UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 27, 2019February 2, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-12597


CULP, INC.

(Exact name of registrant as specified in its charter)


 NORTH CAROLINA 56-1001967

NORTH CAROLINA

56-1001967

(State or other jurisdiction of

 (I.R.S. Employer Identification No.)

incorporation or other organization)

(I.R.S. Employer

Identification No.)

1823 Eastchester Drive

High Point, North Carolina

27265-1402

 (Address

(Address of principal executive offices)

(zip code)



(336) 889-5161

(Registrant'sRegistrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading

Symbol(s)

Name of Each Exchange

On Which Registered

Common Stock, par value $0.05/Share

CULP

New York Stock Exchange


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to thesuch filing requirements for at least the past 90 days.      YES    NO     NO


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period after the registrant was required to submit and post such files).      YES    NO     NO


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer, large accelerated filer, smaller” “smaller reporting company, and emerging“emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer     ☐

Accelerated filer     ☒

Non-accelerated filer     ☐


Smaller Reporting Company     ☐

Emerging Growth Company     ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      YES    NO  


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Common shares outstanding at January 27, 2019:  12,368,413

March 12, 2020: 12,274,434

Par Value: $0.05 per share



Table of Contents

INDEX TO FORMFORM 10-Q

For the period ended January 27, 2019



February 2, 2020

Page
Part I - Financial Statements

Item 1.           Financial Statements: (Unaudited)

Page

Part I - Financial Statements

Item 1. Financial Statements: (Unaudited)

I-1

Consolidated Statements of Net (Loss) Income (Loss) — Three and Nine Months Ended February 2, 2020 and January 27, 2019 and January 28, 2018

I-1

Consolidated Statements of Comprehensive (Loss) Income (Loss) – Three and Nine Months Ended February 2, 2020 and January 27, 2019 and January 28, 2018

I-2

I-3

I-3

I-4

February 2, 2020

I-5

I-5
January 27, 2010

I-6

I-6

I-7

I-43

I-30

Item2.

I-44

I-31

Item3.

I-66

I-46

Item4.

I-66

I-47


Part II - Other Information

Item 1. Legal Proceedings

II-1

Item1.

II-1

Item 1A. Risk Factors

II-1

Item 1A.

II-1

Item 2.

II-2

II-1

Other Information

II-2

II-2

Item 6.II-3

Signatures


II-4

II-4



Table of Contents

Item 1:  Financial Statements

Item1:

CULP, INC.

CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)Financi

FOR THE THREE AND NINE MONTHS ENDED JANUARY 27, 2019 AND JANUARY 28, 2018
UNAUDITED
(Amounts in Thousands, Except for Per Share Data)al Statements

CULP, INC.

CONSOLIDATED STATEMENTS OF NET (LOSS) INCOME

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 2, 2020 AND JANUARY 27, 2019

UNAUDITED

(Amounts in Thousands, Except for Per Share Data)


 

 

THREE MONTHS ENDED

 

 

 

February 2,

2020

 

 

January 27,

2019

 

Net sales

 

$

71,998

 

 

$

77,226

 

Cost of sales

 

 

59,614

 

 

 

63,103

 

Gross profit

 

 

12,384

 

 

 

14,123

 

Selling, general and administrative expenses

 

 

9,952

 

 

 

10,038

 

Asset impairments

 

 

13,639

 

 

 

 

Reversal of contingent consideration - earn-out obligation

 

 

(6,081

)

 

 

 

Restructuring credit

 

 

(35

)

 

 

(214

)

(Loss) income from operations

 

 

(5,091

)

 

 

4,299

 

Interest expense

 

 

8

 

 

 

 

Interest income

 

 

(242

)

 

 

(251

)

Other expense

 

 

267

 

 

 

288

 

(Loss) income before income taxes

 

 

(5,124

)

 

 

4,262

 

Income tax (benefit) expense

 

 

(973

)

 

 

1,225

 

Loss (income) from investment in unconsolidated joint venture

 

 

56

 

 

 

(23

)

Net (loss) income

 

$

(4,207

)

 

$

3,060

 

Net loss attributable to non-controlling interest

 

 

4,149

 

 

 

94

 

Net (loss) income attributable to Culp, Inc. common shareholders

 

$

(58

)

 

$

3,154

 

 

 

 

 

 

 

 

 

 

Net (loss) income attributable to Culp Inc. common shareholders per share - basic

 

$

0.00

 

 

$

0.25

 

Net (loss) income attributable to Culp Inc. common shareholders per share - diluted

 

$

0.00

 

 

$

0.25

 

Average shares outstanding, basic

 

 

12,409

 

 

 

12,438

 

Average shares outstanding, diluted

 

 

12,409

 

 

 

12,465

 

     
 THREE MONTHS ENDED 
     
 January 27, January 28, 
 2019 2018 
     
Net sales $77,226   85,310 
Cost of sales  63,103   67,707 
Gross profit  14,123   17,603 
         
Selling, general and        
  administrative expenses  10,038   9,959 
Restructuring credit  (214)  - 
Income from operations  4,299   7,644 
         
Interest expense  -   31 
Interest income  (251)  (132)
Other expense  288   229 
Income before income taxes  4,262   7,516 
         
Income taxes  1,225   8,208 
         
(Income) loss from investment in unconsolidated joint venture  (23)  56 
Net income (loss) $3,060   (748)
      Plus: Net loss attributable to non-controlling interest  94   - 
Net income (loss) attributable to Culp, Inc. common shareholders $3,154   (748)
         
Net income (loss) attributable to Culp Inc. common shareholders per share - basic $0.25   (0.06)
Net income (loss) attributable to Culp Inc. common shareholders per share - diluted $0.25   (0.06)
Average shares outstanding, basic  12,438   12,436 
Average shares outstanding, diluted  12,465   12,436 
         
         
 NINE MONTHS ENDED 
         
 January 27, January 28, 
   2019   2018 
         
Net sales $225,705   245,541 
Cost of sales  187,697   195,668 
Gross profit  38,008   49,873 
         
Selling, general and        
  administrative expenses  28,174   28,876 
Restructuring credit  (825)  - 
Income from operations  10,659   20,997 
         
Interest expense  38   69 
Interest income  (552)  (391)
Other expense  688   903 
Income before income taxes  10,485   20,416 
         
Income taxes  3,407   11,956 
         
Loss from investment in unconsolidated joint venture  109   249 
Net income $6,969   8,211 
      Plus: Net loss attributable to non-controlling interest  75   - 
Net income attributable to Culp, Inc. common shareholders $7,044   8,211 
         
Net income attributable to Culp Inc. common shareholders per share - basic $0.56   0.66 
Net income attributable to Culp Inc. common shareholders per share - diluted $0.56   0.65 
Average shares outstanding, basic  12,488   12,425 
Average shares outstanding, diluted  12,593   12,626 
         
See accompanying notes to consolidated financial statements.        

 

 

NINE MONTHS ENDED

 

 

 

February 2,

2020

 

 

January 27,

2019

 

Net sales

 

$

219,465

 

 

$

225,705

 

Cost of sales

 

 

179,612

 

 

 

187,697

 

Gross profit

 

 

39,853

 

 

 

38,008

 

Selling, general and administrative expenses

 

 

30,783

 

 

 

28,174

 

Asset impairments

 

 

13,639

 

 

 

 

Reversal of contingent consideration - earn-out obligation

 

 

(6,081

)

 

 

 

Restructuring credit

 

 

(70

)

 

 

(825

)

Income from operations

 

 

1,582

 

 

 

10,659

 

Interest expense

 

 

47

 

 

 

38

 

Interest income

 

 

(732

)

 

 

(552

)

Other expense

 

 

441

 

 

 

688

 

Income before income taxes

 

 

1,826

 

 

 

10,485

 

Income tax expense

 

 

2,607

 

 

 

3,407

 

Loss from investment in unconsolidated joint venture

 

 

60

 

 

 

109

 

Net (loss) income

 

$

(841

)

 

$

6,969

 

Net loss attributable to non-controlling interest

 

 

4,421

 

 

 

75

 

Net income attributable to Culp, Inc. common shareholders

 

$

3,580

 

 

$

7,044

 

 

 

 

 

 

 

 

 

 

Net income attributable to Culp Inc. common shareholders per share - basic

 

$

0.29

 

 

$

0.56

 

Net income attributable to Culp Inc. common shareholders per share - diluted

 

$

0.29

 

 

$

0.56

 

Average shares outstanding, basic

 

 

12,405

 

 

 

12,488

 

Average shares outstanding, diluted

 

 

12,421

 

 

 

12,593

 

See accompanying notes to consolidated financial statements.

I-1


Table of Contents

CULP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 2, 2020 AND JANUARY 27, 2019

(UNAUDITED)

(AMOUNTS IN THOUSANDS)


 

 

THREE MONTHS ENDED

 

 

 

February 2,

2020

 

 

January 27,

2019

 

Net (loss) income

 

$

(4,207

)

 

$

3,060

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on investments, net of tax

 

 

49

 

 

 

(75

)

Reclassification adjustment for realized loss on investments

 

 

 

 

 

22

 

Total other comprehensive income (loss)

 

 

49

 

 

 

(53

)

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(4,158

)

 

$

3,007

 

Comprehensive loss attributable to non-controlling interest

 

 

4,149

 

 

 

94

 

Comprehensive (loss) income attributable to Culp, Inc. common shareholders

 

$

(9

)

 

$

3,101

 

 

 

NINE MONTHS ENDED

 

 

 

February 2,

2020

 

 

January 27,

2019

 

Net (loss) income

 

$

(841

)

 

$

6,969

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on investments, net of tax

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) on investments

 

 

64

 

 

 

(78

)

Reclassification adjustment for realized loss on investments

 

 

 

 

 

116

 

Total unrealized gain on investments

 

 

64

 

 

 

38

 

 

 

 

 

 

 

 

 

 

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

 

 

64

 

 

 

94

 

 

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(777

)

 

$

7,063

 

Comprehensive loss income attributable to non-controlling interest

 

 

4,421

 

 

 

75

 

Comprehensive income attributable to Culp, Inc. common shareholders

 

$

3,644

 

 

$

7,138

 

See accompanying notes to consolidated financial statements.

I-2


Table of Contents

CULP, INC.

CONSOLIDATED BALANCE SHEETS

FEBRUARY 2, 2020, JANUARY 27, 2019, AND APRIL 28, 2019

UNAUDITED

(Amounts in Thousands)

I - 1

 

 

February 2,

2020

 

 

January 27,

2019

 

 

* April 28,

2019

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,872

 

 

 

26,418

 

 

 

40,008

 

Short-term investments - Held-To-Maturity

 

 

3,171

 

 

 

13,544

 

 

 

5,001

 

Short-term investments - Available for Sale

 

 

7,580

 

 

 

 

 

 

 

Accounts receivable, net

 

 

26,614

 

 

 

26,142

 

 

 

23,751

 

Inventories

 

 

57,575

 

 

 

55,415

 

 

 

50,860

 

Current income taxes receivable

 

 

776

 

 

 

 

 

 

776

 

Assets held for sale

 

 

67

 

 

 

 

 

 

 

Other current assets

 

 

3,219

 

 

 

2,954

 

 

 

2,849

 

Total current assets

 

 

120,874

 

 

 

124,473

 

 

 

123,245

 

Property, plant and equipment, net

 

 

46,380

 

 

 

50,129

 

 

 

48,389

 

Goodwill

 

 

16,011

 

 

 

27,222

 

 

 

27,222

 

Intangible assets

 

 

7,738

 

 

 

10,542

 

 

 

10,448

 

Long-term investments - Rabbi Trust

 

 

7,804

 

 

 

6,834

 

 

 

7,081

 

Long-term investments - Held-To-Maturity

 

 

2,224

 

 

 

 

 

 

 

Right of use asset

 

 

5,524

 

 

 

 

 

 

 

Noncurrent income taxes receivable

 

 

733

 

 

 

 

 

 

733

 

Deferred income taxes

 

 

920

 

 

 

3,224

 

 

 

457

 

Investment in unconsolidated joint venture

 

 

1,668

 

 

 

1,512

 

 

 

1,508

 

Other assets

 

 

464

 

 

 

972

 

 

 

643

 

Total assets

 

$

210,340

 

 

$

224,908

 

 

$

219,726

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable-trade

 

$

21,835

 

 

 

28,401

 

 

 

24,377

 

Accounts payable - capital expenditures

 

 

177

 

 

 

91

 

 

 

78

 

Operating lease liability - current

 

 

2,227

 

 

 

 

 

 

 

Deferred revenue

 

 

398

 

 

 

492

 

 

 

399

 

Accrued expenses

 

 

7,742

 

 

 

9,740

 

 

 

9,192

 

Accrued restructuring costs

 

 

 

 

 

228

 

 

 

124

 

Income taxes payable - current

 

 

455

 

 

 

642

 

 

 

1,022

 

Total current liabilities

 

 

32,834

 

 

 

39,594

 

 

 

35,192

 

Accrued expenses - long-term

 

 

233

 

 

 

 

 

 

333

 

Subordinated loan payable

 

 

925

 

 

 

 

 

 

675

 

Operating lease liability - noncurrent

 

 

3,160

 

 

 

 

 

 

 

Contingent consideration - earn-out obligation

 

 

 

 

 

5,781

 

 

 

5,856

 

Income taxes payable - long-term

 

 

3,442

 

 

 

3,294

 

 

 

3,249

 

Deferred income taxes

 

 

2,013

 

 

 

2,225

 

 

 

3,176

 

Deferred compensation

 

 

7,637

 

 

 

6,782

 

 

 

6,998

 

Total liabilities

 

 

50,244

 

 

 

57,676

 

 

 

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 12,361,180 at February 2, 2020; 12,368,413 at

   January 27, 2019; and 12,391,160 at April 28, 2019

 

 

618

 

 

 

619

 

 

 

620

 

Capital contributed in excess of par value

 

 

43,748

 

 

 

43,961

 

 

 

43,694

 

Accumulated earnings

 

 

115,373

 

 

 

118,186

 

 

 

115,579

 

Accumulated other comprehensive income

 

 

104

 

 

 

9

 

 

 

40

 

Total shareholders’ equity attributable to Culp Inc.

 

 

159,843

 

 

 

162,775

 

 

 

159,933

 

Non-controlling interest

 

 

253

 

 

 

4,457

 

 

 

4,314

 

Total equity

 

 

160,096

 

 

 

167,232

 

 

 

164,247

 

Total liabilities and shareholders’ equity

 

$

210,340

 

 

$

224,908

 

 

$

219,726

 




CULP, INC. 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
FOR THE THREE AND NINE MONTHS ENDED JANUARY 27, 2019 AND JANUARY 28, 2018 
(UNAUDITED) 
(AMOUNTS IN THOUSANDS) 
     
 THREE MONTHS ENDED 
     
 January 27, January 28, 
 2019 2018 
     
Net income (loss) $3,060  $(748)
         
Other comprehensive loss        
         
Unrealized holding losses on investments, net of tax  (75)  (4)
Reclassification adjustment for realized loss on investments  22   - 
         
Total other comprehensive loss  (53)  (4)
         
Comprehensive income (loss) $3,007  $(752)
      Plus: Comprehensive loss attributable to non-controlling interest  94   - 
Comprehensive income (loss) attributable to Culp, Inc. common shareholders $3,101  $(752)
         
         
 NINE MONTHS ENDED 
         
 January 27, January 28, 
   2019   2018 
         
Net income $6,969  $8,211 
         
Other comprehensive income        
         
Unrealized gain on investments, net of tax        
         
Unrealized holding (losses) gains on investments  (78)  60 
Reclassification adjustment for realized loss on investments  116   - 
         
Total unrealized gain on investments  38   60 
         
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  94   60 
         
Comprehensive income $7,063  $8,271 
      Plus: Comprehensive loss attributable to non-controlling interest  75   - 
Comprehensive income attributable to Culp, Inc. common shareholders $7,138  $8,271 
         
See accompanying notes to consolidated financial statements.        

I - 2


CULP, INC. 
CONSOLIDATED BALANCE SHEETS
 
JANUARY 27, 2019, JANUARY 28, 2018 AND APRIL 29, 2018 
UNAUDITED 
(Amounts in Thousands) 
          
   January 27,   January 28,  *April 29,
 
  2019  2018  2018 
Current assets:         
Cash and cash equivalents $26,418   22,428   21,228 
Short-term investments - Available for Sale  -   2,472   2,451 
Short-term investments - Held-To-Maturity  13,544   17,206   25,759 
Accounts receivable, net  26,142   26,097   26,307 
Inventories  55,415   55,651   53,454 
Other current assets  2,954   3,114   2,870 
 Total current assets
  124,473   126,968   132,069 
             
Property, plant and equipment, net  50,129   51,838   51,794 
Goodwill  27,222   11,462   13,569 
Intangible assets  10,542   1,397   4,275 
Deferred income taxes  3,224   1,942   1,458 
Long-term investments - Held-To-Maturity  -   13,625   5,035 
Long-term investments - Rabbi Trust  6,834   7,176   7,326 
Investment in unconsolidated joint venture  1,512   1,518   1,501 
Other assets  972   918   957 
 Total assets
 $224,908   216,844   217,984 
             
Current liabilities:            
Accounts payable-trade $28,401   32,434   27,237 
Accounts payable - capital expenditures  91   1,554   1,776 
Deferred revenue  492   -   809 
Accrued expenses  9,740   8,842   9,325 
Accrued restructuring costs  228   -   - 
Income taxes payable - current  642   1,580   1,437 
 Total current liabilities
  39,594   44,410   40,584 
             
Accrued expenses - long-term  -   -   763 
Contingent consideration - earn-out obligation  5,781   -   - 
Income taxes payable - long-term  3,294   10,940   3,758 
Deferred income taxes  2,225   2,096   2,150 
Deferred compensation  6,782   7,216   7,353 
 Total liabilities
  57,676   64,662   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            
12,368,413 at January 27, 2019; 12,450,276            
at January 28, 2018; and 12,450,276 at            
April 29, 2018  619   623   623 
Capital contributed in excess of par value  43,961   48,413   48,203 
Accumulated earnings  118,186   103,090   114,635 
Accumulated other comprehensive income (loss)  9   56   (85)
Total shareholders' equity attributable to Culp Inc.  162,775   152,182   163,376 
Non-controlling interest  4,457   -   - 
Total equity  167,232   152,182   163,376 
Total liabilities and shareholders' equity $224,908   216,844   217,984 
             
* Derived from audited financial statements.            
             
See accompanying notes to consolidated financial statements.            

I - 3


CULP, INC. 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
FOR THE NINE MONTHS ENDED JANUARY 27, 2019 AND JANUARY 28, 2018 
UNAUDITED 
(Amounts in Thousands) 
       
  NINE MONTHS ENDED 
       
  January 27,  January 28, 
  2019  2018 
       
Cash flows from operating activities:      
Net income $6,969   8,211 
Adjustments to reconcile net income to net cash        
provided by operating activities:        
Depreciation  6,087   5,679 
Amortization  592   248 
Stock-based compensation  373   2,422 
Deferred income taxes  (1,691)  (3,020)
Realized loss on sale of short-term investments (Available for Sale)  94   - 
Gain on sale of property, plant, and equipment  (1,456)  - 
Loss from investment in unconsolidated joint venture  109   249 
Foreign currency exchange loss  12   133 
Changes in assets and liabilities, net of effects of acquisition of businesses        
Accounts receivable  (38)  (923)
Inventories  (658)  (3,275)
Other current assets  (43)  (27)
Other assets  6   (37)
Accounts payable - trade  486   1,715 
Deferred revenue  (317)  - 
Accrued expenses and deferred compensation  (1,513)  (1,608)
Accrued restructuring costs  228   - 
Income taxes  (1,155)  11,702 
Net cash provided by operating activities  8,085   21,469 
         
Cash flows from investing activities        
Net cash paid for acquisition of businesses  (12,096)  - 
Capital expenditures  (2,954)  (6,657)
Proceeds from the sale of property, plant, and equipment  1,894   6 
Investment in unconsolidated joint venture  (120)  (661)
Proceeds from the sale of short-term investments (Held to Maturity)  17,150   - 
Proceeds from the sale of short-term investments  (Available for Sale)  2,458   - 
Purchase of short-term investments  (Available for Sale)  (10)  (37)
Proceeds from the sale of long-term investments (Rabbi Trust)  1,233   57 
Purchase of long-term investments (Rabbi Trust)  (795)  (1,699)
Premium payment on life insurance policy  -   (18)
Net cash provided by (used in) investing activities  6,760   (9,009)
         
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)  (3,750)
Dividends paid  (3,493)  (5,722)
Common stock surrendered for withholding taxes payable  (1,303)  (1,530)
Common stock repurchased  (3,316)  - 
Payments of debt issuance costs  (50)  - 
Proceeds from common stock issued  -   111 
Net cash used in financing activities  (9,574)  (10,891)
         
Effect of exchange rate changes on cash and cash equivalents  (81)  64 
         
Increase in cash and cash equivalents  5,190   1,633 
         
Cash and cash equivalents at beginning of period  21,228   20,795 
         
Cash and cash equivalents at end of period $26,418   22,428 
         
See accompanying notes to consolidated financial statements.        

I - 4


CULP, INC. 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
NINE MONTHS ENDED JANUARY 27, 2019 
UNAUDITED 
(Dollars in thousands, except share data) 
                         
                         
        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 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 
    Net income  -   -   -   2,933   -   2,933   11   2,944 
    Stock-based compensation  -   -   395   -   -   395   -   395 
    Unrealized gain on foreign currency cash flow hedge  -   -   -   -   41   41   -   41 
    Unrealized loss on investments  -   -   -   -   (43)  (43)  -   (43)
    Fully vested common stock award  3,600   -   -   -   -   -   -   - 
    Common stock repurchased  (33,890)  (2)  (770)  -   -   (772)  -   (772)
    Dividends paid  -   -   -   (1,126)  -   (1,126)  -   (1,126)
Balance, October 28, 2018  12,491,956  $625   45,959   116,272   62  $162,918  $4,551  $167,469 
    Net income  -   -   -   3,154   -   3,154   (94)  3,060 
    Stock-based compensation  -   -   479   -   -   479   -   479 
    Unrealized loss on investments  -   -   -   -   (53)  (53)  -   (53)
Common stock surrendered for withholding                         
       taxes payable  -   -   (11)  -   -   (11)  -   (11)
   Common stock repurchased  (123,543)  (6)  (2,466)  -   -   (2,472)  -   (2,472)
    Dividends paid  -           (1,240)  -   (1,240)      (1,240)
Balance, January 27, 2019  12,368,413  $619  $43,961  $118,186  $9  $162,775  $4,457  $167,232 
                                 
                                 
* Derived from audited financial statements.                         
                                 
See accompanying notes to consolidated financial statements.   
                 

I - 5


CULP, INC.

*

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
NINE MONTHS ENDED JANUARY 28, 2018
UNAUDITED
(Dollars in thousands, except share data)

Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

I-3


Table of Contents

CULP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED FEBRUARY 2, 2020 AND JANUARY 27, 2019

UNAUDITED

(Amounts in Thousands)


 

 

NINE MONTHS ENDED

 

 

 

February 2,

2020

 

 

January 27,

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(841

)

 

$

6,969

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

5,880

 

 

 

6,087

 

Amortization

 

 

530

 

 

 

592

 

Stock-based compensation

 

 

831

 

 

 

373

 

Asset impairments

 

 

13,639

 

 

 

 

Reversal of contingent consideration - earn-out obligation

 

 

(6,081

)

 

 

 

Deferred income taxes

 

 

(1,626

)

 

 

(1,691

)

Realized loss on sale of short-term investments (Available for Sale)

 

 

 

 

 

94

 

Gain on sale of equipment

 

 

(276

)

 

 

(1,456

)

Loss from investment in unconsolidated joint venture

 

 

60

 

 

 

109

 

Foreign currency exchange (gain) loss

 

 

(15

)

 

 

12

 

Changes in assets and liabilities, net of effects of acquisition of business:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,885

)

 

 

(38

)

Inventories

 

 

(7,016

)

 

 

(658

)

Other current assets

 

 

(527

)

 

 

(43

)

Other assets

 

 

159

 

 

 

6

 

Accounts payable - trade

 

 

(2,475

)

 

 

486

 

Deferred revenue

 

 

(1

)

 

 

(317

)

Accrued expenses and deferred compensation

 

 

542

 

 

 

(1,513

)

Accrued restructuring costs

 

 

(124

)

 

 

228

 

Income taxes

 

 

(293

)

 

 

(1,155

)

Net cash (used in) provided by operating activities

 

 

(519

)

 

 

8,085

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Net cash paid for acquisition of businesses

 

 

 

 

 

(12,096

)

Capital expenditures

 

 

(4,072

)

 

 

(2,954

)

Proceeds from the sale of property, plant, and equipment

 

 

672

 

 

 

1,894

 

Investment in unconsolidated joint venture

 

 

 

 

 

(120

)

Proceeds from the sale of short-term investments (Held to Maturity)

 

 

5,000

 

 

 

17,150

 

Purchase of short-term and long-term investments (Held to Maturity)

 

 

(5,397

)

 

 

 

Proceeds from the sale of short-term investments (Available for Sale)

 

 

 

 

 

2,458

 

Purchase of short-term investments (Available for Sale)

 

 

(7,532

)

 

 

(10

)

Proceeds from the sale of long-term investments (Rabbi Trust)

 

 

 

 

 

1,233

 

Purchase of long-term investments (Rabbi Trust)

 

 

(707

)

 

 

(795

)

Net cash (used in) provided by investing activities

 

 

(12,036

)

 

 

6,760

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from line of credit

 

 

 

 

 

12,000

 

Payments on line of credit

 

 

 

 

 

(12,000

)

Payments on vendor-financed capital expenditures

 

 

 

 

 

(1,412

)

Proceeds from subordinated loan payable

 

 

250

 

 

 

 

Cash paid for acquisition of business

 

 

(1,532

)

 

 

 

Dividends paid

 

 

(3,786

)

 

 

(3,493

)

Common stock surrendered for withholding taxes payable

 

 

(51

)

 

 

(1,303

)

Capital contribution from non-controlling interest

 

 

360

 

 

 

 

Common stock repurchased

 

 

(728

)

 

 

(3,316

)

Payments of debt issuance costs

 

 

 

 

 

(50

)

Net cash used in financing activities

 

 

(5,487

)

 

 

(9,574

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(94

)

 

 

(81

)

(Decrease) increase in cash and cash equivalents

 

 

(18,136

)

 

 

5,190

 

Cash and cash equivalents at beginning of period

 

 

40,008

 

 

 

21,228

 

Cash and cash equivalents at end of period

 

$

21,872

 

 

$

26,418

 

                   
                   
                   
        Capital     Accumulated 
        Contributed     Other  Total 
  Common Stock  in Excess  Accumulated  Comprehensive  Shareholders’ 
  Shares  Amount  of Par Value  Earnings  (Loss) Income  Equity 
Balance,  April 30, 2017  *  12,356,631  $618   47,415   100,601   (4) $148,630 
    Net income  -   -   -   4,984   -   4,984 
    Stock-based compensation  -   -   757   -   -   757 
    Unrealized gain on investments  -   -   -   -   44   44 
Common stock issued in connection with vesting                     
       of performance based restricted stock units  118,845   6   (6)  -   -   - 
    Common stock issued in connection                        
       with exercise of stock options  600   -   5   -   -   5 
Common stock surrendered for withholding                     
       taxes payable  (34,915)  (2)  (1,133)  -   -   (1,135)
    Dividends paid  -   -   -   (3,608)  -   (3,608)
Balance,  July 30, 2017  12,441,161   622   47,038   101,977   40   149,677 
    Net income  -   -   -   3,976   -   3,976 
    Stock-based compensation  -   -   801   -   -   801 
    Unrealized gain on investments  -   -   -   -   20   20 
    Fully vested common stock award  4,800   -   -   -   -   - 
Common stock issued in connection with vesting                     
       of time- based restricted stock units  1,200   -   -   -   -   - 
Common stock surrendered for withholding                     
       taxes payable  (11,885)  -   (398)  -   -   (398)
    Dividends paid  -   -   -   (996)  -   (996)
Balance, October 29, 2017  12,435,276  $622   47,441   104,957   60  $153,080 
    Net loss  -   -   -   (748)  -   (748)
    Stock-based compensation  -   -   867   -   -   867 
    Unrealized loss on investments  -   -   -   -   (4)  (4)
Common stock issued in connection with exercise                 
       of stock options  15,000   1   105   -   -   106 
    Dividends paid  -           (1,119)  -   (1,119)
Balance, January 28, 2018  12,450,276  $623  $48,413  $103,090  $56  $152,182 
                         
                         
* Derived from audited financial statements.                     
                         
See accompanying notes to consolidated financial statements.                 

