Annual Statements Open main menu

CULP INC - Quarter Report: 2020 November (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 1, 2020

Commission File No. 1-12597

CULP, INC.

(Exact name of registrant as specified in its charter)

 

NORTH CAROLINA

56-1001967

(State or other jurisdiction of

incorporation or other organization)

(I.R.S. Employer

Identification No.)

 

1823 Eastchester Drive

 

High Point, North Carolina

27265-1402

(Address of principal executive offices)

(zip code)

 

(336) 889-5161

(Registrant's telephone number, including area code)

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

 

 

 

 

 

 

Name of Each Exchange

Title of Each Class

 

Trading Symbol(s)

 

On Which Registered

Common Stock, par value $.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 such filing requirements for the past 90 days. YES NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “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 December 10, 2020: 12,303,795

Par Value: $0.05 per share

 

 

 


INDEX TO FORM 10-Q

 

For the period ended November 1, 2020

 

 

 

Part I - Financial Statements

 

Page

 

 

 

 

 

Item 1.

 

Financial Statements: (Unaudited)

 

I-1

 

 

 

 

 

 

 

Consolidated Statements of Net Income (Loss) — Three and Six Months Ended November 1, 2020, and November 3, 2019

 

I-1

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended November 1, 2020, and November 3, 2019

 

I-2

 

 

 

 

 

 

 

Consolidated Balance Sheets — November 1, 2020, November 3, 2019, and May 3, 2020

 

I-3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Six Months Ended November 1, 2020, and November 3, 2019

 

I-4

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Six Months Ended November 1, 2020

 

I-5

 

 

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity – Six Months Ended November 3, 2019

 

I-6

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

I-7

 

 

 

 

 

 

 

Cautionary Statement Concerning Forward-Looking Information

 

I-32

 

 

 

 

 

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

I-33

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

I-47

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

I-48

 

 

 

 

 

 

 

Part II - Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

II-1

 

 

 

 

 

Item 1A.

 

Risk Factors

 

II-1

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

II-1

 

 

 

 

 

Item 6.

 

Exhibits

 

II-2

 

 

 

 

 

Signatures

 

II-3

 

 

 


Item 1: Financial Statements

CULP, INC.

CONSOLIDATED STATEMENTS OF NET INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 1, 2020 AND NOVEMBER 3, 2019

UNAUDITED

(Amounts in Thousands, Except for Per Share Data)

 

 

 

THREE MONTHS ENDED

 

 

 

November 1,

 

 

November 3,

 

 

 

2020

 

 

2019

 

Net sales

 

$

76,851

 

 

$

69,550

 

Cost of sales

 

 

(62,590

)

 

 

(56,024

)

Gross profit from continuing operations

 

 

14,261

 

 

 

13,526

 

Selling, general and administrative expenses

 

 

(9,743

)

 

 

(9,117

)

Income from continuing operations

 

 

4,518

 

 

 

4,409

 

Interest expense

 

 

 

 

 

(21

)

Interest income

 

 

59

 

 

 

258

 

Other expense

 

 

(680

)

 

 

(99

)

Income before income taxes from continuing operations

 

 

3,897

 

 

 

4,547

 

Income tax expense

 

 

(1,613

)

 

 

(2,279

)

Income (loss) from investment in unconsolidated joint venture

 

 

100

 

 

 

(16

)

Net income from continuing operations

 

 

2,384

 

 

 

2,252

 

Loss before income taxes from discontinued operation

 

 

 

 

 

(441

)

Income tax benefit

 

 

 

 

 

381

 

Net loss from discontinued operation

 

 

 

 

 

(60

)

Net income

 

$

2,384

 

 

$

2,192

 

Net income from continuing operations per share - basic

 

$

0.19

 

 

$

0.18

 

Net income from continuing operations per share - diluted

 

$

0.19

 

 

$

0.18

 

Net loss from discontinued operation per share - basic

 

$

 

 

$

(0.00

)

Net loss from discontinued operation per share - diluted

 

$

 

 

$

(0.00

)

Net income per share - basic

 

$

0.19

 

 

$

0.18

 

Net income per share - diluted

 

$

0.19

 

 

$

0.18

 

Average shares outstanding, basic

 

 

12,298

 

 

 

12,408

 

Average shares outstanding, diluted

 

 

12,324

 

 

 

12,408

 

 

 

 

SIX MONTHS ENDED

 

 

 

November 1,

 

 

November 3,

 

 

 

2020

 

 

2019

 

Net sales

 

$

141,315

 

 

$

140,269

 

Cost of sales

 

 

(117,153

)

 

