ||||
Increase (decrease) in cash and cash equivalents | 4,228 | (12,635 | ) | |||||
Cash and cash equivalents at beginning of period | 40,008 | 21,228 | ||||||
Cash and cash equivalents at end of period | $ | 44,236 | 8,593 |
CULP, INC. | ||||||||||||||||||||||||||||||||
THREE-MONTH PERIOD ENDED AUGUST 4, 2019 | ||||||||||||||||||||||||||||||||
UNAUDITED | ||||||||||||||||||||||||||||||||
(Dollars in thousands, except share data) | ||||||||||||||||||||||||||||||||
Shareholders' eqity attributable to Culp Inc. | ||||||||||||||||||||||||||||||||
Capital | Accumulated | |||||||||||||||||||||||||||||||
Contributed | Other | |||||||||||||||||||||||||||||||
Common Stock | in Excess | Accumulated | Comprehensive | Non-Controlling | Total | |||||||||||||||||||||||||||
Shares | Amount | of Par Value | Earnings | Income | Total | Interest | Equity | |||||||||||||||||||||||||
Balance, April 28, 2019 * | 12,391,160 | 620 | 43,694 | 115,579 | 40 | 159,933 | 4,314 | 164,247 | ||||||||||||||||||||||||
Net income (loss) | - | - | - | 1,338 | - | 1,338 | (164 | ) | 1,174 | |||||||||||||||||||||||
Stock-based compensation | - | - | 154 | - | - | 154 | - | 154 | ||||||||||||||||||||||||
Unrealized gain on investments | - | - | - | - | 6 | 6 | - | 6 | ||||||||||||||||||||||||
Common stock issued in connection with vesting | ||||||||||||||||||||||||||||||||
of performance based restricted stock units | 12,776 | 1 | (1 | ) | - | - | - | - | - | |||||||||||||||||||||||
Fully vested common stock award | 3,659 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Common stock surrendered for withholding taxes payable | (2,581 | ) | - | (44 | ) | - | - | (44 | ) | - | (44 | ) | ||||||||||||||||||||
Dividends paid | - | - | - | (1,241 | ) | - | (1,241 | ) | - | (1,241 | ) | |||||||||||||||||||||
Capital contribution from non-controlling interest | - | - | - | - | - | - | 40 | 40 | ||||||||||||||||||||||||
Balance, August 4, 2019 | 12,405,014 | 621 | 43,803 | 115,676 | 46 | 160,146 | 4,190 | 164,336 |
CULP, INC. | ||||||||||||||||||||||||||||||||
THREE-MONTH PERIOD ENDED JULY 29, 2018 | ||||||||||||||||||||||||||||||||
UNAUDITED | ||||||||||||||||||||||||||||||||
(Dollars in thousands, except share data) | ||||||||||||||||||||||||||||||||
Shareholders' equity attributable to Culp Inc. | ||||||||||||||||||||||||||||||||
Capital | Accumulated | |||||||||||||||||||||||||||||||
Contributed | Other | |||||||||||||||||||||||||||||||
Common Stock | in Excess | Accumulated | Comprehensive | Non-Controlling | Total | |||||||||||||||||||||||||||
Shares | Amount | of Par Value | Earnings | (Loss) Income | Total | Interest | Equity | |||||||||||||||||||||||||
Balance, April 29, 2018 * | 12,450,276 | $ | 623 | 48,203 | 114,635 | (85 | ) | $ | 163,376 | $ | - | $ | 163,376 | |||||||||||||||||||
Net income | - | - | - | 957 | - | 957 | 8 | 965 | ||||||||||||||||||||||||
Acquisition of subsidiary with non-controlling interest | - | - | - | - | - | - | 4,532 | 4,532 | ||||||||||||||||||||||||
Stock-based compensation | - | - | (501 | ) | - | - | (501 | ) | - | (501 | ) | |||||||||||||||||||||
Unrealized gain on foreign currency cash flow hedge | - | - | - | - | 15 | 15 | - | 15 | ||||||||||||||||||||||||
Unrealized gain on investments | - | - | - | - | 134 | 134 | - | 134 | ||||||||||||||||||||||||
Common stock issued in connection with vesting | ||||||||||||||||||||||||||||||||
of performance based restricted stock units | 115,917 | 6 | (6 | ) | - | - | - | - | - | |||||||||||||||||||||||
Common stock issued in connection with vesting | ||||||||||||||||||||||||||||||||
of time-based restricted stock units | 1,200 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Common stock surrendered for withholding | ||||||||||||||||||||||||||||||||
taxes payable | (42,157 | ) | (2 | ) | (1,290 | ) | - | - | (1,292 | ) | - | (1,292 | ) | |||||||||||||||||||
Common stock repurchased | (2,990 | ) | - | (72 | ) | - | - | (72 | ) | - | (72 | ) | ||||||||||||||||||||
Dividends paid | - | - | - | (1,127 | ) | - | (1,127 | ) | - | (1,127 | ) | |||||||||||||||||||||
Balance, July 29, 2018 | 12,522,246 | 627 | 46,334 | 114,465 | 64 | 161,490 | 4,540 | 166,030 |
THREE MONTHS ENDED | ||||||||
October 28, | October 29, | |||||||
2018 | 2017 | |||||||
Net income | $ | 2,944 | $ | 3,976 | ||||
Other comprehensive (loss) income | ||||||||
Unrealized (loss) gain on investments, net of tax | ||||||||
Unrealized holding (losses) gains on investments | (43 | ) | 20 | |||||
Reclassification adjustment for realized loss (gain) on investments | - | - | ||||||
Total unrealized (loss) gain on investments | (43 | ) | 20 | |||||
Unrealized gain on foreign currency cash flow hedge, net of tax | ||||||||
Unrealized holding gain on foreign currency cash flow hedge | 17 | - | ||||||
Reclassification adjustment for realized loss on foreign currency cash flow hedge | 24 | - | ||||||
Total unrealized gain on foreign currency cash flow hedge | 41 | - | ||||||
Total other comprehensive (loss) income | (2 | ) | 20 | |||||
Comprehensive income | $ | 2,942 | $ | 3,996 | ||||
Less: Comprehensive income attributable to non-controlling interest | (11 | ) | - | |||||
Comprehensive income attributable to Culp, Inc. common shareholders | $ | 2,931 | $ | 3,996 | ||||
SIX MONTHS ENDED | ||||||||
October 28, | October 29, | |||||||
2018 | 2017 | |||||||
Net income | $ | 3,909 | $ | 8,959 | ||||
Other comprehensive income | ||||||||
Unrealized gain on investments, net of tax | ||||||||
Unrealized holding (losses) gains on investments | (3 | ) | 64 | |||||
Reclassification adjustment for realized loss on investments | 94 | - | ||||||
Total unrealized gain on investments | 91 | 64 | ||||||
Unrealized gain on foreign currency cash flow hedge, net of tax | ||||||||
Unrealized holding loss on foreign currency cash flow hedge | (8 | ) | - | |||||
Reclassification adjustment for realized loss on foreign currency cash flow hedge | 64 | - | ||||||
Total unrealized gain on foreign currency cash flow hedge | 56 | - | ||||||
Total other comprehensive income | 147 | 64 | ||||||
Comprehensive income | $ | 4,056 | $ | 9,023 | ||||
Less: Comprehensive income attributable to non-controlling interest | (19 | ) | - | |||||
Comprehensive income attributable to Culp, Inc. common shareholders | $ | 4,037 | $ | 9,023 | ||||
See accompanying notes to consolidated financial statements. |
October 28, | October 29, | April 29, | ||||||||||
2018 | 2017 | 2018 | ||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 14,768 | 15,739 | 21,228 | ||||||||
Short-term investments - Available for Sale | - | 2,478 | 2,451 | |||||||||
Short-term investments - Held-To-Maturity | 26,719 | 4,015 | 25,759 | |||||||||
Accounts receivable, net | 24,362 | 24,220 | 26,307 | |||||||||
Inventories | 50,601 | 50,209 | 53,454 | |||||||||
Assets held for sale | 237 | - | - | |||||||||
Other current assets | 2,461 | 2,263 | 2,870 | |||||||||
Total current assets | 119,148 | 98,924 | 132,069 | |||||||||
Property, plant and equipment, net | 51,325 | 52,530 | 51,794 | |||||||||
Goodwill | 27,222 | 11,462 | 13,569 | |||||||||
Intangible assets | 10,636 | 1,428 | 4,275 | |||||||||
Deferred income taxes | 3,614 | 491 | 1,458 | |||||||||
Long-term investments - Held-To-Maturity | - | 26,853 | 5,035 | |||||||||
Long-term investments - Rabbi Trust | 7,851 | 6,921 | 7,326 | |||||||||
Investment in unconsolidated joint venture | 1,470 | 1,522 | 1,501 | |||||||||
Other assets | 945 | 912 | 957 | |||||||||
Total assets | $ | 222,211 | 201,043 | 217,984 | ||||||||
Current liabilities: | ||||||||||||
Accounts payable-trade | $ | 24,007 | 24,600 | 27,237 | ||||||||
Accounts payable - capital expenditures | 114 | 3,209 | 1,776 | |||||||||
Deferred revenue | 649 | - | 809 | |||||||||
Accrued expenses | 8,670 | 7,364 | 9,325 | |||||||||
Accrued restructuring costs | 260 | - | - | |||||||||
Deferred compensation | 714 | - | - | |||||||||
Income taxes payable - current | 2,044 | 692 | 1,437 | |||||||||
Total current liabilities | 36,458 | 35,865 | 40,584 | |||||||||
Accrued expenses - long-term | - | - | 763 | |||||||||
Contingent consideration - earn-out obligation | 5,706 | - | - | |||||||||
Income taxes payable - long-term | 3,233 | 487 | 3,758 | |||||||||
Deferred income taxes | 2,225 | 4,641 | 2,150 | |||||||||
Deferred compensation | 7,120 | 6,970 | 7,353 | |||||||||
Total liabilities | 54,742 | 47,963 | 54,608 | |||||||||
Commitments and Contingencies (Notes 13 and 22) | ||||||||||||
Shareholders' equity | ||||||||||||
Preferred stock, $0.05 par value, authorized | ||||||||||||
10,000,000 | - | - | - | |||||||||
Common stock, $0.05 par value, authorized | ||||||||||||
40,000,000 shares, issued and outstanding | ||||||||||||
12,491,956 at October 28, 2018; 12,435,276 | ||||||||||||
at October 29, 2017; and 12,450,276 at | ||||||||||||
April 29, 2018 | 625 | 622 | 623 | |||||||||
Capital contributed in excess of par value | 45,959 | 47,441 | 48,203 | |||||||||
Accumulated earnings | 116,272 | 104,957 | 114,635 | |||||||||
Accumulated other comprehensive income (loss) | 62 | 60 | (85 | ) | ||||||||
Total shareholders' equity attributable to Culp Inc. | 162,918 | 153,080 | 163,376 | |||||||||
Non-controlling interest | 4,551 | - | - | |||||||||
Total equity | 167,469 | 153,080 | 163,376 | |||||||||
Total liabilities and shareholders' equity | $ | 222,211 | 201,043 | 217,984 | ||||||||
* Derived from audited financial statements. | ||||||||||||
See accompanying notes to consolidated financial statements. |
SIX MONTHS ENDED | ||||||||
October 28, | October 29, | |||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 3,909 | 8,959 | |||||
Adjustments to reconcile net income to net cash | ||||||||
provided by operating activities: | ||||||||
Depreciation | 4,056 | 3,713 | ||||||
Amortization | 391 | 166 | ||||||
Stock-based compensation | (106 | ) | 1,558 | |||||
Deferred income taxes | (2,081 | ) | 976 | |||||
Realized loss on sale of short-term investments (Available for Sale) | 94 | - | ||||||
Gain on sale of equipment | (1,079 | ) | - | |||||
Loss from investment in unconsolidated joint venture | 132 | 193 | ||||||
Foreign currency exchange (gain) loss | (102 | ) | 42 | |||||
Changes in assets and liabilities, net of effects of acquisition of businesses | ||||||||
Accounts receivable | 1,639 | 561 | ||||||
Inventories | 3,767 | 1,597 | ||||||
Other current assets | 379 | 723 | ||||||
Other assets | (10 | ) | (35 | ) | ||||
Accounts payable - trade | (3,264 | ) | (5,074 | ) | ||||
Deferred revenue | (160 | ) | - | |||||
Accrued expenses and deferred compensation | (1,472 | ) | (3,607 | ) | ||||
Accrued restructuring costs | 260 | - | ||||||
Income taxes | 247 | 406 | ||||||
Net cash provided by operating activities | 6,600 | 10,178 | ||||||
Cash flows from investing activities | ||||||||
Net cash paid for acquisition of businesses | (12,096 | ) | - | |||||
Capital expenditures | (2,096 | ) | (4,978 | ) | ||||
Proceeds from the sale of equipment | 1,280 | 6 | ||||||
Investment in unconsolidated joint venture | (100 | ) | (609 | ) | ||||
Proceeds from the sale of short-term investments (Held to Maturity) | 4,000 | - | ||||||
Proceeds from the sale of short-term investments (Available for Sale) | 2,458 | - | ||||||
Purchase of short-term investments (Available for Sale) | (10 | ) | (24 | ) | ||||
Proceeds from the sale of long-term investments (Rabbi Trust) | - | 54 | ||||||
Purchase of long-term investments (Rabbi Trust) | (526 | ) | (1,457 | ) | ||||
Net cash used in investing activities | (7,090 | ) | (7,008 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from line of credit | 12,000 | 10,000 | ||||||
Payments on line of credit | (12,000 | ) | (10,000 | ) | ||||
Payments on vendor-financed capital expenditures | (1,412 | ) | (2,500 | ) | ||||
Dividends paid | (2,253 | ) | (4,603 | ) | ||||