See accompanying notes to consolidated financial statements.

I-4


Table of Contents

CULP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE-MONTH PERIOD ENDED FEBRUARY 2, 2020

UNAUDITED

(Dollars in thousands, except share data)


 

 

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

 

 

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

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

2,300

 

 

 

 

 

 

2,300

 

 

 

(108

)

 

 

2,192

 

Stock-based compensation

 

 

 

 

 

 

 

 

313

 

 

 

 

 

 

 

 

 

313

 

 

 

 

 

 

313

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

 

 

 

 

 

9

 

Common stock issued in connection with

   vesting of performance based restricted

   stock units

 

 

2,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fully vested common stock award

 

 

4,520

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock surrendered for withholding

   taxes payable

 

 

(439

)

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

(7

)

 

 

 

 

 

(7

)

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

(1,241

)

 

 

 

 

 

(1,241

)

 

 

 

 

 

(1,241

)

Capital contributions from non-controlling

   interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

320

 

 

 

320

 

Balance, November 3, 2019

 

 

12,411,957

 

 

 

621

 

 

 

44,109

 

 

 

116,735

 

 

 

55

 

 

 

161,520

 

 

 

4,402

 

 

 

165,922

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(58

)

 

 

 

 

 

(58

)

 

 

(4,149

)

 

 

(4,207

)

Stock-based compensation

 

 

 

 

 

 

 

 

364

 

 

 

 

 

 

 

 

 

364

 

 

 

 

 

 

364

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

49

 

 

 

 

 

 

49

 

Fully vested common stock award

 

 

4,973

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

 

(55,750

)

 

 

(3

)

 

 

(725

)

 

 

 

 

 

 

 

 

(728

)

 

 

 

 

 

(728

)

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

(1,304

)

 

 

 

 

 

(1,304

)

 

 

 

 

 

(1,304

)

Balance, February 2, 2020

 

 

12,361,180

 

 

$

618

 

 

$

43,748

 

 

$

115,373

 

 

$

104

 

 

$

159,843

 

 

$

253

 

 

$

160,096

 

*

Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

I-5


Table of Contents

CULP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

NINE-MONTH PERIOD ENDED JANUARY 27, 2019

UNAUDITED

(Dollars in thousands, except share data)

 

 

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 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

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,933

 

 

 

 

 

 

2,933

 

 

 

11

 

 

 

2,944

 

Stock-based compensation

 

 

 

 

 

 

 

 

395

 

 

 

 

 

 

 

 

 

395

 

 

 

 

 

 

395

 

Unrealized gain on foreign currency cash

   flow hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

41

 

 

 

 

 

 

41

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43

)

 

 

(43

)

 

 

 

 

 

(43

)

Fully vested common stock award

 

 

3,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock repurchased

 

 

(33,890

)

 

 

(2

)

 

 

(770

)

 

 

 

 

 

 

 

 

(772

)

 

 

 

 

 

(772

)

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

(1,126

)

 

 

 

 

 

(1,126

)

 

 

 

 

 

(1,126

)

Balance, October 28, 2018

 

 

12,491,956

 

 

 

625

 

 

 

45,959

 

 

 

116,272

 

 

 

62

 

 

 

162,918

 

 

 

4,551

 

 

 

167,469

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,154

 

 

 

 

 

 

3,154

 

 

 

(94

)

 

 

3,060

 

Stock-based compensation

 

 

 

 

 

 

 

 

479

 

 

 

 

 

 

 

 

 

479

 

 

 

 

 

 

479

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(53

)

 

 

(53

)

 

 

 

 

 

(53

)

Common stock surrendered for withholding

   taxes payable

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

(11

)

Common stock repurchased

 

 

(123,543

)

 

 

(6

)

 

 

(2,466

)

 

 

 

 

 

 

 

 

(2,472

)

 

 

 

 

 

(2,472

)

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

(1,240

)

 

 

 

 

 

(1,240

)

 

 

 

 

 

(1,240

)

Balance, January 27, 2019

 

 

12,368,413

 

 

$

619

 

 

$

43,961

 

 

$

118,186

 

 

$

9

 

 

$

162,775

 

 

$

4,457

 

 

$

167,232

 

*

Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

I-6


Table of Contents

I - 6



Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


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 13, 2018,12, 2019, for the fiscal year ended April 29, 2018.


28, 2019.

The company’s nine-months ended February 2, 2020, and January 27, 2019, represent 40-week and January 28, 2018, represent 39-week periods, respectively.


2. Significant Accounting Policies


As of January 27, 2019,February 2, 2020, 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 29, 2018.


28, 2019, except as discussed below.

Recently Adopted Accounting Pronouncements


In May 2014, the FASB issued ASU No. 2014-09, which subsequently amended ASC Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are intended to enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Improved disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. The new revenue standard became effective at the beginning of our fiscal 2019, and therefore, we applied the new revenue guidance in our first quarter of fiscal 2019 interim financial statements. This guidance did not have a material impact on our results of operations and financial position but did have a material impact on the disclosures required in our notes to the consolidated financial statements, which are disclosed in Note 5.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to address the diversity in how certain cash receipts and cash payments are presented in the statement of cash flows. This new guidance provides clarity around the cash flow classification for eight specific issues in an effort to reduce the current and potential future diversity in practice. This new standard, which is to be applied retrospectively, became effective at the beginning of our fiscal 2019, and therefore, we applied this new guidance in our first quarter of fiscal 2019 interim financial statements.  During the first quarter of fiscal 2019, this new guidance did not impact our results of operations, balance sheet, or statement of cash flows. Currently, we do expect that this guidance will be applicable in determining how we classify certain contingent payments associated with our business combinations (see note 3) as either investing or financing activities. This guidance requires that cash payments not made soon after the acquisition date of a business combination by an acquirer to settle a contingent consideration liability should be separated and classified as cash outflows from financing activities. In comparison, cash payments made soon after the acquisition date should be separated and classified as cash outflows from investing activities.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, to reduce the diversity in practice and complexity associated with accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Prior GAAP prohibited recognition of deferred income taxes for an intra-entity transfer until the asset had been sold to an outside party. The new pronouncement stipulates that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This new standard, which is required to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings, became effective at the beginning of our fiscal 2019. Therefore, we were required to apply this new guidance in our first quarter fiscal 2019 interim financial statements. This guidance did not impact our results of operations and financial position.
I - 7


Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Recently Issued Accounting Pronouncements

Leases


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which increases transparency and comparability among companies accounting for lease transactions. The most significant change of this update will require the recognition of lease assets and liabilitiesrequires 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 operatingcertain lease arrangements with lease terms greater than twelve months for lessees. This update will require a modified retrospective application which includes a number of optional practical expedients related to the identification and classification of leases commenced before the effective date. This ASUcontracts. Topic 842 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.


The FASB recently issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, which allows entities to apply the transition provisions of the new standard at its adoption date instead of the earliest comparative period presented in the consolidated financial statements. This ASU allows entities to continue As a result, we adopted Topic 842 on April 29, 2019, electing to use Topic 840, Leases, including its disclosure requirements, in the comparative years presented in the year the new leases standard is adopted. Entities that elect this option would still adopt the new leases standard using a modified retrospective transition method, but wouldwhich 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 rather thanof Topic 842 had a material effect on our Consolidated Balance Sheets and increased the earliestrequired 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 in our Consolidated Balance Sheets. The adoption of Topic 842 did not have a material impact on our Consolidated Statements of Net (Loss) Income or our Consolidated Statement of Cash Flows.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which requires entities to use a forward looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables.  The FASB has subsequently issued updates to the standard to provide additional clarification on specific topics. Topic 326 is effective for fiscal years, presented.


Weand interim periods within those fiscal years, beginning after December 15, 2019. As a result, we are required to apply this guidance in our fiscal 20202021 interim and annual financial statements and are currently assessing the impact thatcommencing May 4, 2020. Currently, we do not expect this guidance willto impact our results of operations, financial position, or statement of cash flow.

There are no other new accounting pronouncements that are expected to have a significant impact on our consolidated financial statements. We do expect this guidance to have a material impact on our financial position due to the requirement to recognize right-of-use assets and lease liabilities on our Consolidated Balance Sheets and the disclosures required in our notes to the consolidated financial statements.


3. Business Combinations


Read Window Products, LLC (Read)

Overview

Effective April 1, 2018, we entered into an Asset Purchase Agreement (Asset Agreement) to acquire certain assets and assume certain liabilities of Read, a source of custom window treatments for the hospitality and commercial industries. Based in Knoxville, Tennessee, Read is a turn-key provider of window treatments that offers sourcing of upholstery fabrics and other products, measuring, and installation services of their own products. Read’s custom product line includes motorization, shades, upholstered drapery, upholstered headboards and shower curtains. In addition, Read supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters and pillows, for leading hospitality brands worldwide. The addition of window treatments and other soft goods to our product line allows us to be a more complete source of fabrics for the hospitality market, in which we believe there are significant growth opportunities.
I - 8

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The purchase price for the net assets acquired was $5.7 million, of which $4.5 million was paid at closing on April 1, 2018, $375,000 was paid in May 2018, and $763,000 is to be paid in June 2019, subject to certain conditions as defined in the Asset 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.

(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 

We recorded customer relationships at fair market value based on a multi-period excess earnings valuation model. These customer relationships will be amortized on a straight-line basis over their nine-year useful life. 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 three to ten years.

The goodwill related to this acquisition is attributable to Read’s reputation with the products and services they provide and the collective experience of management with regards to its operations, customers, and industry. Goodwill is deductible for income tax purposes over the statutory period of fifteen years.

The Asset Agreement contains a contingent consideration arrangement that requires us to pay a former shareholder of Read an earn-out payment based on adjusted EBITDA, as defined in the Asset Agreement, for calendar year 2018 in excess of fifty percent of a pre-established adjusted EBITDA target. As of January 27, 2019, based on actual financial results in relation to the pre-established adjusted EBITDA target, a contingent payment will not be made, and therefore, no contingent liability has been recorded.

Other

Acquisition costs totaling $339,000 were included in selling, general, and administrative expenses in our fiscal 2018 Consolidated Statement of Net Income.
I - 9

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

eLuxury, LLC (eLuxury)


Overview


Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement) in, pursuant to 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 asand other bedding items. Theiritems sourced from other suppliers. Its products are available on eLuxury’s own branded website, eLuxury.com, as well as Amazon and other leading online retailers for specialty home goods.


I-7


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We believe thisThis acquisition will provide a new sales channel for eLuxury’s bedding accessories and will expand our opportunity to participate in the e-commerce direct-to-consumer space. This business combination bringsbrought 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. We also have an opportunity to market our new line of bedding accessories, and home products, as well as other finished products that we may develop, through this e-commerce platform.


The estimated consideration given for the initial 80% ownership interest in eLuxury totaled $18.1 million, of which $12.5 million representsrepresented the estimated purchase price and $5.6 million representsrepresented 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 bewas paid in September 2019, subject to certain conditions as defined in the Equity Agreement.


2019.

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.

(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

 


(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 

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 they offerit 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.

I - 10

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

During the third quarter of fiscal 2020, this goodwill was assessed for impairment as we believed indicators of impairment existed during this reporting period. See note 8 located in the notes to consolidated financial statements for further details.

Contingent Consideration

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.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.


Consolidation

We are required to assess the fair value of this earn-out obligation each quarterly reporting period. Based on management’s assessment as of February 2, 2020, we determined it was necessary to adjust forecasted EBITDA as it relates to this earn-out obligation. This determination was based on the future outlook of our home accessories segment and its slower than expected business improvement, as well as updated assumptions on economic conditions in the e-commerce space, combined with the upcoming timeframe for determining the amount associated with this contingent consideration arrangement. As a result of these factors, we recorded a reversal of $6.1 million for the full amount of our earn-out obligation during the third quarter of fiscal 2020.

Non-Controlling Interest


The Equity Agreement contains substantive profit-sharing arrangement provisions in which it explicitly statesstate the ownership interests at the effective date of this business combination and the allocation of net income or loss between the company, as the controlling interest (Culp)holder, and the noncontrolling interest.interest holder. 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, future capital contributions, and equity distributions will be allocated at a percentage of 70% and 30% to the company and the noncontrolling interest holder, respectively.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 therefore, is useful in estimating the fair value of the 20% noncontrolling interest. In order to determine the carrying value of ourthe 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 $4.5 million$253,000 at February 2, 2020, mostly represents the $4.5its $4.6 million fair value determined at the acquisition date, plusminus its allocation of net loss totaling $75,000 subsequent tolosses which includes a charge for asset impairments of $4.1 million incurred during the acquisition date and through the end of our third quarter of fiscal 2019.


2020, slightly offset by capital contributions totaling $360,000.

Other


Acquisitions

Acquisition costs totaling $270,000 were included in selling, general, and administrative expenses in our Consolidated Statement of Net Income for the nine-month period ending January 27, 2019.


Actual revenue and net loss for the period June 22, 2018 through January 27, 2019 were included in our Consolidated Statement of Net Income for the nine-months ended January 27, 2019, and totaled $11.8 million and $248,000, respectively.
I - 11

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Pro Forma Financial Information


The following unaudited pro forma consolidated results of operations for the three-month and nine-month periods ending February 2, 2020, and January 27, 2019, and January 28, 2018, have been prepared as if the acquisitionsacquisition of Read had occurred on May 2, 2016 and eLuxury had occurred on May 1, 2017.

 

 

Three Months Ended

 

(dollars in thousands, except per share data)

 

February 2,

2020

 

 

January 27,

2019

 

Net Sales

 

$

71,998

 

 

$

77,226

 

(Loss) income from operations

 

 

(5,091

)

 

 

4,299

 

Net (loss) income

 

 

(4,207

)

 

 

3,060

 

Net loss - noncontrolling interest

 

 

4,149

 

 

 

94

 

Net (loss) income – Culp Inc. common shareholders

 

 

(58

)

 

 

3,154

 

Net (loss) income per share (basic) – Culp Inc. common shareholders

 

 

0.00

 

 

 

0.25

 

Net (loss) income per share (diluted) – Culp Inc. common

   shareholders

 

 

0.00

 

 

 

0.25

 

    
  Three Months Ended    
(dollars in thousands, except per share data) January 27, 2019  January 28, 2018 
Net Sales $77,226  $93,451 
Income from operations  4,299   7,257 
Net income (loss)  3,060   (1,073)
Net loss (income) - noncontrolling interest  94   (36)
Net income (loss) – Culp Inc. common shareholders  3,154   (1,109)
         
Net income (loss) per share (basic) – Culp Inc. common shareholders  0.25   (0.09)
         
 Net income (loss) per share (diluted) –Culp Inc. common shareholders  0.25
   (0.09)

 

 

Nine Months Ended

 

(dollars in thousands, except per share data)

 

February 2,

2020

 

 

January 27,

2019

 

Net Sales

 

$

219,465

 

 

$

228,830

 

Income from operations

 

 

1,582

 

 

 

10,657

 

Net (loss) income

 

 

(841

)

 

 

6,943

 

Net loss - noncontrolling interest

 

 

4,421

 

 

 

83

 

Net income – Culp Inc. common shareholders

 

 

3,580

 

 

 

7,026

 

Net income per share (basic) – Culp Inc. common shareholders

 

 

0.29

 

 

 

0.56

 

Net income per share (diluted) – Culp Inc. common

   shareholders

 

 

0.29

 

 

 

0.56

 

       
  Nine Months Ended  
 
(dollars in thousands, except per share data) January 27, 2019  January 28, 2018 
Net Sales $228,830  $270,950 
Income from operations  10,657   20,799 
Net income  6,943   7,901 
Net loss (income) - noncontrolling interest  83   (27)
Net income – Culp Inc. common shareholders  7,026   7,874 
         
Net income per share (basic) –Culp Inc. common shareholders  0.56   0.63 
         
 Net income per share (diluted) –Culp Inc. common shareholders   0.56
   0.62
 

The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

I - 12

I-9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


4. Accounts Receivable


A summary of accounts receivable follows:

(dollars in thousands)
 January 27, 2019  January 28, 2018  April 29, 2018 
Customers $26,748  $27,666  $28,097 
Allowance - doubtful accounts  (388)  (357)  (357)
Allowance - cash discounts  (197)  (222)  (245)
Allowance - sales returns & allowances (1)  (21)  (990)  (1,188)
  $26,142  $26,097  $26,307 

 (1) Due to the adoption of ASC Topic 606, Revenue from Contracts with Customers, certain balance sheet reclassifications were required regarding our allowanceAllowance for sales returns and allowances for the current year’s presentation only. See Note 5 to the consolidated financial statements for required balance sheet disclosures associated with the adoption of ASC Topic 606.

Doubtful Accounts

A summary of the activity in the allowance for doubtful accounts follows:

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

Janauary 27,

2019

 

Beginning balance

 

$

393

 

 

$

357

 

(Recovery) provision for bad debts

 

 

(16

)

 

 

78

 

Net write-offs, net of recoveries

 

 

 

 

 

(47

)

Ending balance

 

$

377

 

 

$

388

 

    
  Nine months ended    
(dollars in thousands) January 27, 2019  January 28, 2018 
Beginning balance $(357) $(414)
Provision for bad debts  (78)  57 
Net write-offs, net of recoveries  47   - 
Ending balance $(388) $(357)

A summary of the activity in the allowances for sales returns and allowances and cash discounts follows:
       
  Nine months ended    
(dollars in thousands) January 27, 2019  January 28, 2018 
Beginning balance $(1,433) $(1,220)
Adoption of ASC Topic 606 (1)  1,145   - 
Provision for returns, allowances and discounts  (1,612)  (2,332)
Credits issued  1,682   2,340 
Ending balance $(218) $(1,212)

5. Revenue


Revenue from Contracts with Customers

On April 30, 2018, we adopted ASU 2014-09 “Revenue from Contracts with Customers” (ASC Topic 606 or the “new standard”) using the retrospective modified method.   The retrospective modified method requires an adjustment to the opening balance of retained earnings for the cumulative effect of initially applying the new revenue standard. As permitted by the transition guidance, we elected to apply the new standard only to contracts that were not completed at the date of initial application, and therefore, we only evaluated those contracts that were in-process and not completed before April 30, 2018.
I - 13

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The application of the new standard did not result in a material impact to the opening balance of retained earnings, and therefore no adjustment to retained earnings was recorded. The largest impact of applying the new standard are the required qualitative and quantitative disclosures and the presentation and classification related to estimates of allowances for sales returns. The cumulative effect of the classification changes related to our allowances for sales returns on our April 30, 2018, balance sheet are as follows:


 (dollars in thousands) 
Balance at
April 29, 2018
  
Adjustments Due to
ASC 606 Adoption (1)
  
Balance at
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)
 The adjustments associated with the adoption of the new standard are related to classifying allowances for estimated sales returns as a liability rather than as a contra account to accounts receivable on the consolidated balance sheet for the current year’s presentation only. As required under the new standard, we also recorded the estimated allowance for sales returns on a gross basis rather than a net basis by separately reflecting a return goods asset within other current assets rather than netting such amounts with the estimated sales returns liability.

Currently, we expect the adoption of this new standard to be immaterial to our net income on an ongoing basis. The effect of adopting ASC 606 on our Consolidated Statements of Net Income for the three-month and nine-month periods ended January 27, 2019, are as follows:

 
(dollars in thousands)
 
Three Months Ended
January 27, 2019
  
Adjustments Due to
ASC 606 Adoption (1)
 
Balances Without
ASC 606 Adoption
 
Statements of Net Income   
Net Sales
 $77,226  $13  $77,239 
Cost of Sales
  63,103   13   63,116 

          
          
          
  Nine Months Ended
  Adjustments Due to
  Balances Without
 
(dollars in thousands) January 27, 2019
  ASC 606 Adoption (1)
  ASC 606 Adoption
 
Statements of Net Income
         
Net Sales
 $225,705  $(17) $225,688 
Cost of Sales
  187,697   (17)  187,680 

I - 14

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The effect of adopting ASC 606 on our Consolidated Balance Sheets for the period ended January 27, 2019, is as follows:

 
(dollars in thousands)
 January 27, 2019  
Adjustments Due to
ASC 606 Adoption (1)
  
Balances Without
ASC 606 Adoption
 
 Balance Sheet
Assets:
            
Accounts Receivable
 $26,142  $(1,092) $25,050 
Other Current Assets
  2,954   (17)  2,937 
Liabilities:            
Accrued Expenses $9,740   (1,109) $8,631 

 (1) The adjustments associated with the adoption of the new standard are related to classifying allowances for estimated sales returns as a liability rather than as a contra account to accounts receivable on the consolidated balance sheet for the current year’s presentation only. As required under the new standard, we also recorded the estimated allowance for sales returns on a gross basis rather than a net basis by separately reflecting a return goods asset within other current assets rather than netting such amounts with the estimated sales returns liability.

Nature of Performance Obligations


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, develops, and sells fabrics primarily to residential and commercial furniture manufacturers. Effective April 1, 2018, we acquired Read (see Note 3 for further details)Window Products LLC (Read), a turn keyturn-key provider of window treatments that offeroffers sourcing of upholstery fabrics and other products, measurement,measuring, and installation services of their own products for the hospitality and commercial industries. In addition, Read supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows. Read is included in the upholstery fabrics segment. The home accessories segment is our 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.


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.

I - 15

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Significant Judgments

Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services.  We determined that our customer purchase orders represent contracts as defined in the new standard.  In addition to purchase orders, we also have supply contracts with certain customers that define standard terms and conditions.   Our contracts generally include promises to sell either upholstery fabric, mattress fabric, or bedding accessories and home goods products or promises to provide fabrication and installation services associated with customized window treatments.  The transaction price is typically allocated to performance obligations based upon stand-alone selling prices. We did not disclose the value of unsatisfied performance obligations as substantially all of any unsatisfied performance obligations as of January 27, 2019, will be satisfied within one year or less.  Revenue associated with sales of our products are recognized at the point-in-time when control of the promised goods has been transferred to the customer.  The point-in-time when control transfers to the customer depends on the contractually agreed upon shipping terms, but typically occurs once the product has been shipped or once it has been delivered to a location specified by the customer. For certain warehousing arrangements, transfer of control to the customer is deemed to have occurred when the customer pulls the inventory for use in their production.  Revenue associated with our customized fabrication services, which are performed on various types of window treatments, is recognized over time once the customized products are deemed to have no alternative use but for which we have an enforceable right to payment for the services performed.  Revenue for our customized fabrication services is recognized over time using the output method based on units produced.  Revenue associated with our installation services is also recognized over time as the customer receives and consumes the benefits of the promised installation services. Revenue associated with our installation services is recognized over time using the output method based on units installed.

We evaluated the nature of any guarantees or warranties related to our contracts with customers and determined that any such warranties are assurance-type warranties that cover only compliance with agreed upon specifications, and therefore are not considered separate performance obligations.  We have elected to treat both shipping costs and handling costs as fulfillment costs which are classified in the Consolidated Statements of Net Income as cost of sales and selling, general and administrative expenses, respectively.

Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of the promised products and services.  The amount of consideration we expect to receive changes due to variable consideration associated with allowances for sales returns, early payment discounts, and volume rebates that we offer to customers. The amount of variable consideration which is included in the transaction price is only included in net sales to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period. Our mattress fabrics and upholstery fabrics business segments only allow product returns to the extent that the products or services did not meet the contractually agreed upon specifications at the time of the sale. Customers must receive authorization prior to returning those products. Our home accessories business segment allow returns for any reason provided the product is returned within the stated time frame, generally 30 days, unless the product was customized in which case a defect must be present in order to return the product.  Estimates of allowances for sales returns are based on historical data, current potential product return issues, and known sales returns for which customers have been granted return authorization. Known sales returns for which customers have been granted permission to return products for a refund or credit, continue to be recorded as a contra account receivable. Estimates for potential future sales returns and related customer accommodations are now recorded within accrued expenses as required by the new standard.  Under the new standard we record estimates for sales returns on a gross basis rather than a net basis and an estimate for a right of return asset is recorded in other current assets and cost of goods sold.   Variable consideration associated with early payment cash discounts are estimated using current payment trends and historical data on a customer-by-customer basis. The variable consideration associated with volume rebates are based on the portion of the rebate earned relative to the total amount of rebates the customer is expected to earn over the rebate period as determined using historical data and projections.

Revenue is recognized net of any taxes collected from customers which are subsequently remitted to governmental authorities. We generally recognize sales commission as expense when incurred because the amortization period is one year or less. Sales commissions are recorded within selling, general, and administrative expenses in the Consolidated Statements of Net Income.
I - 16

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


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 SheetSheets as deferred revenue. If upfront deposits or prepaymentprepayments 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 are associatedoperate and are not considered financing arrangements. There were no contract assets recognized as of February 2, 2020, January 27, 2019, and April 28, 2019.


A summary of the activity of deferred revenue for the three-month and nine-month periods ended February 2, 2020, and January 27, 2019, follows:
   
   
 Three Months Ended 
(dollars in thousands)January 27, 2019 
Balance as of October 28, 2018 $649 
Revenue recognized on contract liabilities during the period  (637)
Payments received for services not yet rendered during the period  480 
Balance as of January 27, 2019 $492 

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Beginning balance

 

$

399

 

 

$

809

 

Revenue recognized on contract liabilities

 

 

(1,917

)

 

 

(2,171

)

Payments received for services not yet rendered

 

 

1,916

 

 

 

1,854

 

Ending balance

 

$

398

 

 

$

492

 


   
   
 
Nine Months Ended
 
(dollars in thousands)January 27, 2019 
Balance as of April 29, 2018 $809
 
Revenue recognized on contract liabilities during the period  (2,171)
Payments received for services not yet rendered during the period  1,854
 
Balance as of January 27, 2019 $492 


Disaggregation of Revenue

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 February 2, 2020:

(dollars in thousands)

 

Mattress

Fabrics

 

 

Upholstery

Fabrics

 

 

Home

Accessories

 

 

Total

 

Products transferred at a point in time

 

$

33,105

 

 

$

32,044

 

 

$

3,906

 

 

$

69,055

 

Services transferred over time

 

 

 

 

 

2,943

 

 

 

 

 

 

2,943

 

Total Net Sales

 

$

33,105

 

 

$

34,987

 

 

$

3,906

 

 

$

71,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I-10


Table of Contents

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 nine-month period ending February 2, 2020:


(dollars in thousands)

 

Mattress

Fabrics

 

 

Upholstery

Fabrics

 

 

Home

Accessories

 

 

Total

 

Products transferred at a point in time

 

$

107,250

 

 

$

92,835

 

 

$

11,485

 

 

$

211,570

 

Services transferred over time

 

 

 

 

 

7,895

 

 

 

 

 

 

7,895

 

Total Net Sales

 

$

107,250

 

 

$

100,730

 

 

$

11,485

 

 

$

219,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 January 27, 2019:

(dollars in thousands)

 

Mattress

Fabrics

 

 

Upholstery

Fabrics

 

 

Home

Accessories

 

 

Total

 

Products transferred at a point in time

 

$

35,732

 

 

$

34,730

 

 

$

4,390

 

 

$

74,852

 

Services transferred over time

 

 

 

 

 

2,374

 

 

 

 

 

 

2,374

 

Total Net Sales

 

$

35,732

 

 

$

37,104

 

 

$

4,390

 

 

$

77,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Net Sales  
 
(dollars in thousands)
Mattress
Fabrics
 
Upholstery
Fabrics
 
Home
Accessories
 Total 
Products transferred at a point in time $35,732  $34,730  $4,390  $74,852 
Services transferred over time  -   2,374   -   2,374 
Total Net Sales $35,732  $37,104  $4,390  $77,226 
I - 17

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 nine-month period ending January 27, 2019:

(dollars in thousands)

 

Mattress

Fabrics

 

 

Upholstery

Fabrics

 

 

Home

Accessories

 

 

Total

 

Products transferred at a point in time

 

$

107,335

 

 

$

98,610

 

 

$

11,759

 

 

$

217,704

 

Services transferred over time

 

 

 

 

 

8,001

 

 

 

 

 

 

8,001

 

Total Net Sales

 

$

107,335

 

 

$

106,611

 

 

$

11,759

 

 

$

225,705

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Net Sales   
 
(dollars in thousands)
 
Mattress
Fabrics
  
Upholstery
Fabrics
  
Home
Accessories
  Total 
Products transferred at a point in time $107,335  $98,610  $11,759  $217,704 
Services transferred over time  -   8,001   -   8,001 
Total Net Sales $107,335  $106,611  $11,759  $225,705 

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:

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

Raw materials

 

$

7,607

 

 

$

5,745

 

 

$

5,617

 

Work-in-process

 

 

2,537

 

 

 

2,610

 

 

 

2,289

 

Finished goods

 

 

47,431

 

 

 

47,060

 

 

 

42,954

 

 

 

$

57,575

 

 

$

55,415

 

 

$

50,860

 


  
(dollars in thousands)January 27, 2019 January 28, 2018 April 29, 2018 
Raw materials $5,745  $6,654  $6,024 
Work-in-process  2,610   3,151   3,264 
Finished goods  47,060   45,846   44,166 
  $55,415  $55,651  $53,454 
             
7. Intangible Assets            
             
A summary of intangible assets follows:            
             
(dollars in thousands)January 27, 2019 January 28, 2018 April 29, 2018 
Tradenames $7,232  $-  $683 
Customer relationships, net  2,613   625   2,839 
Non-compete agreement, net  697   772   753 
  $10,542  $1,397  $4,275 

Tradename

7. Intangible Assets

A summary of intangible assets follows:

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

Tradenames

 

$

4,804

 

 

$

7,232

 

 

$

7,232

 

Customer relationships, net

 

 

2,313

 

 

 

2,613

 

 

 

2,538

 

Non-compete agreement, net

 

 

621

 

 

 

697

 

 

 

678

 

 

 

$

7,738

 

 

$

10,542

 

 

$

10,448

 

I-11


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Tradenames

A summary of change in the carrying amount of our tradenames from our recent acquisitions (see Note 3) follow:follows:

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Beginning balance

 

$

7,232

 

 

$

683

 

Acquisition of business (note 3)

 

 

 

 

 

6,549

 

Impairment charge

 

 

(2,428

)

 

 

 

Ending balance

 

$

4,804

 

 

$

7,232

 


(dollars in thousands) January 27, 2019  January 28, 2018  April 29, 2018 
Read $683  $-  $683 
eLuxury  6,549   -   - 
  $7,232  $-  $683 

Our tradenames were recorded at their fair market values at the effective date of their acquisitions (see Note 3) and were based on the relief from royalty method. These tradenames were determined to have an indefinite useful life and therefore, are not being amortized. However, thesein accordance with ASC Topic 350 Intangibles – Goodwill and Other, our tradenames will be assessed annually for impairment.

I - 18

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

impairment or between annual test if we believe indicators of impairment exist.  As of February 2, 2020, management determined that impairment indicators existed that pertained to changes in the future outlook of our home accessories segment and its slower than expected business improvement as well as current economic conditions within the e-commerce bedding space.  As a result of our interim impairment assessment, we recorded an impairment charge of $2.4 million in Asset Impairments in the Consolidated Statements of Net (Loss) Income for the three-month and nine-month periods ended February 2, 2020.  There were no impairment charges for the three-month or nine-month periods ended January 27, 2019.

Customer Relationships

A summary of the change in the carrying amount of our customer relationships follows:
     
 Nine months ended   
(dollars in thousands)January 27, 2019 January 28, 2018 
Beginning balance $2,839  $664 
Amortization expense  (226)  (39)
Ending balance $2,613  $625 


 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Beginning balance

 

$

2,538

 

 

$

2,839

 

Amortization expense

 

 

(225

)

 

 

(226

)

Ending balance

 

$

2,313

 

 

$

2,613

 

In connection with our asset purchase agreement with Read (see note 3) on April 1, 2018, we purchased certain customer relationships. We recorded these

Our customer relationships at fair market value totaling $2.2 million based on a multi-period excess earnings valuation model. These customer relationships will beare amortized on a straight-line basis over their nine-year useful life.

Additionally, we have customer relationshipslives ranging from a prior acquisition with a carrying amount of $574,000 at January 27, 2019. These customer relationships are being amortized on a straight-line basis over their seventeen-year useful life.
nine to seventeen years.

The gross carrying amount of our customer relationships were $3.1 million, $868,000 andwas $3.1 million at February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively. Accumulated amortization for these customer relationships werewas $802,000, $502,000 $243,000 and $276,000$577,000 at February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively.

The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2019 - $75,000; FY 2020 - $301,000;$76,000; FY 2021 - $301,000; FY 2022 - $301,000; FY 2023 - $301,000; FY 2024 - $301,000; and Thereafter - $1,334,000.

$1,033,000.

The weighted average amortization period for our customer relationships is 8.97.9 years as of January 27, 2019.


February 2, 2020.

Non-Compete Agreement


A summary of the change in the carrying amount of our non-compete agreement follows:
   
 Nine months ended   
(dollars in thousands)January 27, 2019 January 28, 2018 
Beginning balance $753  $828 
Amortization expense  (56)  (56)
Ending balance $697  $772 


 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Beginning balance

 

$

678

 

 

$

753

 

Amortization expense

 

 

(57

)

 

 

(56

)

Ending balance

 

$

621

 

��

$

697

 

We have a

Our non-compete agreement from a prior acquisition that is being amortized on a straight-line basis over the fifteen-year life of the agreement.

The gross carrying amount of thisour non-compete agreement was $2.0 million at February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively. Accumulated amortization for thisour non-compete agreement was $1.4 million at February 2, 2020, $1.3 million at January 27, 2019, and April 29, 2018, and $1.2$1.4 million at JanuaryApril 28, 2018.

2019.

I-12


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The remaining amortization expense for the next five years and thereafter follows: FY 20192020 - $19,000; FY 2020 - $75,000; FY 2021 - $75,000; FY 2022 - $75,000; FY 2023 - $75,000; FY 2024 - $75,000, and Thereafter - $378,000.

I - 19$302,000.

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The weighted average amortization period for the non-compete agreement is 9.38.3 years as of January 27, 2019.


February 2, 2020.

8. Goodwill


A summary of the change in the carrying amount of goodwill follows:

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Beginning balance

 

$

27,222

 

 

$

13,569

 

Acquisition of business (see note 3)

 

 

 

 

 

13,653

 

Impairment charge

 

 

(11,211

)

 

 

 

Ending balance

 

$

16,011

 

 

$

27,222

 

   
 Nine months ended   
(dollars in thousands)January 27, 2019 January 28, 2018 
Beginning balance $13,569  $11,462 
Acquisition of business (see note 3)
  13,653   - 
 Loss on impairment   -    - 
Ending balance $27,222  $11,462 

In accordance with ASC Topic 350 Intangibles – Goodwill and Other, we assess goodwill for impairment annually or between annual test if we believe indicators of impairment exist.  As of February 2, 2020, management determined that impairment indicators existed that pertained to the future outlook of our home accessories segment and its slower than expected business improvement, as well as current economic conditions within the e-commerce bedding space. As a result of the interim impairment assessment, we recorded an impairment charge of $11.2 million in Asset Impairments in the consolidated statements of net (loss) income for the three-month and nine-month periods ended February 2, 2020. There were no impairment charges for the three-month or nine-month periods ended January 27, 2019.

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 duringin the second quarter of fiscal 2018 (October 2017) and complements our mattress fabric operations with a mirroredreactive platform that enhances our ability to meet customer demand while adding a lower cost operation to our platform.


CLIH incurredreported a net loss totalingof $120,000 and $218,000 and $498,000 for the nine-month periods ending February 2, 2020, and January 27, 2019, and January 28, 2018, respectively. Our equity interest in CLIH’s net loss through the third quarter of fiscal 2018 included a significant amount of initial start-up operating expenses. Our equity interests in these net losses were $109,000 and $249,000 for the nine-month periods ending February 2, 2020 and January 27, 2019 was $60,000 and January 28, 2018,$109,000, respectively.


The following table summarizes information on assets, liabilities, and members’ equity of our equity method investment in CLIH:

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

Total assets

 

$

3,502

 

 

$

3,255

 

 

$

3,126

 

Total liabilities

 

$

167

 

 

$

230

 

 

$

111

 

Total members’ equity

 

$

3,335

 

 

$

3,025

 

 

$

3,015

 


 
(dollars in thousands)
 
January 27,
2019
  
January 28,
2018
  
April 29,
2018
 
Total assets $3,255  $3,186  $3,130 
Total liabilities $230  $150  $128 
Total members’ equity $3,025  $3,036  $3,002 

At February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, our investmentequity interest in CLIH totaled $1.7 million, $1.5 million, which represents the company’s fifty percent ownership interest in CLIH.


I - 20

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

and $1.5 million, respectively.

10. Accrued Expenses


A summary of accrued expenses follows:
       
(dollars in thousands)January 27, 2019 January 28, 2018 April 29, 2018 
Compensation, commissions and related benefits $4,848  $6,288  $6,918 
Interest  -   5   20 
Other accrued expenses  4,892   2,549   3,150 
  $9,740  $8,842  $10,088 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

Compensation, commissions and related benefits

 

$

4,230

 

 

$

4,848

 

 

$

4,229

 

Interest

 

 

2

 

 

 

 

 

 

4

 

Other accrued expenses

 

 

3,743

 

 

 

4,892

 

 

 

5,292

 

 

 

$

7,975

 

 

$

9,740

 

 

$

9,525

 


I-13


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At February 2, 2020, we had accrued expenses totaling $8.0 million, of which $7.7 million and $233,000 were classified as current accrued expenses and long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets. At January 27, 2019, and January 28, 2018, we had accrued expenses totaling $9.7 million, and $8.8 million, respectively, all of which were classified as current accrued expenses in the accompanying Consolidated Balance Sheets. At April 29, 2018,28, 2019, we had accrued expenses totaling $10.1$9.5 million, of which $9.3$9.2 million and $763,000$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 and restructuring related charges totaling $1.6 million that were associated with the above exit and disposal activity:

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Inventory markdowns

 

$

 

 

$

1,564

 

Employee termination benefits

 

 

(70

)

 

 

661

 

Other operational costs associated with a closed plant

   facility

 

 

 

 

 

824

 

Gain on sale of equipment

 

 

 

 

 

(1,486

)

Restructuring credit and restructuring related charges (1) (2)

 

$

(70

)

 

$

1,563

 

(1)

The $70,000 credit was recorded to restructuring credit in the Consolidated Statements of Net (Loss) Income for the nine-month period ending February 2, 2020.

   
 Nine months ended 
 January 27, 
(dollars in thousands)2019 
Inventory markdowns $1,564 
Other operating costs associated with a closed facility  824 
Employee termination benefits  661 
Gain on sale of property, plant, and equipment  (1,486)
  $1,563 

(2)

Of the total net charge, a $2.3 million charge, a charge of $40,000, and a credit of $825,000 were recorded in cost of sales, selling, general and administrative expenses, and restructuring credit, respectively, in the Consolidated Statements of Net Income for the nine-month period ending January 27, 2019.


Of this total net charge, a charge of $2.3 million, a charge of $40,000 and a credit of $825,000 were recorded in cost of sales, selling, general, and administrative expenses, and restructuring credit, respectively in the Consolidated Statement of Net Income for the nine-month period ending January 27, 2019.
I - 21

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following summarizes the activity in theaccrued restructuring accrual:costs:

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Beginning balance

 

$

124

 

 

$

 

Accrual established in fiscal 2019

 

 

 

 

 

451

 

Payments

 

 

(54

)

 

 

(434

)

Adjustments

 

 

(70

)

 

 

211

 

Ending balance

 

$

 

 

$

228

 

   
 Nine months ended 
 January 27, 
(dollars in thousands)2019 
Accrual established in fiscal 2019 $451 
Paid in fiscal 2019  (434)
Adjustments in fiscal 2019  211 
  $228 

The above restructuring accrual pertains to employee termination benefits that were associated with the above exit and disposal activity.


Note

12. Assets Held for Sale


In connection with our exit and disposal activity noted above, propery, plant, and equipment with a carrying value totaling $393,000 were classified as held for sale during our second quarter of fiscal 2019. We determined that the fair value of the propery, plant, and equipment exceeded its carrying value and therefore, no impairment was recorded.

During the second and third quarters of fiscal 2019, we received cash proceeds totaling $1.9 million for all of the propery, plant, and equipment that were classified as held for sale and recorded a corresponding gain on sale totaling $1.5 million.

As of January 27, 2019, we had no assets held for sale associated with the exit and disposal activity noted above.

13. Lines of Credit

Revolving Credit Agreement – United States


At April 29, 2018, our

Our Credit Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) provided forprovides a revolving loan commitment of $30 million. Effective August 13, 2018, we entered into a Fifth Amendment to our Credit Agreement which reduced the amount of our line of credit from $30 million to $25 million, reduced the amount of the Unencumbered Liquid Assets maintenance covenant from $20 millionis set to $15 million, and set the expiration date toexpire on August 15, 2020. Additionally, this amendment reduced the limit of outstanding2020, and allows us to issue letters of credit not to $1.0 million, which includes the $250,000 workers compensation letter of credit noted below.


exceed $1 million.

Interest wasis charged at a rate (applicable interest rate of 3.95%3.11%, 3.02%3.95%, and 3.36%3.93% at February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively) as a variable spread over LIBOR based on our ratio of debt to EBITDA.


I-14


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively.

I - 22

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

At February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, there were $250,000 in outstanding letters of credit (all of which related to workers compensation) provided by the Credit Agreement.


Effective August 1, 2016, we entered into a Third Amendment to our Credit Agreement which allowed us to issue letters of credit not to exceed $7.5 million. On August 3, 2016, we issued a $5.0 million letter of credit, in addition to the $250,000 letter of credit noted above, for the construction of a new building associated with our mattress fabrics segment (see Note 22 for further details). The terms of this $5.0 million letter credit expired on May 15, 2018.


Revolving Credit Agreement – China


At January 27, 2019, we had

We have an unsecured credit agreement associated with our operations in China that provides for a line of credit up to 40 million RMB ($6.05.8 million USD at January 27, 2019) and was set to expire on MarchFebruary 2, 2019.2020). This agreement has an interest rate determined by the Chinese government and thereis set to expire on December 4, 2020. There were no outstanding borrowings as of February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018. 28, 2019.

Subordinated Loan Payable

On January 31,February 7, 2019, we renewed this unsecuredeLuxury 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 3.36% at February 2, 2020) as a variable spread over LIBOR based on Culp’s ratio of debt to extend the expiration date to January 31, 2020.


EBITDA plus 25 basis points. There were outstanding borrowings under this agreement totaling $925,000 and $675,000 at February 2, 2020 and April 28, 2019, respectively.

Overall


Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of January 27, 2019, weWe were in compliance with these financial covenants.


14.covenants as of February 2, 2020.

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,observable; and


Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.

I - 23

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recurring Basis


The following table presents information about assets measured at fair value on a recurring basis:

 

 

Fair value measurements at February 2, 2020 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

 

$

6,334

 

 

N/A

 

N/A

 

$

6,334

 

Short Term Bond Funds

 

 

4,743

 

 

N/A

 

N/A

 

 

4,743

 

Inflation Protected Bond Funds

 

 

2,837

 

 

N/A

 

N/A

 

 

2,837

 

Strategic Income Fund

 

 

1,001

 

 

N/A

 

N/A

 

 

1,001

 

Growth Allocation Fund

 

 

239

 

 

N/A

 

N/A

 

 

239

 

Moderate Allocation Fund

 

 

138

 

 

N/A

 

N/A

 

 

138

 

Other

 

 

92

 

 

N/A

 

N/A

 

 

92

 


 Fair value measurements at January 27, 2019 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 $6,433   N/A   N/A  $6,433 
Growth Allocation Fund  184   N/A   N/A   184 
Moderate Allocation Fund  119   N/A   N/A   119 
Other  98   N/A   N/A   98 


 Fair value measurements at January 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 $6,287   N/A   N/A  $6,287 
Low Duration Bond Fund  1,085   N/A   N/A   1,085 
Intermediate Term Bond Fund  759   N/A   N/A   759 
Strategic Income Fund  628   N/A   N/A   628 
Large Blend Fund  431   N/A   N/A   431 
Growth Allocation Fund  171   N/A   N/A   171 
Moderate Allocation Fund               114   N/A   N/A   114 
Other  173   N/A   N/A   173 

I - 24

I-15


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Fair value measurements at January 27, 2019 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

 

$

6,433

 

 

N/A

 

N/A

 

$

6,433

 

Growth Allocation Fund

 

 

184

 

 

N/A

 

N/A

 

 

184

 

Moderate Allocation Fund

 

 

119

 

 

N/A

 

N/A

 

 

119

 

Other

 

 

98

 

 

N/A

 

N/A

 

 

98

 

(Unaudited)

 

 

Fair value measurements at April 28, 2019 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

 

$

6,639

 

 

N/A

 

N/A

 

$

6,639

 

Growth Allocation Fund

 

 

203

 

 

N/A

 

N/A

 

 

203

 

Moderate Allocation Fund

 

 

127

 

 

N/A

 

N/A

 

 

127

 

Other

 

 

112

 

 

N/A

 

N/A

 

 

112

 



 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 

Our EURO foreign exchange contract was recorded at a fair value provided by our bank and is classified within level 2 of the fair value hierarchy. Most derivative contracts are not listed on an exchange and require the use of valuation models. In accordance with ASC Topic 820, we attempted to maximize the use of observable inputs used in the valuation models used to determine the fair value of this contract. Derivative contracts valued based on valuation models with significant unobservable inputs and that are not actively traded, are classified within level 3 of the fair value hierarchy.

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

Currently, our investments classified as held-to-maturity consist of investment grade U.S. corporate bonds, foreign bonds, and government bonds with remaining maturities that ranged from 1 to 3 years.  These investments were classified as held-to-maturity, as we have 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 the contractual maturity date in relation to the respective reporting period, and were recorded at amortized cost.

At February 2, 2020, January 27, 2019, and April 28, 2019, our held-to-maturity investments recorded at amortized cost totaled $5.4 million, $13.5 million, and $5.0 million, respectively. The fair value of our held-to-maturity investments at February 2, 2020, January 27, 2019, and April 28, 2019, totaled $5.4 million, $13.5 million and $5.0 million, respectively.

Our bond investments 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 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 bond.

Short-Term Investments Available for Sale


There were no short-term investments classified as available for sale held at January 27, 2019.

At January 28, 2018 and April 29, 2018,February 2, 2020, our short-term investments classified as available for sale totaled $2.5$7.6 million and consisted of short-term bond funds. Since these short-term bond funds were classified as available for sale, these investments were recorded at their fair market value and their unrealized gains or losses are included in other comprehensive income (loss). Our short-term bond investmentsfunds had an accumulated unrealized lossgain totaling $57,000 and $91,000 at January 28, 2018, and April 29, 2018, respectively.$48,000. At January 28, 2018, and April 29, 2018,February 2, 2020, the fair value of our short-term bond funds approximated its cost basis.

I - 25

There were no short-term investments classified as available for sale held at January 27, 2019 and April 28, 2019.

I-16


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Short-Term and Long-Term Investments - Held-To-Maturity

Our investments classified as held-to-maturity consist of investment grade U.S. Corporate bonds with maturities that ranged from 2 to 2.5 years. The purpose of these investments was to earn a higher rate of return on our excess cash located in the Cayman Islands. These investments are classified as held-to-maturity as we have the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments are recorded as either current or noncurrent on our Consolidated Balance Sheets, based on contractual maturity date in relation to the respective reporting period and recorded at amortized cost.

At January 27, 2019, January 28, 2018, and April 29, 2018, our held-to-maturity investments recorded at amortized cost totaled $13.5 million, $30.8 million, and $30.8 million, respectively. The fair value of our held-to-maturity investments at January 27, 2019, January 28, 2018 and April 29, 2018 totaled $13.5 million, $30.7 million, and $30.6 million, respectively.

Our U.S. corporate bonds are classified as level 2 as they are traded over the counter within a broker network and not on an active market. The fair value of our U.S. corporate bonds is determined based on a published source that provides an average bid price. The average bid price is based on various broker prices that are 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 $7.8 million, $6.8 million, $7.2and $7.1 million and $7.3 million at February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively. Our long-term investments had an accumulated unrealized gain of $56,000, $9,000, $113,000, and $61,000$40,000 at February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively. The fair value of our long-term investments associated with our Rabbi Trust approximates itstheir cost basis.


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

As of February 2, 2020, we had certain assets and a contingent consideration – earn-out obligation that were required to be measured at fair value on a nonrecurring basis.

 

 

Fair value measurements at February 2, 2020 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 (note 8)

 

N/A

 

N/A

 

$

2,442

 

 

$

2,442

 

Tradename (note 7)

 

N/A

 

N/A

 

 

4,121

 

 

 

4,121

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Contingent Consideration – Earn-Out Obligation (note 3)

 

N/A

 

N/A

 

$

 

 

$

 

I - 26

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Nonrecurring Basis

At

The goodwill was recorded at fair market value using the discounted cash flow method that used significant unobservable inputs and was classified as level 3.  The tradename was recorded at fair market value using the royalty from relief method that used significant unobservable inputs and was classified as level 3.