 

(114,331

)

Gross profit from continuing operations

 

 

24,162

 

 

 

25,938

 

Selling, general and administrative expenses

 

 

(17,761

)

 

 

(18,266

)

Restructuring credit

 

 

 

 

 

35

 

Income from continuing operations

 

 

6,401

 

 

 

7,707

 

Interest expense

 

 

(51

)

 

 

(21

)

Interest income

 

 

117

 

 

 

518

 

Other expense

 

 

(1,046

)

 

 

(194

)

Income before income taxes from continuing operations

 

 

5,421

 

 

 

8,010

 

Income tax expense

 

 

(5,937

)

 

 

(3,971

)

Income (loss) from investment in unconsolidated joint venture

 

 

167

 

 

 

(3

)

Net (loss) income from continuing operations

 

 

(349

)

 

 

4,036

 

Loss before income taxes from discontinued operation

 

 

 

 

 

(1,062

)

Income tax benefit

 

 

 

 

 

392

 

Net loss from discontinued operation

 

 

 

 

 

(670

)

Net (loss) income

 

$

(349

)

 

$

3,366

 

Net (loss) income from continuing operations per share - basic

 

$

(0.03

)

 

$

0.33

 

Net (loss) income from continuing operations per share - diluted

 

$

(0.03

)

 

$

0.33

 

Net loss from discontinued operation per share - basic

 

$

 

 

$

(0.05

)

Net loss from discontinued operation per share - diluted

 

$

 

 

$

(0.05

)

Net (loss) income per share - basic

 

$

(0.03

)

 

$

0.27

 

Net (loss) income per share - diluted

 

$

(0.03

)

 

$

0.27

 

Average shares outstanding, basic

 

 

12,293

 

 

 

12,403

 

Average shares outstanding, diluted

 

 

12,293

 

 

 

12,413

 

 

See accompanying notes to consolidated financial statements.

 

I-1

 


CULP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 1, 2020 AND NOVEMBER 3, 2019

UNAUDITED

(Amounts in Thousands)

 

 

 

 

THREE MONTHS ENDED

 

 

 

November 1,

 

 

November 3,

 

 

 

2020

 

 

2019

 

Net income

 

$

2,384

 

 

$

2,192

 

 

 

 

 

 

 

 

 

 

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

 

 

(39

)

 

 

9

 

Reclassification adjustment for realized loss on investments

 

 

6

 

 

 

 

Comprehensive income

 

$

2,351

 

 

$

2,201

 

Plus: Comprehensive loss attributable to noncontrolling

    interest associated with discontinued operation

 

 

 

 

 

108

 

Comprehensive income attributable to Culp, Inc.

   common shareholders

 

$

2,351

 

 

$

2,309

 

 

 

 

 

SIX MONTHS ENDED

 

 

 

November 1,

 

 

November 3,

 

 

 

2020

 

 

2019

 

Net (loss) income

 

$

(349

)

 

$

3,366

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains on investments, net of tax

 

 

30

 

 

 

15

 

Reclassification adjustment for realized loss on investments

 

 

6

 

 

 

 

Comprehensive (loss) income

 

$

(313

)

 

$

3,381

 

Plus: Comprehensive loss attributable to noncontrolling

    interest associated with discontinued operation

 

 

 

 

 

272

 

Comprehensive (loss) income attributable to Culp, Inc.

   common shareholders

 

$

(313

)

 

$

3,653

 

 

See accompanying notes to consolidated financial statements.

 

I-2

 


CULP, INC.

CONSOLIDATED BALANCE SHEETS

NOVEMBER 1, 2020, NOVEMBER 3, 2019, AND MAY 3, 2020

UNAUDITED

(Amounts in Thousands)

 

 

 

November 1,

 

 

November 3

 

 

* May 3,

 

 

 

2020

 

 

2019

 

 

2020

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

45,288

 

 

 

46,955

 

 

 

69,790

 

Short-term investments - held-to-maturity

 

 

5,005

 

 

 

 

 

 

4,271

 

Short-term investments - available for sale

 

 

5,462

 

 

 

 

 

 

923

 

Accounts receivable, net

 

 

32,960

 

 

 

23,890

 

 

 

25,093

 

Inventories

 

 

47,726

 

 

 

51,443

 

 

 

47,907

 

Current income taxes receivable

 

 

 

 

 

776

 

 

 

1,585

 

Current assets - discontinued operation

 

 

 

 

 

4,760

 

 

 

 

Other current assets

 

 

3,509

 

 

 

2,745

 

 

 

2,116

 

Total current assets

 

 

139,950

 

