Market Overview

Culp Announces Results for First Quarter Fiscal 2019

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Culp, Inc. (NYSE:CULP) today reported financial and operating
results for the first quarter ended July 29, 2018.

Fiscal 2019 First Quarter Highlights

  • Net sales were $71.5 million, down 10.1 percent over the prior year,
    with mattress fabrics sales down 23.6 percent and upholstery fabrics
    sales up 10.9 percent.
  • Pre-tax income was $1.9 million, compared with $6.7 million for the
    prior year period. Excluding restructuring and related charges of
    approximately $2.0 million, pre-tax income was $4.0 million for the
    first quarter of fiscal 2019. (See reconciliation table on page 6).
  • Net income was $957,000, or $0.08 per diluted share, compared with net
    income of $5.0 million, or $0.40 per diluted share, in the prior year
    period. These results include the $2.0 million in restructuring and
    related charges noted above.
  • The company's financial position reflected total cash and investments
    of $39.3 million and $4.0 million outstanding on the company's line of
    credit as of July 29, 2018, for a net cash position of $35.3 million.
    (See summary of cash and investments table on page 6).
  • The company announced a quarterly cash dividend of $0.09 per share,
    payable in October.
  • Completed the majority ownership investment in eLuxury, an e-commerce
    company offering bedding accessories and home goods direct to
    consumers.

Financial Outlook

  • The projection for the second quarter of fiscal 2019 is for overall
    sales to be down approximately 5 percent compared to the same period
    last year. Pre-tax income is expected to be in the range of
    $3.6 million to $4.6 million, excluding any restructuring and related
    expenses and credits. Pre-tax income for the second quarter of fiscal
    2018 was $6.2 million.
  • The company's performance for the second half of fiscal 2019 is
    currently expected to be more in line with the results achieved during
    the second half of last fiscal year, assuming bedding industry relief
    materializes under U.S. trade laws.

Overview

For the first quarter ended July 29, 2018, net sales were $71.5 million,
compared with $79.5 million a year ago. On a pre-tax basis, the company
reported income of $1.9 million, compared with pre-tax income of $6.7
million for the first quarter of fiscal 2018. The company reported net
income attributable to Culp, Inc. shareholders of $957,000, or $0.08 per
diluted share, for the first quarter of fiscal 2019, compared with net
income of $5.0 million, or $0.40 per diluted share, for the first
quarter of fiscal 2018. The effective income tax rate was 46.5 percent
for the quarter, compared to 24.3 percent for the first quarter of last
fiscal year. The increase was primarily due to the mix of pre-tax income
favoring the company's foreign income tax jurisdictions that are taxed
at higher income and withholding tax rates compared to the U.S. federal
statutory rate of 21.0 percent. The financial results for the first
quarter of fiscal 2019 also included approximately $2.0 million in
restructuring and related charges, due to the closure of the company's
Anderson, South Carolina, production facility. Excluding these charges,
pre-tax income for the first quarter of fiscal 2019 was $4.0 million.

Commenting on the results, Frank Saxon, president and chief executive
officer of Culp, Inc., said, "As expected, our results for the first
quarter reflect challenging bedding industry conditions resulting
primarily from the significant increase of low-priced imported
mattresses from China. We estimate total mattress imports now represent
approximately 20 percent of U.S. industry shipments. We are pleased that
even with substantially lower sales of mattress fabrics from a year ago,
we achieved an operating income margin in this business of close to
eight percent. Additionally, we are optimistic that the U.S. bedding
industry could benefit in the near term from relief under U.S. trade
laws to address this situation. If and when such action would occur, we
believe it will favorably affect our business and the domestic mattress
industry going forward. With regard to our upholstery fabrics business,
we were pleased with the improved sales performance for the first
quarter, which included an additional contribution from Read Window
Products ("RWP"), acquired at the end of fiscal 2018.