As of January 27, 2019, we had no assets that were required to be measured at fair value on a nonrecurring basis other than thecertain assets acquired fromand liabilities assumed in connection with the eLuxury business combination on June 22, 2018 (see note 3) that were acquired at fair value:.

 

 

Fair value measurements at January 27, 2019 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

 

$

5,600

 

 

$

5,600

 


 Fair value measurements at January 27, 2019 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  $5,781  $5,781 
                 

The tradename was recorded at fair market value using the royalty from relief method that used significant unobservable inputs and werewas classified as level 3. The contingent consideration – earn-out obligation was recorded at fair market value using the Black SholesScholes pricing model.


I-17


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 - 27

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


At April 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 Read (see note 3) that were acquired at fair value:

 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 
                 
These customer relationships were recorded at fair market value using a multi-period excess earnings valuation model that used significant unobservable inputs and were classified as level 3. 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.

Additionally, we acquired certain current assets such as accounts receivable and other assets and assumed certain liabilities such as deferred revenue, 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 allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.

15.  Derivatives

During the fourth quarter of fiscal 2018, we entered into a EURO foreign exchange contract to mitigate the risk of foreign exchange rate fluctuations associated with certain capital expenditures. The contract effectively converts our EURO capital expenditures at a fixed EURO foreign exchange rate compared with the United States dollar of 1.263. The contract expired in August 2018.
In accordance with the provisions of ASC Topic 815, Derivatives and Hedging, our EURO foreign exchange contract was designated as a cash flow hedge, with the fair value of these financial instruments recorded in accrued expenses and changes in fair value recorded in accumulated other comprehensive income (loss). ASC Topic 815 requires disclosure of gains and losses on derivative instruments in the following tabular format.
I - 28

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 (Amounts in Thousands)
Fair Values of Derivative Instruments
January 27, 2019April 29, 2018
Derivatives designated as hedging instruments under ASC Topic 815
Balance
 Sheet
 Location
Fair
 Value
Balance
 Sheet
 Location
Fair
 Value
Euro Foreign Exchange Contract
Accrued
Expenses
$     -
Accrued
Expenses
$55      

At January 28, 2018, we did not have any derivatives designated as hedging instruments under ASC Topic 815.

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) 
                
  
Nine Months Ended
January 27, 2019
 
Nine Months Ended
January 28, 2018
       
Nine
Months Ended
January 27, 2019
 
Nine
Months Ended
January 28, 2018
      
Nine
Months Ended
January 27, 2019
 
Nine
Months Ended
January 28, 2018
 
                   
EURO Foreign Exchange Contract  $56  $- 
Other
Expense
  $(64) $- Other Expense $-  $- 

16.

14. Cash Flow Information


Interest and income taxes paid are as follows:

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Interest

 

$

48

 

 

$

54

 

Income taxes

 

 

4,500

 

 

 

6,226

 

     
 Nine months ended 
(dollars in thousands)January 27, 2019 January 28, 2018 
Interest $54  $181 
Income taxes  6,226   3,426 


Interest costs charged to operations were $38,000 and $168,000 for the nine months ended January 27, 2019 and January 28, 2018, respectively.

No interest costs for the construction of qualifying fixed assets were capitalized for the nine-months ended January 27, 2019. Interest costs totaling $99,000 for the construction of qualifying fixed assets were capitalized for the nine-months ended January 28, 2018. As a result, these interest costs will be amortized over the related assets’ useful lives.
I - 29

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


17.

15. Net (Loss) Income (Loss) Per Share


Basic net (loss) income (loss) per share is computed using the weighted-average number of shares outstanding during the period. Diluted net (loss) income (loss) 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 (loss) income (loss) per share follows:

 

 

Three months ended

 

(amounts in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Weighted average common shares outstanding, basic

 

 

12,409

 

 

 

12,438

 

Dilutive effect of stock-based compensation

 

 

 

 

 

27

 

Weighted average common shares outstanding, diluted

 

 

12,409

 

 

 

12,465

 

    
  Three months ended    
(amounts in thousands) January 27, 2019  January 28, 2018 
Weighted average common shares outstanding, basic  12,438   12,436 
Dilutive effect of stock-based compensation  27   - 
Weighted average common shares outstanding, diluted  12,465   12,436 

At January 27, 2019 and April 29, 2018, there were no options to purchase

During the three-months ended February 2, 2020, 10,793 shares of our common stock outstanding. Therefore, options to purchase shares of ourunvested common stock were not included in the computation of diluted earnings per share, as we incurred a net incomeloss for that reporting period. During the three-months endingended January 27, 2019. Stock-based compensation awards totaling 160,7432019, 723 shares of unvested common stock were not included in the computation of diluted net lossearnings per share foras their effect would be antidilutive.

 

 

Nine months ended

 

(amounts in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Weighted average common shares outstanding, basic

 

 

12,405

 

 

 

12,488

 

Dilutive effect of stock-based compensation

 

 

16

 

 

 

105

 

Weighted average common shares outstanding, diluted

 

 

12,421

 

 

 

12,593

 

During the three-months ending January 28, 2018, as we incurred a net loss for that reporting period.

       
  Nine months ended 
(amounts in thousands) January 27, 2019  January 28, 2018 
Weighted average common shares outstanding, basic  12,488   12,425 
Dilutive effect of stock-based compensation  105   201 
Weighted average common shares outstanding, diluted  12,593   12,626 

At January 27, 2019 and April 29, 2018, there were no options to purchasenine-months ended February 2, 2020, 5,853 shares of our common stock outstanding. Therefore, options to purchase shares of ourunvested common stock were not included in the computation of diluted net income forearnings per share as their effect would be antidilutive. During the nine-months endingended January 27, 2019. All options to purchase2019, all unvested shares of common stock were included in the computation of diluted net income for the nine-months ending January 28, 2018, as the exercise price of the options was less than the average market price of the common shares.

18.earnings per share.

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, develops, and sells fabrics primarily to residential and commercial furniture manufacturers. The home accessories segment is our 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.


Effective April 1, 2018, we acquired Read (see Note 3 for further details), a turn key provider of window treatments that offer the sourcing of upholstery fabrics and other products, measuring, and installation services of their own products for the hospitality and commercial industries. Read’s financial information is aggregated with our upholstery fabric segment.
I - 30

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Effective June 22, 2018, we acquired an initial 80% ownership interest in eLuxury (see Note 3 for further details), a company that offers bedding accessories and home goods directly to consumers and businesses through its e-commerce platform. eLuxury’s financial information is included in our home accessories segment.

We evaluate the operating performance of our segments based upon income (loss) from operations before certain unallocated corporate expenses, restructuring expense (credit)credit and restructuring related charges, impairment charges, and other non-recurring items. Cost of sales infor all of our segments include costs to develop, manufacture, develop, 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

I-18


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, and property, plant and equipment.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. During fiscal 2019, we elected to no longer include goodwillGoodwill 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.


Financial information for the company’s operating segments follows:

 

 

Three months ended

 

 

 

February 2,

2020

 

 

January 27,

2019

 

Net sales:

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

33,105

 

 

$

35,732

 

Upholstery Fabrics

 

 

34,987

 

 

 

37,104

 

Home Accessories

 

 

3,906

 

 

 

4,390

 

 

 

$

71,998

 

 

$

77,226

 

Gross profit:

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

4,614

 

 

$

5,963

 

Upholstery Fabrics

 

 

6,906

 

 

 

7,624

 

Home Accessories

 

 

864

 

 

 

1,050

 

Total segment gross profit

 

$

12,384

 

 

$

14,637

 

Restructuring related charges

 

 

 

(4)

 

(514

)

 

 

$

12,384

 

 

$

14,123

 

Selling, general, and administrative expenses

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

2,836

 

 

$

2,755

 

Upholstery Fabrics

 

 

3,876

 

 

 

3,825

 

Home Accessories

 

 

1,046

 

 

 

1,361

 

Unallocated corporate expenses

 

 

2,194

 

 

 

1,628

 

Total segment selling, general, and administrative expenses

 

$

9,952

 

 

$

9,569

 

Other non-recurring charges

 

 

 

(5)

 

429

 

Restructuring related charges

 

 

 

(5)

 

40

 

 

 

$

9,952

 

 

$

10,038

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

1,777

 

 

$

3,208

 

Upholstery Fabrics

 

 

3,030

 

 

 

3,799

 

Home Accessories

 

 

(181

)

 

 

(311

)

Unallocated corporate expenses

 

 

(2,194

)

 

 

(1,628

)

Total segment income from operations

 

 

2,432

 

 

 

5,068

 

Asset impairments

(1)

 

(13,639

)

 

 

 

Reversal of contingent consideration - earn-out obligation

(2)

 

6,081

 

 

 

 

Restructuring credit and restructuring related charges

(3)

 

35

 

(6)

 

(340

)

Other non-recurring charges

 

 

 

(5)

 

(429

)

Total (loss) income from operations

 

 

(5,091

)

 

 

4,299

 

Interest expense

 

 

(8

)

 

 

 

Interest income

 

 

242

 

 

 

251

 

Other expense

 

 

(267

)

 

 

(288

)

(Loss) income before income taxes

 

$

(5,124

)

 

$

4,262

 

(1)

Our home accessories segment incurred asset impairment charges totaling $13.6 million, of which $11.2 million and $2.4 million pertained to this segment’s goodwill and tradename, respectively.

    
  Three months ended
 
  January 27, 2019
  January 28, 2018
 
Net sales:
Mattress Fabrics
 $35,732  $49,042 
Upholstery Fabrics  37,104   36,268 
Home Accessories  4,390   - 
  $77,226  $85,310 
 Gross profit:        
Mattress Fabrics $5,963  $10,146 
Upholstery Fabrics  7,624   7,457 
Home Accessories  1,050   - 
Total segment gross profit $14,637  $17,603 
Restructuring related charges (1)  (514)  - 
  $14,123  $17,603 
 Selling, general, and administrative expenses        
 Mattress Fabrics $2,755  $3,309 
Upholstery Fabrics  3,825   3,947 
Home Accessories  1,361   - 
Unallocated corporate expenses  1,628   2,703 
Total segment selling, general, and administrative expenses  9,569   9,959 
Other non-recurring charges (2)  429   - 
Restructuring related charges (2)  40   - 
  $10,038  $9,959 
 Income (loss) from operations:        
 Mattress Fabrics $3,208  $6,837 
Upholstery Fabrics  3,799   3,510 
Home Accessories  (311)  - 
Unallocated corporate expenses  (1,628)  (2,703)
Total segment income from operations  5,068   7,644 
Other non-recurring charges (2)  (429)  - 
Restructuring credit and related charges (2) (3)  (340)  - 
Total income from operations  4,299   7,644 
Interest expense  -   (31)
Interest income  251   132 
Other expense  (288)  (229)
Income before income taxes $4,262  $7,516 

(2)

We recorded a reversal of $6.1 million that pertained to a contingent earn-out obligation associated with the purchase of our 80% ownership interest in eLuxury, LLC.

(1) The $514 represents a restructuring related charge for other operating costs associated with our closed upholstery fabrics plant facility located in Anderson, SC.

(3)

The $35 restructuring credit pertains to employee termination benefits associated with our closed Anderson, SC upholstery fabrics facility.


(4)

Cost of sales for the three-month period ending January 27, 2019, includes a $514 restructuring related charge for operating costs associated with our closed upholstery fabrics facility located in Anderson, SC.


Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(5)

Selling, general, and administrative expenses for the three-months ending January 27, 2019, includes a $469 non-recurring charge associated with the accelerated vesting of certain stock-based compensation agreements. Of this $469 non-recurring charge, $429 and $40 pertain to unallocated corporate expenses and a restructuring related charge, respectively, associated with our closed Anderson, SC upholstery fabrics plant facility.

(Unaudited)

(6)

The $340 represents restructuring related charges totaling $554 disclosed in notes 4 and 5 above, partially offset by a restructuring credit of $214. The $214 restructuring credit represents a $362 gain on the sale of the building and land associated with our Anderson, SC upholstery fabrics facility, partially offset by a charge of $148 for employee termination benefits.

 

 

Nine months ended

 

 

 

February 2,

2020

 

 

January 27,

2019

 

Net sales:

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

107,250

 

 

$

107,335

 

Upholstery Fabrics

 

 

100,730

 

 

 

106,611

 

Home Accessories

 

 

11,485

 

 

 

11,759

 

 

 

$

219,465

 

 

$

225,705

 

Gross profit:

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

16,553

 

 

$

17,050

 

Upholstery Fabrics

 

 

20,905

 

 

 

20,031

 

Home Accessories

 

 

2,395

 

 

 

3,435

 

Total segment gross profit

 

$

39,853

 

 

$

40,516

 

Other non-recurring charges

 

 

 

(8)

 

(159

)

Restructuring related charges

 

 

 

(9)

 

(2,349

)

 

 

$

39,853

 

 

$

38,008

 

Selling, general, and administrative expenses

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

8,860

 

 

$

8,141

 

Upholstery Fabrics

 

 

11,528

 

 

 

10,985

 

Home Accessories

 

 

3,462

 

 

 

3,690

 

Unallocated corporate expenses

 

 

6,933

 

 

 

4,800

 

Total segment selling, general, and administrative expenses

 

$

30,783

 

 

$

27,616

 

Other non-recurring charges

 

 

 

(10)

 

518

 

Restructuring related charges

 

 

 

(5)

 

40

 

 

 

$

30,783

 

 

$

28,174

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

7,693

 

 

$

8,910

 

Upholstery Fabrics

 

 

9,378

 

 

 

9,044

 

Home Accessories

 

 

(1,068

)

 

 

(254

)

Unallocated corporate expenses

 

 

(6,933

)

 

 

(4,800

)

Total segment income from operations

 

 

9,070

 

 

 

12,900

 

Asset impairments

(1)

 

(13,639

)

 

 

 

Reversal of contingent consideration - earn-out obligation

(2)

 

6,081

 

 

 

 

Restructuring credit and restructuring related charges

(7)

 

70

 

(11)

 

(1,563

)

Other non-recurring charges

 

 

 

(12)

 

(678

)

Total income from operations

 

 

1,582

 

 

 

10,659

 

Interest expense

 

 

(47

)

 

 

(38

)

Interest income

 

 

732

 

 

 

552

 

Other expense

 

 

(441

)

 

 

(688

)

Income before income taxes

 

$

1,826

 

 

$

10,485

 

(7)

The $70 restructuring credit pertains to employee termination benefits associated with our closed Anderson, SC upholstery fabrics facility.


(8)

The $159 represents a non-recurring charge regarding employee termination benefits and other operational reorganization costs associated with our mattress fabrics segment.


(9)

The $2.4 million consists of restructuring related charges of $1.6 million for inventory markdowns and $784 for other operating costs associated with our closed upholstery fabrics facility located in Anderson, SC.


(10)

The $518 represents non-recurring charges of $429 for the accelerated vesting of a stock-based compensation agreement associated with unallocated corporate expenses and $89 for employee termination benefits and operational reorganization costs associated with our mattress fabrics segment.

    
  Nine months ended
 
  January 27, 2019
  January 28, 2018
 
Net sales:
Mattress Fabrics
 $107,335  $146,072 
Upholstery Fabrics  106,611   99,469 
Home Accessories  11,759   - 
  $225,705  $245,541 
 Gross profit:        
 Mattress Fabrics $17,050  $29,641 
Upholstery Fabrics  20,031   20,232 
Home Accessories  3,435   - 
Total segment gross profit $40,516  $49,873 
Other non-recurring charges (4)  (159)  - 
Restructuring related charges (5)  (2,349)  - 
  $38,008  $49,873 
Selling, general, and administrative expenses        
Mattress Fabrics $8,141  $9,868 
Upholstery Fabrics  10,985   11,458 
Home Accessories  3,690   - 
Unallocated corporate expenses  4,800   7,550 
Total segment selling, general, and administrative expenses  27,616   28,876 
Other non-recurring charges (6)  518   - 
Restructuring related charges (2)  40   - 
  $28,174  $28,876 
 Income (loss) from operations:        
Mattress Fabrics $8,910  $19,774 
Upholstery Fabrics  9,044   8,773 
Home Accessories  (254)  - 
Unallocated corporate expenses  (4,800)  (7,550)
Total segment income from operations  12,900   20,997 
Other non-recurring charges (4) (6)  (678)  - 
Restructuring credit and related charges (7)  (1,563)  - 
Total income from operations  10,659   20,997 
Interest expense  (38)  (69)
Interest income  552   391 
Other expense  (688)  (903)
Income before income taxes $10,485  $20,416 

(4) The $159 represents a non-recurring charge regarding employee termination benefits and other operational reorganization costs associated with our mattress fabrics segment.



Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(11)

The $1.6 million represents related charges disclosed in note 9 above and $40 associated with the accelerated vesting of a stock-based compensation agreement, partially offset by a restructuring credit of $825. The $825 restructuring credit represents a $1.5 million gain on the sale of property, plant, and equipment associated with our Anderson, SC upholstery fabrics facility, partially offset by a charge of $661 for employee termination benefits.

(Unaudited)

(12)

The $678 represents non-recurring charges of $429 for the accelerated vesting of a stock-based compensation agreement and $249 regarding employee termination benefits and other operational reorganization costs associated with our mattress fabrics segment.



Balance sheet information for the company’s operating segments follows:
             
 (dollars in thousands)  
January 27,
2019 
   
January 28,
2018
   
April 29,
2018
 
 Segment assets:            
Mattress Fabrics
Accounts receivable
 $12,373  $12,840  $15,195 
Inventory  26,243   29,355   28,740 
Property, plant and equipment (1)  45,845   49,289   48,797 
Investment in unconsolidated joint venture  1,512   1,518   1,501 
Total mattress fabrics assets  85,973   93,002   94,233 
Upholstery Fabrics
 Accounts receivable
  13,367   13,257   11,112 
Inventory  26,067   26,296   24,714 
Property, plant and equipment (2)  1,957   2,101   2,445 
Total upholstery fabrics assets  41,391   41,654   38,271 
Home Accessories            
 Accounts receivable
  402
   -
   -
 
  Inventory
  3,105
   -
   -
 
  Property, plant and equipment (3)
  1,985
   -
   -
 
   Total home accessories assets
  5,492
   -
   -
 
 Total segment assets  132,856
   134,656
   132,504
 
Non-segment assets:
Cash and cash equivalents
  26,418   22,428   21,228 
Short-term investments (Available for Sale)  -   2,472   2,451 
Short-term investments (Held-to-Maturity)  13,544   17,206   25,759 
Other current assets  2,954   3,114   2,870 
Deferred income taxes  3,224   1,942   1,458 
Property, plant and equipment (4)  342   448   552 
Goodwill  27,222   11,462   13,569 
Intangible assets  10,542   1,397   4,275 
Long-term investments (Held-to-Maturity)  -   13,625   5,035 
Long-term investments (Rabbi Trust)  6,834   7,176   7,326 
Other assets  972   918   957 
Total assets $224,908  $216,844  $217,984 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

Segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

Mattress Fabrics

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

12,940

 

 

$

12,373

 

 

$

12,098

 

Inventory

 

 

29,753

 

 

 

26,243

 

 

 

24,649

 

Assets held for sale

 

 

67

 

 

 

 

 

 

 

Property, plant and equipment (1)

 

 

42,368

 

 

 

45,845

 

 

 

44,266

 

Right of use assets (2)

 

 

426

 

 

 

 

 

 

 

Investment in unconsolidated joint venture

 

 

1,668

 

 

 

1,512

 

 

 

1,508

 

Total mattress fabrics assets

 

 

87,222

 

 

 

85,973

 

 

 

82,521

 

Upholstery Fabrics

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

12,908

 

 

 

13,367

 

 

 

11,274

 

Inventory

 

 

24,256

 

 

 

26,067

 

 

 

22,915

 

Property, plant and equipment (3)

 

 

1,675

 

 

 

1,957

 

 

 

1,795

 

Right of use assets (4)

 

 

2,143

 

 

 

 

 

 

 

Total upholstery fabrics assets

 

 

40,982

 

 

 

41,391

 

 

 

35,984

 

Home Accessories

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

766

 

 

 

402

 

 

 

379

 

Inventory

 

 

3,566

 

 

 

3,105

 

 

 

3,296

 

Property, plant and equipment (5)

 

 

1,728

 

 

 

1,985

 

 

 

1,910

 

Right of use assets (6)

 

 

949

 

 

 

 

 

 

 

Total home accessories assets

 

 

7,009

 

 

 

5,492

 

 

 

5,585

 

Total segment assets

 

 

135,213

 

 

 

132,856

 

 

 

124,090

 

Non-segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

21,872

 

 

 

26,418

 

 

 

40,008

 

Short-term investments (Held-to-Maturity)

 

 

3,171

 

 

 

13,544

 

 

 

5,001

 

Short-term investments (Available for Sale)

 

 

7,580

 

 

 

 

 

 

 

Current income taxes receivable

 

 

776

 

 

 

 

 

 

776

 

Other current assets

 

 

3,219

 

 

 

2,954

 

 

 

2,849

 

Deferred income taxes

 

 

920

 

 

 

3,224

 

 

 

457

 

Property, plant and equipment (7)

 

 

609

 

 

 

342

 

 

 

418

 

Right of use assets (8)

 

 

2,006

 

 

 

 

 

 

 

Goodwill

 

 

16,011

 

 

 

27,222

 

 

 

27,222

 

Intangible assets

 

 

7,738

 

 

 

10,542

 

 

 

10,448

 

Long-term investments (Rabbi Trust)

 

 

7,804

 

 

 

6,834

 

 

 

7,081

 

Long-term investments (Held-to-Maturity)

 

 

2,224

 

 

 

 

 

 

 

Noncurrent income taxes receivable

 

 

733

 

 

 

 

 

 

733

 

Other assets

 

 

464

 

 

 

972

 

 

 

643

 

Total assets

 

$

210,340

 

 

$

224,908

 

 

$

219,726

 

I - 33

I-21


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Capital expenditures (9):

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

3,416

 

 

$

2,342

 

Upholstery Fabrics

 

 

253

 

 

 

294

 

Home Accessories

 

 

104

 

 

 

33

 

Unallocated Corporate

 

 

398

 

 

 

11

 

Total capital expenditures

 

$

4,171

 

 

$

2,680

 

Depreciation expense:

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

5,017

 

 

$

5,265

 

Upholstery Fabrics

 

 

577

 

 

 

595

 

Home Accessories

 

 

286

 

 

 

227

 

Total depreciation expense

 

$

5,880

 

 

$

6,087

 

(Unaudited)



       
   Nine months ended    
(dollars in thousands) January 27, 2019  January 28, 2018 
Capital expenditures (5):      
Mattress Fabrics $2,342  $5,445 
Upholstery Fabrics  294   379 
Home Accessories  33   - 
Unallocated Corporate  11   47 
Total capital expenditures $2,680  $5,871 
Depreciation expense:        
Mattress Fabrics $5,265  $5,068 
Upholstery Fabrics  595   611 
Home Accessories  227   - 
Total depreciation expense $6,087  $5,679 

(1)

The $42.4 million at February 2, 2020, represents property, plant, and equipment of $28.7 million and $13.7 million located in the U.S. and Canada, respectively. The $45.8 million at January 27, 2019, represents property, plant, and equipment of $33.5 million and $12.3 million located in the U.S. and Canada, respectively. The $49.3$44.3 million at JanuaryApril 28, 2018,2019, represents property, plant, and equipment of $35.6$32.4 million and $13.7$11.9 million located in the U.S. and Canada, respectively.

(2)

The $48.8$426 at February 2, 2020, represents right of use assets located in the U.S.

(3)

The $1.7 million at April 29, 2018,February 2, 2020, represents property, plant, and equipment of $35.4$1.2 million and $13.4 million$469 located in the U.S. and Canada,China, respectively.


(2)The $2.0 million at January 27, 2019, represents property, plant, and equipment of $1.3 million and $615 located in the U.S. and China, respectively. The $2.1$1.8 million at JanuaryApril 28, 2018,2019, represents property, plant, and equipment of $1.4$1.2 million and $711$591 located in the U.S. and China, respectively.

(4)

The $2.4$2.1 million at April 29, 2018,February 2, 2020, represents property, plant, and equipmentright of $1.8use assets of $1.1 million and $661$1.0 million located in China and the U.S. and China, respectively., respectively


(3)

(5)

The $1.7 million at February 2, 2020, $2.0 million at January 27, 2019, and $1.9 million at April 28, 2019, represents property, plant and equipment located in the U.S.


(6)

The $949 million at February 2, 2020, represents right of use assets located in the U.S.

(4)

(7)

The $609, $342, $448, and $552$418 at February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by our mattress fabrics, upholstery fabrics, and home accessories segments. Property, plant, and equipment associated with our corporate aredepartments reside in the U.S.

(8)

The $2.0 million at February 2, 2020, represents right of use assets located in the U.S.


(5)

(9)

Capital expenditure amounts are stated on the accrual basis. See Consolidated Statements of Cash Flows for capital expenditure amounts on a cash basis.


19.

17. Income Taxes


Effective Income Tax Rate


We recorded income tax expense of $2.6 million, or 142.8% of income before income taxes, for the nine-month period ended February 2, 2020, compared with income tax expense of $3.4 million, or 32.5% of income before income taxes, for the nine- monthnine-month period ended January 27, 2019, compared to income tax expense of $12.0 million or 58.6% of income before income taxes, for the nine-month period ended January 28, 2018.2019. Our effective income tax rates for thesethe nine-month periods ended February 2, 2020, and January 27, 2019, 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.