 

 

130,569

 

 

 

151,685

 

Property, plant and equipment, net

 

 

41,599

 

 

 

45,221

 

 

 

43,147

 

Goodwill

 

 

 

 

 

13,569

 

 

 

 

Intangible assets

 

 

3,192

 

 

 

3,711

 

 

 

3,380

 

Long-term investments - rabbi trust

 

 

8,060

 

 

 

7,575

 

 

 

7,834

 

Long-term investments - held-to-maturity

 

 

759

 

 

 

 

 

 

2,076

 

Right of use assets

 

 

6,165

 

 

 

4,883

 

 

 

3,903

 

Noncurrent income taxes receivable

 

 

 

 

 

733

 

 

 

 

Deferred income taxes

 

 

645

 

 

 

511

 

 

 

793

 

Investment in unconsolidated joint venture

 

 

1,859

 

 

 

1,504

 

 

 

1,602

 

Long-term note receivable affiliated with discontinued operation

 

 

 

 

 

1,800

 

 

 

 

Noncurrent assets - discontinued operation

 

 

 

 

 

22,950

 

 

 

 

Other assets

 

 

547

 

 

 

496

 

 

 

664

 

Total assets

 

$

202,776

 

 

 

233,522

 

 

 

215,084

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Line of credit - China operations

 

$

 

 

 

 

 

 

1,015

 

Paycheck Protection Program Loan

 

 

 

 

 

 

 

 

7,606

 

Accounts payable - trade

 

 

38,247

 

 

 

26,336

 

 

 

23,002

 

Accounts payable - capital expenditures

 

 

68

 

 

 

398

 

 

 

107

 

Operating lease liability - current

 

 

2,316

 

 

 

2,090

 

 

 

1,805

 

Deferred revenue

 

 

375

 

 

 

375

 

 

 

502

 

Accrued expenses

 

 

11,684

 

 

 

8,263

 

 

 

5,687

 

Accrued restructuring costs

 

 

 

 

 

35

 

 

 

 

Current liabilities - Discontinued operation

 

 

 

 

 

1,907

 

 

 

 

Income taxes payable - current

 

 

1,413

 

 

 

1,539

 

 

 

395

 

Total current liabilities

 

 

54,103

 

 

 

40,943

 

 

 

40,119

 

Line of credit - U.S. operations

 

 

 

 

 

 

 

 

29,750

 

Accrued expenses - long-term

 

 

 

 

 

333

 

 

 

167

 

Operating lease liability - noncurrent

 

 

4,008

 

 

 

2,614

 

 

 

2,016

 

Income taxes payable - long-term

 

 

3,325

 

 

 

3,442

 

 

 

3,796

 

Deferred income taxes

 

 

6,089

 

 

 

3,283

 

 

 

1,818

 

Deferred compensation

 

 

8,000

 

 

 

7,429

 

 

 

7,720

 

Contingent consideration affiliated with discontinued operation

 

 

 

 

 

6,006

 

 

 

 

Noncurrent liabilities - discontinued operation

 

 

 

 

 

3,550

 

 

 

 

Total liabilities

 

 

75,525

 

 

 

67,600

 

 

 

85,386

 

Commitments and Contingencies (Notes 10, 17 and 18)

 

 

 

 

 

 

 

 

 

 

 

 

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 12,303,023 at November 1, 2020; 12,411,957 at November 3,

   2019; and 12,284,946 at May 3, 2020

 

 

615

 

 

 

621

 

 

 

615

 

Capital contributed in excess of par value

 

 

43,031

 

 

 

44,109

 

 

 

42,582

 

Accumulated earnings

 

 

83,579

 

 

 

116,735

 

 

 

86,511

 

Accumulated other comprehensive income (loss)

 

 

26

 

 

 

55

 

 

 

(10

)

Total shareholders' equity attributable to Culp, Inc.

 

 

127,251

 

 

 

161,520

 

 

 

129,698

 

Noncontrolling interest - discontinued operation

 

-

 

 

 

4,402

 

 

 

 

Total equity

 

 

127,251

 

 

 

165,922

 

 

 

129,698

 

Total liabilities and shareholders' equity

 

$

202,776

 

 

 

233,522

 

 

 

215,084

 

 

* Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

 

 

I-3

 


 

CULP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED NOVEMBER 1, 2020 AND NOVEMBER 3, 2019

UNAUDITED

(Amounts in Thousands)

 

 

 

SIX MONTHS ENDED

 

 

 

November 1,

 

 

November 3,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(349

)

 

 

3,366

 

Adjustments to reconcile net (loss) income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

