Market Overview

Culp Announces Results for Second Quarter Fiscal 2018

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Board of Directors Authorizes Increase in Quarterly Cash Dividend
from $0.08 to $0.09 Per Share

Culp, Inc. (NYSE:CULP) today reported financial and operating
results for the second quarter and six months ended October 29, 2017.

Fiscal 2018 Second Quarter Highlights

  • Net sales were $80.7 million, up 7.1 percent, with mattress fabrics
    sales up 6.8 percent and upholstery fabrics sales up 7.7 percent, as
    compared with the same quarter last year.
  • Pre-tax income was $6.2 million, compared with $7.2 million in the
    second quarter of fiscal 2017. The $6.2 million included approximately
    $400,000 of non-recurring legal and other professional expenses.
  • Net income was $4.0 million, or $0.32 per diluted share, compared with
    net income of $4.5 million, or $0.36 per diluted share, in the prior
    year period.
  • The company's financial position reflected total cash and investments
    of $49.1 million and no outstanding debt. (See summary of cash and
    investments table on page 5.) The $49.1 million was achieved despite
    spending $7.5 million in capital expenditures, which includes vendor
    financed payments, and $4.6 million on dividend payments during the
    first six months of this fiscal year.
  • The company announced a 12.5 percent increase in its quarterly cash
    dividend from $0.08 to $0.09 per share, or $0.36 per share on an
    annualized basis, commencing in the third quarter of fiscal 2018.

Fiscal 2018 Year to Date Highlights

  • Net sales were $160.2 million, up 2.7 percent, with mattress fabrics
    sales up 1.0 percent and upholstery fabrics sales up 5.4 percent
    compared with the same period a year ago.
  • Pre-tax income was $12.9 million, compared with $15.7 million for the
    same period last year.
  • Net income was $9.0 million, or $0.71 per diluted share, compared with
    net income of $9.8 million, or $0.78 per diluted share, in the prior
    year period.
  • Annualized consolidated return on capital was 25 percent, compared
    with 34 percent for the same period a year ago.
  • During the first half of fiscal 2018, the company paid $4.6 million in
    dividends, of which $2.6 million was for a special dividend. Since
    June 2011, the company has returned a total of $51.0 million to
    shareholders in the form of regular quarterly and special dividends
    and share repurchases.

Financial Outlook

  • The projection for third quarter fiscal 2018 is for overall sales to
    be slightly higher than the previous year's third quarter. Pre-tax
    income for the third quarter of fiscal 2018 is expected to be in the
    range of $6.8 million to $7.4 million. Pre-tax income for the third
    quarter of fiscal 2017 was $7.0 million.
  • The company's performance for the second half of fiscal 2018 is
    currently expected to be somewhat better than the results achieved
    during the second half of last fiscal year, excluding any impact from
    potential acquisitions.

Overview

For the second quarter ended October 29, 2017, net sales were $80.7
million, compared with $75.3 million for the same period a year ago. The
company reported net income of $4.0 million, or $0.32 per diluted share,
for the second quarter of fiscal 2018, compared with net income of $4.5
million, or $0.36 per diluted share, for the second quarter of fiscal
2017. The results for the second quarter of fiscal 2018 included
approximately $400,000 of non-recurring legal and professional expenses
related to the proposed acquisition of a China business that was not
completed. The effective GAAP income tax rate was 34.2 percent for the
second quarter of fiscal 2018, compared with 37.5 percent for the second
quarter of last year. The rate decrease was primarily due to the mix of
earnings between the company's U.S. parent and foreign subsidiaries. The
consolidated adjusted effective income tax rate was 14.2 percent for the
second quarter of fiscal 2018, compared with 17.8 percent for the prior
year. (A reconciliation of consolidated adjusted effective income tax
rate to consolidated GAAP effective income tax rate is presented on page
6.)

Commenting on the results, Frank Saxon, president and chief executive
officer of Culp, Inc., said, "Overall, our second quarter sales were
higher than expected, and we are pleased with the solid top line
performance for both upholstery fabrics and mattress fabrics. We have
continued to drive product innovation and creativity and leverage the
strength of our efficient global manufacturing platform. We have just
completed a major transition period in our mattress fabrics business,
and we expect to realize greater operating efficiencies from these
changes going forward. Our strategic initiatives focused on product and
customer diversification are producing favorable results for our
upholstery fabrics business. Importantly, we have the financial strength
to continue to make the strategic investments to enhance our operations,
including potential acquisitions that support our growth objectives.

"We are also pleased that our board has approved an increase in our
quarterly cash dividend from $0.08 to $0.09 per share, or $0.36 per
share on an annualized basis. This is an important milestone for Culp,
as $0.36 per share is three times the payment amount when dividends were
reinstated in July 2012. Our financial performance and strong balance
sheet have enabled us to take this action, which is consistent with our
capital allocation strategy and confirms our commitment to generate
value for our shareholders," added Saxon.