Common stock surrendered for withholding taxes payable | (1,292 | ) | (1,147 | ) | ||||
Common stock repurchased | (844 | ) | - | |||||
Proceeds from common stock issued | - | 5 | ||||||
Net cash used in financing activities | (5,801 | ) | (8,245 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (169 | ) | 19 | |||||
Decrease in cash and cash equivalents | (6,460 | ) | (5,056 | ) | ||||
Cash and cash equivalents at beginning of period | 21,228 | 20,795 | ||||||
Cash and cash equivalents at end of period | $ | 14,768 | 15,739 | |||||
See accompanying notes to consolidated financial statements. |
Shareholders' equity attributable to Culp Inc. | ||||||||||||||||||||||||||||||||
Capital | Accumulated | |||||||||||||||||||||||||||||||
Contributed | Other | Non- | ||||||||||||||||||||||||||||||
Common Stock | in Excess | Accumulated | Comprehensive | Controlling | Total | |||||||||||||||||||||||||||
Shares | Amount | of Par Value | Earnings | (Loss) Income | Total | Interest | Equity | |||||||||||||||||||||||||
Balance, April 30, 2017 * | 12,356,631 | $ | 618 | 47,415 | 100,601 | (4 | ) | $ | 148,630 | $ | - | $ | 148,630 | |||||||||||||||||||
Net income | - | - | - | 20,877 | - | 20,877 | - | 20,877 | ||||||||||||||||||||||||
Stock-based compensation | - | - | 2,212 | - | - | 2,212 | - | 2,212 | ||||||||||||||||||||||||
Unrealized loss on foreign currency cash flow hedge | - | - | - | - | (55 | ) | (55 | ) | - | (55 | ) | |||||||||||||||||||||
Unrealized loss on investments | - | - | - | - | (26 | ) | (26 | ) | - | (26 | ) | |||||||||||||||||||||
Common stock issued in connection with vesting | ||||||||||||||||||||||||||||||||
of performance based restricted stock units | 118,845 | 6 | (6 | ) | - | - | - | - | - | |||||||||||||||||||||||
Fully vested common stock award | 4,800 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Common stock issued in connection with vesting | ||||||||||||||||||||||||||||||||
of time- based restricted stock units | 1,200 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Common stock issued in connection with exercise | . | |||||||||||||||||||||||||||||||
of stock options | 15,600 | 1 | 110 | - | - | 111 | - | 111 | ||||||||||||||||||||||||
Common stock surrendered for the cost of stock option | ||||||||||||||||||||||||||||||||
exercises and withholding taxes payable | (46,800 | ) | (2 | ) | (1,528 | ) | - | - | (1,530 | ) | - | (1,530 | ) | |||||||||||||||||||
Dividends paid | - | - | - | (6,843 | ) | - | (6,843 | ) | - | (6,843 | ) | |||||||||||||||||||||
Balance, April 29, 2018 * | 12,450,276 | 623 | 48,203 | 114,635 | (85 | ) | 163,376 | - | 163,376 | |||||||||||||||||||||||
Net income | - | - | - | 3,890 | - | 3,890 | 19 | 3,909 | ||||||||||||||||||||||||
Acquisition of subsidiary with non-controlling interest | - | - | - | - | - | - | 4,532 | 4,532 | ||||||||||||||||||||||||
Stock-based compensation | - | - | (106 | ) | - | - | (106 | ) | - | (106 | ) | |||||||||||||||||||||
Unrealized gain on foreign currency cash flow hedge | - | - | - | - | 56 | 56 | - | 56 | ||||||||||||||||||||||||
Unrealized gain on investments | - | - | - | - | 91 | 91 | - | 91 | ||||||||||||||||||||||||
Common stock issued in connection with vesting | ||||||||||||||||||||||||||||||||
of performance based restricted stock units | 115,917 | 6 | (6 | ) | - | - | - | - | - | |||||||||||||||||||||||
Common stock issued in connection with vesting | ||||||||||||||||||||||||||||||||
of time- based restricted stock units | 1,200 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Fully vested common stock award | 3,600 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Common stock surrendered for | ||||||||||||||||||||||||||||||||
withholding taxes payable | (42,157 | ) | (2 | ) | (1,290 | ) | - | - | (1,292 | ) | - | (1,292 | ) | |||||||||||||||||||
Common stock repurchased | (36,880 | ) | (2 | ) | (842 | ) | - | - | (844 | ) | - | (844 | ) | |||||||||||||||||||
Dividends paid | - | - | - | (2,253 | ) | - | (2,253 | ) | - | (2,253 | ) | |||||||||||||||||||||
Balance, October 28, 2018 | 12,491,956 | $ | 625 | 45,959 | 116,272 | 62 | $ | 162,918 | $ | 4,551 | $ | 167,469 | ||||||||||||||||||||
* Derived from audited financial statements. | ||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements. |
(dollars in thousands) | Fair Value | |||
Customer relationships | $ | 2,247 | ||
Goodwill | 2,107 | |||
Inventory | 1,128 | |||
Accounts receivable | 897 | |||
Tradename | 683 | |||
Property, plant & equipment | 379 | |||
Other assets | 35 | |||
Deferred revenue | (903 | ) | ||
Accounts payable | (719 | ) | ||
Accrued expenses | (174 | ) | ||
$ | 5,680 |
(dollars in thousands) | Fair Value | |||
Goodwill | $ | 13,653 | ||
Tradename | 6,549 | |||
Equipment | 2,179 | |||
Inventory | 1,804 | |||
Accounts receivable and other current assets | 108 | |||
Accounts payable | (1,336 | ) | ||
Accrued expenses | (295 | ) | ||
Non-controlling interest in eLuxury | (4,532 | ) | ||
$ | 18,130 |
Three Months Ended | ||||||||
(dollars in thousands, except per share data) | October 28, 2018 | October 29, 2017 | ||||||
Net Sales | $ | 77,006 | $ | 88,760 | ||||
Income from operations | 4,284 | 6,675 | ||||||
Net income | 2,944 | 4,100 | ||||||
Net income - noncontrolling interest | (11 | ) | (57 | ) | ||||
Net income – Culp Inc. common shareholders | 2,933 | 4,043 | ||||||
Net income per share (basic) – | ||||||||
Culp Inc. common shareholders | 0.23 | 0.33 | ||||||
Net income per share (diluted) – | ||||||||
Culp Inc. common shareholders | 0.23 | 0.32 | ||||||
Six Months Ended | ||||||||
(dollars in thousands, except per share data) | October 28, 2018 | October 29, 2017 | ||||||
Net Sales | $ | 151,604 | $ | 177,498 | ||||
Income from operations | 6,357 | 13,540 | ||||||
Net income | 3,883 | 8,973 | ||||||
Net (income) loss - noncontrolling interest | (11 | ) | 28 | |||||
Net income – Culp Inc. common shareholders | 3,872 | 9,001 | ||||||
Net income per share (basic) – | ||||||||
Culp Inc. common shareholders | 0.31 | 0.72 | ||||||
Net income per share (diluted) – | ||||||||
Culp Inc. common shareholders | 0.31 | 0.71 |
(dollars in thousands) | October 28, 2018 | October 29, 2017 | April 29, 2018 | |||||||||
Customers | $ | 24,956 | $ | 25,593 | $ | 28,097 | ||||||
Allowance - doubtful accounts | (388 | ) | (374 | ) | (357 | ) | ||||||
Allowance - cash discounts | (164 | ) | (188 | ) | (245 | ) | ||||||
Allowance - sales returns & allowances (1) | (42 | ) | (811 | ) | (1,188 | ) | ||||||
$ | 24,362 | $ | 24,220 | $ | 26,307 |
Six months ended | ||||||||
(dollars in thousands) | October 28, 2018 | October 29, 2017 | ||||||
Beginning balance | $ | (357 | ) | $ | (414 | ) | ||
Provision for bad debts | (28 | ) | 40 | |||||
Net write-offs, net of recoveries | (3 | ) | - | |||||
Ending balance | $ | (388 | ) | $ | (374 | ) |
Six months ended | ||||||||
(dollars in thousands) | October 28, 2018 | October 29, 2017 | ||||||
Beginning balance | $ | (1,433 | ) | $ | (1,220 | ) | ||
Adoption of ASC Topic 606 (1) | 1,145 | - | ||||||
Provision for returns, allowances and discounts | (1,080 | ) | (1,330 | ) | ||||
Credits issued | 1,162 | 1,551 | ||||||
Ending balance | $ | (206 | ) | $ | (999 | ) |
Balance at | Adjustments Due to | Balance at | ||||||||||
(dollars in thousands) | April 29, 2018 | ASC 606 Adoption (1) | April 30, 2018 | |||||||||
Balance Sheet | ||||||||||||
Assets: | ||||||||||||
Accounts Receivable | $ | 26,307 | $ | 1,145 | $ | 27,452 | ||||||
Other Current Assets | 2,870 | 27 | 2,897 | |||||||||
Liabilities: | ||||||||||||
Accrued Expenses | 9,325 | 1,172 | 10,497 |
1. Basis of Presentation The accompanying unaudited 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 of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited 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 12, 2019, for the fiscal year ended April 28, 2019. The company’s three-months ended August 4, 2019, and July 29, 2018, represent 14-week and 13-week periods, respectively. 2. Significant Accounting Policies As of August 4, 2019, 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 April 28, 2019. Recently Adopted Accounting Pronouncements Leases In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on the balance sheet and disclose certain key information about their leasing arrangements. The new standard establishes a right of use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability for certain lease contracts. Topic 842 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. As a result, we adopted Topic 842 on April 29, 2019, electing to use the modified retrospective transition method, which requires us to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, financial information and disclosures will not be provided for periods prior to April 29, 2019. Topic 842 allows the election of several practical expedients as part of adopting this new standard. We elected the “package of practical expedients” which permits us not to reassess, under Topic 842, our previous conclusions regarding lease identification and classification. We did not elect the use of hindsight with respect to determining the lease term. Also, Topic 842, provides practical expedients after adopting the new standard. We elected the short-term lease exemption, and therefore, we will not recognize ROU assets or lease liabilities for leases shorter than twelve months. We did not elect the practical expedient to combine lease and non-lease components for any class of assets and will account for lease components separately from non-lease components. The adoption of Topic 842 had a material effect on our Consolidated Balance Sheets and increased the required disclosures in our notes to the consolidated financial statements (see note 19 for further details). The most significant effect related to the recognition of ROU assets totaling $7.2 million that were mostly offset by the recognition of lease liabilities totaling $7.1 million on our Consolidated Balance Sheets. The adoption of Topic 842 did not have a material impact on our Consolidated Statements of Net Income and our Consolidated Statement of Cash Flows. I-7 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Recently Issued Accounting Pronouncements The company has considered all recent accounting pronouncements and currently believes there are no recent accounting pronouncements that may have a material impact on our Consolidated Financial Statements. 3. Business Combinations eLuxury, LLC (eLuxury) Overview Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement) in which we acquired an initial 80% ownership interest in eLuxury, a company that offers bedding accessories and home goods directly to consumers. eLuxury’s primary products include a line of mattress pads manufactured at eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, as well as other bedding items. Its products are available on eLuxury’s own branded website, eLuxury.com, Amazon, and other leading online retailers for specialty home goods. This acquisition brings together eLuxury’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise with our global production, sourcing, and distribution capabilities. The estimated consideration given for the initial 80% ownership interest in eLuxury totaled $18.1 million, of which $12.5 million represents the estimated purchase price and $5.6 million represents the fair value for contingent consideration associated with an earn-out obligation (see below for further details). Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018, $185,000 was paid in August 2018, and $749,000 is to be paid in September 2019, subject to certain conditions as defined in the Equity Agreement. Assets Acquired and Liabilities Assumed The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.