3,538

 

 

 

3,893

 

Amortization

 

 

235

 

 

 

353

 

Stock-based compensation

 

 

474

 

 

 

467

 

Deferred income taxes

 

 

4,419

 

 

 

53

 

Gain on disposal of equipment

 

 

 

 

 

(93

)

Realized loss on short-term investments available for sale

 

 

6

 

 

 

 

(Income) loss from investment in unconsolidated joint venture

 

 

(167

)

 

 

3

 

Foreign currency exchange loss (gain)

 

 

723

 

 

 

(106

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(7,663

)

 

 

(835

)

Inventories

 

 

602

 

 

 

(4,797

)

Other current assets

 

 

(1,175

)

 

 

(31

)

Other assets

 

 

(40

)

 

 

133

 

Accounts payable – trade

 

 

14,156

 

 

 

3,564

 

Deferred revenue

 

 

(127

)

 

 

(24

)

Accrued expenses and deferred compensation

 

 

6,019

 

 

 

1,620

 

Accrued restructuring costs

 

 

 

 

 

(89

)

Income taxes

 

 

2,052

 

 

 

770

 

Net cash provided by operating activities

 

 

22,703

 

 

 

8,247

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,041

)

 

 

(2,410

)

Proceeds from the sale of equipment

 

 

12

 

 

 

363

 

Investment in unconsolidated joint venture

 

 

(90

)

 

 

 

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

 

 

1,800

 

 

 

5,000

 

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

 

 

(1,245

)

 

 

 

Purchase of short-term investments (Available for Sale)

 

 

(5,010

)

 

 

 

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

 

 

455

 

 

 

 

Proceeds from the sale of long-term investments (rabbi trust)

 

 

77

 

 

 

 

Purchase of long-term investments (rabbi trust)

 

 

(257

)

 

 

(479

)

Net cash (used in) provided by investing activities

 

 

(6,299

)

 

 

2,474

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments associated with lines of credit

 

 

(30,772

)

 

 

 

Payments associated with Paycheck Protection Program Loan

 

 

(7,606

)

 

 

 

Dividends paid

 

 

(2,583

)

 

 

(2,482

)

Cash paid for acquisition of business

 

 

 

 

 

(1,532

)

Proceeds from subordinated loan payable associated with the

     noncontrolling interest of discontinued operation

 

 

 

 

 

250

 

Capital contribution from noncontrolling interest associated

     with discontinued operation

 

 

 

 

 

360

 

Common stock surrendered for withholding taxes payable

 

 

(25

)

 

 

(51

)

Payments of debt issuance costs

 

 

(15

)

 

 

 

Net cash used in financing activities

 

 

(41,001

)

 

 

(3,455

)

Effect of exchange rate changes on cash and cash equivalents

 

 

95

 

 

 

(91

)

(Decrease) increase in cash and cash equivalents

 

 

(24,502

)

 

 

7,175

 

Cash and cash equivalents at beginning of period

 

 

69,790

 

 

 

40,008

 

Cash and cash equivalents at end of period (1)

 

$

45,288

 

 

 

47,183

 

 

See accompanying notes to consolidated financial statements.

 

(1) As of November 3, 2019, cash and cash equivalents totaled $47.2 million, of which $47.0 million and $228,000 were classified as (i) cash and cash equivalents and (ii) within current assets – discontinued operation, respectively, in the accompanying Consolidated Balance Sheets.

I-4

 


 

CULP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX-MONTH PERIOD ENDED NOVEMBER 1, 2020

UNAUDITED

(Dollars in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributed

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

in Excess

 

 

Accumulated

 

 

Comprehensive

 

 

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

of Par Value

 

 

Earnings

 

 

(Loss) Income

 

 

Equity

 

Balance, May 3, 2020 *

 

 

12,284,946

 

 

$

615

 

 

$

42,582

 

 

$

86,511

 

 

$

(10

)

 

$

129,698

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,733

)

 

 

 

 

 

(2,733

)

Stock-based compensation

 

 

 

 

 

 

 

 

126

 

 

 

 

 

 

 

 

 

126

 

Unrealized gain on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69

 

 

 

69

 

Fully vested common stock award

 

 

7,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

(1,291

)

 

 

 

 

 

(1,291

)

Balance, August 2, 2020

 

 

12,291,946

 

 

$

615

 

 

$

42,708

 

 

$

82,487

 

 

$

59

 

 

$

125,869

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,384

 

 

 

 

 

 

2,384

 

Stock-based compensation

 

 

 

 

 

 

 

 

348

 

 

 

 

 

 

 

 

 

348

 

Unrealized loss on investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33

)

 

 

(33

)

Fully vested common stock award

 

 

5,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued in connection with

    vesting of performance-based restricted

     stock units

 

 

8,019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock surrendered for withholding

     taxes payable

 

 

(2,135

)

 

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

(25

)

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

(1,292

)

 

 

 

 

 

(1,292

)

Balance, November 1, 2020

 

 

12,303,023

 

 

$

615

 

 

$

43,031

 

 

$

83,579

 

 

$

26

 

 

$

127,251

 

 

*

Derived from audited financial statements.