Mattress Fabrics Segment

Mattress fabrics sales for the second quarter were $48.6 million, up 6.8
percent compared with $45.5 million for the second quarter of fiscal
2017.

"We are pleased with the solid growth in mattress fabrics sales for the
second quarter," said Iv Culp, president of Culp's mattress fabrics
division. "Notably, we continued to execute our strategy in an uncertain
market environment, and Culp again outperformed reported mattress
industry growth trends. Our strategic focus on design creativity and
innovation and our ability to provide a diverse product offering across
all price points, including mattress fabrics and sewn covers, have been
the key drivers of our sales performance. Sales for the second quarter
of fiscal 2018 also reflected aggressive marketing of some new product
roll-outs. Our global manufacturing platform supports our product
strategy with outstanding customer service and delivery performance.

"We have made excellent progress in enhancing our platform and
production capabilities as we have recently completed a period of major
transformation across our North American manufacturing operations. As
expected, we experienced some disruptions to our production through the
second quarter, as well as higher expenses associated with product
roll-outs; however, we expect to realize greater operating efficiencies
going forward. All of our knitting and other fabric forming equipment
has been placed into service in our expanded Stokesdale, North Carolina,
facility, and our U.S. mattress cover operation, CLASS, is fully
operational in its new location, also in North Carolina. We have also
finished the installation of new equipment in our Canada operation, and
we are now focused on further refinement of our overall inspection and
quality processes to support our continuous improvement initiatives.

"From product design to final delivery, we are executing our
diversification strategy to offer a full complement of fabrics and sewn
covers. We are excited about the increasing sales contribution from
CLASS, our mattress cover business, as we have expanded our business
with traditional customers and made impressive strides in reaching new
customer markets, especially the fast growing boxed bedding space.
Additionally, our newest joint venture mattress cover production
facility in Haiti will further strengthen our ability to grow our CLASS
business. We have commenced production activities, and we will continue
to gradually add capacity in line with expected demand. The Haiti
operation complements our U.S. operations with additional capacity via a
mirrored platform, improving our ability to meet customer demand and
remain cost-competitive. We also have the ability to utilize our China
fabric and cut and sew platform to expand our business to new markets.
With the transformation of our North American operations and our global
production capabilities for both fabric and sewn covers, we are well
positioned to meet demand in all segments of the market. At the same
time, we continue to look for supportive opportunities to add to our
platform through acquisitions or other strategies that will support our
growth.

"Looking ahead, Culp has a solid competitive position across all product
categories, supported by a sustainable, efficient global platform with
sufficient capacity and distribution capabilities. Overall, we expect to
see solid improvement in our quarterly operating results as we move into
the second half of fiscal 2018," added Culp.

Upholstery Fabrics Segment

Sales for this segment were $32.1 million for the second quarter of
fiscal 2018, up 7.7 percent compared with sales of $29.8 million in the
second quarter of fiscal 2017.

"We are pleased with the solid growth in our upholstery fabric sales for
the second quarter, as we benefitted from the success of our various
growth initiatives," noted Boyd Chumbley, president of Culp's upholstery
fabric division. "However, our operating performance was affected by
higher than anticipated freight costs associated with our China
operation. During our second quarter, a forced Chinese government
shutdown in certain textile mills for environmental control disrupted
the supply chain, and we incurred additional freight costs in order to
ensure customer deliveries. We also experienced some impact from an
unfavorable China foreign exchange rate.

"We have continued to drive innovation and creativity and execute our
product-driven strategy and reach new market segments. Our results for
the second quarter reflect the success of this strategy, highlighted by
expanded sales of LiveSmart®, our popular ‘performance' line of highly
durable, stain-resistant fabric. We have also seen continued solid
growth in sales of fabrics designed for the hospitality market, and we
are excited about the opportunities to reach a more diverse customer
base. We are exploring potential acquisitions in the hospitality market
that will complement our upholstery fabrics business, which is
principally in the residential market.

"We had an excellent showing at the recent October furniture market, and
our creative designs and innovative products continue to distinguish the
Culp brand. We are especially pleased with the favorable customer
response to LiveSmart®, as many manufacturers are featuring this fabric
in their showrooms. We have recently launched a new website specifically
for this innovative product line along with a more aggressive marketing
campaign, and we remain optimistic about the sales opportunities for
Culp.

"Looking ahead, we are encouraged by a more favorable market outlook as
consumer spending for home furnishings is starting to pick up. We
believe Culp is well positioned to benefit from any further improvement
in demand trends, and we look forward to continued growth in the second
half of fiscal 2018," added Chumbley.