"Overall, our operating performance for the first quarter was affected
by lower sales of mattress fabrics, an unfavorable currency exchange
rate in China, and the impact of closing our Anderson, South Carolina,
operations. While we are experiencing considerable headwinds, we are
optimistic that we will begin to see improvement in our quarterly
results in the second half of the fiscal year. The incremental sales
from RWP in the upholstery fabrics business, and the expected
contribution to our mattress fabrics sales from our investment in
eLuxury, completed in the first quarter, will support our product-driven
strategy. For both businesses, we remain focused on offering creative
designs and innovative products that meet the changing demands of our
customers. Importantly, we have the financial strength to support our
business in this current environment, and we are well positioned for
continued growth as market conditions evolve," said Saxon.

Mattress Fabrics Segment

Mattress fabrics sales for the first quarter were $37.0 million,
compared with $48.4 million for the first quarter of fiscal 2018.

"As expected, our sales for the first quarter reflect the significant
disruptions and uncertainties surrounding the mattress industry compared
with market conditions a year ago," said Iv Culp, president of Culp's
mattress fabrics division. "We have continued to face very soft demand
trends related to the rapid growth of low-cost imported mattresses from
China. The influx of these products has significantly disrupted the
domestic mattress business and affected many of our customers. As a
leader in mattress fabrics and sewn covers, we felt a disproportionate
impact with reduced orders from our major customers during the first
quarter. In addition, ongoing changes with a large mattress retailer
have created more uncertainty throughout the mattress industry supply
chain, which affected our distribution. Despite these challenges, we
continued to see consistent placements with our customers, and we have
strong, established customer relationships and expect to see our
business normalize as market conditions improve.

"We have remained focused on our product diversification strategy with a
favorable product mix of mattress fabrics and sewn covers. Although we
experienced lower sales for CLASS, our mattress cover business, as
compared to the same period last year, we are pleased with the recent
trends. We are expanding our business with existing customers, and we
are also seeing orders from new customers in the growing boxed bedding
space. We recently launched our new line of bedding accessories,
marketed under the brand name, ‘Comfort Supply Company by Culp,' and we
remain excited about the opportunities to extend our market reach. As we
have identified additional marketing channels, we have also implemented
a new digital marketing strategy and expanded our social media presence
to enhance Culp's brand awareness and increase sales, especially with
younger consumers.

"During the first quarter, we completed our previously announced
majority ownership investment in eLuxury, an e-commerce company offering
bedding accessories and home goods direct to consumers. This strategic
investment substantially expands our addressable market, provides an
important new sales channel for Culp in the bedding accessories and home
goods categories, and expands our ability to participate in the rapidly
growing e-commerce direct-to-consumer space. We have already developed
and are beginning to launch our Phase One product offerings, and we are
also creating innovative new items to be marketed through this exciting
platform. We believe eLuxury will enhance our strong value proposition,
and we expect to see a meaningful contribution from this new business
category by the second half of fiscal 2019.

"We have been aggressive over the past two years as we worked to create
a sustainable, efficient platform with enhanced capacity and
distribution capabilities," added Culp. "The flexibility and scalability
of this platform have served us well, especially during the difficult
market conditions we faced in the first quarter. We continue to focus on
maximizing the efficiency of our operations and aligning our costs in
tandem with current and expected demand. In addition, we have reduced
our capital expenditure budget for the year and deferred certain
projects that were originally expected to be completed in fiscal 2019.
Overall, our manufacturing and service platforms are in excellent
condition worldwide, and we are excited about the benefits we will
realize from our recent work.

"Looking ahead, we see continued uncertainty in the mattress industry
that will affect short-term demand trends and our operating performance.
We are optimistic that the proposed relief being sought by the bedding
industry under U.S. trade laws to address the impact of imported,
low-priced mattresses from China will be favorable for our business.
Assuming such actions are successful, and factoring in the incremental
sales from eLuxury, we expect our mattress fabrics sales and operating
performance will improve in the second half of the fiscal year. We have
a solid core business and a strong competitive position across all
product categories from fabric to sewn covers. Furthermore, we have a
comprehensive strategy in place to expand our market reach with
complementary products and new sales channels, especially as the
mattress industry begins to stabilize," said Culp.