We recorded the tradename at fair market value based on the relief from royalty method. This tradename was determined to have an indefinite useful life and, therefore, is not being amortized. Equipment will be depreciated on a straight-line basis over useful lives ranging from five to ten years. I-8 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The goodwill related to this acquisition is attributable to eLuxury’s reputation with the products it offers and management’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise. Goodwill is deductible for income tax purposes over the statutory period of fifteen years. As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires us to pay the seller, who is also the owner of the noncontrolling interest, an earn-out payment based on a multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending August 31, 2021, less $12.0 million We recorded a contingent liability at the acquisition date for this earn-out obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model. Non-Controlling Interest The Equity Agreement contains substantive profit-sharing arrangement provisions which explicitly state the ownership interests at the effective date of this business combination and the allocation of net income or loss between Culp Inc., as the controlling interest, and the noncontrolling interest. The Equity Agreement states that at the effective date of this acquisition (June 22, 2018), we acquired an 80% ownership interest in eLuxury with the seller retaining a 20% noncontrolling interest. Additionally, the Equity Agreement states that eLuxury’s net income or loss and future capital contributions will be allocated, at a percentage of 70% and 30% to Culp Inc. and the noncontrolling interest, respectively. Based on the terms of the Equity Agreement, we believe the related risks associated with the Other Acquisitions costs totaling $270,000 were included in selling, general, and administrative expenses in our Consolidated Statement of Net Income for the |
Three Months Ended | Adjustments Due to | Balances Without | ||||||||||
(dollars in thousands) | October 28, 2018 | ASC 606 Adoption (1) | ASC 606 Adoption | |||||||||
Statements of Net Income | ||||||||||||
Net Sales | $ | 77,006 | $ | 10 | $ | 77,016 | ||||||
Cost of Sales | 63,680 | 10 | 63,690 |
Six Months Ended | Adjustments Due to | Balances Without | ||||||||||
(dollars in thousands) | October 28, 2018 | ASC 606 Adoption (1) | ASC 606 Adoption | |||||||||
Statements of Net Income | ||||||||||||
Net Sales | $ | 148,479 | $ | (30 | ) | $ | 148,449 | |||||
Cost of Sales | 124,594 | (30 | ) | 124,564 |
Adjustments Due to | Balances Without | |||||||||||
(dollars in thousands) | October 28, 2018 | ASC 606 Adoption (1) | ASC 606 Adoption | |||||||||
Balance Sheet | ||||||||||||
Assets: | ||||||||||||
Accounts Receivable | $ | 24,362 | $ | (1,094 | ) | $ | 23,268 | |||||
Other Current Assets | 2,461 | (30 | ) | 2,431 | ||||||||
Liabilities: | ||||||||||||
Accrued Expenses | $ | 8,670 | (1,124 | ) | $ | 7,546 |
Three Months Ended | ||||
(dollars in thousands) | October 28, 2018 | |||
Balance as of July 29, 2018 | $ | 634 | ||
Revenue recognized on contract liabilities during the period | (792 | ) | ||
Payments received for services not yet rendered during the period | 807 | |||
Balance as of October 28, 2018 | $ | 649 | ||
Six Months Ended | ||||
(dollars in thousands) | October 28, 2018 | |||
Balance as of April 29, 2018 | $ | 809 | ||
Revenue recognized on contract liabilities during the period | (1,534 | ) | ||
Payments received for services not yet rendered during the period | 1,374 | |||
Balance as of October 28, 2018 | $ | 649 |
Net Sales | ||||||||||||
(dollars in thousands) | Mattress Fabrics | Upholstery Fabrics | Total | |||||||||
Products transferred at a point in time | $ | 41,989 | $ | 31,877 | $ | 73,866 | ||||||
Services transferred over time | - | 3,140 | 3,140 | |||||||||
Total Net Sales | $ | 41,989 | 35,017 | $ | 77,006 |
Net Sales | ||||||||||||
(dollars in thousands) | Mattress Fabrics | Upholstery Fabrics | Total | |||||||||
Products transferred at a point in time | $ | 78,972 | $ | 63,878 | 142,850 | |||||||
Services transferred over time | - | 5,629 | 5,629 | |||||||||
Total Net Sales | $ | 78,972 | $ | 69,507 | 148,479 |
(dollars in thousands) | October 28, 2018 | October 29, 2017 | April 29, 2018 | |||||||||
Raw materials | $ | 5,397 | $ | 6,617 | $ | 6,024 | ||||||
Work-in-process | 2,082 | 2,686 | 3,264 | |||||||||
Finished goods | 43,122 | 40,906 | 44,166 | |||||||||
$ | 50,601 | $ | 50,209 | $ | 53,454 |
(dollars in thousands) | October 28, 2018 | October 29, 2017 | April 29, 2018 | |||||||||
Tradenames | $ | 7,232 | $ | - | $ | 683 | ||||||
Customer relationships, net | 2,688 | 638 | 2,839 | |||||||||
Non-compete agreement, net | 716 | 790 | 753 | |||||||||
$ | 10,636 | $ | 1,428 | $ | 4,275 |
(dollars in thousands) | October 28, 2018 | October 29, 2017 | April 29, 2018 | |||||||||
Read | $ | 683 | $ | - | $ | 683 | ||||||
eLuxury | 6,549 | - | - | |||||||||
$ | 7,232 | $ | - | $ | 683 |
Six months ended | ||||||||
(dollars in thousands) | October 28, 2018 | October 29, 2017 | ||||||
Beginning balance | $ | 2,839 | 664 | |||||
Acquisition of assets | - | - | ||||||
Amortization expense | (151 | ) | (26 | ) | ||||
Loss on impairment | - | - | ||||||
Ending balance | $ | 2,688 | $ | 638 |
Six months ended | ||||||||
(dollars in thousands) | October 28, 2018 | October 29, 2017 | ||||||
Beginning balance | $ | 753 | $ | 828 | ||||
Amortization expense | (37 | ) | (38 | ) | ||||
Loss on impairment | - | - | ||||||
Ending balance | $ | 716 | $ | 790 |
Six months ended | ||||||||
(dollars in thousands) | October 28, 2018 | October 29, 2017 | ||||||
Beginning balance | $ | 13,569 | $ | 11,462 | ||||
Acquisition of business (see note 3) | 13,653 | - | ||||||
Loss on impairment | - | - | ||||||
Ending balance | $ | 27,222 | $ | 11,462 |
October 28, | October 29, | April 29, | ||||||||||
(dollars in thousands) | 2018 | 2017 | 2018 | |||||||||
Total assets | $ | 3,063 | $ | 3,180 | $ | 3,130 | ||||||
Total liabilities | $ | 124 | $ | 136 | $ | 128 | ||||||
Total members’ equity | $ | 2,939 | $ | 3,044 | $ | 3,002 |
(dollars in thousands) | October 28, 2018 | October 29, 2017 | April 29, 2018 | |||||||||
Compensation, commissions and related benefits | $ | 3,353 | $ | 5,399 | $ | 6,918 | ||||||
Interest | - | 18 | 20 | |||||||||
Other accrued expenses | 5,317 | 1,947 | 3,150 | |||||||||
$ | 8,670 | $ | 7,364 | $ | 10,088 |
Six months ended October 28, | ||||
(dollars in thousands) | 2018 | |||
Inventory markdowns | $ | 1,565 | ||
Employee termination benefits | 513 | |||
Other operating costs associated with a closed facility | 270 | |||
Gain on sale of equipment | (1,123 | ) | ||
$ | 1,225 |
Six months ended October 28, | ||||
(dollars in thousands) | 2018 | |||
Accrual established in fiscal 2019 | $ | 451 | ||
Paid in fiscal 2019 | (253 | ) | ||
Adjustments in fiscal 2019 | 62 | |||
$ | 260 |
Fair value measurements at October 28, 2018 using: | ||||||||||||||||
Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
(amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Premier Money Market Fund | $ | 6,943 | N/A | N/A | $ | 6,943 | ||||||||||
Large Blend Fund | 422 | N/A | N/A | 422 | ||||||||||||
Growth Allocation Fund | 175 | N/A | N/A | 175 | ||||||||||||
Moderate Allocation Fund | 114 | N/A | N/A | 114 | ||||||||||||
Other | 197 | N/A | N/A | 197 |
Fair value measurements at October 29, 2017 using: | ||||||||||||||||
Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
(amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Premier Money Market Fund | $ | 6,153 | N/A | N/A | $ | 6,153 | ||||||||||
Low Duration Bond Fund | 1,087 | N/A | N/A | 1,087 | ||||||||||||
Intermediate Term Bond Fund | 765 | N/A | N/A | 765 | ||||||||||||
Strategic Income Fund | 626 | N/A | N/A | 626 | ||||||||||||
Large Blend Fund | 393 | N/A | N/A | 393 | ||||||||||||
Growth Allocation Fund | 153 | N/A | N/A | 153 | ||||||||||||
Moderate Allocation Fund | 107 | N/A | N/A | 107 | ||||||||||||
Other | 115 | N/A | N/A | 115 |
Fair value measurements at April 29, 2018 using: | ||||||||||||||||
Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
(amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Premier Money Market Fund | $ | 6,492 | N/A | N/A | $ | 6,492 | ||||||||||
Low Duration Bond Fund | 1,085 | N/A | N/A | 1,085 | ||||||||||||
Intermediate Term Bond Fund | 747 | N/A | N/A | 747 | ||||||||||||
Strategic Income Fund | 619 | N/A | N/A | 619 | ||||||||||||
Large Blend Fund | 402 | N/A | N/A | 402 | ||||||||||||
Growth Allocation Fund | 169 | N/A | N/A | 169 | ||||||||||||
Moderate Allocation Fund | 113 | N/A | N/A | 113 | ||||||||||||
Other | 150 | N/A | N/A | 150 | ||||||||||||
Liabilities: | ||||||||||||||||
EURO Foreign Currency | ||||||||||||||||
Cash Flow Hedge | N/A | $ | 55 | N/A | $ | 55 |
Fair value measurements at October 28, 2018 using: | ||||||||||||||||
Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
(amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Goodwill | N/A | N/A | $ | 13,653 | $ | 13,653 | ||||||||||
Tradename | N/A | N/A | 6,549 | 6,549 | ||||||||||||
Equipment | N/A | N/A | 2,179 | 2,179 | ||||||||||||
Inventory | N/A | N/A | 1,804 | 1,804 | ||||||||||||
Liabilities: | ||||||||||||||||
Contingent Consideration – | ||||||||||||||||
Earn-Out Obligation | N/A | N/A | $ | 5,706 | $ | 5,706 | ||||||||||
Fair value measurements at April 29, 2018 using: | ||||||||||||||||
Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
(amounts in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | ||||||||||||||||
Customer Relationships | N/A | N/A | $ | 2,247 | $ | 2,247 | ||||||||||
Goodwill | N/A | N/A | 2,107 | 2,107 | ||||||||||||
Inventory | N/A | N/A | 1,128 | 1,128 | ||||||||||||
Tradename | N/A | N/A | 683 | 683 | ||||||||||||
Equipment | N/A | N/A | 379 | 379 | ||||||||||||
Liabilities: | ||||||||||||||||
None | N/A | N/A | N/A | N/A | ||||||||||||
Pro Forma Financial Information The following unaudited pro forma consolidated results of operations for the three-month periods ending August 4, 2019, and July 29, 2018, have been prepared as if the acquisition of eLuxury had occurred on May 1, 2017.