I - 34

I-22


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following schedule summarizes the factors that contributed to the differenceprincipal 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 for the nine months of each fiscal year
statements:

 

 

2020

 

 

2019

 

U.S. federal income tax rate

 

 

21.0

%

 

 

21.0

%

Global Intangible Low Taxed Income Tax (GILTI)

 

58.2

 

 

 

2.6

 

Foreign income tax rate differential

 

 

35.7

 

 

 

10.1

 

Non-controlling interest income attributable to a consolidated partnership

 

 

21.0

 

 

 

-

 

Tax effects of Chinese foreign exchange gains

 

 

4.4

 

 

 

1.4

 

Change in estimate of U.S. valuation allowance

 

2.5

 

 

 

1.0

 

Stock-based compensation

 

 

1.2

 

 

 

0.7

 

Tax effects of the 2017 Tax Cuts and Jobs Act

 

 

-

 

 

 

(5.7

)

Other

 

 

(1.2

)

 

 

1.4

 

 

 

 

142.8

%

 

 

32.5

%

       
  2019  2018 
Federal income tax rate  21.0%  30.4%
Tax effects of the 2017 Tax Cuts and Jobs Act  (5.7)  28.4 
Foreign income tax rate differential  10.1   3.9 
Global Intangible Low Taxed Income Tax (GILTI)  2.6   - 
Tax effects of Chinese foreign exchange gains (losses)  1.4   (2.9)
Excess income tax deficiency (benefits)        
     related to stock-based compensation  0.7   (2.3)
Other  2.4   1.1 
   32.5%  58.6%

2017 Tax Cuts and Jobs Act

On December 22, 2017 (the Enactment Date), the Tax Cuts and Jobs Act (H.R.1) (the Tax Act) was signed into law.

The key effects of the Tax Act onincrease in our financial statements during fiscal 2019 will include the reduction of our U.S federal statutoryeffective income tax rate reflects the significant decline in our projected annual consolidated taxable income, particularly in the U.S., and the mix of our consolidated taxable income that is earned by our foreign operations located in China and Canada that have higher income tax rates in relation to 21% compared with the blended statutoryU.S. This current mix of taxable income has led to a significant increase in our effective income tax rate of 30.4% during fiscal 2018 and the creation of thethat is associated with our Global Intangible Low TaxedTax Income Tax (GILTI).


In order to calculate GILTI on an interim basis, estimates were required based on (i) projections and estimates associated with tax, which represents a U.S. and foreign pre-tax earnings and income tax expense for fiscal 2019, (ii) projections and estimates regarding certain assets that will be held inon foreign earnings. Additionally, our domestic operations or foreign subsidiaries, and (iii) projections and estimateseffective income tax rate significantly increased due to the income tax effects of our asset impairments associated with our net sales with foreign jurisdictions. Our estimates may change based on actual versus projected results. Our policy to account for GILTI will be to expense this tax in the period incurred.

During our third quarter of fiscal 2019, we completed our assessment of the effects of the Tax Act in connection with our fiscal 2018 U.S. Federal income tax return filing. In accordance with SEC Staff Accounting Bulletin No. 118, we recorded our final provisional adjustments within the one-year time period from the Enactment Date. Our final provisional adjustments recordedhome accessories segment incurred during the third quarter of fiscal 2019 totaledthat were attributable to an income tax benefit of $593,000, and represented a discrete event for which the full income tax effects were recorded in the three-month and nine-month periods ending January 27, 2019. The $593,000 final provisional adjustment represents $310,000 for the re-measurement of our U.S. deferred income taxes and $283,000 for the one-time mandatory repatriation tax on our undistributed earnings from our foreign subsidiaries.

During the third quarter of fiscal 2018, we recorded a provisional income tax charge of $5.9 million, which represented a discrete event for which the full income tax effects were recorded during the three-month and nine-month periods ending January 28, 2018. The $5.9 million provisional income tax charge represents $1.1 million for the re-measurement of our U.S. deferred income taxes and $4.8 million for the one-time mandatory repatriation tax on our undistributed earnings from our foreign subsidiaries.
I - 35

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


non-controlling interest.

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 February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, valuation allowances against our deferred income taxes pertain to the following jurisdictions:

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

U.S. state loss carryforwards and credits

 

$

711

 

 

 

903

 

 

 

666

 

U.S. foreign income tax credits

 

 

 

 

 

4,550

 

 

 

82

 

 

 

$

711

 

 

 

5,453

 

 

 

748

 

       
                                                                  
January 27,
 January 28, April 29, 
(dollars in thousands)2019 2018 2018 
U.S. foreign income tax credits $4,550   2,277   4,550 
U.S. state loss carryforwards and credits  903   495   578 
Polish loss carryforwards  -   73   76 
  $5,453   2,845   5,204 


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 January 27, 2019,February 2, 2020, 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.


For fiscal 2019

As a result of the 2017 Tax Cuts and beyond, the TaxJobs Act, allows 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 February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, we recorded a deferred income tax liability of $3.4 million, $3.1$3.4 million, and $4.3$3.5 million, respectively, for withholding taxes on undistributed earnings and profits from our foreign subsidiaries.


I-23


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

I - 36

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



At February 2, 2020, 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 January 27, 2019, we had a $880,000 total gross unrecognized income tax benefit, of which $500,000 and $380,000 were classified as income taxes payable-payable – long-term and non-current deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. At JanuaryApril 28, 2018,2019, we had a $12.4 million$903,000 total gross unrecognized income tax benefit, of which $9.9 million and $2.5 million were classified as income taxes payable long term and non-current deferred income taxes respectively, in the accompanying Consolidated Balance Sheets. At April 29, 2018, we had a $844,000 total gross unrecognized income tax benefit, of which $464,000$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 February 2, 2020, our $914,000 total gross unrecognized income tax benefit would favorably affect the income tax rate in future periods. At January 27, 2019, our $880,000 total gross unrecognized income tax benefit included $500,000 that, if recognized, would favorably affect the income tax rate in future periods. At JanuaryApril 28, 2018,2019, our $12.4 million$903,000 total gross unrecognized income tax benefit included $9.9 million$523,000 that, if recognized, would favorably affect the income tax rate in future periods. At April 29, 2018, our $844,000 total gross unrecognized income tax benefit included $464,000 that, if recognized, would favorably affect the income tax rate in future periods.


Our gross unrecognized income tax benefit of $880,000,$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.


20.

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 updated and replaced our 2007 Equity Incentive Plan (the “2007 Plan”) as the vehicle for granting new equity-based awards substantially similar to those authorized under the 2007 Plan. In general, 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. In connection with the approval of the 2015 Plan, no further awards will be granted under the 2007 Plan, but outstanding awards under the 2007 Plan will be settled in accordance with their terms.


At January 27, 2019,February 2, 2020, there were 969,406908,334 shares available for future equity-based grants under our 2015 plan.


Performance Based

Performance-Based Restricted Stock Units


Executive Management (NEOs)

Fiscal 2019 and 2018
On August 2, 2018 (Fiscal 2019), and July 13, 2017 (Fiscal 2018), we granted

Senior Executives

We grant performance-based restricted stock units to NEOscertain 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.

I - 37

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Compensation cost wasfor share-based awards is measured based at theon their fair market value on the date of grant (August 2, 2018 and July 13, 2017).grant. The fair market value per share wasis 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 component.

components of awards.

The following table provides assumptions used to determine the fair market value of the market-based shareholder return component of awards using the Monte Carlo simulation model onduring the date offiscal year the grants noted above:below were awarded:

 

 

Fiscal 2020

 

 

Fiscal 2019

 

 

Fiscal 2018

 

Closing price of our common stock

 

$

18.49

 

 

$

24.35

 

 

$

32.50

 

Expected volatility of our common stock

 

 

30.0

%

 

 

33.5

%

 

 

31.0

%

Expected volatility of peer companies (1) (2)

 

29.9% - 82.3%

 

 

 

16.0

%

 

 

16.5

%

Risk-free interest rate

 

 

1.73

%

 

 

2.74

%

 

 

1.56

%

Dividend yield

 

 

2.10

%

 

 

1.35

%

 

 

1.66

%

Correlation coefficient of peer companies (1) (2)

 

0.00 – 0.43

 

 

 

0.47

 

 

 

0.46

 

I-24


Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)

The expected volatility and correlation coefficient of our peer companies for fiscal 2020 were based on peer companies that were approved by the Compensation Committee of our board of directors as an aggregate benchmark for determining the market-based total shareholder return component. Therefore, we disclosed the ranges of the expected volatility and correlation coefficient for the companies that represented this peer group.


(2)

The expected volatility and correlation coefficient of our peer companies for fiscal 2019 and 2018 were based on the Russell 2000 Index which was approved by the Compensation Committee of our board of directors as the benchmark for determining the market-based total shareholder return component. Since the Russell 2000 Index was the only benchmark for determining the market-based total shareholder return component, no ranges were disclosed for these assumptions.

  Fiscal 2019  Fiscal 2018 
Closing price of our common stock $24.35  $32.50 
Expected volatility of our common stock  33.5%  31.0%
Expected volatility of peer companies  16.0%  16.5%
Risk-free interest rate  2.74%  1.56%
Dividend yield  1.35%  1.66%
Correlation coefficient of peer companies  0.47   0.46 

Fiscal 2017

On July 14, 2016 we granted performance-based restricted stock units to NEOs which could earn up to a certain number of shares of common stock if certain performance targets were met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. These awards were measured based on the fair market value (closing price of our common stock) on the date of grant. No market-based total shareholder return component was included in this award.

Key Employees and a Non-Employee


Fiscal 2019, 2018, and 2017

We grantedgrant 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 basedperformance-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 basedperformance-based restricted stock units granted to a non-employee, (fiscal 2017 only)which vested during the first quarter of fiscal 2020, were measured based on the fair market value (the closing price of our common stock) aton the earlier date of when the performance criteria are met or the end of the reporting period. No market-based total shareholder return component was included in these awards.


The following table summarizes information related to our grants of performance based restricted stock units associated with NEOs and key employees that are currently unvested:
          
   (3)
          
 Restricted Stock Price Per   Vesting
Date of GrantUnits Awarded Share   Period
August 2, 2018 (1)  86,599  $18.51  (4)3 years
August 2, 2018 (2)  47,800  $24.35  (6)3 years
July 13, 2017 (1)  78,195  $31.85  (5)3 years
July 13, 2017 (2)  44,000  $32.50  (6)3 years
July 14, 2016 (1) (2)  107,880  $28.00  (6)3 years

I - 38


Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(1) Performance-based restricted stock units awarded to NEOs.
(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 our common stock) 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 our NEOs 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 our common stock) 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 our NEOs on July 13, 2017.
(6) Price per share represents the closing price of our common stock on the date of grant.

met.

The following table summarizes information related to our grants of performance-based restricted stock units associated with a non-employeecertain senior executives and key employees that are currently unvested:

Date of Grant

 

(3) Restricted

Stock Units

Awarded

 

 

Price Per

Share

 

 

 

Vesting

Period

July 18, 2019 (1)

 

 

93,653

 

 

$

19.04

 

(4)

 

3 years

July 18, 2019 (2)

 

 

30,426

 

 

$

18.49

 

(7)

 

3 years

August 2, 2018 (1)

 

 

86,599

 

 

$

18.51

 

(5)

 

3 years

August 2, 2018 (2)

 

 

47,800

 

 

$

24.35

 

(7)

 

3 years

July 13, 2017 (1)

 

 

78,195

 

 

$

31.85

 

(6)

 

3 years

July 13, 2017 (2)

 

 

44,000

 

 

$

32.50

 

(7)

 

3 years

(1)

Performance-based restricted stock units awarded to certain senior executives.

(2)

(1)
Restricted StockPrice PerVesting
Date of GrantUnits AwardedSharePeriod
July 14, 201611,549$18.47 (2)3 years

Performance-based restricted stock units awarded to key employees.


(1)

(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 ($1.03 per $1 or an increase of $0.55 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 ($18.49) for the performance-based components of the performance-based restricted stock units granted to certain senior executives on July 18, 2019.

(5)

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.

(6)

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.

(7)

Price per share represents the closing price of our common stock on the date of grant.

I-25


Table of common stock shares that could be earned if certain performance targets are met as defined in the related restricted stock unit agreements.


Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes information related to our performance basedperformance-based restricted stock units that vested during the nine-month periodsperiod ending January 27, 2019February 2, 2020 and Januarythe entire fiscal year ending April 28, 2018:2019:

Fiscal Year

 

Restricted

Stock Units

Vested

 

 

(3) Fair Value

 

 

Weighted

Average

Price

Per Share

 

 

Fiscal 2020 (1)

 

 

9,489

 

 

$

165

 

 

$

17.36

 

(4)

Fiscal 2020 (2)

 

 

4,148

 

 

$

72

 

 

$

17.36

 

(4)

Fiscal 2019 (1)

 

 

128,632

 

 

$

3,754

 

 

$

29.19

 

(4)

Fiscal 2019 (2)

 

 

10,364

 

 

$

320

 

 

$

30.90

 

(4)

(1)

Certain senior executives and key employees.

(2)

Non-employee

          
                                                                                                                                  
       
 Weighted
Average
 
  Restricted Stock   (3)
 Price 
Fiscal Year Units Vested  Fair Value  Per Share 
Fiscal 2019 (1)  126,232  $3,707  $29.37(4)
Fiscal 2019 (2)  10,364  $320  $30.90(4)
Fiscal 2018 (1)  102,845  $3,342  $32.50(4)
Fiscal 2018 (2)  16,000  $520  $32.50(4)

(1) NEOs and key employees.

(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.

(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 - 39

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Overall

We recorded compensation expense of $259,000$467,000 and $2.2 million$259,000 within selling, general, and administrative expenses for the nine-month periods ending February 2, 2020, and January 27, 2019, and January 28, 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.period of outstanding awards. If performance goals are not probable of occurrence, compensation cost will not be recognizedrecorded and any previously recognized compensation cost would be reversed.

At January 27, 2019,February 2, 2020, the remaining unrecognized compensation cost related to our performance basedperformance-based restricted stock units was $760,000,$680,000, which is expected to be recognized over a weighted average vesting period of 2.01.9 years. At January 27, 2019,February 2, 2020, the performance basedperformance-based restricted stock units that were expected to vest had a fair value totaling $1.2 million.


Time Based$757,000.

Time-Based Restricted Stock Units


Fiscal 2019

On August 2, 2018, we granted 10,000 shares

The following table summarizes information related to our grants of time-based restricted stock units associated with senior executives and key members of management that are currently unvested:

Date of Grant

 

Time Based

Stock Units

Awarded

 

 

Price Per

Share

 

 

 

Vesting

Period

July 18, 2019

 

 

34,399

 

 

$

18.49

 

(1)

 

3 years

August 2, 2018

 

 

10,000

 

 

$

24.35

 

(1)

 

5 years

(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 certain key employees. These awards will vest over a period of 59 months and were measured at their fair market value, which was $24.35 per share, and represents the closing price of our common stock at the date of grant.


Fiscal 2018 Grant

On July 13, 2017, an employee was granted 1,200 shares of time vestedtime-based restricted stock units whichthat vested overduring the requisite servicenine-month period ending February 2, 2020 and the entire fiscal year ending April 28, 2019:

Fiscal Year

 

Restricted

Stock

Units Vested

 

 

(1) Fair Value

 

 

Weighted

Average

Price

Per Share

 

 

Fiscal 2020

 

 

 

 

$

 

 

 

 

 

Fiscal 2019

 

 

1,200

 

 

$

21

 

 

$

17.36

 

(2)

(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-26


Table of 11 months. This award was measured at its fair market value, which was $32.50 per share, and represented the closing price of our common stock on the date of grant.



Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fiscal 2017 GrantOverall


On July 14, 2016, an employee was granted 1,200 shares of time vested restricted stock units which vested over the requisite service period of 11 months. This award was measured at its fair market value, which was $28 per share, and represented the closing price of our common stock on the date of grant.

During the first quarter of fiscal 2018, 1,200 shares of common stock associated with this grant vested and had a weighted average grant date fair value of $34,000 or $28 per share.

Overall

We recorded compensation expense of $30,000$154,000 and $28,000$30,000 within selling, general, and administrative expense associated with our time vestedtime-based restricted stock unit awards for the nine-month periods ending February 2, 2020, and January 27, 2019, and January 28, 2018, respectively.

I - 40

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


At January 27, 2019,February 2, 2020, the remaining unrecognized compensation cost related to our time vestedtime-based restricted stock units was $219,000,$688,000, which is expected to be recognized over a weighted average vesting period of 4.42.6 years. At January 27, 2019,February 2, 2020, the time vestedtime-based restricted stock awards that were expected to vest had a fair value totaling $185,000.

$561,000.

Common Stock Awards

Award

Fiscal 2020

We granted a total of 3,6004,972, 4,519, and 4,8003,659 shares of common stock to our outside directors on January 2, 2020, October 1, 2018,2019, and October 2, 2017,July 1, 2019, respectively. These shares of common stock vested immediately and were valued based on themeasured at their fair market value on the date of grant. The fair value of these awards were $23.45was $14.08, $15.49, and $33.20$19.21 per share on January 2, 2020, October 1, 2018,2019, and October 2, 2017,July 1, 2019, respectively, which represents the closing price of our common stock on the date of grant.

Fiscal 2019

We granted a total of 2,948 and 3,600 shares of common stock to our outside directors on April 1, 2019 and October 1, 2018, respectively. These shares of common stock vested immediately and were measured at their fair value on the date of grant. The fair value of these awards was $19.18 and $23.45 per share on April 1, 2019 and October 1, 2018, respectively, which represents the closing price of our common stock on the date of grant.

We recorded $84,000$210,000 and $159,000$84,000 of compensation expense within selling, general, and administrative expense for theseour common stock awards for the nine-months ending February 2, 2020 and January 27, 2019, respectively.

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.

For these contracts, an estimated incremental borrowing rate (“IBR”) is utilized, based on information available at the inception of the lease. The IBR represents an estimate of the interest rate we would incur at the lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.

Balance Sheet

The right of use asset and lease liabilities associated with our operating leases as of February 2, 2020, and April 29, 2019, are as follows:

(dollars in thousands)

 

February 2,

2020

 

 

(1) April 29,

2019

 

Right of use asset

 

$

5,524

 

 

$

7,191

 

Operating lease liability - current

 

 

2,227

 

 

 

2,629

 

Operating lease liability – noncurrent

 

 

3,160

 

 

 

4,473

 

(1)

Represents adoption date of Topic 842.

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Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Supplemental Cash Flow Information

(dollars in thousands)

 

Three Months

Ended

February 2,

2020

 

 

Nine Months

Ended

February 2,

2020

 

Operating lease liability payments

 

$

671

 

 

$

2,079

 

Right of use assets exchanged for lease liabilities

 

 

322

 

 

 

344

 

Operating lease expense for the three-month and nine-month periods ending February 2, 2020, was $726,000 and $2.2 million, respectively. Short-term lease and variable lease expenses were immaterial for the three-month and nine-month periods ending February 2, 2020.

Other Information

Maturity of our operating lease liabilities for the remainder of fiscal 2020, the next subsequent four fiscal years, and thereafter follows:

(dollars in thousands)

 

 

 

 

2020

 

$

590

 

2021

 

 

2,161

 

2022

 

 

1,207

 

2023

 

 

767

 

2024

 

 

659

 

Thereafter

 

 

347

 

 

 

$

5,731

 

Less: interest

 

 

(344

)

Present value of lease liabilities

 

$

5,387

 

As of February 2, 2020, the weighted average remaining lease term and discount rate for our operating leases follows:

Weighted average lease term

3.4 years

Weighted average discount rate

3.76

%

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 February 2, 2020, January 27, 2019, and JanuaryApril 28, 2018, respectively.


2019, we had total amounts due regarding capital expenditures totaling $177,000, $91,000, 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 February 2, 2020, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $2.3 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.

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Table of Contents

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The transfer to this reserve must be made before distributions of any dividend to shareholders. As of January 27, 2019,February 2, 2020, the company’s statutory surplus reserve was $4.3$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 with the exception ofexcept for the statutory surplus reserve of $4.3$4.2 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.


22.   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.
I - 41

Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Accounts Payable – Capital Expenditures

At January 27, 2019, we had total amounts due regarding capital expenditures totaling $91,000, which pertained to outstanding vendor invoices, none of which were financed. The total outstanding amount of $91,000 is required to be paid based on normal credit terms.

At January 28, 2018, and April 29, 2018, we had total amounts due regarding capital expenditures totaling $1.6 million and $1.8 million, respectively, of which $1.4 million was financed and pertained to completed work for the construction of a new building (see below).

Purchase Commitments – Capital Expenditures

At January 27, 2019, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $632,000.

Mattress Fabrics Building

Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina to expand our distribution capabilities and office space at a cost of $11.3 million. This agreement required an installment payment of $1.9 million that was made in April 2016, with additional installment payments of $4.3 million that were made in fiscal 2017, $3.7 million that were made in fiscal 2018, and a final installment payment of $1.4 million made in May 2018 (first quarter of fiscal 2019). Interest was charged on the required outstanding installment payments for services that were previously rendered at a rate of $2.25% plus the current 30-day LIBOR rate.

Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor’s bank being the beneficiary. In addition to the interest charged on the outstanding installment payments noted above, there was a 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month (see Note 13 for further details).

This new building was placed into service in July 2017 (first quarter of fiscal 2018).

23. Common Stock Repurchase Program

On June 15, 2016,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. During the nine-month period ending February 2, 2020, we purchased 55,750 shares of our common stock at a cost of $728,000 pursuant to this authorization, all of which was purchased during the third quarter. As a result, at February 2, 2020, we have $4.3 million available for future repurchases of our common stock associated with the $5.0 million repurchase program approved by our board of directors on September 5, 2019.

On March 4, 2020, we announced that our board of directors approved an authorization 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 amountnumber of shares that can be 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.

During the nine-month period ended January 27, 2019, we purchased 160,423 shares of our common stock at a cost of $3.3 million. During the nine-month period ended January 28, 2018, we did not purchase anyThe 160,423 shares were purchased pursuant to a prior authorization approved by our board of our common stock.

At January 27, 2019, we had $1.7 million available for repurchases of our common stock.

24.directors on June 15, 2016.

23. Dividend Program


On February 27, 2019,March 4, 2020, we announced that our board of directors approved a quarterly cash dividend of $0.10$0.105 per share. This paymentshare that will be madepaid on April 15, 2019,2020, to shareholders of record as of April 1, 2019.


7, 2020.

During the nine monthsnine-months ended February 2, 2020, dividend payments totaled $3.8 million, which represented quarterly dividend payments ranging from $0.10 per share to $0.105 per share. During the nine-months ended January 27, 2019, dividend payments totaled $3.5 million, which represented quarterly dividend payments ranging from $0.09 per share to $0.10 per share. During the nine months ended January 28, 2018, dividend payments totaled $5.7 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $3.1 million represented quarterly dividend payments ranging from $0.08 per share to $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 - 42

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Table of Contents

CAUTIONARY STATEMENT CONCERNINGCONCERNING FORWARD-LOOKING INFORMATION


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,” “intend,” “plan,” and “project,” and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, new product launches, sales, profit margins, profitability, operating income, capital expenditures, working capital levels, income taxes, SG&A or other expenses, pre-tax income, earnings, cash flow, and other performance or liquidity measures, as well as any statements regarding potential acquisitions, future economic or industry trends, public health epidemics, or future developments. There can be no assurance that the company will realize these expectations, meet its guidance, or that these beliefs will prove correct.


Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. The future performance of our business depends in part on our success in conducting and finalizing acquisition negotiations and integrating acquired businesses into our existing operations. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in tariffs or trade policy, or changes in the value of the U.S. dollar versus other currencies, could affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and 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. The impact of public health epidemics on employees, suppliers, and the global economy, such as the coronavirus outbreak currently affecting China and beyond, could also adversely affect our operations and financial performance.  In addition, the impact of potential goodwill or intangible asset impairments could affect our financial results, including without limitation possible additional future write-downs with respect to our home accessories segment in accordance with our policy, as described herein. 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 13, 2018,12, 2019, for the fiscal year ended April 29, 2018,28, 2019, and our subsequent periodic reports filed with the Securities and Exchange Commission.

I - 43

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Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


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 nine-monthsnine months ended February 2, 2020, and January 27, 2019, represent 40-week and January 28, 2018, each represent 39-week periods.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, andas well as 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 recent 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, measuring, as well as measuring and installation services of Read'sRead’s own products to customers in the hospitality and commercial industries. The company operated an upholstery fabrics plant facility in Anderson, SC, during the first quarter of fiscal 2019, which has since beenwas 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 (loss) from operations before certain unallocated corporate expenses, restructuring expense (credit) and related charges, impairment charges, and other non-recurring items. Cost of sales in each segment includes costs to develop, manufacture, develop, 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 - 44

Executive Summary


Results of Operations

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

Change

 

Net sales

 

$

71,998

 

 

$

77,226

 

 

 

(6.8

)%

Gross profit

 

 

12,384

 

 

 

14,123

 

 

 

(12.3

)%

Gross profit margin

 

 

17.2

%

 

 

18.3

%

 

(110)bp

 

SG&A expenses

 

 

9,952

 

 

 

10,038

 

 

 

(0.9

)%

Asset impairments

 

 

13,639

 

 

 

 

 

 

100.0

%

Reversal of contingent consideration - earn-out obligation

 

 

6,081

 

 

 

 

 

 

100.0

%

(Loss) income from operations

 

 

(5,091

)

 

 

4,299

 

 

 

(218.4

)%

Operating margin

 

 

(7.1

)%

 

 

5.6

%

 

(1270)bp

 

(Loss) income before income taxes

 

 

(5,124

)

 

 

4,262

 

 

 

(220.2

)%

Income tax (benefit) expense

 

 

(973

)

 

 

1,225

 

 

 

(179.4

)%

Net (loss) income

 

 

(4,207

)

 

 

3,060

 

 

 

(237.5

)%

Net (loss) income attributable to Culp Inc common shareholders

 

 

(58

)

 

 

3,154

 

 

 

(101.8

)%

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Table of Contents


 

 

Nine Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

Change

 

Net sales

 

$

219,465

 

 

$

225,705

 

 

 

(2.8

)%

Gross profit

 

 

39,853

 

 

 

38,008

 

 

 

4.9

%

Gross profit margin

 

 

18.2

%

 

 

16.8

%

 

140bp

 

SG&A expenses

 

 

30,783

 

 

 

28,174

 

 

 

9.3

%

Asset impairments

 

 

13,639

 

 

 

 

 

 

100.0

%

Reversal of contingent consideration - earn-out obligation

 

 

6,081

 

 

 

 

 

 

100.0

%

Income from operations

 

 

1,582

 

 

 

10,659

 

 

 

(85.2

)%

Operating margin

 

 

0.7

%

 

 

4.7

%

 

(400)bp

 

Income before income taxes

 

 

1,826

 

 

 

10,485

 

 

 

(82.6

)%

Income tax expense

 

 

2,607

 

 

 

3,407

 

 

 

(23.5

)%

Net (loss) income

 

 

(841

)

 

 

6,969

 

 

 

(112.1

)%

Net income attributable to Culp Inc common shareholders

 

 

3,580

 

 

 

7,044

 

 

 

(49.2

)%

  Three Months Ended    
(dollars in thousands) January 27, 2019  January 28, 2018  Change 
Net sales $77,226  $85,310   (9.5)%
Gross profit  14,123   17,603   (19.8)%
Gross profit margin  18.3%  20.6%  (230)bp
SG&A expenses  10,038   9,959   0.8%
Income from operations  4,299   7,644   (43.8)%
Operating margin  5.6%  9.0%  (340)bp
Income before income taxes  4,262   7,516   (43.3)%
Income taxes  1,225   8,208   (85.1)%
Net income (loss)  3,060   (748)  509.1%
Net income (loss) attributable to
Culp Inc common shareholders
  3,154   (748)  521.7%


  Nine Months Ended    
(dollars in thousands) January 27, 2019  January 28, 2018  Change 
Net sales $225,705  $245,541   (8.1)%
Gross profit  38,008   49,873   (23.8)%
Gross profit margin  16.8%  20.3%  (350)bp
SG&A expenses  28,174   28,876   (2.4)%
Income from operations  10,659   20,997   (49.2)%
Operating margin  4.7%  8.6%  (390)bp
Income before income taxes  10,485   20,416   (48.6)%
Income taxes  3,407   11,956   (71.5)%
Net income  6,969   8,211   (15.1)%
Net income attributable to
Culp Inc common shareholders
  7,044   8,211   (14.2)%

Net Sales


Overall, our net sales for the third quarter of fiscal 20192020 decreased by 9.5%6.8% compared with the same period a year ago, with mattress fabric sales declining 27.1%7.4%, upholstery fabric sales declining 5.7%, and upholstery fabrics increasing 2.3%. Net sales from our new home accessories segment were $4.4 million, with no comparable prior-year sales.