Upholstery Fabrics Segment

Sales for this segment were $34.5 million for the first quarter,
compared with sales of $31.1 million in the first quarter of fiscal 2018.

"Our upholstery fabrics sales were in line with expectations for
the first quarter of fiscal 2019, with a solid 10.9 percent growth in
sales compared with the first quarter sales performance a year ago,"
noted Boyd Chumbley, president of Culp's upholstery fabrics division.
"Our ability to execute our product-driven strategy and diversify our
customer base has been the key driver of our sales performance. Culp's
creative designs and innovative products continue to resonate with our
global customer base.

"Our results reflect consistent organic growth with our China produced
fabrics, as we continued to see favorable demand trends for our popular
line of ‘performance fabrics.' Our sales for the quarter also included
the first full quarter of financial results for RWP, and we are pleased
with the successful integration of this window treatment business as we
achieved our anticipated financial and operating objectives for the
quarter. Looking ahead, we are excited about the additional growth
opportunities RWP provides as we extend our reach into the hospitality
market. We continue to diversify our sales with additional end-user
markets and customers, as well as expand sales in certain other
geographic markets. Additionally, we are pleased with the continued
growth of our fabric sold for stationary furniture applications.

"As expected, our operating performance for the first quarter of fiscal
2019 was primarily affected by an unfavorable currency exchange rate in
China, although we did see some benefit from a weakening currency late
in the quarter. In addition, we incurred $2.0 million in restructuring
and related charges for the previously announced closing of our
Anderson, South Carolina, facility, which included approximately $1.5
million for inventory markdowns and $500,000 in severance and retention
expenses. We expect to recover most of these costs over the next two
quarters from the sale of the plant and equipment in Anderson with
anticipated proceeds of $1.7 million to $2.0 million. We are on schedule
to cease production in Anderson by the end of August.

"Looking ahead, currently the impact of the proposed tariffs and the
associated geopolitical risks are uncertain. We are monitoring the
situation and the potential impact on Culp's business, and if additional
tariffs are implemented, we will determine an appropriate response.
Additionally, we continue to closely monitor the gradual increase in raw
material costs in China. Despite these uncertainties, we believe Culp is
well positioned to benefit from any uptick in demand for home
furnishings and more stable market conditions," added Chumbley.

Balance Sheet

"Maintaining a strong financial position is one of Culp's top priorities
for fiscal 2019," added Ken Bowling, senior vice president and chief
financial officer of Culp, Inc. "We reported $39.3 million in total cash
and investments and $4.0 million outstanding on the company's line of
credit as of July 29, 2018, for a net cash position of $35.3 million.
During the first quarter, we spent $2.2 million on capital expenditures,
including vendor financed payments, funded $11.6 million for the eLuxury
investment, and spent $1.1 million on regular dividends. Consistent with
the first quarter in previous years, the company borrowed funds for
working capital requirements at the beginning of the fiscal year, and we
expect to reduce this outstanding debt as soon as possible."

Dividends and Share Repurchases

The company also announced that the Board of Directors approved the
payment of the company's quarterly cash dividend of $0.09 per share.
This payment will be made on October 15, 2018, to shareholders of record
as of October 1, 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 repurchased approximately 3,000 shares at the end of the
first quarter of fiscal 2019, leaving $4.9 million available under the
share repurchase program approved by the Board in June 2016.

Since June 2011, the company has returned approximately $57.1 million to
shareholders in the form of regular quarterly and special dividends and
share repurchases.

Financial Outlook

Commenting on the outlook for the second quarter of fiscal 2019, Bowling
remarked, "We expect overall sales to be down approximately 5.0 percent
compared with the second quarter of last year.

