CULP ANNOUNCES RESULTS FOR SECOND QUARTER FISCAL 2014
Board of Directors Authorizes a 25 Percent Increase
in the Quarterly Cash Dividend to $0.05 Per Share
HIGH POINT, N.C. (November 25, 2013) ─ Culp, Inc. (NYSE: CFI) today reported financial and operating results for the second quarter and six months ended October 27, 2013.
Fiscal 2014 Second Quarter Highlights:
| | § | Net sales were $70.6 million, up eight percent, with mattress fabric sales up two percent and upholstery fabric sales up 17 percent, as compared with the same quarter last year. This reflects the highest sales level for the second quarter in nine years. |
| | § | Pre-tax income was $4.8 million, up six percent from $4.5 million in the second quarter of fiscal 2013. |
| | § | Adjusted net income (non-GAAP) was $4.1 million, or $0.33 per diluted share, for the current quarter, compared with $3.9 million, or $0.31 per diluted share, for the prior year period. (Adjusted net income is calculated using estimated cash income tax expense. See the reconciliation to net income on page 6). Net income (GAAP) was $3.1 million, or $0.25 per diluted share, compared with net income of $8.3 million, or $0.67 per diluted share, in the prior year period. |
| | § | The company’s financial position remained strong with a total cash position of $30.5 million and total debt of $5.0 million as of October 27, 2013, even after spending $4.0 million in total for debt and interest payments, dividends and capital expenditures during the quarter. |
| | § | The company announced a 25 percent increase in its quarterly cash dividend from $0.04 to $0.05 per share, commencing in the third quarter of fiscal 2014. |
Fiscal 2014 Year to Date Highlights
| | § | Year to date sales were $140.7 million, up four percent from the same period a year ago, with mattress fabrics segment sales up one percent and upholstery fabrics segment sales up nine percent over the same period a year ago. |
| | § | Year to date pre-tax income was $10.3 million, up five percent from $9.9 million for the same period last year. |
| | § | Year to date adjusted net income (non-GAAP) was $8.8 million, or $0.70 per diluted share, compared with $8.4 million, or $0.67 per diluted share, for the prior year period. |
| | § | Net income (GAAP) was $6.3 million, or $0.51 per diluted share, compared with net income of $11.8 million, or $0.94 per diluted share, for the same period a year ago. |
| | § | Consolidated return on capital was 29 percent, equal to the same period a year ago. |
| | § | Free cash flow was $7.5 million, up from $5.7 million for the same period a year ago. |
| | § | The projection for third quarter fiscal 2014 is for overall sales to be five to nine percent higher as compared to the previous year’s third quarter. Pre-tax income for the third quarter of fiscal 2014 is expected to be in the range of $4.5 to $5.0 million. Pre-tax income for the third quarter of fiscal 2013 was $4.5 million. |
CFI Announces Results for Second Quarter Fiscal 2014
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Overview
For the second quarter ended October 27, 2013, net sales were $70.6 million, an eight percent increase compared with $65.6 million a year ago. The company reported net income of $3.1 million, or $0.25 per diluted share, for the second quarter of fiscal 2014, compared with net income of $8.3 million, or $0.67 per diluted share, for the second quarter of fiscal 2013. Net income for the second quarter of 2014 included an income tax expense of $1.7 million, while net income for the previous year period included an income tax benefit of $3.7 million. The income tax benefit for the second quarter of fiscal 2013 included a benefit of $5.6 million, of which $12.2 million was for the non-cash reversal of primarily all of the remaining valuation allowance associated with the company’s net deferred tax assets in the U.S., partially offset by a non-cash income tax charge of $6.6 million associated with the sourced earnings from the company’s subsidiaries in Canada and China.