Balance Sheet

"We have maintained a strong financial position through the first half
of fiscal 2018, even while spending $7.5 million on capital
expenditures, which include vendor-financed payments, and returning $4.6
million to shareholders in regular and special dividends," added Ken
Bowling, senior vice president and chief financial officer of Culp, Inc.
"As of October 29, 2017, total cash and investments were $49.1 million,
with no outstanding debt on the company's line of credit."

Dividends and Share Repurchases

The company also announced that its Board of Directors approved a 12.5
percent increase in the company's quarterly cash dividend from $0.08 to
$0.09 per share, or $0.36 per share on an annualized basis. This payment
will be made on January 16, 2018, to shareholders of record as of
January 2, 2018. Future dividend payments are subject to board approval
and may be adjusted at the board's discretion as business needs or
market conditions change.

The company did not repurchase any shares during the first half of
fiscal 2018, leaving $5.0 million available under the share repurchase
program approved by the Board in June 2016.

Since June 2011, the company has returned a total of $51.0 million to
shareholders in the form of regular quarterly and special dividends and
share repurchases.

Financial Outlook

Commenting on the outlook for the third quarter of fiscal 2018, Bowling
remarked, "We expect overall sales to be slightly higher as compared
with the third quarter of last year.

"Mattress fabrics sales are expected to be slightly higher than the same
period a year ago. Operating income and margins in this segment are
expected to be somewhat higher as compared to a year ago.

"In our upholstery fabrics segment, we expect sales to be slightly
higher than the same period a year ago. Operating income and margins in
this segment are expected to be slightly lower as compared to last year,
as we expect to face higher shipment costs out of China and an
unfavorable China foreign exchange rate.

"Considering these factors, the company expects to report pre-tax income
for the third fiscal quarter of 2018 in the range of $6.8 million to
$7.4 million. Pre-tax income for last year's third quarter was
$7.0 million.

"With respect to the full year, capital expenditures for fiscal 2018,
including vendor financed payments, are currently expected to be
comparable to the previous year and mostly related to additional
improvement projects for mattress fabrics. Additionally, the company
expects another good year of cash flow, even with the expected level of
capital expenditures and modest growth in working capital," added
Bowling.

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 Haiti.

This press release contains "forward-looking statements" within the
meaning of the federal securities laws, including the Private Securities
Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933
and Section 21E of the Securities and Exchange Act of 1934).
Such
statements are inherently subject to risks and uncertainties.
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, 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 measures, as well as any statements
regarding potential acquisitions, 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, as well as our success in finalizing
acquisition negotiations.
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 14, 2017 for the fiscal year
ended April 30, 2017.

 

CULP, INC.

Condensed Financial Highlights

(Unaudited)

 
 
 

Three Months Ended

 

Six Months Ended

October 29,

 

October 30,

October 29,

 

October 30,

2017

2016

2017

2016

 
Net sales $ 80,698,000 $ 75,343,000 $ 160,230,000 $ 156,026,000
Income before income taxes $ 6,159,000 $ 7,159,000 $ 12,900,000 $ 15,706,000
Net income $ 3,976,000 $ 4,475,000 $ 8,959,000 $ 9,789,000
Net income per share:
Basic $ 0.32 $ 0.36 $ 0.72 $ 0.80
Diluted $ 0.32 $ 0.36 $ 0.71 $ 0.78
 
Average shares outstanding:
Basic 12,440,000 12,308,000 12,420,000 12,297,000
Diluted 12,580,000 12,507,000 12,613,000 12,495,000
 
               
Summary of Cash and Investments
October 29, 2017, October 30, 2016 and April 30, 2017

(Unaudited)

(Amounts in thousands)

 
Amounts
October 29, October 30, April 30,
2017   2016   2017*
 
 
Cash and cash equivalents $ 15,739 $ 13,910 $ 20,795
Short-term investments - Available for Sale 2,478 2,430 2,443
Short-term investments - Held-To-Maturity 4,015 - -
Long-term investments - Held-To-Maturity   26,853     31,050     30,945
Total cash and investments $ 49,085   $ 47,390   $ 54,183
 
* Derived from audited financial statements.
 
           
Consolidated Adjusted Effective Income Tax Rate,

For the Six Months Ended October 29, 2017 and October 30, 2016

(Unaudited)

(Amounts in Thousands)

 
SIX MONTHS ENDED
 
Amounts
October 29, October 30,
2017 2016
 
 
Consolidated Effective GAAP Income Tax Rate (1) 29.1 % 37.7 %
 
Non-Cash U.S. Income Tax Expense (19.1 )% (19.6 )%
 

Excess Income Tax Benefits Related To Stock-Based Compensation

4.3 % -
 
Other Non-Cash Foreign Income Tax Expense (0.1 )% (0.3 )%
 
Consolidated Adjusted Effective Income Tax Rate (2) 14.2 % 17.8 %
 
 
 

(1)

Calculated by dividing consolidated income tax expense by
consolidated income before income taxes.