"We expect sales, operating income and margins in our mattress fabrics
segment to show sequential improvement, but to be lower than the second
quarter of fiscal 2018. Assuming the mattress industry stabilizes,
bedding industry relief materializes under U.S. trade laws and business
conditions improve, we expect to see more normalized trends in the
second half of fiscal 2019 that are more in line with the prior year.

"In our upholstery fabrics segment, we expect sales to be slightly
higher compared to the same time last year. Operating income and margins
are expected to be slightly up compared with the same period a year ago,
assuming more favorable trends in currency exchange rates and the
elimination of operating losses associated with the Anderson facility.

"Considering these factors, the company expects to report pre-tax income
for the second fiscal quarter of 2019 in the range of $3.6 million to
$4.6 million, excluding any restructuring and related charges and
credits. Pre-tax income for last year's second quarter was $6.2 million.
Our performance for the second half of fiscal 2019 is currently expected
to be more in line with the results achieved during the second half of
last fiscal year.

"Based on our current budget, capital expenditures for fiscal 2019 are
now expected to be in the $6.0 million to $6.5 million range, as we have
moved to a more maintenance level of capital expenditures," 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 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, and integrating acquired businesses.
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 tariffs or trade policy, or
changes in the value of the U.S. dollar versus other currencies could
affect our financial results because a significant portion of our
operations are located outside the United States. Strengthening of the
U.S. dollar against other currencies could make our products less
competitive on the basis of price in markets outside the United States,
and strengthening of currencies in Canada and China can have a negative
impact on our sales of products produced in those places. Also, economic
and political instability in international areas could affect our
operations or sources of goods in those areas, as well as demand for our
products in international markets. 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 13,
2018 for the fiscal year ended April 29, 2018.

 
CULP, INC.

Condensed Financial Highlights

(Unaudited)

    Three Months Ended
July 29,

2018

    July 30,

2017

Net sales $ 71,473,000 $ 79,533,000
Income before income taxes $ 1,948,000 $ 6,742,000
Net income attributable to Culp, Inc. $ 957,000 $ 4,984,000
Net income per share:
Basic $ 0.08 $ 0.40
Diluted $ 0.08 $ 0.40
Average shares outstanding:
Basic 12,510,000 12,399,000
Diluted 12,600,000 12,590,000
 
Adjusted Consolidated Statement of Operations

For Three Months Ended July 29, 2018

(Unaudited)

    As Reported

July 29, 2018

  (1)

Adjustments

  July 29, 2018

Adjusted

Results

 
 
Net Sales $ 71,473 $ - $ 71,473
Cost of Sales (1)   60,914     (1,565 )   59,349  
Gross Profit 10,559 (1,565 ) 12,124
 
Selling, general, and administrative expenses 8,033 - 8,033
Restructuring expense (1)   451     (451 )   -  
Income from operations 2,075 (2,016 ) 4,091
 
Interest expense 20 - 20
Interest income (150 ) - (150 )
Other expense   257     -     257  
Income before income taxes $ 1,948   $ (2,016 ) $ 3,964  
 
(1) The $1.6 million adjustment for cost of sales
represents a restructuring related charge for inventory markdowns.
The $451 restructuring charge is for employee termination benefits.
Both of these charges are associated with the closure of the
company's Anderson, South Carolina, plant facility. The were no
restructuring activities during the three month period ending July
30, 2017.
 

Summary of Cash and Investments

July 29, 2018, July 30, 2017, and April 29, 2018

(Unaudited)

(Amounts in Thousands)

    Amounts
July 29,

2018

  July 30,

2017

  April 29,

2018 *

Cash and cash equivalents $ 8,593 $ 18,322 $ 21,228
Short-term investments - Available for Sale - 2,469 2,451
Short-term investments - Held-To-Maturity 30,756 - 25,759
Long-term investments - Held-To-Maturity   -   30,907   5,035
Total cash and investments $ 39,349 $ 51,698 $ 54,473
 
*Derived from audited financial statements.

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