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would actually have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results. 4. Allowance for Doubtful Accounts A summary of the activity in | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
5. Revenue from Contracts with Customers Nature of | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. Effective April 1, 2018, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives in ASC Topic 815 Net Investment Hedging Relationships | Amt of Gain (Loss) (net of tax) Recognized in OCI on Derivative (Effective Portion) and recorded in Accrued Expenses at Fair Value | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Gain (loss) (net of tax) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||||||||||||||||
Six Months Ended October 28, 2018 | Six Months Ended October 29, 2017 | Six Months Ended October 28, 2018 | Six Months Ended October 29, 2017 | Six Months Ended October 28, 2018 | Six Months Ended October 29, 2017 | |||||||||||||||||||||||
EURO Foreign Exchange Contract | $ | 56 | $ | - | Other Expense | $ | (64 | ) | $ | - | Other Expense | $ | - | $ | - | |||||||||||||
Six months ended | ||||||||
(dollars in thousands) | October 28, 2018 | October 29, 2017 | ||||||
Interest | $ | 54 | $ | 146 | ||||
Income taxes | 3,994 | 2,599 |
Three months ended | ||||||||
(amounts in thousands) | October 28, 2018 | October 29, 2017 | ||||||
Weighted average common shares outstanding, basic | 12,515 | 12,440 | ||||||
Dilutive effect of stock-based compensation | 36 | 140 | ||||||
Weighted average common shares outstanding, diluted | 12,551 | 12,580 |
Six months ended | ||||||||
(amounts in thousands) | October 28, 2018 | October 29, 2017 | ||||||
Weighted average common shares outstanding, basic | 12,512 | 12,420 | ||||||
Dilutive effect of stock-based compensation | 100 | 193 | ||||||
Weighted average common shares outstanding, diluted | 12,612 | 12,613 |
Three months ended | ||||||||
Otober 28, 2018 | Otober 29, 2017 | |||||||
Net sales: | ||||||||
Mattress Fabrics | $ | 41,989 | $ | 48,601 | ||||
Upholstery Fabrics | 35,017 | 32,097 | ||||||
$ | 77,006 | $ | 80,698 | |||||
Gross profit: | ||||||||
Mattress Fabrics | $ | 7,498 | $ | 9,730 | ||||
Upholstery Fabrics | 6,257 | 6,074 | ||||||
Total segment gross profit | $ | 13,755 | $ | 15,804 | ||||
Other non-recurring charges (1) | (159 | ) | - | |||||
Restructuring related charges (2) | (270 | ) | - | |||||
$ | 13,326 | $ | 15,804 | |||||
Selling, general, and administrative expenses | ||||||||
Mattress Fabrics | $ | 4,566 | $ | 3,168 | ||||
Upholstery Fabrics | 3,535 | 3,700 | ||||||
Total segment selling, general, and administrative expenses | 8,101 | 6,868 | ||||||
Other non-recurring charges (1) | 89 | - | ||||||
Unallocated corporate expenses | 1,913 | 2,547 | ||||||
$ | 10,103 | $ | 9,415 | |||||
Income from operations: | ||||||||
Mattress Fabrics | $ | 2,932 | $ | 6,562 | ||||
Upholstery Fabrics | 2,722 | 2,374 | ||||||
Total segment income from operations | 5,654 | 8,936 | ||||||
Unallocated corporate expenses | (1,913 | ) | (2,547 | ) | ||||
Other non-recurring charges (1) | (248 | ) | - | |||||
Restructuring credit and related charges (3) | 791 | - | ||||||
Total income from operations | 4,284 | 6,389 | ||||||
Interest expense | (18 | ) | (37 | ) | ||||
Interest income | 151 | 128 | ||||||
Other expense | (142 | ) | (321 | ) | ||||
Income before income taxes | $ | 4,275 | $ | 6,159 |
Six months ended | ||||||||
October 28,2018 | October 29, 2017 | |||||||
Net sales: | ||||||||
Mattress Fabrics | $ | 78,972 | $ | 97,030 | ||||
Upholstery Fabrics | 69,507 | 63,200 | ||||||
$ | 148,479 | $ | 160,230 | |||||
Gross profit: | ||||||||
Mattress Fabrics | $ | 13,470 | $ | 19,495 | ||||
Upholstery Fabrics | 12,410 | 12,773 | ||||||
Total segment gross profit | $ | 25,880 | $ | 32,268 | ||||
Other non-recurring charges (1) | (159 | ) | - | |||||
Restructuring related charges (4) | (1,836 | ) | - | |||||
$ | 23,885 | $ | 32,268 | |||||
Selling, general, and administrative expenses | ||||||||
Mattress Fabrics | $ | 7,714 | $ | 6,559 | ||||
Upholstery Fabrics | 7,161 | 7,511 | ||||||
Total segment selling, general, and administrative expenses | 14,875 | 14,070 | ||||||
Other non-recurring charges (1) | 89 | - | ||||||
Unallocated corporate expenses | 3,172 | 4,846 | ||||||
$ | 18,136 | $ | 18,916 | |||||
Income from operations: | ||||||||
Mattress Fabrics | $ | 5,755 | $ | 12,936 | ||||
Upholstery Fabrics | 5,249 | 5,262 | ||||||
Total segment income from operations | 11,004 | 18,198 | ||||||
Unallocated corporate expenses | (3,172 | ) | (4,846 | ) | ||||
Other non-recurring charges (1) | (248 | ) | - | |||||
Restructuring credit and related charges (5) | (1,225 | ) | - | |||||
Total income from operations | 6,359 | 13,352 | ||||||
Interest expense | (38 | ) | (37 | ) | ||||
Interest income | 301 | 259 | ||||||
Other expense | (399 | ) | (674 | ) | ||||
Income before income taxes | $ | 6,223 | $ | 12,900 |
(dollars in thousands) | October 28, 2018 | October 29, 2017 | April 29, 2018 | |||||||||
Segment assets: | ||||||||||||
Mattress Fabrics | ||||||||||||
Accounts receivable | $ | 10,740 | $ | 13,645 | $ | 15,195 | ||||||
Inventory | 29,836 | 29,083 | 28,740 | |||||||||
Property, plant and equipment (1) | 48,825 | 49,965 | 48,797 | |||||||||
Investment in unconsolidated joint venture | 1,470 | 1,522 | 1,501 | |||||||||
Total mattress fabrics assets | 90,871 | 94,215 | 94,233 | |||||||||
Upholstery Fabrics | ||||||||||||
Accounts receivable | 13,622 | 10,575 | 11,112 | |||||||||
Inventory | 20,765 | 21,126 | 24,714 | |||||||||
Property, plant and equipment (2) | 2,048 | 2,063 | 2,445 | |||||||||
Total upholstery fabrics assets | 36,435 | 33,764 | 38,271 | |||||||||
Total segment assets | 127,306 | 127,979 | 132,504 | |||||||||
Non-segment assets: | ||||||||||||
Cash and cash equivalents | 14,768 | 15,739 | 21,228 | |||||||||
Short-term investments (Available for Sale) | - | 2,478 | 2,451 | |||||||||
Short-term investments (Held-to-Maturity) | 26,719 | 4,015 | 25,759 | |||||||||
Assets held for sale | 237 | - | - | |||||||||
Other current assets | 2,461 | 2,263 | 2,870 | |||||||||
Deferred income taxes | 3,614 | 491 | 1,458 | |||||||||
Property, plant and equipment (3) | 452 | 502 | 552 | |||||||||
Goodwill | 27,222 | 11,462 | 13,569 | |||||||||
Intangible assets | 10,636 | 1,428 | 4,275 | |||||||||
Long-term investments (Held-to-Maturity) | - | 26,853 | 5,035 | |||||||||
Long-term investments (Rabbi Trust) | 7,851 | 6,921 | 7,326 | |||||||||
Other assets | 945 | 912 | 957 | |||||||||
Total assets | $ | 222,211 | $ | 201,043 | $ | 217,984 | ||||||
Six months ended | ||||||||||||
(dollars in thousands) | October 28, 2018 | October 29, 2017 | ||||||||||
Capital expenditures (4): | ||||||||||||
Mattress Fabrics | $ | 1,578 | $ | 4,364 | ||||||||
Upholstery Fabrics | 267 | 203 | ||||||||||
Unallocated Corporate | - | 30 | ||||||||||
Total capital expenditures | $ | 1,845 | $ | 4,597 | ||||||||
Depreciation expense: | ||||||||||||
Mattress Fabrics | $ | 3,644 | $ | 3,310 | ||||||||
Upholstery Fabrics | 412 | 403 | ||||||||||
Total depreciation expense | $ | 4,056 | $ | 3,713 |
Our primary performance obligations include the sale of mattress fabrics, upholstery fabrics, and bedding and home accessories products, as well as the performance of customized fabrication and installation services of our own products associated with window treatments. Contract Assets & Liabilities Certain contracts, primarily those for customized fabrication and installation services, 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 – 45 days. Such terms are common within the industries in which we operate and are not considered financing arrangements. There were no contract assets recognized as of August 4, 2019, July 29, 2018, and April 28, 2019. A summary of the activity of deferred revenue for the three-month periods ended August 4, 2019, and July 29, 2018, follows:
Disaggregation of Revenue The
I-11 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 July 29, 2018:
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:
7. Intangible Assets A summary of intangible assets follows:
Tradenames A summary of the carrying amount of our tradenames follows:
I-12 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Our tradenames were determined to have an indefinite useful life and therefore, are not being amortized. However, our tradenames will be assessed annually for impairment. Customer Relationships A summary of the change in the carrying amount of our customer relationships follows:
The gross carrying amount of our customer relationships were $3.1 million at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. Accumulated amortization for these customer relationships were $652,000, $351,000 and $577,000 at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2020 - $226,000; FY 2021 - $301,000; FY 2022 - $301,000; FY 2023 - $301,000; FY 2024 - $301,000; and Thereafter - $1,033,000. The weighted average amortization period for our customer relationships is 8.4 years as of August 4, 2019. Non-Compete Agreement A summary of the change in the carrying amount of our non-compete agreement follows:
Our non-compete agreement is amortized on a straight-line basis over the fifteen-year life of the agreement. The gross carrying amount of our non-compete agreement was $2.0 million at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. Accumulated amortization for our non-compete agreement was $1.4 million at August 4, 2019, $1.3 million at July 29, 2018, and $1.4 million at April 28, 2019. The remaining amortization expense for the next five years and thereafter follows: FY 2020 - $57,000; FY 2021 - $75,000; FY 2022 - $75,000; FY 2023 - $75,000; FY 2024 - $75,000, and Thereafter - $302,000. The weighted average amortization period for the non-compete agreement is 8.8 years as of August 4, 2019. I-13 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. Goodwill A summary of the change in the carrying amount of goodwill follows:
9. Investment in Unconsolidated Joint Venture Culp International Holdings, Ltd. (Culp International), a wholly-owned subsidiary of the company, entered into a joint venture agreement, pursuant to which Culp International owns fifty percent of Class International Holdings, Ltd. (CLIH). CLIH produces cut and sewn mattress covers, and its operations are located in a modern industrial park in northeastern Haiti, which borders the Dominican Republic. CLIH commenced production in the second quarter of fiscal 2018 and complements our mattress fabric operations with a mirrored platform that enhances our ability to meet customer demand while adding a lower cost operation to our platform. CLIH reported net income totaling $26,000 for the three-month period ending August 4, 2019, and incurred a net loss totaling $154,000 for the three-month period ending July 29, 2018. Our equity interest in CLIH’s net income for the three-month period ending August 4, 2019, was $13,000, and our equity interest in CLIH’s net loss for the three-month period ending July 29, 2018, was $77,000. The following table summarizes information on assets, liabilities and members’ equity of our equity method investment in CLIH:
At August 4, 2019, July 29, 2018, and April 28, 2019, our investment in CLIH totaled $1.5 million, which represents the company’s fifty percent ownership interest in CLIH. 10. Accrued Expenses A summary of accrued expenses follows:
I-14 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) At August 4, 2019, we had accrued expenses totaling $8.9 million, of which $8.6 million and $333,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets. At July 29, 2018, we had accrued expenses totaling $8.9 million of which $8.2 million and $749,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets. At April 28, 2019, we had accrued expenses totaling $9.5 million, of which $9.2 million and $333,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets. 11. Exit and Disposal Activity On June 12, 2018, our board of directors announced the closure of our upholstery fabrics manufacturing facility located in Anderson, South Carolina. This closure was completed during the second quarter of fiscal 2019 and was due to a continued decline in demand for the products manufactured at this facility, reflecting a change in consumer style preferences. The following summarizes our restructuring (credit) expense and restructuring related charges that were associated with the above exit and disposal activity:
The following summarizes the activity in accrued restructuring costs:
The above restructuring accrual pertains to employee termination benefits that were associated with the above exit and disposal activity. I-15 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 12. Lines of Credit Revolving Credit Agreement – United States Our Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $25 million, is set to expire on August 15, 2020, and allows us to issue letters of credit not to exceed $1 million. Interest is charged at a rate (applicable interest rate of 3.68%, 3.53%, and 3.93% at August 4, 2019, July 29, 2018, and April 28, 2019) as a variable spread over LIBOR based on our ratio of debt to EBITDA. Outstanding borrowings are secured by a pledge of 65% of the common stock of Culp International Holdings Ltd. (our subsidiary located in the Cayman Islands), as required by the Credit Agreement. There were no borrowings outstanding under the Credit Agreement at August 4, 2019 and April 28, 2019, respectively. At July 29, 2018, we had outstanding borrowings associated with the Credit Agreement totaling $4.0 million. At August 4, 2019, July 29, 2018, and April 28, 2019, there were $250,000 in outstanding letters of credit (all of which related to workers compensation) provided by the Credit Agreement. Revolving Credit Agreement – China We have an unsecured credit agreement associated with our operations in China that provides for a line of credit up to 40 million RMB ($5.8 million USD at August 4, 2019). This agreement has an interest rate determined by the Chinese government and is set to expire on January 31, 2020. There were no outstanding borrowings as of August 4, 2019, July 29, 2018, and April 28, 2019, respectively. Subordinated Loan Payable On February 7, 2019, eLuxury entered into a subordinated credit agreement with the owner of its noncontrolling interest which provides a revolving loan commitment of $1.0 million that expires on June 22, 2023. Interest is charged at a rate (applicable interest rate of 3.68% at August 4, 2019) as a variable spread over LIBOR based on Culp’s ratio of debt to EBITDA. There were outstanding borrowings under this agreement totaling $925,000 and $675,000 at August 4, 2019 and April 28, 2019, respectively. Overall Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. We were in compliance with these financial covenants as of August 4, 2019. I-16 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 13. Fair Value of Financial Instruments 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; 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. Recurring Basis The following table presents information about assets measured at fair value on a recurring basis:
I-17 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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. Short-Term and Long-Term Investments - Held-To-Maturity Our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds with maturities that ranged from 2 to 2.5 years, in which these bonds have since matured during the first quarter of fiscal 2020. These investments were classified as held-to-maturity as we had the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments were recorded as either current or noncurrent in our Consolidated Balance Sheets, based on contractual maturity date in relation to the respective reporting period and recorded at amortized cost. At April 28, 2019, and July 29, 2018, our held-to-maturity investments recorded at amortized cost totaled $5.0 million and $30.8 million, respectively. The fair value of our held-to-maturity investments at April 28, 2019, and July 29, 2018, totaled $5.0 million and $30.6 million, respectively. Our U.S. corporate bonds were classified as level 2 as they were traded over the counter within a broker network and not on an active market. The fair value of our U.S. corporate bonds 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 U.S. corporate bond. Long-Term Investments - Rabbi Trust We have a Rabbi Trust to set aside funds for participants of our deferred compensation plan (the “Plan”) which enables the participants to credit their contributions to various investment options of the Plan. The investments associated with the Rabbi Trust consist of a money market fund and various mutual funds that are classified as available for sale. These long-term investments are recorded at their fair values of $7.3 million, $7.7 million, and $7.1 million at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. Our long-term investments had an accumulated unrealized gain of $46,000, $104,000, and $40,000 at August 4, 2019, July 29, 2018, and April 28, 2019, respectively. The fair value of our long-term investments associated with our Rabbi Trust approximates its cost basis. I-18 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other The carrying amount of our cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximates fair value because of the short maturity of these financial instruments. Nonrecurring Basis At July 29, 2018, we had no assets that were required to be measured at fair value on a nonrecurring basis other than the assets acquired from eLuxury (see note 3) that were acquired at fair value:
The tradename was recorded at fair market value using the royalty from relief method that used significant unobservable inputs and were classified as level 3. The contingent consideration – earn-out obligation was recorded at fair market value using the Black Sholes pricing model. Additionally, we acquired certain current assets such as accounts receivable and prepaid expenses and assumed certain liabilities such as accounts payable and accrued expenses. Based on the nature of these items and their short maturity, the carrying amount of these items approximated their fair values. See note 3 for the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values. I-19 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 14. Cash Flow Information Interest and income taxes paid are as follows:
15. Net Income Per Share Basic net income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income 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 per share follows:
16. Segment Information Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. The home accessories segment is our finished products business that manufactures, sources and sells bedding accessories and home goods directly to consumers and businesses through global e-commerce and business-to-business sales channels. We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses, restructuring (credit) expense and restructuring related charges, and other non-recurring items. Cost of sales for all segments include 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, 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 (see note 19 for further details). The mattress fabrics segment also includes in segment assets their assets held for sale and investment in an unconsolidated joint venture. Goodwill and intangible assets are not included in segment assets, as these assets are not used by the Chief Operating Decision Maker to evaluate the respective segment’s operating performance, to allocate resources to the individual segments, or determine executive compensation. I-20 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Financial information for the company’s operating segments follows:
(1) The $35 restructuring credit represents employee termination benefits associated with the closure of our upholstery fabrics plant facility located in Anderson, SC (see note 11 for further details). The $35 restructuring credit was recorded to restructuring credit in the Consolidated Statements of Net Income for the three-month period ending August 4, 2019. (2) The total charge of $2.0 million, represents a restructuring related charge of $1.6 million for inventory markdowns and a $451 restructuring charge for employee termination benefits associated with the closure of our upholstery fabrics plant facility in Anderson, SC. The $1.6 million restructuring related charge and the $451 restructuring charge were recorded to cost of sales and restructuring expense in the Consolidated Statements of Net Income for the three-month period ending July 29, 2018. I-21 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Balance sheet information for the company’s operating segments follows:
I-22 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
I-23 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 17. Income Taxes Effective Income Tax Rate We recorded income tax expense of $1.7 million, or 59.1% of income before income taxes, for the three- month period ended August 4, 2019, compared with income tax expense of $906,000, or 46.5% of income before income taxes, for the three-month period ended July 29, 2018. Our effective income tax rates for the three-month periods ended August 4, 2019, and July 29, 2018, 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. 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 and Canada 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:
Deferred Income Taxes Valuation Allowance In accordance with ASC Topic 740, we evaluate 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, taking into account the effects of local tax law. Based on our assessments at August 4, 2019, July 29, 2018, and April 28, 2019, valuation allowances against our deferred income taxes pertain to the following jurisdictions:
I-24 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. Based on our assessment as of August 4, 2019, it is our intention not to permanently invest our undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time. As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a 100% dividend received deduction for earnings and profits received from a 10% owned foreign corporation. Therefore, a deferred tax liability will be required for withholding taxes that are incurred by our foreign subsidiaries at the time earnings and profits are distributed. As a result, at August 4, 2019, July 29, 2018, and April 28, 2019, we recorded a deferred income tax liability of $2.9 million, $2.8 million, and $3.5 million, respectively, for withholding taxes on undistributed earnings and profits from our foreign subsidiaries. Uncertainty In Income Taxes 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 reporting period, or is effectively settled through examination, negotiation, or 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 benefits will be recorded at that time. At August 4, 2019, we had a $914,000 total gross unrecognized income tax benefit that was recorded to income taxes payable- long-term in the accompanying Consolidated Balance Sheets. At July 29, 2018, we had a $820,000 total gross unrecognized income tax benefit, of which $440,000 and $380,000 were classified as income taxes payable – long-term and non-current deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. At April 28, 2019, we had a $903,000 total gross unrecognized income tax benefit, of which $523,000 and $380,000 were classified as income taxes payable – long-term and non-current deferred income taxes respectively, in the accompanying Consolidated Balance Sheets. At August 4, 2019, our $914,000 total gross unrecognized income tax benefit would favorably affect the income tax rate in future periods. At July 29, 2018, our $820,000 total gross unrecognized income tax benefit, included $440,000 that, if recognized, would favorably affect the income tax rate in future periods. At April 28, 2019, our $903,000 total gross unrecognized income tax benefit included $523,000 that, if recognized, would favorably affect the income tax rate in future periods. Our gross unrecognized income tax benefit of $914,000 relates to income tax positions for which significant change is currently not expected within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions. I-25 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 18. Stock-Based Compensation Equity Incentive Plan Description On September 16, 2015, our shareholders approved an equity incentive plan entitled 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 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan. At August 4, 2019, there were 913,648 shares available for future equity-based grants under our 2015 plan. Performance-Based Restricted Stock Units Executive Management We grant performance-based restricted stock units to certain 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 the performance targets that have been achieved will be adjusted based on a market-based total shareholder return component as defined in the related restricted stock unit agreements. Compensation cost is measured based on their fair market value on the date of grant. The fair market value per share is 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 components. Key Employees and a Non-Employee We grant 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. Our performance-based restricted stock units granted to a non-employee, which vested during the first quarter of fiscal 2020, were measured based on the fair market value (the closing price of our common stock) on the date when the performance criteria was met. I-26 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table summarizes information related to our grants of performance-based restricted stock units associated with certain senior executives and key employees that are currently unvested:
(1) Performance-based restricted stock units awarded to certain senior executives. (2) Performance-based restricted stock units awarded to key employees. (3) Amounts represent the maximum number of common stock shares that could be earned if certain performance targets are met as defined in the related restricted stock unit agreements. (4) Price per share represents the fair market value per share ($0.76 per $1 or a reduction of $5.84 to the closing price of the common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($24.35) for the performance-based components of the performance-based restricted stock units granted to certain senior executives on August 2, 2018. (5) Price per share represents the fair market value per share ($0.98 per $1 or a reduction of $0.65 to the closing price of the common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($32.50) for the performance-based components of the performance-based restricted stock units granted to certain senior executives on July 13, 2017. (6) Price per share represents the closing price of our common stock on the date of grant. The following table summarizes information related to our performance-based restricted stock units that vested during the three-month periods ending August 4, 2019 and July 29, 2018:
(1) Certain senior executives and key employees. (2) Non-employee (3) Dollar amounts are in thousands. (4) The weighted average price per share is derived from the closing prices of our common stock on the dates the respective performance based restricted stock units vested. I-27 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Overall We recorded compensation expense of $68,000 and a credit to compensation expense of $506,000 within selling, general, and administrative expenses for the three-month periods ending August 4, 2019, and July 29, 2018, respectively. Compensation cost is recorded based on an assessment each reporting period of the probability that certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, compensation cost will not be recorded and any previously recognized compensation cost would be reversed. At August 4, 2019, the remaining unrecognized compensation cost related to our performance based restricted stock units was $1.4 million, which is expected to be recognized over a weighted average vesting period of 2.7 years. At August 4, 2019, the performance based restricted stock units that were expected to vest had a fair value totaling $1.5 million. Time Based Restricted Stock Units The following table summarizes information related to our grants of time-based restricted stock units associated with key members of management that are currently unvested:
(1) Price per share represents closing price of common stock on the date the respective award was granted The following table summarizes information related to our time-based restricted stock units that vested during the three-month periods ending August 4, 2019 and July 29, 2018:
(1) Dollar amounts are in thousands. (2) The weighted average price per share is derived from the closing prices of our common stock on the dates the respective time-based restricted stock units vested. I-28 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Overall We recorded compensation expense of $16,000 and $5,000 within selling, general, and administrative expense associated with our time vested restricted stock unit awards for the three-month periods ending August 4, 2019, and July 29, 2018, respectively. At August 4, 2019, the remaining unrecognized compensation cost related to our time vested restricted stock units was $467,000, which is expected to be recognized over a weighted average vesting period of 3.3 years. At August 4, 2019, the time vested restricted stock awards that were expected to vest had a fair value totaling $435,000. Common Stock Award We granted a total of 3,659 shares of common stock to our outside directors on July 1, 2019. These shares of common stock vested immediately and were measured at their fair value on the date of grant. The fair value of this award was $19.21 per share on July 1, 2019, which represents the closing price of our common stock on the date of grant. We recorded $70,000 of compensation expense within selling, general, and administrative expense for these common stock awards for the three-months ending August 4, 2019. 19. Leases Overview We lease manufacturing facilities, office space, distribution centers, and equipment under operating lease arrangements. We determine if an arrangement is a lease at its inception if it conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Operating leases with an initial term of 12 months or less are not recognized in our Consolidated Balance Sheets. We recognize a right of use asset and lease liability on the commencement date of a lease arrangement based on the present value of lease payments over the lease term. Our operating leases have remaining lease terms of 1 to 6 years, with renewal options for additional periods ranging up to 10 years. A lease term may include renewal options if it is reasonably certain that the option to renew a lease period will be exercised. A renewal option is considered reasonably certain to be exercised if there is a significant economic incentive, as defined in Topic 842, to exercise the renewal option on the date a lease arrangement is commenced. Currently, renewal options are not included in the lease terms for any of our leases, as there is not a significant economic incentive for us to exercise any of our renewal options. Most of our leases do not provide an implicit interest rate, and as a result, we use our incremental borrowing rate based on information available on the commencement date of a lease arrangement in determining the present value of lease our payments. I-29 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Balance Sheet The right of use asset and lease liabilities associated with our operating leases as of August 4, 2019, and April 29, 2019, are as follows:
Supplemental Cash Flow Information
Operating lease expense for the three-months ended August 4, 2019, was $719,000. Short-term lease and variable lease expenses were immaterial for the three-months ended August 4, 2019. Other Information Maturity of our operating lease liabilities for the remainder of fiscal 2020, the subsequent next four fiscal years, and thereafter follows:
I-30 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of August 4, 2019, the weighted average remaining lease term and discount rate for our operating leases follows:
20. Commitments and Contingencies 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 At August 4, 2019, July 29, 2018, and April 28, 2019, we had total amounts due regarding capital expenditures totaling $60,000, $862,000, and $78,000, respectively, which pertained to outstanding vendor invoices, none of which were financed. These total outstanding amounts were required to be paid based on normal credit terms. Purchase Commitments – Capital Expenditures At August 4, 2019, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $1.5 million. 21. Statutory Reserves Our subsidiaries located in China are required to transfer 10% of their 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 reaches 50% of the company’s registered capital. The transfer to this reserve must be made before distributions of any dividend to shareholders. As of August 4, 2019, the company’s statutory surplus reserve was $4.2 million, representing 10% of accumulated earnings and profits determined in accordance with PRC accounting rules and regulations. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. Our subsidiaries located in China can transfer funds to the parent company excerpt for the statutory surplus reserve of $4.2 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business. I-31 Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 22. Common Stock Repurchase Program On June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. During the three-month period ended August 4, 2019, we did not purchase any shares of our common stock. At August 4, 2019, we had $1.7 million available for repurchases of our common stock associated with the $5.0 million repurchase program approved by our board of directors on June 15, 2016. On September 5, 2019, we announced that 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. 23. Dividend Program On September 5, 2019, we announced that our board of directors approved a quarterly cash dividend of $0.10 per share. This payment will be made on or about October 15, 2019, to shareholders of record as of October 4, 2019. During the three-months ended August 4, 2019, dividend payments totaled $1.2 million, which represented a quarterly dividend payment of $0.10 per share. During three-months ended July 29, 2018, dividend payments totaled $1.1 million, which represented a quarterly dividend payment of $0.09 per share. Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change. I-32 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,” “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, 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 the 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. 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, are included in Item 1A “Risk Factors” section in our Form 10-K filed with the Securities and Exchange Commission on July 12, 2019, for the fiscal year ended April 28, 2019, and our subsequent periodic reports filed with the Securities and Exchange Commission. I-33 The following analysis of financial condition and results of operations should be read in conjunction with the 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 4, 2019, and July 29, 2018, represent 14-week and 13-week periods, respectively. Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. We have wholly owned mattress fabric operations located in Stokesdale, NC, High Point, NC, and Quebec, Canada, and a fifty-percent owned cut and sew mattress cover operation located in Haiti. The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. We have wholly owned upholstery fabric operations located in Shanghai, China, and Burlington, NC. With the acquisition of Read Window Products, LLC (Read) late in fiscal 2018, we now have a wholly owned company located in Knoxville, TN, that provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read’s own products to customers in the hospitality and commercial industries. The company operated an upholstery fabrics plant in Anderson, SC during the first quarter of fiscal 2019, which has since been closed during the second quarter of fiscal 2019. The home accessories segment is the company’s new finished products business that manufactures, sources, and sells bedding accessories and home goods directly to consumers and businesses through global e-commerce and business-to-business sales channels. Through our June 22, 2018, investment in eLuxury, LLC (eLuxury), we now have a majority owned company located in Evansville, IN which operates the global e-commerce platform for the home accessories segment. We evaluate the operating performance of our segments based upon income from operations before certain unallocated corporate expenses, restructuring expense (credit) 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 costs 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, all costs associated with being a public company, and other miscellaneous expenses. I-34 Executive Summary Results of Operations
Net Sales Overall, our net sales for the first quarter of fiscal 2020 increased by 4.7% compared with the same period a year ago, with mattress fabric sales increasing 12.5% and upholstery fabric sales declining 7.6%. Net sales for our home accessories segment were $4.3 million compared with $2.6 million for the partial first quarter period of fiscal 2019, which commenced in the middle of the quarter with the June 22, 2018, investment in eLuxury. Net sales for the home accessories segment were comparable to the fourth and third quarters of fiscal 2019. The first quarter of fiscal 2020 had 14 weeks compared to 13 weeks for the first quarter of fiscal 2019. With respect to the home accessories segment, the first quarter of fiscal 2020 had 14 weeks compared to six weeks for the partial first quarter period of fiscal 2019. The increase in mattress fabrics net sales reflects an additional week of sales for the quarter, as well as a strong performance from CLASS, our sewn mattress cover business, and increased customer demand for our woven mattress fabrics. The decline in upholstery fabric net sales for the quarter primarily relates to the continued soft retail environment for retail furniture, as well as ongoing issues surrounding international trade agreements and the associated tariffs. It also reflects a loss in sales resulting from the closure of our Anderson, SC facility, that was completed in the second quarter of fiscal 2019. The first quarter net sales for our new home accessories business segment, which includes our June 2018 majority investment in eLuxury, reflect reduced demand for legacy bedding products. See the Segment Analysis section below for further details. I-35 Income Before Income Taxes Overall, our income before income taxes was $2.8 million, compared with $1.9 million for the prior-year period. Income before income taxes for the first quarter of the prior fiscal year was affected by non-recurring restructuring and related charges of $2.0 million related to the company’s closure of the Anderson, South Carolina, production facility, while results for the first quarter of fiscal 2020 included a non-recurring restructuring credit of approximately $35,000 related to certain employee termination benefits. Operating performance for the first quarter of fiscal 2020 was affected by operating income pressures in the mattress fabrics segment related primarily to lower demand for our more profitable knitted mattress fabrics products, resulting in reduced production schedules, as well as higher employee-related costs. In addition, the home accessories segment was affected by reduced demand for eLuxury’s legacy bedding products and increased marketing fees and promotional expenses. These pressures were offset somewhat by an improved operating performance in the upholstery fabrics segment as a result of a more profitable product mix and more favorable foreign currency exchange rates associated with our operations located in China compared with the same period a year ago. Additionally, unallocated corporate SG&A expense was significantly higher this quarter as compared to the prior year due primarily to adjustments that occurred in the first quarter of fiscal 2019 that lowered share-based compensation expense. See the Segment Analysis section below for further details. Income Taxes The effective income tax rate for the first quarter of fiscal 2020 was 59.1% compared with 46.5% for the same period a year ago. The increase reflects the continued shift in the mix of our taxable income that is now mostly earned by our foreign operations located in China and Canada at higher income tax rates in relation to the U.S. Additionally, this current mix of our taxable income has resulted in a significant increase in our Global Intangible Low Taxed Income (GILTI) Tax, which represents a U.S. income tax on our foreign earnings. Importantly, income taxes incurred in the U.S. on a cash basis for fiscal 2020 are expected to be minimal due to the projected utilization of our U.S. Federal net operating loss carryforwards. Refer to note 17 located in the notes to the consolidated financial statements for further details regarding our provision for income taxes. Liquidity At August 4, 2019, our cash and investments (which comprise cash and cash equivalents and short-term investments (held-to-maturity)) totaled $44.2 million compared with $45.0 million at April 28, 2019. This slight decrease from the end of fiscal 2019 was primarily due to a regular quarterly dividend payment of $1.2 million, $935,000 for capital expenditures that were mostly associated with our mattress fabrics segment, and $763,000 for a final cash payment of an acquisition, partially offset by net cash provided by operating activities totaling $2.0 million. I-36 Our net cash provided by operating activities was $2.0 million during the first quarter of fiscal 2020, improved from a $2.0 million use of cash from operating activities during the first quarter of fiscal 2019. This improvement is due mostly to higher cash flow from earnings and improved working capital management during the first quarter of fiscal 2020 compared with the same period a year ago. At August 4, 2019, our borrowings totaling $925,000 related to our subordinated loan payable between eLuxury and its minority owner. Dividend Program On September 5, 2019, we announced that our board of directors approved a quarterly cash dividend of $0.10 per share. This payment will be made on or about October 15, 2019, to shareholders of record as of October 4, 2019. During the first quarter of fiscal 2020, dividend payments totaled $1.2 million, which represented a quarterly dividend payment of $0.10 per share. During first quarter of fiscal 2019, dividend payments totaled $1.1 million, which represented a quarterly dividend payment of $0.09 per share. Common Stock Repurchase Program On June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. During the three-month period ended August 4, 2019, we did not purchase any shares of our common stock. At August 4, 2019, we had $1.7 million available for repurchases of our common stock associated with the $5.0 million repurchase program approved by our board of directors on June 15, 2016. On September 5, 2019, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Segment Analysis Mattress Fabrics Segment