Given the volatility in the income tax area during previous years, the company is reporting adjusted net income (non-GAAP), which is calculated using estimated cash income tax expense for its foreign subsidiaries. (A presentation of adjusted net income and reconciliation to net income is set forth on page 6). The company currently does not incur cash income tax expense in the U.S., nor does it expect to for a number of years, due to $50.7 million in U.S. net operating loss carryforwards as of the end of fiscal 2013. For the second quarter of fiscal 2014, adjusted net income was $4.1 million, or $0.33 per diluted share, compared with $3.9 million, or $0.31 per diluted share, for the second quarter fiscal 2013. On a pre-tax basis, the company reported income of $4.8 million compared with pre-tax income of $4.5 million for the second quarter of fiscal 2013.
Commenting on the results, Frank Saxon, president and chief executive officer of Culp, Inc., said, “We are pleased with our second quarter performance, marking another excellent quarter and building upon a solid first quarter. We continue to experience favorable customer response to our designs and wide range of products, and we are excited about the progress we are making in product innovation and creativity. These efforts, which are our top strategic priority, are making significant contributions to our sales and profit performance, with an increasing percentage of our sales coming from recent product introductions. We compete in a product and fashion driven business that is always changing. As a result, our ability to create innovative fabrics season after season is the key driver to our long-term success.
“We are also pleased that our consistent financial performance, higher cash flow and sound balance sheet have enabled us to reward our shareholders with a 25 percent increase in our quarterly cash dividend. Looking ahead, we continue to expect another strong year of free cash flow this fiscal year,” added Saxon.
Mattress Fabrics Segment
Mattress fabric sales for the second quarter were $40.3 million, up two percent compared with $39.7 million for the second quarter of fiscal 2013.
“Our results for the second quarter of fiscal 2014 were in line with our expectations,” said Iv Culp, president of Culp’s mattress fabrics division. “We were pleased with the consistent sales performance during what has been an unsteady demand period in the mattress industry. Our mattress fabric business has delivered solid results in spite of some intermittent industry headwinds. Our operating results for the second quarter were affected by higher sampling and development costs in advance of new customer roll-outs for calendar 2014, as well as continued transition costs for our Culp-Lava operation.
“We have continued to capitalize on the growing consumer demand for ‘better’ designed bedding products,” Culp continued. “As the mattress industry has evolved into a much more decorative business, our customers are more selective in their fabric choices to achieve today’s fashionable look. In response to this demand trend, we have increased our design staff, as well as expanded our design capabilities and technical expertise, to develop an array of innovative fabric choices across all price points. Additionally, we have a scalable manufacturing platform and reactive capacity that supports our ability to deliver a diverse and favorable product mix in line with customer demand. As a result, we have enhanced our competitive position as a leading supplier of mattress fabrics and covers to all major players across all categories in the mattress industry. We are encouraged by the response to our exciting new innovative designs and recent product introductions with strong future placements for business in early calendar 2014.
CFI Announces Results for Second Quarter Fiscal 2014
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“We also continued to make progress with Culp-Lava, our new mattress cover operation, and we are pleased with the increased sales contribution during the second quarter. We are continuing to focus on improving our operating efficiencies through this transition period for Culp-Lava. With most of the training and development work behind us, we are beginning to realize improved productivity that will gradually add capacity and enhance reactivity. We are excited about the opportunities ahead to leverage this new platform and enhance Culp’s leadership position in the bedding industry,” added Culp.
Upholstery Fabrics Segment
Sales for this segment were $30.3 million for the second quarter of fiscal 2014, a 17 percent improvement compared with sales of $25.9 million in the second quarter of fiscal 2013.
“We had a solid performance in our upholstery fabrics business during the second quarter of fiscal 2014 with higher than expected sales,” noted Saxon. “The sales increase was product-driven as we have continued to see very favorable customer response to our creative designs and new product introductions. Innovation is a critical factor for success in today’s fashion-driven home furnishings business, and our design team has done an exceptional job in anticipating customers’ style preferences. Our ability to offer a diverse product mix of fabric styles and price points, supported by outstanding service, has enhanced our competitive position. As a result, we have increased sales both with our key customers and through additional orders from new customers.
“China produced fabrics continued to drive our growth and accounted for 91 percent of Culp’s upholstery fabrics sales during the quarter. The ability to leverage our design capabilities with our scalable and 100% owned China platform has been an important advantage for Culp. We are also pleased with the steady progress made through our Culp Europe operation, which further supports our global sales efforts.”