I - 45



sales declining 11.0%. Our overall net sales for the first nine months of fiscal 20192020 decreased by 8.1%2.8% compared with the same period a year ago, with mattress fabrics decreasing 26.5%sales declining 0.1% and upholstery fabrics increasing 7.2%sales declining 5.5%. NetThere was no full period of comparable prior-year sales from our newfor the home accessories segment were $11.8 million sinceas a result of the June 22, 2018, investment date in eLuxury, with no comparable prior-year sales.

eLuxury. The first nine months of fiscal 2020 had 40 weeks compared to 39 weeks for the first nine months of fiscal 2019.

The decrease in mattress fabrics net sales reflectsfor the ongoingthird quarter and the first nine months of fiscal 2020 primarily relates to continued industry weakness resulting in softer demand trends for our legacy mattress fabrics customers. The anti-dumping measures enacted by the U.S. government relating to low-priced imports from China have not yet provided the relief expected for the domestic mattress industry. Third quarter sales for our CLASS sewn cover business were also affected by the holiday shutdowns in Haiti and China. Mattress covers have become an increasingly important part of the mattress fabrics business, and losing multiple productive weeks caused a more significant challenges facingimpact when combined with continued industry weakness in our legacy business.

The decrease in upholstery fabrics net sales for the bedding industry, primarily relatedthird quarter relates to a slowdown in shipments heading into the Chinese New Year. It is difficult to predict the impact of the holiday shutdown from year to year, and this year we experienced a greater than expected decline in January leading up to the continued high volume of low-priced imported mattresses from China. Delays resulting from the recent U.S. government shutdown affected the timing of expected punitive measures against Chinese importers, with a preliminary ruling now expected in May 2019.holiday period. As a result, we continued to experience reduced demandshowed a modest drop in sales for mattress fabric and sewn covers from our major customers.  Additionally,the third quarter of fiscal 2020 compared with a very strong sales were unfavorablyperformance in the prior-year period, which was positively affected by weather disruptions and the usual seasonal slowdown for the holidays, compounded by a weak retail and e-commerce sales environment. Although import activity appears to have slowedadvance customer purchases in anticipation of upcoming anti-dumping measures, we believe there remains a large excess of inventory of late 2018 imports that will likely take at least through the fourth quarter of fiscal 2019 to sell off, which will negatively affect our mattress fabrics sales.


additional tariffs.  The increasedecrease in upholstery fabricfabrics net sales for the first nine months of fiscal 20192020 primarily relates to the netslowdown in shipments noted for the third quarter, as well as the soft retail environment for residential furniture and ongoing issues surrounding international trade agreements and the associated tariffs during the first half of the year. It also reflects a loss in sales contributionresulting from Read, acquired on April 1, 2018, partially offset by athe closure of our Anderson, SC, production facility that was completed during the second quarter of fiscal 2019.

The decrease in net sales associated with our closed facility located in Anderson, SC, and the timing of the Chinese New Year holiday.


The third quarter and year-to-date financial results for our new home accessories business segment which includesprimarily relates to reduced demand for our June 2018 majority investment in eLuxury, reflect typical product roll-out, sampling and marketing challenges in connection with the start-up and integration ofbedding products on Amazon, a newly combined platform.  These challenges, along with a weak retail andprincipal sales channel for this segment’s legacy e-commerce sales environment, unfavorably affected our financial results for the third quarter and nine-month year-to-date period.
business.

See the Segment Analysis section below for further details.


Income Before Income Taxes

Overall, our income (loss) before income taxes for the third quarter of fiscal 2020 was $(5.1) million, compared with $4.3 million for the prior-year period, while income before income taxes decreasedfor the first nine months of fiscal 2020 was $1.8 million, compared with $10.5 million for the prior-year period. Income (loss) before income taxes for the third quarter and the first nine months of fiscal 2019, due primarily2020 included a reversal of a $6.1 million contingent earnout liability, non-cash impairment charges of $13.6 million related to the decreasehome accessories division, and a $35,000 restructuring credit associated with the closure of our Anderson, SC, upholstery fabrics facility, resulting in salesa non-cash net charge of mattress$7.5 million for the third quarter of fiscal 2020. In addition to the restructuring credit recorded in the third quarter of fiscal 2020, we recorded a restructuring credit of $35,000 during the first quarter of fiscal 2020 associated with the closure of our Anderson, SC, upholstery fabrics noted above.

Additionally, our incomefacility. Income before income taxes was affected byfor the third quarter and the first nine months of the prior fiscal year included a non-recurring charge of $769,000 in the third quarter and a non-recurring charge of $2.2 million in the first nine-monthsnine months of fiscal 2019, related to the closure of our upholstery fabrics operation located in Anderson, SC, and other non-recurring charges.

In addition to the non-recurring charges noted above, income (loss) before income taxes for the third quarter and first nine months of fiscal 2020 was primarily affected by lower sales.

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Additionally, unallocated corporate SG&A expense was higher during the first nine months of fiscal 2020, 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 decreases in our income tax expense and effective income tax rate for the third quarter and the nine-month year-to-date period of fiscal 2019 are mostly2020 was 142.8% compared with 32.5% for the same period a year ago. The increase in our effective income tax rate reflects the significant decline in our projected annual consolidated taxable income, particularly in the U.S., and the mix of our consolidated taxable income that is earned by our foreign operations located in China and Canada that have higher income tax rates in relation to the U.S. This current mix of taxable income has led to a significant increase in our effective income tax rate that is associated with our Global Intangible Low Tax Income (GILTI) tax, which represents a U.S. income tax on foreign earnings. Additionally, our effective income tax rate significantly increased due to a provisionalthe income tax chargeeffects of $5.9 million, related to the 2017 Tax Cuts and Jobs Act (the “Tax Act”) that was recordedour asset impairments associated with our home accessories segment incurred during the third quarter and the nine-month year-to-date period of fiscal 2018. The $5.9 million provisional charge consists of $4.8 million for the one-time mandatory repatriation tax onthat were attributable to our undistributed earnings from our foreign subsidiaries and $1.1 million for the revaluation of our U.S. deferred income taxes and reduction in the U.S. Federal corporate income tax rate pursuant to the Tax Act.

I - 46


During the third quarter and the year-to-date period of fiscal 2019, we completed our assessment of the effects of the Tax Act in connection with our fiscal 2018 U.S. Federal income tax return filing. In accordance with SEC Staff Accounting Bulletin No. 118, we recorded our final provisional adjustments within the one-year time period from the December 22, 2017, enactment date. Our final provisional adjustments totaled to an income tax benefit of $593,000. The $593,000 income tax benefit represents $310,000 for the re-measurement of our U.S. deferred income taxes and $283,000 for the one-time mandatory repatriation tax on our undistributed earnings from our foreign subsidiaries.

non-controlling interest.

Refer to Note 19note 17 located in the notes to the consolidated financial statements for further details regarding our provision for income taxes.


Liquidity


At January 27, 2019,February 2, 2020, our cash and investments (which comprise cash and cash equivalents, short-term investments (available for sale)(available-for-sale), and short-term and long-term investments (held-to-maturity)), totaled $40.0$34.8 million compared with $54.5$45.0 million at April 29, 2018.  Additionally, we did not have any outstanding borrowings on our lines of credits as of January 27,28, 2019.


The This decrease in our cash and investments from the end of fiscal 20182019 was primarily due to net cash used in operating activities totaling $519,000, $4.5 million returned to shareholders in the form of regular quarterly dividend payments of $12.1and common stock share repurchases, $4.1 million for acquisitions, capital expenditures totaling $4.4 million (of which $1.4 million was vendor-financed) that were mostly associated with our mattress fabrics segment, $6.8and $1.5 million returned tofor additional cash payments on our shareholders primarily in the form of our regular quarterly cash dividend payments and common stock share repurchases, and $1.3 million in employee withholding tax payments associated with the vesting of certain stock-based compensation awards, partially offset byrecent acquisitions.

Our net cash provided byused in operating activities totaling $8.1 million and proceeds fromwas $519,000 for the salefirst nine months of property, plant, and equipment of $1.9 million associatedfiscal 2020, compared with our closed upholstery fabrics facility located in Anderson, SC.


Our net cash provided by operating activities of $8.1 million through the third quarter of fiscal 2019 decreased from $21.5 million duringfor the same period a year ago. This trend isdecrease was due primarily due to the decreasetiming of payments in cash flow from earnings as a resultadvance of the lower mattress fabrics sales noted above.
See the Liquidity section below for further details.

Chinese New Year shutdowns and higher than expected inventories.

At February 2, 2020, our borrowings totaling $925,000 related to our subordinated loan payable between eLuxury and its minority owner.

Dividend and Common Stock Repurchase Programs


Program

On February 27, 2019,March 4, 2020, we announced that our board of directors approved a quarterly cash dividend of $0.10$0.105 per share. This paymentshare, that will be madepaid on April 15, 2019,2020, to shareholders of record as of April 1, 2019.

I - 47


7, 2020.

During the nine monthsnine-month period ended February 2, 2020, dividend payments totaled $3.8 million, which represented quarterly dividend payments ranging from $0.10 per share to $0.105 per share. During the nine-month period ended January 27, 2019, dividend payments totaled $3.5 million, which represented quarterly dividend payments ranging fromof $0.09 per share to $0.10 per share.

Common Stock Repurchase Program

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. During the nine monthsnine-month period ended January 28, 2018, dividend payments totaled $5.7February 2, 2020, we purchased 55,750 shares of common stock at a cost of $728,000 pursuant to this authorization, all of which was purchased during the third quarter. As a result, at February 2, 2020, we had $4.3 million available for future repurchases of our common stock associated with the $5.0 million repurchase program approved by our board of directors on September 5, 2019.

On March 4, 2020, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $3.1 million represented quarterly dividend payments ranging from $0.08 per share to $0.09 per share.


our common stock.

During the nine-month period ended January 27, 2019, we purchased 160,423 shares of our common stock at a cost of $3.3 million. DuringThe 160,423 shares were purchased pursuant to a prior authorization approved by our board of directors on June 15, 2016.

Coronavirus Impact

Currently, we have not experienced significant impacts to our operations from the nine-month period ended January 28, 2018, we did not purchasecoronavirus outbreak in any shares of our common stock.


business segments.  

In our upholstery fabrics business, our Culp China location is operating at normal levels with virtually all employees reporting to work following the additional week of shutdowns required by the Chinese government after the Chinese New Year holiday. We have a stable, long-term supply base in China and have experienced minimal delays as most of our suppliers are back to near full output. We have also relocated a considerable amount of our cut and sew production to two facilities we work with in Vietnam.  

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In both our mattress fabrics and home accessories business segments, we are not currently experiencing any significant delays in Asia, and we also have alternative locations for production as needed. This includes production or sourcing capabilities in the U.S., Canada, Haiti, Vietnam, and Turkey.

We are monitoring the situation daily and following the processes and procedures provided for in the company’s global pandemic disease contingency plan to protect our workforce.  However, the potential impact of the coronavirus is difficult to estimate reasonably at this point given the fluidity in circumstances related to the disease and the actions being taken to control its spread.  If conditions relating to the virus worsen, our operations and supply chain, particularly in China, could be disrupted, and consumer confidence could be negatively affected, which could adversely affect our financial results.

Segment Analysis


Mattress Fabrics Segment

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

Change

 

Net sales

 

$

33,105

 

 

$

35,732

 

 

 

(7.4

)%

Gross profit

 

 

4,614

 

 

 

5,963

 

 

 

(22.6

)%

Gross profit margin

 

 

13.9

%

 

 

16.7

%

 

(280)bp

 

SG&A expenses

 

 

2,836

 

 

 

2,755

 

 

 

2.9

%

Income from operations

 

 

1,777

 

 

 

3,208

 

 

 

(44.6

)%

Operating margin

 

 

5.4

%

 

 

9.0

%

 

(360)bp

 


 

 

Nine Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

Change

 

Net sales

 

$

107,250

 

 

$

107,335

 

 

 

(0.1

)%

Gross profit

 

 

16,553

 

 

 

17,050

 

 

 

(2.9

)%

Gross profit margin

 

 

15.4

%

 

 

15.9

%

 

(50)bp

 

SG&A expenses

 

 

8,860

 

 

 

8,141

 

 

 

8.8

%

Income from operations

 

 

7,693

 

 

 

8,910

 

 

 

(13.7

)%

Operating margin

 

 

7.2

%

 

 

8.3

%

 

(110)bp

 

  Three Months Ended    
(dollars in thousands) January 27, 2019  January 28, 2018  Change 
          
Net sales $35,732  $49,042   (27.1)%
Gross profit  5,963   10,146   (41.2)%
Gross profit margin  16.7%  20.7%  (400)bp
SG&A expenses  2,755   3,309   (16.7)%
Income from operations  3,208   6,837   (53.1)%
Operating margin  9.0%  13.9%  (490)bp

  Nine Months Ended    
(dollars in thousands) January 27, 2019  January 28, 2018  Change 
          
Net sales $107,335  $146,072   (26.5)%
Gross profit  17,050   29,641   (42.5)%
Gross profit margin  15.9%  20.3%  (440)bp
SG&A expenses  8,141   9,868   (17.5)%
Non-recurring charges  248   -   100.0%
Income from operations  8,910   19,774   (54.9)%
Operating margin  8.3%  13.5%  (520)bp

Net Sales


The decreasesdecrease in mattress fabrics net sales for the third quarter and the first nine months of fiscal 2019 reflect2020 reflects the impact of holiday shutdowns in Haiti and China on our CLASS sewn cover business, as well as continued challenges facingindustry weakness for our legacy mattress fabrics customers. Mattress covers have become an increasingly important part of our mattress fabrics business, and losing multiple productive weeks caused a more significant impact when combined with continued industry weakness in our legacy business. Also, the bedding industry related toanti-dumping measures enacted by the high volume of low-priced imported mattresses from China. Delays resulting from the recent U.S. government shutdown affectedrelating to low-priced imports from China have not yet provided the timingrelief expected for the domestic mattress industry. The first nine months of expected punitive measures against Chinese importers,fiscal 2020 had 40 weeks compared to 39 weeks for the first nine months of fiscal 2019.

While the holiday shutdowns disrupted our CLASS sewn cover operations in Haiti and China during the third quarter, this business experienced continued growth during the quarter. Demand trends for mattress covers remain favorable, especially for the growing boxed bedding space, and we continue to develop fresh products with both new and existing customers.  Our production capabilities for sewn covers in the U.S., Haiti, and Asia support our diversification strategy and allow us to maximize our full supply chain potential from fabric to finished covers.

The domestic disruption from low-priced mattress imports from China appears to be continuing as a preliminary ruling now expected in late May 2019. Additionally, the increased influxresult of sources for many of these low-priced imports during late 2018 created excess inventory in the third quarter. As a result,moving to other countries, and we continued to experience reduced demand forexpect mattress fabric and sewn covers from our major customers. Third quarter sales were also affected by weather disruptions and the usual seasonal slowdown for the holidays, compounded by a weak retail and e-commerce sales environment.

I - 48


Currently, we expect the ongoing challenges in the mattress industry will continue to affect short-term demand trends and operating performance. Although import activity appearsbe pressured due to be slowing, and some customers are beginning to alter supply chains away from China, there remains a large excess of inventory that will likely takeongoing softness in our legacy business through at least through the fourth quarter of fiscal 20192020.  Despite this trend, we believe our strong global platform for fabric and covers in Asia has us well positioned to sell off.capture market share with imported mattresses going forward. We also continue to invest in our design and marketing capabilities with technologies to improve the customer experience and speed to market, and we are enhancing our service platform to be more responsive to customer demand with shorter lead times. We believe expected anti-dumping measureswe will benefit from these advanced technologies and processes that support our sales and marketing efforts with both legacy and new customers.  

Our expectations for the U.S. government will ultimately benefitfourth quarter and beyond assume the coronavirus outbreak does not have a greater than anticipated impact on the operations of our customers and our business.mattress fabrics segment. We are beginningnot currently experiencing any significant delays or disruption as a result of the virus, including with respect to see some positive developmentsour operations in China. We also have alternative locations for production and improvementsourcing as needed, including capabilities in sequential demand trends asthe U.S., Canada, Haiti, Vietnam, and Turkey. While we cannot predict whether the virus will have any negative impact on our design strengthsoperations or consumer confidence in the future, we believe our global platform supports our ability to manage disruption created by the

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outbreak. However, the potential impact of the coronavirus is difficult to estimate, and efficient manufacturing platform are providing market share gainif conditions relating to the outbreak worsen, the impact on our employees, suppliers, consumers, and improved operating results.  Nevertheless, it remains uncertain as to when demand trends will return to normal levels.


the global economy could adversely affect our operations and financial performance.

Gross Profit and Operating Income


Our operating profits declined in the third quarter and first nine months of fiscal 20192020 compared with the same periods a year ago, due primarily to the decrease in net sales noted above.  In addition, we had a non-recurring charge of $248,000 relating to employee termination benefits and other operational reorganization costs that were recorded in the second quarter of fiscal 2019.


Over the past several years, we have invested substantially in creating a sustainable and efficient platform with enhanced production and distribution capabilities.  As a result, we have improved our operating efficiencies with the ability to control both variable and fixed costs.  Additionally, these capabilities allow us to provide a full complement of mattress fabrics and sewn covers and maintain flexibility to adapt to evolving customer needs.  We continue to focus on maximizing the efficiency of our operations and aligning our costs with current and expected demand trends.  In addition, due to the lower demand, we have reduced our capital expenditure budget and deferred certain capital projects that were originally expected to be completed in fiscal 2019.
I - 49

Segment assets


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

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

Accounts receivable

 

$

12,940

 

 

$

12,373

 

 

$

12,098

 

Inventory

 

 

29,753

 

 

 

26,243

 

 

 

24,649

 

Assets held for sale

 

 

67

 

 

 

 

 

 

 

Property, plant & equipment

 

 

42,368

 

 

 

45,845

 

 

 

44,266

 

Right of use assets

 

 

426

 

 

 

 

 

 

 

Investment in unconsolidated joint venture

 

 

1,668

 

 

 

1,512

 

 

 

1,508

 

 

 

$

87,222

 

 

$

85,973

 

 

$

82,521

 


 
(dollars in thousands)
 
January 27,
2019
  
January 28,
2018
  
April 29,
2018
 
Accounts receivable $12,373  $12,840  $15,195 
Inventory  26,243   29,355   28,740 
Property, plant & equipment  45,845   49,289   48,797 
 Investment in unconsolidated joint venture  1,512
   1,518
   1,501
 

Refer to Note 18note 16 located in the notes to the consolidated financial statements for disclosures regarding determination of our segment assets.


Accounts Receivable


As of February 2, 2020, accounts receivable increased 4.6% compared with January 27, 2019, accounts receivable decreased by 3.6%and increased 7.0% compared with April 28, 2019. These increases resulted from a change in discount credit terms with key customers and fewer customers taking advantage of discounts during fiscal 2020 as compared with fiscal 2019.

Inventory

As of February 2, 2020, inventory increased $3.5 million, or 13.3%, compared with January 28, 2018. This decrease reflects the decrease in net sales of 27.1%  for the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 as noted above, mostly offset by higher days’ sales outstanding of 32 days for the third quarter of fiscal 2019 compared with 24 days for the third quarter of fiscal 2018. The increase in days’ sales outstanding is primarily due to a significant increase in net sales at the end of third quarter of fiscal 2019 compared to the third quarter of fiscal 2018. Net sales in January 2019 increased 27.1% compared with December 2018, as opposed to net sales in January 2018 decreasing 8.3% compared with December 2017.


As of January 27, 2019, accounts receivable decreased by $2.8and increased $5.1 million, or 18.6%20.7%, compared with April 29, 2018. The decrease primarily reflects a decrease28, 2019. These increases represent inventory purchases in net salesexcess of 23.2% for the third quarter of fiscal 2019 compared with the fourth quarter of fiscal 2018, partially offset by higher days’ sales outstanding of 32 days for the third quarter of fiscal 2019 compared with 29 days for the fourth quarter of fiscal 2018.

Inventory

As of January 27, 2019,actual demand trends, which were lower than anticipated. Currently, management is adjusting inventory decreased compared with January 28, 2018, and April 28, 2018, respectively. This trend primarily represents the decrease in net sales noted above during the third quarter of fiscal 2019 compared with the third quarter of 2018 and fourth quarter of 2018, respectively.
I - 50

purchases to reduce inventory levels.

Property, Plant, & Equipment


As of January 27, 2019,February 2, 2020, property plant, and equipment decreased in comparison towith January 28, 2018,27, 2019, and April 29, 2018.28, 2019. This trend represents a decrease in capital expenditure requirements and a progression toward a more maintenance level of spending foron our machinery and equipment. Through

The $42.4 million at February 2, 2020, represents property, plant, and equipment of $28.7 million and $13.7 million located in the third quarter of fiscal 2019, our mattress fabrics segment reported $2.3 million of capital expenditures compared with $6.7 million during fiscal 2018U.S. and $17.7 million during fiscal 2017,Canada, respectively.


The $45.8 million at January 27, 2019, represents property, plant, and equipment of $33.5 million and $12.3 million located in the U.S. and Canada, respectively. The $49.3$44.3 million at JanuaryApril 28, 2018,2019, represents property, plant, and equipment of $35.6$32.4 million and $13.7$11.9 million located in the U.S. and Canada, respectively. The $48.8 million at April 29, 2018, represents property, plant,

Right of Use Assets

As of February 2, 2020, our right of use assets balance mostly reflects the adoption of ASU No. 2016-02, Leases (Topic 842). See notes 2 and equipment of $35.4 million and $13.4 million19 located in the notes to the consolidated financial statements for further details. The $426,000 represents right of use assets located in the U.S. and Canada, respectively.


Investment in Unconsolidated Joint Venture


Our investment in unconsolidated joint venture represents our fifty percent ownership of Class International Holdings Ltd. (See Notenote 9 located in the notes to the consolidated financial statements for further details).


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Table of Contents

Upholstery Fabrics Segment


Net Sales

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

 

 

 

 

January 27,

2019

 

 

 

 

 

 

% Change

 

Non-U.S. Produced

 

$

31,980

 

 

 

91

%

 

$

34,450

 

 

 

93

%

 

 

(7.2

)%

U.S. Produced

 

 

3,007

 

 

 

9

%

 

 

2,654

 

 

 

7

%

 

 

13.3

%

Total

 

$

34,987

 

 

 

100

%

 

$

37,104

 

 

 

100

%

 

 

(5.7

)%


 

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

 

 

 

 

January 27,

2019

 

 

 

 

 

 

% Change

 

Non-U.S. Produced

 

$

92,525

 

 

 

92

%

 

$

95,361

 

 

 

89

%

 

 

(3.0

)%

U.S. Produced

 

 

8,205

 

 

 

8

%

 

 

11,250

 

 

 

11

%

 

 

(27.1

)%

Total

 

$

100,730

 

 

 

100

%

 

$

106,611

 

 

 

100

%

 

 

(5.5

)%

   Three Months Ended     
 
(dollars in thousands)
January 27,
2019
   
January 28,
2018
   % Change 
           
Non U.S. Produced $34,450   93% $34,282   95%  0.5%
U.S. Produced  2,654   7%  1,986   5%  33.6%
Total $37,104   100% $36,268   100%  2.3%


   Nine Months Ended     
 
(dollars in thousands)
January 27,
2019
   
January 28,
2018
   % Change 
           
Non U.S. Produced $95,361   89% $93,806   94%  1.7%
U.S. Produced  11,250   11%  5,663   6%  98.7%
Total $106,611   100% $99,469   100%  7.2%

Net sales in this segment increaseddecreased in the third quarter and the first nine months of fiscal 2019.  These increases include2020 as compared to the contribution from Read, acquired on April 1, 2018, partially offset bysame period a year ago. The first nine months of fiscal 2020 had 40 weeks compared to 39 weeks for the declinefirst nine months of fiscal 2019.