 

(2)

Represents estimated cash income tax expense for our subsidiaries
located in Canada and China divided by consolidated income before
income taxes.

 
   
Reconciliation of Free Cash Flow
For the Six Months Ended October 29, 2017 and October 30, 2016

(Unaudited)

(Amounts in thousands)

 
Six Months Ended Six Months Ended
October 29, 2017 October 30, 2016
 
Net cash provided by operating activities $ 10,178 $ 17,049
Minus: Capital Expenditures (4,978 ) (6,308 )
Minus: Investment in unconsolidated joint venture (609 ) -
Plus: Proceeds from the sale of equipment 6 -
Minus: Payments on vendor-financed capital expenditures (2,500 ) -
Plus: Proceeds from the sale of long-term investments (Rabbi Trust) 54 -
Minus: Purchase of long-term investments (Rabbi Trust) (1,457 ) (929 )
Effect of exchange rate changes on cash and cash equivalents   19     (38 )
 
Free Cash Flow $ 713   $ 9,774  
 
     
Reconciliation of Return on Capital
For the Six Months Ended October 29, 2017 and October 30, 2016

(Unaudited)

(Amounts in thousands)

 
 
Six Months Ended Six Months Ended
October 29, 2017 October 30, 2016
 
Consolidated Income from Operations $ 13,352 $ 15,973
Average Capital Employed (2)   105,341     93,019  
 
Return on Average Capital Employed (1)   25.3 %   34.3 %
 
Average Capital Employed
 
October 29, 2017 July 30, 2017 April 30, 2017
 
Total assets $ 201,043 $ 207,904 $ 205,634
Total liabilities   (47,963 )   (58,227 )   (57,004 )
 
Subtotal $ 153,080 $ 149,677 $ 148,630
Less:
Cash and cash equivalents (15,739 ) (18,322 ) (20,795 )
Short-term investments - Available for Sale (2,478 ) (2,469 ) (2,443 )
Short-term investments - Held-to-Maturity (4,015 ) - -
Long-term investments - Held-to-Maturity (26,853 ) (30,907 ) (30,945 )
Long-term investments - Rabbi Trust (6,921 ) (6,714 ) (5,466 )
Deferred income taxes - non-current (491 ) (436 ) (419 )
Income taxes payable - current 692 884 287
Income taxes payable - long-term 487 487 467
Deferred income taxes - non-current 4,641 4,253 3,593
Line of credit - 5,000 -
Deferred compensation   6,970     6,769     5,520  
Total Capital Employed $ 109,373   $ 108,222   $ 98,429  
 
Average Capital Employed (2) $ 105,341  
 
 
October 30, 2016 July 31, 2016 May 1, 2016
 
Total assets $ 179,127 $ 183,360 $ 175,142
Total liabilities   (43,178 )   (51,925 )   (46,330 )
 
Subtotal $ 135,949 $ 131,435 $ 128,812
Less:
Cash and cash equivalents (13,910 ) (45,549 ) (37,787 )
Short-term investments - Available for Sale (2,430 ) (2,434 ) (4,359 )
Long-term investments - Held-To-Maturity (31,050 ) - -
Long-term investments - Rabbi Trust (4,994 ) (4,611 ) (4,025 )
Income taxes receivable - - (155 )
Deferred income taxes - non-current (581 ) (1,942 ) (2,319 )
Income taxes payable - current 513 358 180
Income taxes payable - long-term 3,734 3,779 3,841
Deferred income taxes - non-current 1,699 1,532 1,483
Line of credit - 7,000 -
Deferred compensation   5,171     5,031     4,686  
Total Capital Employed $ 94,101   $ 94,599   $ 90,357  
 
 
Average Capital Employed (2) $ 93,019  
 
 
Notes:
 

(1)

Return on average capital employed represents operating income
for the six month periods ending October 29, 2017 and October 30,
2016 times two quarters to arrive at an annualized value then
divided by average capital employed. Average capital employed does
not include cash and cash equivalents, short-term investments -
Available for Sale, short-term investments - Held-To-Maturity,
long-term investments (Held-To-Maturity), long-term investments
(Rabbi Trust), noncurrent deferred income tax assets and
liabilities, income taxes receivable and payable, line of credit,
and deferred compensation.

 

(2)

Average capital employed used for six months ending October 29,
2017 was computed using the three quarterly periods ending October
29, 2017, July 30, 2017 and April 30, 2017.

Average capital employed used for six months ending October 30,
2016 was computed using the three quarterly periods ending October
30, 2016, July 31, 2016 and May 1, 2016.

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