Saxon continued, “We are pleased with the trends in our upholstery fabrics business with strong fabric placements with customers at the recent October furniture market. Looking ahead, we are well positioned to build on this momentum; especially as the housing market gains more traction and consumer confidence improves.”
Balance Sheet
“We have continued to maintain a strong financial position, even as we returned cash to shareholders and reduced our debt during the quarter,” added Saxon. “The company has generated $7.5 million in free cash flow through the first six months of fiscal 2014, compared to $5.7 million for the same period last year. As of October 27, 2013, we reported $30.5 million in cash and cash equivalents and short-term investments. This cash position also reflects a scheduled debt and interest payment of $2.5 million made during the quarter. Additionally, the company paid a $0.04 per share dividend on October 15, 2013. Total debt at the end of the second quarter was $5.0 million, which includes long-term debt plus current maturities of long-term debt and our line of credit. Notably, our net cash position, or cash minus total debt, was $25.5 million at the end of the second quarter, representing the highest net cash level in the company’s history.
Increase in Quarterly Cash Dividend Payment
The company also announced that its Board of Directors has approved a 25 percent increase in payment of a quarterly cash dividend from $0.04 to $0.05 per share, commencing in the third quarter of fiscal 2014. The dividend will be paid on January 20, 2014, to shareholders of record as of the close of business on January 6, 2014. Future dividend payments are subject to Board approval and may be adjusted at the Board’s discretion as business needs or market conditions change.
CFI Announces Results for Second Quarter Fiscal 2014
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Outlook
Commenting on the outlook for the third quarter of fiscal 2014, Saxon remarked, “We expect overall sales to be five to nine percent higher as compared with the third quarter of last year.
“We expect sales in our mattress fabrics segment to be three to seven percent higher compared with the same period a year ago. Operating income in this segment is expected to be higher than the same period a year ago, while operating margins are expected to be comparable to last year.
“In our upholstery fabrics segment, we expect sales to be six to ten percent higher than the previous year’s third quarter results. We believe the upholstery fabric segment’s operating income will be higher than the same quarter of last year, while operating margins are expected to be comparable to last year.
“Considering these factors, the company expects to report pre-tax income for the third fiscal quarter of 2014 in the range of $4.5 million to $5.0 million. Pre-tax income for last year’s third quarter was $4.5 million.”
In closing, Saxon remarked, “We are pleased with an excellent first half of fiscal 2014, which reflects gains in sales and profitability over a strong first half of last fiscal year. We have many reasons to be optimistic about the future with our outstanding design capabilities and innovative product offerings that are resonating with customers in both businesses. We will continue to leverage our scalable and global manufacturing platforms to deliver these products and keep pace with expected industry demand. We are also optimistic about an improved economic outlook, especially as the housing market gains more traction and supports higher consumer demand for home furnishings. We believe Culp is favorably positioned for continued growth in this environment with the financial strength to execute our strategic initiatives and reward shareholders. Above all, we are committed to outstanding performance for our customers as a financially stable and trusted source for innovative fabrics.”
About the Company
Culp, Inc. is one of the world's largest marketers of mattress fabrics for bedding and upholstery fabrics for residential and commercial furniture. The company markets a variety of fabrics to its global customer base of leading bedding and furniture companies, including fabrics produced at Culp’s manufacturing facilities and fabrics sourced through other suppliers. Culp has operations located in the United States, Canada, China and Poland.
This release contains “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 27A of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties. Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update such statements. 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,” “estimate,” “plan” and “project” and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, sales, gross profit margins, operating income, SG&A or other expenses, earnings, cash flow, and other performance measures, as well as any statements regarding future economic or industry trends or future developments. 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. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in the value of the U.S. dollar versus other currencies could affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and strengthening of currencies in Canada and China can have a negative impact on our sales of products produced in those places. Also, economic and political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, is included in Item 1A “Risk Factors” in our Form 10-K filed with the Securities and Exchange Commission on July 12, 2013 for the fiscal year ended April 28, 2013.