The third quarter drop in net sales for this segment relates to a slowdown in shipments heading into the Chinese New Year. It is difficult to predict the impact of the holiday shutdown from year to year, and this year we experienced a greater than expected decline in January leading up to the holiday period. As a result, we showed a modest drop in sales for the third quarter of fiscal 2020 compared with a very strong sales performance in the prior-year period, which was positively affected by advance customer purchases in anticipation of additional tariffs.  

The decrease in upholstery fabrics net sales for the first nine months of fiscal 2020 primarily relates to the slowdown in shipments noted for the third quarter, as well as the soft retail environment for residential furniture and ongoing issues surrounding international trade agreements and the associated withtariffs during the first half of the year. Additionally, the drop in U.S. produced sales for the first nine months of fiscal 2020 reflects the closure of our Anderson, SC, production facility that was completed during the second quarter of fiscal 2019, as net sales for the first six months of fiscal 2019 included sales from the Anderson facility, whereas there were no such sales in the first six months of fiscal 2020.

Despite these challenges, we have continued to execute our strategic focus of introducing new products and diversifying our customer base. We experienced continued growth in our hospitality business, as we have expanded our reach in this growing market. Read Window Products, our window treatment and installation services business, is a key driver of this strategy. Additionally, our line of LiveSmart® performance fabrics continues to be very popular with both existing and new residential furniture customers, and we have experienced favorable demand trends for LiveSmart Evolve™, our recently introduced line of sustainability fabrics featuring the timinguse of recycled fibers along with the same stain-resistant performance. This product line has received extensive placements for the upcoming April furniture market, and we expect to see continued growth as a product that can fulfill the desires of environmentally conscious consumers.

Our expectations for the fourth quarter and beyond assume the coronavirus outbreak does not have a greater than anticipated impact on the operations of our upholstery fabrics segment. We are not currently experiencing any significant delays or disruption as a result of the virus, and our Culp China location is operating at normal levels with virtually all employees reporting to work following the additional week of shutdowns required by the China government after the Chinese New Year holiday.

I - 51


Additionally, these results reflect our product-driven strategy and various growth initiatives.  Our ability to provide We have also built a diverse product offering and creative designs has allowed us to reach new market segments and expand our customerstable, long-term supply base in bothChina, and we have experienced minimal delays as most of our suppliers are back to nearly full output. However, the residentialpotential impact of the coronavirus is difficult to estimate, and hospitality markets.  Our results reflectif conditions relating to the continued success of this strategy, highlighted by expanded sales of LiveSmart®,outbreak worsen, the impact on our “performance” line of highly durable, stain-resistant fabric. 

employees, suppliers, consumers, and the global economy could adversely affect our operations and financial performance.

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

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

Change

 

Gross profit

 

$

6,906

 

 

$

7,624

 

 

 

(9.4

)%

Gross profit margin

 

 

19.7

%

 

 

20.5

%

 

(80)bp

 

SG&A expenses

 

 

3,876

 

 

 

3,825

 

 

 

1.3

%

Income from operations

 

 

3,030

 

 

 

3,799

 

 

 

(20.2

)%

Operating margin

 

 

8.7

%

 

 

10.2

%

 

(150)bp

 

Restructuring related charges

 

 

 

 

 

554

 

 

 

(100.0

)%

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Table of Contents


 

 

Nine Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

Change

 

Gross profit

 

$

20,905

 

 

$

20,031

 

 

 

4.4

%

Gross profit margin

 

 

20.8

%

 

 

18.8

%

 

200bp

 

SG&A expenses

 

 

11,528

 

 

 

10,985

 

 

 

4.9

%

Income from operations

 

 

9,378

 

 

 

9,044

 

 

 

3.7

%

Operating margin

 

 

9.3

%

 

 

8.5

%

 

80bp

 

Restructuring related charges

 

 

 

 

 

2,388

 

 

 

(100.0

)%

  Three Months Ended    
(dollars in thousands) January 27, 2019  January 28, 2019  Change 
          
Gross profit $7,624  $7,457   2.2%
Gross profit margin  20.5%  20.6%  (10)bp
SG&A expenses  3,825   3,947   (3.1)%
Income from operations  3,799   3,510   8.2%
Operating margin  10.2%  9.7%  50bp
Restructuring related charges  554   -   100%


  Nine Months Ended    
(dollars in thousands) January 27, 2019  January 28, 2018  Change 
          
Gross profit $20,031  $20,232   (1.0)%
Gross profit margin  18.8%  20.3%  (150)bp
SG&A expenses  10,985   11,458   (4.1)%
Income from operations  9,044   8,773   3.1%
Operating margin  8.5%  8.8%  (30)bp
Restructuring related charges  2,388   -   100%

Our gross profit and operating income both improved duringperformance declined in the third quarter of fiscal 20192020 compared with the same period a year ago. However, gross profit was lower andago due primarily to the decrease in net sales noted above.

Our improved operating income was higherperformance for the first nine months of fiscal 2019 compared2020 reflects a more profitable product mix and more favorable foreign currency exchange rates associated with our operations located in China, leading to the same period last year. Ourhigher gross profit and operating income reflected the increase in net sales noted above and operating margins reflect lower operating costs associated with fluctuations in foreign currency exchange rates in China. Additionally, with the closure of our Anderson, SC, production facility, we incurred restructuring and related charges of $554,000 and $2.3 million during the third quarter and year-to-date period of fiscal 2019.


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.SC. 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.

I - 52

The following summarizes our restructuring credit and restructuring related charges totaling $340,000 during the third quarter that were associated with the above exit and disposal activity:

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Inventory markdowns

 

$

 

 

$

1,564

 

Employee termination benefits

 

 

(70

)

 

 

661

 

Other operational costs associated with a closed plant

   facility

 

 

 

 

 

824

 

Gain on sale of equipment

 

 

 

 

 

(1,486

)

Restructuring credit and restructuring related charges (1) (2)

 

$

(70

)

 

$

1,563

 

 

 

 

 

 

 

 

 

 

(1)

The $70,000 credit was recorded to restructuring credit in the Consolidated Statements of Net Income for the nine-month period ending February 2, 2020.

(2)

Of this total net charge, a $2.3 million charge, a charge of $40,000, and a credit of $825,000 were recorded to cost of sales, selling, general, and administrative expense, and restructuring credit, respectively, in the Consolidated Statements of Net Income for the nine-month period ending January 27, 2019.

   
 Three months ended 
 January 27, 
(dollars in thousands)2019 
Other operating costs associated with a closed facility $554 
Employee termination benefits  148 
Gain on sale of building and land  (362)
  $340 

Of this total net charge, a charge of $514,000, a charge of $40,000, and a credit of $214,000 were recorded in cost of sales, selling, general, and administrative expenses, and restructuring credit, respectively in the Consolidated Statement of Net Income for the three-month period ending January 27, 2019.

The following summarizes ourthe activity in accrued restructuring credit and related charges totaling $1.6 million during the first nine months of fiscal 2019costs:

 

 

Nine months ended

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

Beginning balance

 

$

124

 

 

$

 

Accrual established in fiscal 2019

 

 

 

 

 

451

 

Payments

 

 

(54

)

 

 

(434

)

Adjustments

 

 

(70

)

 

 

211

 

Ending balance

 

$

 

 

$

228

 

The above restructuring accrual pertains to employee termination benefits that were associated with the above exit and disposal activity:

    
  Nine months ended 
  January 27, 
(dollars in thousands) 2019 
Inventory markdowns $1,564 
Other operating costs associated with a closed facility  824 
Employee termination benefits  661 
Gain on sale of property, plant, and equipment  (1,486)
  $1,563 

Of this total net charge, a charge of $2.3 million, a charge of $40,000, and a credit of $825,000 were recorded in cost of sales, selling, general, and administrative expenses, and restructuring credit, respectively, in the Consolidated Statement of Net Income for the nine-month period ending January 27, 2019.

activity.

Segment Assets


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

I-37


Table of Contents

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

Accounts receivable

 

$

12,908

 

 

$

13,367

 

 

$

11,274

 

Inventory

 

 

24,256

 

 

 

26,067

 

 

 

22,915

 

Property, plant & equipment

 

 

1,675

 

 

 

1,957

 

 

 

1,795

 

Right of use assets

 

 

2,143

 

 

 

 

 

 

 

 

 

$

40,982

 

 

$

41,391

 

 

$

35,984

 


(dollars in thousands) January 27, 2019  January 28, 2018  April 29, 2018 
Accounts receivable $13,367  $13,257  $11,112 
Inventory  26,067   26,296   24,714 
Property, plant & equipment  1,957   2,101   2,445 

I - 53


Refer to Note 18note 16 located in the notes to the consolidated financial statements for disclosures regarding determination of our segment assets.


Accounts Receivable


As of January 27, 2019,February 2, 2020, accounts receivable increased slightlydecreased by 3.4% compared with January 28, 2018, as27, 2019. This decrease primarily reflects the 5.7% decrease in net sales forduring the third quarter of fiscal 2019 were modestly higher2020 compared with the third quarter of fiscal 2018, as noted above.


2019.

As of January 27, 2019,February 2, 2020, accounts receivable increased by $2.3$1.6 million, or 20.3%14.5%, compared with April 29, 2018.28, 2019. This increase primarily reflects anthe increase in net sales during the third quarter of fiscal 20192020 compared with fourth quarter of fiscal 2018. Net sales were $37.1 million during the third quarter of fiscal 2019, an increase of $5.4 million or 17.2 percent, compared with $31.7 million during the fourth quarter of fiscal 2018.  This increase in net sales was2019 due to the timing of the Chinese New Year Holiday. As a result, many of our customers shifted more of their purchases into January 2018, in advance of holiday plant shutdowns in order meet anticipated demand.


Inventory

As of January 27, 2019, inventory was comparable with January 28, 2018, as netholiday. Net sales forduring the third quarter of fiscal 2019 2020 were comparable$35.0 million, an increase of $6.0 million, or 20.5%, compared with net sales of $29.0 million during the fourth quarter of fiscal 2019.

Inventory

As of February 2, 2020, inventory decreased $1.8 million, or 6.9%, compared with January 27, 2019. This decrease primarily reflects the 5.7% decrease in net sales during the third quarter of fiscal 2018, as noted above.


2020, compared with the third quarter of fiscal 2019.

As of January 27, 2019,February 2, 2020, inventory increased by $1.4$1.3 million, or 5.5%5.9%, compared with April 29, 2018.28, 2019. This increase wasreflects higher inventory costs due to the increase in net sales relatedU.S. tariffs imposed on our inventory produced in China and sold to our customers located in the U.S., as well as the timing of the Chinese New Year.


Year holiday.

Property, Plant, & Equipment


The $1.7 million at February 2, 2020, represents property, plant, and equipment of $1.2 million and $469,000 located in the U.S. and China, respectively. The $2.0 million at January 27, 2019, represents property, plant, and equipment of $1.3 million and $615,000 located in the U.S. and China, respectively. The $2.1$1.8 million at JanuaryApril 28, 2018,2019, represents property, plant, and equipment of $1.4$1.2 million and $711,000$591,000 located in the U.S. and China, respectively. The $2.4 million at April 29, 2018, represents property, plant,

Right of Use Assets

As of February 2, 2020, our right of use assets balance mostly reflects the adoption of ASU No. 2016-02, Leases (Topic 842). See notes 2 and equipment of $1.8 million and $661,00019 located in the U.S.notes to the consolidated financial statements for further details. The $2.1 million represents right of use assets of $1.1 million and $1.0 million located in China and the U.S., respectively.


I - 54


Home Accessories Segment

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

Change

 

Net sales

 

$

3,906

 

 

$

4,390

 

 

 

(11.0

)%

Gross profit

 

 

864

 

 

 

1,050

 

 

 

(17.7

)%

Gross profit margin

 

 

22.1

%

 

 

23.9

%

 

(180)bp

 

SG&A expenses

 

 

1,046

 

 

 

1,361

 

 

 

(23.1

)%

Asset impairments

 

 

13,639

 

 

 

 

 

 

100.0

%

Loss from operations

 

 

(181

)

 

 

(311

)

 

 

(41.8

)%

Operating margin

 

 

(4.6

)%

 

 

(7.1

)%

 

(250)bp

 

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Table of Contents


 

 

Nine Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020 (1)

 

 

January 27,

2019 (1)

 

 

Change

 

Net sales

 

$

11,485

 

 

$

11,759

 

 

 

(2.3

)%

Gross profit

 

 

2,395

 

 

 

3,435

 

 

 

(30.3

)%

Gross profit margin

 

 

20.9

%

 

 

29.2

%

 

(830)bp

 

SG&A expenses

 

 

3,462

 

 

 

3,690

 

 

 

(6.2

)%

Asset impairments

 

 

13,639

 

 

 

 

 

 

100.0

%

Loss from operations

 

 

(1,068

)

 

 

(254

)

 

 

320.5

%

Operating margin

 

 

(9.3

)%

 

 

(2.2

)%

 

710bp

 

  Three Months Ended 
(dollars in thousands) January 27, 2019  January 28, 2018 
       
Net sales $4,390  $- 
Gross profit  1,050   - 
Gross profit margin  23.9%  - 
SG&A expenses  1,361   - 
Loss from operations  (311)  - 
Operating margin  (7.1)%  - 


(1)

The first nine months of fiscal 2020 included 40 weeks, whereas the first nine months of fiscal 2019 included only 32 weeks as a result of the June 22, 2018, investment in eLuxury.


  Nine Months Ended 
(dollars in thousands) January 27, 2019  January 28, 2018 
       
Net sales $11,759  $- 
Gross profit  3,435   - 
Gross profit margin  29.2%  - 
SG&A expenses  3,690   - 
Loss from operations  (254)  - 
Operating margin  (2.2)%  - 


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, net sales for the third quarter of fiscal 2020 were $3.9 million, compared with $4.4 million for the prior year period. For this segment, the first nine months of fiscal 2020 had 40 weeks, compared to 32 weeks for the first nine months of fiscal 2019, as a result of the June 22, 2018, investment in eLuxury. Net sales for this segment for the first nine months of fiscal 2020 were $11.5 million, compared with $11.8 million for the 32-week period of fiscal 2019.

The decline in net sales for our home accessories segment were $4.4 millionreflects reduced demand for our bedding products on Amazon, a principal sales channel for this segment’s legacy e-commerce business. As noted in recent press reports, the Amazon marketplace and many of its trusted third-party sellers, including eLuxury, have been negatively affected by new sellers operating outside of Amazon’s normal terms of service.

The operating loss for our home accessories segment for the third quarter of fiscal 2019,2020, excluding the non-cash impairment charge associated with no comparable prior-year sales,this segment, showed meaningful sequential improvement as compared to the first and $11.8 million since the June 2018 investment date in eLuxury, with no comparable prior-year sales.


The third quarter and year-to-date financial results reflect typical product roll-out, sampling and marketing challenges in connection with the start-up and integrationsecond quarters of a newly combined platform.  These challenges, along with a weak retail and e-commerce sales environment, unfavorably affected our financialfiscal 2020. The results for the third quarter, as well as the first nine months of fiscal 2020, reflect the decline in sales noted above. Our SG&A expenses declined 23.1% for the third quarter as a result of our strategic initiative to reduce marketing fees and year-to-date period.
promotional expenses and focus on improving margins. SG&A expenses increased slightly for the first nine months of fiscal 2020 due to an extra eight weeks in this period as compared to the prior-year period, offset by the reduction in SG&A expenses in the second and third quarters of fiscal 2020.

In accordance with ASC Topic 350, we assess goodwill and other indefinite-lived intangible assets 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. As a result of slower than expected growth on new e-commerce and business-to-business sales channels for this segment, and changes in future growth assumptions based on current economic conditions in the e-commerce space, management determined that impairment indicators existed for the third quarter of fiscal 2020. Accordingly, this determination required an interim assessment of the goodwill and other intangible assets for the home accessories segment. Based on this assessment, the company recorded a non-cash impairment charge of $11.2 million for goodwill and $2.4 million for certain indefinite-lived assets (trademarks and tradenames) associated with the home accessories segment. I - 55In accordance with ASC Topic 350, management will continue to assess whether impairment indicators exist each quarter, which could result in possible additional future write-downs in accordance with our policy.



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 have an arrayworked hard to refine our strategy and drive improved results for this business. While it is taking longer than we expected to reach our initial projections, we are encouraged by recent opportunities with new online marketplaces and business-to-business sales channels. We also remain dedicated to improving our performance on Amazon, a principal sales channel for our legacy e-commerce business, despite the challenging sales environment created primarily as a result of many new sellers operating on this platform in violation of Amazon’s normal terms of services. In tandem with these strategies, we are continuing to develop new products featuring Culp mattress fabrics and upholstery fabrics in inventory that we plan to market through this new sales channel.


Our expectations for the fourth quarter and beyond assume the coronavirus outbreak does not have a greater than anticipated impact on the operations of our home accessories segment. We are not currently experiencing any significant delays or disruption as a result of the virus, and we also have alternative locations for production and sourcing, as needed. However, the potential impact of the coronavirus is difficult to estimate, and if conditions relating to the outbreak worsen, the impact on our employees, suppliers, distribution channels, consumers, and the global economy could adversely affect our operations and financial performance.

I-39


Table of Contents

eLuxury


Overview

Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement) pursuant to 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 asand other bedding items. Theiritems sourced from other suppliers. Its products are available on eLuxury’s own branded website, eLuxury.com, as well as Amazon and other leading online retailers for specialty home goods.


This acquisition bringsbrought together eLuxury'seLuxury’s experience in e-commerce, online brand building, and direct to consumerdirect-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 representsrepresented the estimated purchase price and $5.6 million representsrepresented 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 bewas paid in September 2019, subject to certain conditions as defined in the Equity Agreement.


2019.

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.

(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

 

    
(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 

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.

Contingent Consideration

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.

I - 56


Consolidation

We are required to assess the fair value of this earn-out obligation each quarterly reporting period. Based on management’s assessment as of February 2, 2020, we determined it was necessary to adjust forecasted EBITDA as it relates to this earn-out obligation. This determination was based on the future outlook of our home accessories segment and Non-Controlling Interest


its slower than expected business improvement, as well as updated assumptions on economic conditions in the e-commerce space, combined with the upcoming time frame for determining the amount associated with this contingent consideration arrangement. As a result of these factors, we recorded a reversal of $6.1 million for the acquisitionfull amount of our earn-out obligation during the third quarter of fiscal 2020.

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 the company, as the controlling interest holder, and the noncontrolling interest holder. 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, future capital contributions, and equity distributions will be allocated at a percentage of 70% and 30% to the company and the noncontrolling interest holder, respectively.

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Table of Contents

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 we included allprovides information for the accountsequity value of eLuxury as a whole, and is useful in our consolidated financial statements and have eliminated all significant intercompany balances and transactions. Net income (loss) attributableestimating the fair value of the 20% noncontrolling interest. In order to determine the minoritycarrying value of the noncontrolling interest in eLuxury, we applied the Hypothetical-Liquidation-At-Book-Value method (HLBV). HLBV is excluded from total consolidatedan 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 $253,000 at February 2, 2020, mostly represents its $4.6 million fair value determined at the acquisition date, minus its allocation of net income (loss) to arrive at net income (loss) attributable to Culp Inc. common shareholders.


losses which includes a charge for asset impairments of $4.1 million incurred during the third quarter of fiscal 2020, slightly offset by capital contributions totaling $360,000.

Other


Acquisitions

Acquisition costs totaling $270,000 were included in selling, general, and administrative expenses in our Consolidated Statement of Net Income for the nine-month period ending January 27, 2019.


Segment Assets


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

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

Accounts receivable

 

$

766

 

 

$

402

 

 

$

379

 

Inventory

 

 

3,566

 

 

 

3,105

 

 

 

3,296

 

Property, plant & equipment

 

 

1,728

 

 

 

1,985

 

 

 

1,910

 

Right of use assets

 

 

949

 

 

 

 

 

 

 

 

 

$

7,009

 

 

$

5,492

 

 

$

5,585

 


(dollars in thousands) January 29, 2017  January 28, 2018  April 29, 2018 
Accounts receivable $402  $-  $- 
Inventory  3,105   -   - 
Property, plant & equipment  1,985   -   - 

Refer to Note 18note 16 located in the notes to the consolidated financial statements for disclosures regarding determination of our segment assets.


Accounts Receivable

As of February 2, 2020, accounts receivable did not vary by a material amount from levels at January 27, 2019, and April 28, 2019.

Inventory

As of February 2, 2020, inventory did not vary by a material amount from levels at January 27, 2019 and April 28, 2019.

Property, Plant, & Equipment


The $1.7 million at February 2, 2020, $2.0 million at January 27, 2019, representsand $1.9 million at April 28, 2019, represent property, plant, and equipment located in the U.S.


Right of Use Assets

As of February 2, 2020, our right of use assets balance mostly 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 $949,000 represents right of use assets located in the U.S.

Other Income Statement Categories

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

% Change

 

SG&A expenses

 

$

9,952

 

 

$

10,038

 

 

 

(0.9

)%

Reversal of contingent consideration - earn-out obligation

 

 

6,081

 

 

 

 

 

 

100.0

%

Interest expense

 

 

8

 

 

 

 

 

 

100.0

%

Interest income

 

 

242

 

 

 

251

 

 

 

(3.6

)%

Other expense

 

 

267

 

 

 

288

 

 

 

(7.3

)%

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Table of Contents


 

 

Nine Months Ended

 

 

 

 

 

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

% Change

 

SG&A expenses

 

$

30,783

 

 

$

28,174

 

 

 

9.3

%

Reversal of contingent consideration - earn-out obligation

 

 

6,081

 

 

 

 

 

 

100.0

%

Interest expense

 

 

47

 

 

 

38

 

 

 

23.7

%

Interest income

 

 

732

 

 

 

552

 

 

 

32.6

%

Other expense

 

 

441

 

 

 

688

 

 

 

(35.9

)%

  Three Months Ended    
(dollars in thousands) January 27, 2019  January 28, 2018  % Change 
SG&A expenses $10,038  $9,959   0.8%
Interest expense  -   31   (100.0)%
Interest income  251   132   90.2%
Other expense  288   229   25.8%


  Nine Months Ended    
(dollars in thousands) January 27, 2019  January 28, 2018  % Change 
SG&A expenses $28,174  $28,876   (2.4)%
Interest expense  38   69   (44.9)%
Interest income  552   391   41.2%
Other expense  688   903   (23.8)%

I - 57


Selling, General and Administrative Expenses


SG&A

The increase in selling, general, and administrative expenses during the third quarter and year-to-date periodfirst nine months of fiscal 2019 were comparable with the same periods a year ago. This trend is primarily due to increased selling expenses associated with our majority investment in eLuxury, offset by lower incentive compensation expense reflecting weaker financial results for the company in relation to pre-established targets, as well as lower professional fees.


Interest Expense

Interest costs charged to operations through our third quarter of fiscal 2019, were lower2020, compared with the same period a year ago.
ago, is mostly due to the following:


No interest costs

Stock-based compensation expense was $831,000 during the first nine months of fiscal 2020, compared with $373,000 for the construction of qualifying fixed assets were capitalized for the nine-months ended January 27, 2019. Interest costs totaling $99,000 for the construction of qualifying fixed assets were capitalized for the nine-months ended January 28, 2018. These interest costs will be amortized over the related assets’ useful lives.


Interest Income

Duringsame period a year ago. This decrease in stock-based compensation expense during fiscal 2019 reflected change in estimate adjustments that were based on our assessment of the probability of whether certain pre-established targets would be met, and 2018,in turn, determine the number of performance-based restricted stock units expected to vest for awards outstanding. The change in estimate adjustments reflected our interest income was mostlydecrease in profitability during fiscal 2019 stemming from the rapid growth of low-priced mattress imports from China.

Higher selling expenses associated with our investment grade U.S. corporate bonds locatedCLASS mattress cover operation that mostly reflect an increase in net sales that occurred during fiscal 2020.

Interest Expense

Interest expense reflects our historically low amount of borrowings outstanding. At February 2, 2020, our borrowings totaled $925,000 and related to our subordinated loan payable between eLuxury and the Cayman Islands. owner of its non-controlling interest.

Interest Income

The increase in interest income reflects our current investment of excess cash held in U.S. money market funds, bond mutual funds, and investment grade U.S. corporate, foreign, and government bonds.

Other Expense

The decrease in other expense for the third quarter and nine-month year-to-date periodthe first nine months of fiscal 2019,2020, compared with the same periods a year ago, is primarily due to repatriated earnings and profits from our foreign subsidiaries that have been invested in U.S. money market funds at higher interest rates. Additionally, the increase is due to higher participant account balances held in our Rabbi Trust, that is associated with our deferred compensation plan, during fiscal 2019 compared with fiscal 2018.


Other Expense

Other expense increased for the third quarter of fiscal 2019 was comparable with the third quarter of fiscal 2018. This increase is due to less favorable foreign currency exchange rates associated with our operations located in China, partially offset by a decrease in our deferred compensation obligation resulting from unrealized losses incurred on our Rabbi Trust investments during the third quarter of fiscal 2019.

Other expense decreased for the nine-month year-to-date period of fiscal 2019, compared with the same period a year ago. This decrease was mostly due to more favorable foreign currency exchange rates associated with our China operations locatedthat were experienced during fiscal 2020 compared with fiscal 2019. Additionally, the decrease in China.

other expense for the first nine months of fiscal 2020, compared with the same period a year ago, is also due to the realized loss of $94,000 from the sale of short-term investments (available-for-sale) that occurred during the first quarter of fiscal 2019.

Income Taxes


Effective Income Tax Rate


We recorded income tax expense of $2.6 million, or 142.8% of income before income taxes, for the nine-month period ended February 2, 2020, compared with income tax expense of $3.4 million, or 32.5% of income before income taxes, for the nine- monthnine-month period ended January 27, 2019, compared with income tax expense of $12.0 million, or 58.6% of income before income taxes, for the nine-month period ended January 28, 2018.2019. Our effective income tax rates for thesethe nine-month periods ended February 2, 2020, and January 27, 2019, respectively, 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.