I-37 Net Sales The increase in mattress fabrics net sales reflects a 14-week period in the first quarter of fiscal 2020 compared to a 13-week period in the first quarter of fiscal 2019, as well a higher customer demand for sewn mattress covers from our CLASS business and for woven mattress fabrics. We benefitted from the growing demand for mattress covers from customers in the expanding roll-packed (boxed) bedding space. We have diversified our customer base in this market segment, and we are encouraged by additional opportunities with existing and new customers. Our flexible, global platform, including out production locations in the U.S., Haiti, and China, supports this diversification strategy. Following a difficult year of declining sales related to the influx of low-cost mattress imports from China, as well as retail disruption, the domestic mattress industry appears to be stabilizing, and we are realizing some benefits from the punitive anti-dumping measures announced by the U.S. Department of Commerce early in the first quarter. We expect business conditions will continue improving with the further sell-through of excess inventory of China mattress imports, as well as customers continuing to alter their supply chains away from China. Nevertheless, it remains uncertain as to when demand trends will return to previous levels. Gross Profit and Operating Income Although our net sales increased over the first quarter of fiscal 2019 as noted above, our operating profits declined compared with the same period a year ago, due primarily to temporary lower demand for our more profitable knitted products as customers absorbed existing inventory, resulting in reduced production schedules. We also incurred increases in certain employee-related costs. Looking forward to the second quarter of fiscal 2020, we believe business conditions are stabilizing and will result in improved performance as we continue to rationalize production in the most cost-effective locations. Additionally, our sustainable and efficient manufacturing platform with enhanced capacity and distribution capabilities continues to provide the flexibility and scalability necessary to serve our customers in a changing global environment. I-38 Segment assets Segment assets consist of accounts receivable, inventory, assets held for sale, property, plant and equipment, right of use assets, and investment in an unconsolidated joint venture.
Refer to note 16 located in the notes to the consolidated financial statements for disclosures regarding determination of our segment assets. Accounts Receivable As of August 4, 2019, accounts receivable increased by 10.7%, compared with July 29, 2018. This increase primarily reflects the increase in net sales of 12.5% during the first quarter noted above. As of August 4, 2019, accounts receivable increased by 4.4%, compared with April 28, 2019. This increase primarily reflects an increase in net sales during the first quarter of fiscal 2020 compared with the fourth quarter of fiscal 2019. Net sales during the first quarter of fiscal 2020 were $38.7 million, an increase of 2.5%, compared with $37.7 million during the fourth quarter of fiscal 2019. Inventory As of August 4, 2019, inventory decreased by $7.1 million, or 22.5%, compared with July 29, 2018. During the first quarter of fiscal 2019, inventory significantly increased due to purchases in excess of actual demand trends that were much lower than anticipated as a result of the rapid growth of low-priced imported mattresses from China. Subsequently, management aligned our inventory purchases to reflect this lower demand, and therefore, was able to subsequently reduce our inventory levels. As of August 4, 2019, inventory was comparable with April 28, 2019. Property, Plant & Equipment As of August 4, 2019, property plant, and equipment decreased in comparison to July 29, 2018, and April 28, 2019. This trend represents a decrease in capital expenditure requirements and a progression toward a more maintenance level of spending on our machinery and equipment. I-39 The $43.2 million at August 4, 2019, represents property, plant, and equipment of Right of Use Assets As of August 4, 2019, our right of use assets balance reflects the adoption of ASU No. 2016-02, Leases (Topic 842). See notes 2 and 19 located in the notes to the consolidated financial statements for further details. The $235,000 represents right of use assets located in the U.S. Investment in Unconsolidated Joint Venture Our investment in unconsolidated joint venture represents our fifty percent ownership of Class International Holdings Ltd. (See note 9 to the consolidated financial statements for further details). Upholstery Fabrics Segment Net Sales
Net sales in this segment decreased in the first quarter of fiscal 2020 as compared to the same period a year ago, in line with expectations. The first quarter of fiscal 2020 had 14 weeks compared to 13 weeks for the first quarter of fiscal 2019. The drop in net sales for this segment reflects the continued soft retail environment for residential furniture, as well as ongoing issues surrounding international trade agreements and associated tariffs. This unstable environment has disrupted supply chains throughout the furniture industry. Additionally, the drop in U.S. produced sales reflects the closure of our Anderson, SC, facility in the second quarter of fiscal 2019, such that net sales for the first quarter of fiscal 2019 included sales from the Anderson facility, whereas there were no such sales in the first quarter of fiscal 2020. In spite of these challenges, we aggressively pursued our product-driven strategy and remained focused on the diversification of our customer base. Our ability to provide a diverse product offering has allowed us to reach new market segments and expand our customer base in both the residential and hospitality markets. Read Window Products, our window treatment and installation services business, has supported our ability to expand our reach in the hospitality market. We also continue to see favorable demand trends from our residential furniture customers for our popular line of LiveSmart® performance fabrics. During the first quarter of fiscal 2020, we also expanded the LiveSmart® brand with the introduction of LiveSmart Evolve™, a new line of fabrics featuring the same performance technology with the use of recycled fibers to deliver a sustainable textile product. The LiveSmart Evolve™ launch has been well received in recent showings and confirms our ongoing commitment to environmental responsibility. I-40 Currently, the uncertainties surrounding additional proposed tariffs and the associated geopolitical risks make it difficult to forecast the potential impact on our business. We expect the soft retail demand trends for furniture, as well as the ongoing tariff uncertainties, to continue at least through the second quarter of fiscal 2020. Gross Profit, Selling, General & Administrative Expenses, and Operating Income
Our improved operating performance for the first quarter of fiscal 2020 reflects a more profitable product mix and more favorable foreign currency exchange rates associated with our operations located in China, leading to higher gross profit and operating margin. Exit and Disposal Activity On June 12, 2018, our board of directors announced the closure of our upholstery fabrics manufacturing facility located in Anderson, South Carolina. This closure was completed during the second quarter of fiscal 2019 and was due to a continued decline in demand for the products manufactured at this facility, reflecting a change in consumer style preferences. The following summarizes our restructuring (credit) expense and restructuring related charges that were associated with the above exit and disposal activity:
I-41 The
The above restructuring accrual pertains to employee termination benefits that were associated with the above exit and disposal activity. Segment Assets Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
Refer to note 16 located in the notes to the consolidated financial statements for disclosures regarding determination of our segment assets. Accounts Receivable As of August 4, 2019, accounts receivable was comparable with July 29, 2018, and April 28, 2019. Inventory As of August 4, 2019, inventory increased $1.4 million or 6.4%, compared with July 29, 2018. The increase in inventory stems from increased tariffs. As of August 4, 2019, inventory was comparable with April 28, 2019. I-42 Property, Plant, & Equipment The $1.9 million at Right of Use Assets As of August 4, 2019, our right of use assets balance reflects the adoption of ASU No. 2016-02, Leases (Topic 842). See notes 2 and 19 located in the notes to the consolidated financial statements for further details. The $3.1 million represents right of use assets of $1.8 million and $1.3 million located in China and the U.S., respectively. Home Accessories Segment
Net Sales, Gross Profit, and Operating (Loss) Income This segment, which includes our June 2018 majority investment in eLuxury, represents our e-commerce and finished products business offering bedding accessories and home goods. The combined platform for this new segment supports sales of finished products to both consumers and businesses through global e-commerce and business-to-business sales channels. For our home accessories segment, the first quarter of fiscal 2020 had 14 weeks, compared to six weeks for the first quarter of fiscal 2019 as a result of the June 22, 2018 investment in eLuxury. Net sales for this segment in the first quarter of fiscal 2020 were $4.3 million, compared with $2.6 million in net sales for the partial first quarter period of fiscal 2019. Net sales for the home accessories segment were comparable to the third and fourth quarters of fiscal 2019. I-43 The operating loss for our home accessories segment was in line with expectations, and comparable to the operating loss in the third and fourth quarters of fiscal 2019. The results reflect reduced demand for legacy bedding products and increased marketing fees and promotional expenses. These challenges unfavorably affected our financial results for the first quarter. Our strategic focus for the segment is to develop innovative bedding products and other home accessory items through our global manufacturing platform and in coordination with all of Culp’s other divisions. We are refining this business model with a more aggressive and strategic focus on the business-to-business market, along with greater customer diversification and new online retail marketplaces. We also remain committed to improving the performance of legacy product lines for this segment. In tandem with these strategies, we are continuing to develop new products featuring Culp mattress fabrics and upholstery fabrics that we plan to market through this new sales channel. In accordance with ASC Topic 350, we assess goodwill for impairment at the end of each fiscal year or between annual tests if events or changes in circumstances indicate the carrying value of the asset may not be recovered. Such indicators include, but are not limited to, market conditions, operating results, competition, and general economic conditions. Identifying and assessing whether such impairment indicators exist, or if events or changes in circumstances have occurred, requires significant judgment. At August 4, 2019, management determined that no impairment indicators existed for our home accessories segment. Management will continue to carefully review whether impairment indicators exist each quarter. If we are not successful with our refined business model and strategic focus discussed above, we may determine that impairment indicators exist, which could result in possible future write-downs in accordance with our policy. eLuxury Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement) in which we acquired an initial 80% ownership interest in eLuxury, a company that offers bedding accessories and home goods directly to consumers. eLuxury’s primary products include a line of mattress pads manufactured at eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, as well as other bedding items. Its products are available on eLuxury’s own branded website, eLuxury.com, Amazon, and other leading online retailers for specialty home goods. This acquisition brings together eLuxury’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise with our global production, sourcing, and distribution capabilities. The estimated consideration given for the initial 80% ownership interest in eLuxury totaled $18.1 million, of which $12.5 million represents the estimated purchase price and $5.6 million represents the fair value for contingent consideration associated with an earn-out obligation (see below for further details). Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018, $185,000 was paid in August 2018, and $749,000 is to be paid in September 2019, subject to certain conditions as defined in the Equity Agreement. I-44 Assets Acquired and Liabilities Assumed The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.