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The following schedule summarizes the factors that contributed to the differenceprincipal 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 for the first nine months each fiscal year:
statements:

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Table of Contents

 

 

2020

 

 

2019

 

U.S. federal income tax rate

 

 

21.0

%

 

 

21.0

%

Global Intangible Low Taxed Income Tax (GILTI)

 

 

58.2

 

 

 

2.6

 

Foreign income tax rate differential

 

 

35.7

 

 

 

10.1

 

Non-controlling interest income attributable to a consolidated partnership

 

 

21.0

 

 

 

 

Tax effects of Chinese foreign exchange gains

 

 

4.4

 

 

 

1.4

 

Change in estimate of U.S. valuation allowance

 

 

2.5

 

 

 

1.0

 

Stock-based compensation

 

 

1.2

 

 

 

0.7

 

Tax effects of the 2017 Tax Cuts and Jobs Act

 

 

 

 

 

(5.7

)

Other

 

 

(1.2

)

 

 

1.4

 

 

 

 

142.8

%

 

 

32.5

%


  2019  2018 
Federal income tax rate  21.0%  30.4%
Tax effects of the 2017 Tax Cuts and Jobs Act  (5.7)  28.4 
Foreign income tax rate differential  10.1   3.9 
Global Intangible Low Taxed Income Tax (GILTI)  2.6   - 
Tax effects of Chinese foreign exchange gains (losses)  1.4   (2.9)
Excess income tax deficiency (benefits)        
     related to stock-based compensation  0.7   (2.3)
Other  2.4   1.1 
   32.5%  58.6%

2017 Tax Cuts and Jobs Act

On December 22, 2017 (the Enactment Date), the Tax Cuts and Jobs Act (H.R.1) (the Tax Act) was signed into law.

The key effects of the Tax Act onincrease in our financial statements during fiscal 2019 include the reduction of our U.S federal statutoryeffective income tax rate reflects the significant decline in our projected annual consolidated taxable income, particularly in the U.S., and the mix of our consolidated taxable income that is earned by our foreign corporations located in China and Canada that have higher income tax rates in relation to 21% compared with the blended statutoryU.S. This current mix of taxable income has led to a significant increase in our effective income tax rate of 30.4% during fiscal 2018 and the creation of thethat is associated with our Global Intangible Low TaxedTax Income Tax (GILTI).


In order to calculate GILTI on an interim basis, estimates were required based on (i) projections and estimates associated with tax, which represents a U.S. and foreign pre-tax earnings and income tax expense for fiscal 2019, (ii) projections and estimates regarding certain assets that will be held inon foreign earnings. Additionally, our domestic operations or foreign subsidiaries, and (iii) projections and estimateseffective income tax rate significantly increased due to the income tax effects of our asset impairments associated with our net sales with foreign jurisdictions. Our estimates may change based on actual versus projected results. Our policy to account for GILTI will be to expense this tax in the period incurred.

During our third quarter of fiscal 2019, we completed our assessment of the effects of the Tax Act in connection with our fiscal 2018 U.S. Federal income tax return filing. In accordance with SEC Staff Accounting Bulletin No. 118, we recorded our final provisional adjustments within the one-year time period from the Enactment Date. Our final provisional adjustments recordedhome accessories segment incurred during the third quarter that were attributable to our non-controlling interest.

The U.S. Treasury Department and Internal Revenue Service have issued newly proposed regulations that, if enacted, and if enacted as proposed, could provide us with some relief from the GILTI Tax under the proposed GILTI High-Tax exception, subject to the timing of fiscal 2019, totaledenactment. Additionally, if the U.S. Treasury Department and Internal Revenue Service decide that the GILTI High-Tax exception election will apply retroactively, this could provide us with additional relief beyond the currently proposed regulations. The proposed GILTI High-Tax exception election is not currently available, and any determination with respect to an income taxretroactivity will not be known, until the proposed regulations are finalized and effective. There is no guarantee that the proposed regulations will be enacted, or that there won’t be changes to the final regulations that would reduce or eliminate the relief we would otherwise benefit of $593,000, and represented a discrete event for whichfrom under the full income tax effects were recorded in the three-month and nine-month periods ending January 27, 2019. The $593,000 final provision adjustment represents $310,000 for the re-measurement of our U.S. deferred income taxes and $283,000 for the one-time mandatory repatriation tax on our undistributed earnings from our foreign subsidiaries.


During the third quarter of fiscal 2018, we recorded a provisional income tax charge of $5.9 million, which represented a discrete event for which the full income tax effects were recorded during the three-month and nine-month periods ending January 28, 2018. The $5.9 million provisional income tax charge represents $1.1 million for the re-measurement of our U.S. deferred income taxes and $4.8 million for the one-time mandatory repatriation tax on our undistributed earnings from our foreign subsidiaries.
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proposed regulations.

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.


Refer to Note 19note 17 located in the notes to the consolidated financial statements for disclosures regarding our assessments of our recorded valuation allowance as of February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018,28, 2019, respectively.

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. 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.


Refer to Note 19note 17 located in the Notesnotes to the Consolidated Financial Statementsconsolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with undistributed earnings from our foreign subsidiaries as of February 2, 2020, January 27, 2019, January 28, 2018, and April 29, 2018, respectively


28, 2019, respectively.

Uncertain Income Tax Positions


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.


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Refer to Note 19note 17 located in the Notesnotes to the Consolidated Financial Statementsconsolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of January 27, 2019, January 28, 2018, and April 29, 2018, respectively.

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Income Taxes Paid

We reported income tax expense of $3.4 million and $12.0 million for the nine-month periods endingFebruary 2, 2020, January 27, 2019, and JanuaryApril 28, 2018,2019, respectively. In addition, our

Income Taxes Paid

Our income tax payments totaled $4.5 million during the first nine months of fiscal 2020 compared with $6.2 million and $3.4 million forduring the same respective periods.period a year ago. Our income tax payments were mostly associated with our foreign subsidiaries located in Canada and China. These payments increased duringIncome taxes incurred in the U.S. on a cash basis for fiscal 2019 as compared with the same period a year ago, primarily2020 are expected to be minimal due to a withholding tax paymentthe projected utilization of $862,000 associated with an earnings and profit distribution from our Canadian subsidiary and the first installment of our mandatory repatriation tax payment of $500,000 made in our second quarter, and higher installment payments associated with our Canadian subsidiary during fiscal 2019 compared with fiscal 2018.


As a result of the Tax Act noted above, we were required to calculate a one-time mandatory repatriation tax (the Transition Tax) for fiscal 2018 related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system.  Consequently, we started making income tax payments associated with the Transition Tax in the second quarter fiscal 2019, which we elected to pay over a period of eight years. Additionally, we have approximately $7.0 million of U.S. Federal net operating loss operatingcarryforwards and AMT credit carryforwards to apply against fiscal 2019 U.S. taxable income.  This fact, combined with the lower U.S. corporate income tax rate and the immediate expensing of U.S. capital expenditures next year, is currently expected to result in minimal U.S. cash income taxes paid in fiscal 2019 (excluding the Transition Tax).

expenditures.

Liquidity and Capital Resources


Liquidity


Overall


Currently, our sources of liquidity include cash and cash equivalents, short-term investments (available-for-sale), 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 $26.4and short-term investments (available-for-sale) totaling $29.5 million as of January 27, 2019,at February 2, 2020, cash flow from operations, and the current availability ($31.0 million)30.8 million at February 2, 2020) under our revolving credit lines will beare sufficient to fund our foreseeable business needs, contractual obligations, and potential acquisitions.


At January 27, 2019February 2, 2020, our cash and investments (which comprise cash and cash equivalents, short-term investments (available for sale)(available-for-sale), and short-term and long-term investments (held-to-maturity)), totaled $40.0$34.8 million, compared with $54.5$45.0 million at April 29, 2018.  Additionally, we did not have any outstanding borrowings on our lines of credit as of January 27,28, 2019.


The This decrease in our cash and investments from the end of fiscal 20182019 was primarily due to net cash used in operating activities totaling $519,000, $4.5 million returned to shareholders in the form of regular quarterly dividend payments of $12.1and common stock share repurchases, $4.1 million for acquisitions, capital expenditures totaling $4.4 million (of which $1.4 million was vendor-financed) that were mostly associated with our mattress fabrics segment, $6.8and $1.5 million returned tofor additional purchase price payments on our shareholders primarily in the form of our regular quarterly cash dividend payments and common stock share repurchases, and $1.3 million in employee withholding tax payments associated with the vesting of certain stock-based compensation awards, partially offset byrecent acquisitions.

Our net cash provided byused in operating activities totaling $8.1 million and proceeds fromwas $519,000 for the salefirst nine months of property, plant, and equipment of $1.9 million associatedfiscal 2020, compared with our closed upholstery fabrics facility located in Anderson, SC.

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Our net cash provided by operating activities of $8.1 million through the third quarter of fiscal 2019 decreased from $21.5 million duringfor the same period a year ago. This trend isdecrease was due primarily due to the decreasetiming of payments in cash flow from earnings as a resultadvance of Chinese New Year shutdowns and higher than expected inventories.

At February 2, 2020, our borrowings totaling $925,000 related to our subordinated loan payable between eLuxury and the lower business volume noted above.


owner of its non-controlling interest.

Our cash and cash equivalents and short-term investment (available for sale)investments (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, short-term investments (available for sale)(available-for-sale), and short-term and long-term investments (held-to-maturity) by geographic area follows:

(dollars in thousands)

 

February 2,

2020

 

 

January 27,

2019

 

 

April 28,

2019

 

United States

 

$

28,030

 

 

$

16,478

 

 

$

33,079

 

China

 

 

5,363

 

 

 

8,412

 

 

 

9,670

 

Canada

 

 

1,412

 

 

 

1,456

 

 

 

2,196

 

Cayman Islands

 

 

42

 

 

 

13,616

 

 

 

64

 

 

 

$

34,847

 

 

$

39,962

 

 

$

45,009

 


 
(dollars in thousands)
 
January 27,
2019
  
January 28,
2018
  
April 29,
2018
 
United States $16,478  $5,707  $9,221 
Cayman Islands  13,616   38,918   31,000 
China  8,412   7,228   10,537 
Canada  1,456   3,878   3,715 
  $39,962  $55,731  $54,473 

During the third quarterand fourth quarters of fiscal 2019, we hadexperienced a significant increase in ourshift of cash and investments held in the Cayman Islands to the U.S. This trend was primarilymostly due to our strategy to takeof taking advantage of the 2017 Tax Cuts and Jobs Act, which allows a U.S. corporation a 100% dividend received income tax deduction on earnings and profits repatriated to the U.S. from 10%foreign owned foreign corporations.


As

At October 28, 2018 (the end of April 29, 2018,our second quarter of the $31.0 million infiscal 2019), we had cash and investments held in the Cayman Islands, almost alltotaling $26.7 million that mostly pertained to investment grade U.S. corporate bonds.bonds that were held in the Cayman Islands. As our U.S. corporate bonds mature,matured, we have been repatriating most orrepatriated almost all ofour earnings and profits residing in the Cayman Islands to the U.S.our U.S parent company. DuringAs of the end of our first quarter of fiscal 2019, we received cash proceeds from the sale of2020, all our U.S. corporate bonds totaling $17.2 million, of which $13.2 million was received in the third quarter. In turn, we repatriated earnings and profits to our U.S. parent company totaling $17.6 million during fiscal 2019, of which $14.3 million pertained to the third quarter.


As of January 27, 2019, we held U.S. corporate bonds residingthat resided in the Cayman Islands totaling $13.5 million, of which $8.5 million will mature during our fourth quarter,have matured and $5.0 million will mature in May 2019 (our first quarter of fiscal 2020). Currently, we expect to repatriateall the corresponding sales proceeds from the sale of our U.S. corporate bonds held as of January 27, 2019,have been repatriated to the U.S. parent company as those investments mature.

company.

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Common Stock Repurchase Program

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On June 15, 2016,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. During the nine-month period ending February 2, 2020, we purchased 55,750 shares of our common stock at a cost of $728,000 pursuant to this authorization, all of which were purchased during the third quarter. As a result, at February 2, 2020, we had $4.3 million available for future repurchases of our common stock associated with the $5.0 million repurchase program approved by our board of directors on September 5, 2019.

On March 4, 2020, we announced that our board of directors approved an authorization 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 amountnumber of shares that can be 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.

During the nine-month period ended January 27, 2019, we purchased 160,423 shares of our common stock at a cost of $3.3 million. During the nine-month period ended January 28, 2018, we did not purchase anyThe 160,423 shares were purchased pursuant to a prior authorization approved by our board of our common stock.

At January 27, 2019, we had $1.7 million available for repurchases of our common stock.
directors on June 15, 2016.

Dividend Program


On February 27, 2019,March 4, 2020, we announced that our board of directors approved a quarterly cash dividend of $0.10$0.105 per share. This paymentshare that will be madepaid on April 15, 2019,2020, to shareholders of record as of April 1, 2019.


7, 2020.

During the nine monthsnine-month period ended February 2, 2020, dividend payments totaled $3.8 million, which represented quarterly dividend payments of $0.10 per share to $0.105 per share. During the nine-month period ended January 27, 2019, dividend payments totaled $3.5 million, which represented quarterly dividend payments ranging fromof $0.09 per share to $0.10 per share. During the nine months ended January 28, 2018, dividend payments totaled $5.7 million, of which $2.6 million represented a special cash dividend payment of $0.21 per share, and $3.1 million represented quarterly dividend payments ranging from $0.08 per share to $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.


Working Capital


Accounts receivable at January 27, 2019, and January 28, 2018, were $26.1 million. Our accounts receivable balance at January 27, 2019, was affected by the decrease in net sales for the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018 that was associated with our mattress fabric segment, partially offset by higher days’ sales outstanding, which were 30 days for the third quarter of fiscal  2019 compared with 28 days for the third quarter of fiscal 2018.

Inventories as of January 27, 2019, totaling $55.4 million, were comparable with $55.7 million at January 28, 2018. Inventory turns were 4.6 for the third quarter of fiscal 2019 compared with 5.2 for the third quarter of fiscal 2018.

Accounts payable-trade as of January 27, 2019, totaling $28.4 million, decreased $4.0 million or 12.3%, compared with with $32.4 million at January 28, 2018. This decrease is mostly due to the timing of vendor payments associated with the Chinese New Year holiday experienced by our upholstery fabric operations.

Operating Working Capital

Operating working capital (accounts receivable and inventories, less accounts payable-trade, accounts payable-capital expenditures, and deferred revenue) was $61.8 million at February 2, 2020, compared with $52.6 million at January 27, 2019, compared with $47.8 million at January 28, 2018.2019. Operating working capital turnover was 5.4 during the third quarter of fiscal 2020 compared with 6.0 during the third quarter of fiscal 20192019.

Accounts Receivable

As of February 2, 2020, accounts receivable totaled $26.6 million, compared with 7.4$26.1 million at January 27, 2019. Although our net sales declined 6.8% during our third quarter of fiscal 2020 compared with the third quarter of fiscal 2019, we experienced a slight increase in accounts receivable. This increase resulted from a change in discount credit terms with key customers and fewer customers taking advantage of discounts that were associated with our mattress fabrics segment during fiscal 2020 as compared with fiscal 2019.

Days’ sales outstanding were 33 days during the third quarter of fiscal 2018.

I2020 compared with 30 days during the third quarter of fiscal 2019.

Inventory

Inventories as of February 2, 2020, totaling $57.6 million, increased $2.2 million, or 3.9%, compared with inventories totaling $55.4 million at January 27, 2019. This increase is mostly due to inventory purchases associated with our mattress fabrics segment that were in excess of actual demand trends, which were lower than anticipated, partially offset by a reduction in inventory associated with our upholstery fabrics segment reflecting a 5.7% decrease in the net sales for this segment during the third quarter of fiscal 2020 compared with the third quarter of fiscal 2019.

Inventory turns were 4.1 during the third quarter of fiscal 2020 compared with 4.6 for the third quarter of fiscal 2019.    

Accounts Payable

Accounts payable - 63

trade as of February 2, 2020, totaling $21.8 million, decreased $6.6 million, or 23.1%, compared with $28.4 million at January 27, 2019. The decrease in accounts payable is mostly due to the timing of payments in advance of Chinese New Year shutdowns.

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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 to the U.S. to take advantage of the Tax Act, which allows a U.S. corporation a 100% dividend received income tax deduction on earnings and profits repatriated to the U.S. from 10% owned foreign corporations.

subsidiaries.

Our revolving credit agreements require us to maintain compliance with certain financial covenants as defined in the respective agreements. At January 27, 2019,February 2, 2020, we were in compliance with all our financial covenants.

At February 2, 2020, we had borrowings totaling $925,000 related to our subordinated loan payable between eLuxury and its minority owner.

Refer to Note 13note 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 $4.4$4.1 million (of which $1.4 million were vendor- financed) for the nine-month period ending January 27, 2019,February 2, 2020, compared with $10.4$4.4 million (of which $3.8$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 $6.1$5.9 million for the nine-month period ending January 27, 2019,February 2, 2020, compared with $5.7$6.1 million for the same period a year ago. Depreciation expense mostly related to our mattress fabrics segment for both periods.


For fiscal 2019,2020, we are projecting cash capital expenditures to be in the range of $6.0 million to $6.5 million. Depreciation expense is projected to be approximately $8.0 million in fiscal 2019.2020. The estimated capital expenditures and depreciation expense for fiscal 20192020 mostly relatesrelate 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 January 27, 2019,February 2, 2020, we had total amounts due regarding capital expenditures totaling $91,000,$177,000, pertaining to outstanding vendor invoices, none of which were financed. The total amount outstanding of $91,000$177,000 is required to be paid based on normal credit terms.


Purchase Commitments – Capital Expenditures


At January 27, 2019,February 2, 2020, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $632,000.

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Mattress Fabrics Building

Effective May 16, 2016, we entered into an agreement with a contractor to construct a new building located in North Carolina to expand our distribution capabilities and office space at a cost of $11.3$2.3 million. This agreement required an installment payment of $1.9 million that was made in April 2016, with additional installment payments of $4.3 million that were made in fiscal 2017, $3.7 million that were made in fiscal 2018, and a final installment payment of $1.4 million made in May 2018 (first quarter of fiscal 2019). Interest was charged on the required outstanding installment payments for services that were previously rendered at a rate of $2.25% plus the current 30-day LIBOR rate.

Also, we were required to issue a letter of a credit totaling $5.0 million with the contractor’s bank being the beneficiary. In addition to the interest charged on the outstanding installment payments noted above, there was a 0.1% unused fee calculated on the balance of the $5.0 million letter of credit less the amount outstanding per month (see Note 13 for further details).

This new building was placed into service in July 2017 (first quarter of fiscal 2018).

Critical Accounting Policies and Recent Accounting Developments


At January 27, 2019,February 2, 2020, 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 ended April 29, 2018.


28, 2019.

Refer to Notesnotes 2 and 519 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 29, 2018.


28, 2019.

Contractual Obligations

As of January 27, 2019,February 2, 2020, there were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended April 29, 2018.


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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates on our revolving credit lines.


At January 27, 2019,February 2, 2020, our U.S. revolving credit agreement and subordinated loan payable requires interest to be charged at a rate (applicable interest rate of 3.95% at January 27, 2019) as a variable spread over LIBOR based on our ratio of debt to EBITDA as defined in the agreement.agreements. Our revolving credit line associated with our China subsidiaries

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subsidiary bears interest at a rate determined by the Chinese government. There were no borrowings outstanding under our revolving credit lines at January 27, 2019.

February 2, 2020. At February 2, 2020, we had outstanding borrowings of $925,000 associated with our subordinated loan payable between eLuxury and its minority owner.

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 January 27, 2019,February 2, 2020, would not have had a significant impact on our results of operations or financial position.

ITEM 4.

CONTROLS AND PROCEDURES


ITEM 4.  CONTROLS AND PROCEDURES

We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of January 27, 2019,February 2, 2020, the end of the period covered by this report. This evaluation was conducted under the supervision and with the participation of management, including our Executive Chairman, Chief Executive Officer, and Chief Financial Officer. Based upon that evaluation, we have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports filed by us and submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported as and when required. Further, we concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Executive Chairman, Chief Executive Officer, and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosures.


There has been no change in our internal control over financial reporting that occurred during the quarter ended January 27, 2019,February 2, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


Part II – OtherOther Information

Item 1.

Legal Proceedings


Item 1. Legal Proceedings

There have not been any material changes to our legal proceedings during the three months ended January 27, 2019.February 2, 2020. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 13, 201812, 2019 for the fiscal year ended April 29, 2018.28, 2019.

Item 1A.

Risk Factors


Item 1A.  Risk Factors

A detailed discussion of our risk factors is included in Item 1A “Risk Factors” of our Annual Report on Form 10-K filed July 13, 201812, 2019 for the year ended April 29, 2018.28, 2019. The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.


Our business, financial condition, and results of operation may be adversely affected by increased tariffs or other changesglobal public health epidemics, including the recent coronavirus outbreak.

Our business, financial condition, and results of operations may be adversely affected if a global public health epidemic, including the recent coronavirus outbreak in U.S. policy related to imported products.


ManyChina and beyond, interferes with the ability of our products are manufacturedemployees, suppliers, distribution channels, or sourced outsidecustomers to conduct business or negatively affects consumer confidence or the global economy. In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In January 2020, the coronavirus spread to other countries, including the United States.States, and efforts to contain the spread of coronavirus intensified. The U.S. government has recently compiled a list of products under consideration for potential tariffs on imports from many countries, including China, where a significant amount ofoutbreak and any preventative or protective actions that governments or our products is produced. Certain tariffs have been imposed, and negotiations continue regarding possible additional tariffs. Any tariffs that result in increased costs of imported products and materials could require uscompany may take with respect to increase prices to our domestic customers or, if we are unable to do so, result in lowering our gross margins on products sold. As a result, the tariffs could have a material adverse effect on our results of operations. In addition to recent announcements about tariffs, the U.S. government is considering other proposals for substantial changes to its trade and tax policies, which could include import restrictions, increased import tariffs, changes to or withdrawal from existing trade agreements, and border-adjustment taxes, among other possible measures. Material changes in these policies could increase our tax obligations or require us to increase prices to customers, which could adversely affect sales. Any significant change in U.S. policy related to imported products could coronavirus may have a material adverse effect on our business or our suppliers, distribution channels, and customers, including business shutdowns or disruptions for an indefinite period of time, reduced operations, restrictions on shipping products in certain jurisdictions where they are sold, or reduced consumer demand. Any resulting financial results.
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Item 2.  Unregistered Salesimpact cannot be estimated reasonably at this time, but may materially affect our business, financial condition, or results of Equity Securitiesoperation. The extent to which the coronavirus affects our results will depend on future developments, which are highly uncertain and Usecannot be predicted, including new information which may emerge concerning the severity of Proceedsthe coronavirus and the actions to contain the outbreak or treat its impact, among others.  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

(a)

Total

Number

of Shares

Purchased

 

 

(b)

Average

Price Paid

per Share

 

 

(c)

Total

Number of

Shares

Purchased

as Part of

Publicly

Announced

Plans

or Programs

 

 

(d)

Approximate

Dollar Value

of Shares that

May Yet Be

Purchased

Under the

Plans  or

Programs (1)

 

November 4, 2019 to December 8, 2019

 

 

 

 

 

 

 

 

 

 

 

$

5,000,000

 

December 9, 2019 to January 5, 2020

 

 

 

 

 

 

 

 

 

 

 

$

5,000,000

 

January 6, 2020 to February 2, 2020

 

 

 

55,750

 

 

 

13.05

 

 

 

55,750

 

 

$

4,272,222

 

Total

 

 

 

55,750

 

 

 

13.05

 

 

 

55,750

 

 

$

4,272,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Period 
(a)
Total Number of Shares Purchased
  
(b)
Average Price Paid per Share
  
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
  
(d)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
 
October 29, 2018 to
December 2, 2018
  24,929   21.57   24,929  $3,618,954 
December 3, 2018 to
December 30, 2018
  67,588   20.06   67,588  $2,262,961 
December 31, 2018
to January 27, 2019
  31,026   18.65   31,026  $1,684,362 
Total  123,543   20.01   123,543  $1,684,362 

(1)

On June 15, 2016,September 5, 2019, we announced that our board of directors increased theapproved an authorization for us to acquire up to $5.0 million of common stock. At February 2, 2020, the $4.3 million available for repurchases of our common stock was associated with such repurchase program.  On March 4, 2020, we announced that our board of directors approved an authorization for us to acquire up to $5.0 million of common stock.


ITEM 5.  Other Information

Contents

Item 6.  Exhibits

Exhibits

The following exhibits are submitted as part of this report.

10.1
Form of Annual Incentive Award Agreement

   31.1

10.2
Written Description of Non-Employee Director Compensation
31.1

Certification of ChiefCo-Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

   31.2

31.2

Certification of ChiefCo-Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

   31.3

Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

   32.1

32.1

Certification of ChiefCo-Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

   32.2

32.2

Certification of ChiefCo-Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

   32.3

Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101.INS

101.INS

XBRL Instance Document

101.SCH

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

II - 3

II-2



SIGNATURES

Table of Contents

EXHIBIT INDEX

Exhibit

Number

    Exhibit    

  31.1

Certification of Co-Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

  31.2

Certification of Co-Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

  31.3

Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

  32.1

Certification of Co-Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

  32.2

Certification of Co-Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

  32.3

Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document


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Table of Contents

SIGNATURES

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.




CULP, INC.

(Registrant)

Date: March 8, 201913, 2020

By:

/s/ Kenneth R. Bowling

Kenneth R. Bowling

Senior

Executive Vice President and Chief Financial Officer

(Authorized to sign on behalf of the registrant

and also signing as principal financial officer)





By:

/s/ Thomas B. Gallagher, Jr.

Thomas B. Gallagher, Jr.

Corporate Controller

(Authorized to sign on behalf of the registrant

and also signing as principal accounting officer)



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EXHIBIT INDEX



Exhibit Number
Exhibit
10.1
Form of Annual Incentive Award Agreement
10.2
Written Description of Non-Employee Director Compensation
Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document


II-4