We recorded the tradename at fair market value based on the relief from royalty method. This tradename was determined to have an indefinite useful life and, therefore, is not being amortized. Equipment will be depreciated on a straight-line basis over useful lives ranging from five to ten years. The goodwill related to this acquisition is attributable to eLuxury’s reputation with the products it offers and management’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise. Goodwill is deductible for income tax purposes over the statutory period of fifteen years. As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires us to pay the seller, who is also the owner of the noncontrolling interest, an earn-out payment based on a multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending August 31, 2021, less $12.0 million. We recorded a contingent liability at the acquisition date for this earn-out obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model. Non-Controlling Interest The Equity Agreement contains substantive profit-sharing arrangement provisions which explicitly state the ownership interests at the effective date of this business combination and the allocation of net income or loss between Culp Inc., as the controlling interest, and the noncontrolling interest. The Equity Agreement states that at the effective date of this acquisition (June 22, 2018), we acquired an 80% ownership interest in eLuxury with the seller retaining a 20% noncontrolling interest. Additionally, the Equity Agreement states that eLuxury’s net income or loss and future capital contributions will be allocated, at a percentage of 70% and 30% to Culp Inc. and the noncontrolling interest, respectively. I-45 Based on the terms of the Equity Agreement, we believe the related risks associated with the ownership interests are aligned and therefore, the total consideration of $18.1 million for the 80% controlling interest provides information for the equity value of eLuxury as a whole, and is useful in estimating fair value of the 20% noncontrolling interest. In order to determine the carrying value of the noncontrolling interest in eLuxury, we applied the Hypothetical-Liquidation-At-Book-Value method (HLBV). HLBV is an approach that is used in practice to determine the carrying value of a noncontrolling interest if it is consistent with an existing profit-sharing arrangement such as the Equity Agreement. Therefore, the carrying amount of the noncontrolling interest of $4.2 million at August 4, 2019, mostly represents the $4.5 million fair value determined at the acquisition date minus its allocation of net loss subsequent to the acquisition date and through the end of our first quarter of fiscal 2020. Other Acquisitions costs totaling $270,000 were included in selling, general, and administrative expenses in our Consolidated Statement of Net Income for the three-month period ending July 29, 2018. Segment Assets Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
Refer to note 16 located in the notes to the consolidated financial statements for disclosures regarding determination of our segment assets. Accounts Receivable As of August 4, 2019, accounts receivable were comparable with July 29, 2018, and April 28, 2019. Inventory As of August 4, 2019, inventory increased $1.4 million, or 80.5%, compared with July 29, 2018. The increase in inventory represents the start-up of our home accessories segment and acquisition of eLuxury that occurred during our first quarter of fiscal 2019. As of August 4, 2019, inventory was comparable with April 28, 2019. I-46 Property, Plant, & Equipment The $1.8 million at August 4, 2019, $2.1 million at July 29, 2018, and $1.9 million at April 28, 2019, represents property, plant, and equipment located in the U.S. Right of Use Assets As of August 4, 2019, our right of use assets balance reflects the adoption of ASU No. 2016-02, Leases (Topic 842). See notes 2 and 19 located in the notes to the consolidated financial statements for further details. The $1.0 million represents right of use assets located in the U.S. Other Income Statement Categories
Selling, General and Administrative Expenses The increase in selling, general, and administrative expenses during the first quarter of fiscal 2020 compared with the first quarter of fiscal 2019 is mostly due to the following:
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basis for fiscal 2020 are expected to be minimal due to the projected utilization of our U.S. Federal net operating loss carryforwards and immediate expensing of U.S. capital expenditures.
Liquidity and Capital Resources Liquidity Overall Currently, our sources of liquidity include cash and cash equivalents, 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 present cash and cash equivalents of $44.2 million as of August 4, 2019, cash flow from operations, and the current availability ($30.8 million) under our revolving credit lines will be sufficient to fund our foreseeable business needs, contractual obligations, and potential acquisitions. At August 4, 2019, our cash and investments (which comprise cash and cash equivalents and short-term investments (held-to-maturity)) totaled $44.2 million compared with $45.0 million at April 28, 2019. This slight decrease from the end of fiscal 2019 was primarily due to a regular quarterly dividend payment of $1.2 million, $935,000 for capital expenditures that were mostly associated with our mattress fabrics segment, and $763,000 for a final cash payment of an acquisition, partially offset by net cash provided by operating activities totaling $2.0 million. Our net cash provided by operating activities was $2.0 million during the first quarter of fiscal 2020, improved from a $2.0 million use of cash from operating activities during the first quarter of fiscal 2019. This improvement is due mostly to higher cash flow from earnings and improved working capital management during the first quarter of fiscal 2020 compared with the same period a year ago. At August 4, 2019, our borrowings totaling $925,000 related to our subordinated loan payable between eLuxury and the owner of its non-controlling interest. Our cash and cash equivalents and short-term investment (available for sale) balance may be adversely affected by factors beyond our control, such as lower net sales due to weakening industry demand and delays in receipt of payment on accounts receivable. By Geographic Area A summary of our cash and cash equivalents and short-term investments (held-to-maturity) by geographic area follows:
I-51 During the third and fourth quarters of fiscal 2019, we experienced a significant shift of cash and investments held in the Cayman Islands to the U.S. This trend was mostly due to our strategy of taking advantage of the of the 2017 Tax Cuts and Jobs Act, which allows a U.S. corporation a 100% dividend received deduction on earnings and profits repatriated to the U.S. from foreign owned corporations. At July 29, 2018, we had cash and investments totaling $31.0 million that mostly pertained to investment grade U.S. corporate bonds. As our U.S. corporate bonds matured, we repatriated almost all our earnings and profits residing in the Cayman Islands to our U.S parent company. As of the end of our first quarter of fiscal 2020, all our U.S. corporate bonds that resided in the Cayman Islands have matured and all of the corresponding sales proceeds have been repatriated to the U.S. parent company. Common Stock Repurchase Program On June 15, 2016, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. During the three-month period ended August 4, 2019, we did not purchase any shares of our common stock. At August 4, 2019, we had $1.7 million available for repurchases of our common stock associated with the $5.0 million repurchase program approved by our board of directors on June 15, 2016. On September 5, 2019, we announced that 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. Dividend Program On September 5, 2019, we announced that our board of directors approved a quarterly cash dividend of $0.10 per share. This payment will be made on or about October 15, 2019, to shareholders of record as of October 4, 2019. During the three months ended August 4, 2019, dividend payments totaled $1.2 million, which represented a quarterly dividend payment of $0.10 per share. During the three months ended July 29, 2018, dividend payments totaled $1.1 million, which represented a quarterly dividend payment of $0.09 per share. Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change. I-52 Working Capital Operating Working Capital Operating working capital (accounts receivable and inventories, less accounts payable-trade, accounts payable-capital expenditures, and deferred revenue) was $51.4 million at August 4, 2019, compared with $51.7 million at July 29, 2018. Operating working capital turnover was 5.9 during the first quarter of fiscal 2020 compared with 6.6 during the first quarter of fiscal 2019. Accounts Receivable Accounts receivable as of August 4, 2019, totaling $24.1 million, increased 3.7%, compared with $23.2 million at July 29, 2018. This increase primarily reflects the increase in net sales of 4.7% during the first quarter compared with the same period a year ago. Days’ sales outstanding were 31 days for the first quarter of fiscal 2020 compared with 29 days for the first quarter of fiscal 2019. Inventory Inventories as of August 4, 2019, totaling $50.7 million, decreased $4.3 million, or 7.9%, compared with $55.0 million at July 29, 2018. This decrease is attributable to a significant decline in inventory associated with our mattress fabrics business of $7.1 million, or 22.5%. During the first quarter of fiscal 2019, inventory significantly increased due to purchases in excess of actual demand trends that were much lower than anticipated as a result of the rapid growth of low-priced imported mattresses from China. Subsquently, management aligned our inventory purchases to reflect this lower demand, and therefore was able to subsequently reduce our inventory levels. The decrease in inventory associated with our mattress fabrics segment was partially offset by an increase in inventory for both our upholstery fabrics and home accessories segments. Inventory associated with our upholstery fabrics segment increased $1.4 million or 6.4%, and primarily stemmed from increased tariffs. Inventory relating to our home accessories segment increased $1.4 million or 80.5% and represents the start-up of our home accessories segment and acquisition of eLuxury that occurred during our first quarter of fiscal 2019. Inventory turns were 4.9 for the first quarter of fiscal 2020 compared with 4.4 for the first quarter of fiscal 2019. Accounts Payable Accounts payable - trade as of August 4, 2019, totaling $22.6 million, decreased $2.4 million or 9.7%, compared with $25.1 million at July 29, 2018. The decrease in accounts payable reflects the overall decrease in inventory purchases noted above. I-53 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. Our revolving credit agreements require us to maintain compliance with certain financial covenants as defined in the respective agreements. At August 4, 2019, we were in compliance with all our financial covenants. At August 4, 2019, we had borrowings totaling $925,000 related to our subordinated loan payable between eLuxury and its minority owner. Refer to Note 12 located in the notes to the consolidated financial statements for further details of our revolving credit agreements. Capital Expenditures and Depreciation Overall Capital expenditures on a cash basis were $935,000 for the first quarter of fiscal 2020, compared with $2.2 million (of which $1.4 million were vendor-financed) for the same period a year ago. Capital expenditures mostly related to our mattress fabrics segment for both periods. Depreciation expense was $1.9 million for the first quarter of fiscal 2020, compared with $2.0 million for the same period a year ago. Depreciation expense mostly related to our mattress fabrics segment for both periods. For fiscal 2020, we are projecting cash capital expenditures to be in the range of $7.0 million to $8.0 million. Depreciation expense is projected to be approximately $8.0 million in fiscal 2020. The estimated capital expenditures and depreciation expense for fiscal 2020 mostly relate to the mattress fabrics segment. These are management’s current expectations only, and changes in our business could cause changes in plans for capital expenditures and expectations related to depreciation expense. Accounts Payable – Capital Expenditures At August 4, 2019, we had total amounts due regarding capital expenditures totaling $60,000, pertaining to outstanding vendor invoices, none of which were financed. The total amount outstanding of $60,000 is required to be paid based on normal credit terms. Purchase Commitments – Capital Expenditures At August 4, 2019, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $1.5 million. I-54 Critical Accounting Policies and Recent Accounting Developments At August 4, 2019, 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 April 28, 2019. Refer to Notes 2 and 19 located in the notes to the consolidated financial statements for recently adopted and issued accounting pronouncements since the filing of our Form 10-K for the year ended April 28, 2019. Contractual Obligations As of August 4, 2019, there were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended April 28, 2019. 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.
We are exposed to market risk from changes in interest rates on our revolving credit lines. At 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 currency of our subsidiaries domiciled in Canada and China, although 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 at I-55 We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of There has been no change in our internal control over financial reporting that occurred during the quarter ended Part II – Other Information There have not been any material changes to our legal proceedings during the three months ended ISSUER PURCHASES OF EQUITY SECURITIES
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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