See accompanying notes to consolidated financial statements

I-5

 


 

CULP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX-MONTH PERIOD ENDED NOVEMBER 3, 2019

UNAUDITED

(Dollars in thousands, except share data)

 

 

 

Shareholders’ equity attributable to Culp Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contributed

 

 

 

 

 

 

Other

 

 

 

 

 

 

Interest

 

 

 

 

 

 

 

Common Stock

 

 

in Excess

 

 

Accumulated

 

 

Comprehensive

 

 

 

 

 

 

Discontinued

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

of Par Value

 

 

Earnings

 

 

Income

 

 

Total

 

 

Operation

 

 

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 associated with discontinued

   operation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 contribution from non-controlling

   interest associated with discontinued

   operation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

320

 

 

 

320

 

Balance, November 3, 2019

 

 

12,411,957

 

 

$

621

 

 

$

44,109

 

 

$

116,735

 

 

$

55

 

 

$

161,520

 

 

$

4,402

 

 

$

165,922

 

 

*

Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

I-6

 


 

Culp, Inc.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed 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 condensed 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 17, 2020, for the fiscal year ended May 3, 2020.

The company’s six-months ended November 1, 2020, and November 3, 2019, represent 26-week and 27-week periods, respectively.

2. Significant Accounting Policies

As of November 1, 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 May 3, 2020.

Recently Adopted Accounting Pronouncements

Current Expected Credit Losses (“CECL”)

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, and interim periods within those fiscal years, beginning after December 15, 2019. As a result, we adopted the provisions of Topic 326 on May 4, 2020 and applied this guidance through the second quarter of fiscal 2021. The adoption of Topic 326 did not have an impact on our financial position, results of operations, or cash flows. See Notes 4 and 11 of our consolidated financial statements for further details of the adoption of CECL as of May 4, 2020 and our assessments and conclusions as of November 1, 2020.

Recently Issued Accounting Pronouncements

Income Taxes

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are required to apply this guidance in our fiscal 2022 interim and annual financial statements. Currently we do not expect this standard to affect our consolidated financial statements and related disclosures. 

There are no other new recent accounting pronouncements that are expected to have a material impact on our consolidated financial statements.

3.

HOME ACCESSORIES SEGMENT – DISCONTINUED OPERATION

Overview

On March 31, 2020, we sold our entire ownership interest in eLuxury, LLC (“eLuxury”) to eLuxury’s noncontrolling interest holder in consideration of an accelerated settlement of certain financial obligations due and payable by eLuxury to us and the entry into supply and royalty arrangements designed to preserve an additional sales channel for our core products. Also, this sale, which was part of our comprehensive response to the challenging business conditions arising from the COVID-19 global pandemic, has allowed us to focus on our core businesses of upholstery and mattress fabrics and has been a factor in the increase of our liquidity through the first half of fiscal 2021.

In connection with the sale of our entire ownership interest in eLuxury, (i) we received $509,500 at closing as an accelerated repayment of principal amounts previously loaned to eLuxury, together with outstanding interest, under a loan agreement between us and eLuxury; (ii) we forgave $300,000 of borrowings payable by eLuxury to us under this loan agreement; (iii) we

I-7

 


 

entered into an amended and restated credit and security agreement with eLuxury and the buyer (the former noncontrolling interest holder) (together, the “Borrowers”), pursuant to which the Borrowers agreed to repay an additional $1 million previously loaned to eLuxury within thirty days of the closing of the sale transaction (and which amount was secured by the assets of both Borrowers); and (iv) eLuxury agreed to pay $613,000 within sixty days of the sale transaction in satisfaction of certain trade accounts payable due from eLuxury to us.

 

The remaining $1 million we previously loaned to eLuxury and the outstanding trade accounts payable balance of $613,000 due from eLuxury to us has been paid in full in accordance with the terms of the sale agreement outlined above.

 

Discontinued Operation Financial Statement Presentation and Disclosures

 

Financial Statement Presentation

 

Due to the sale of our entire ownership interest in eLuxury, our home accessories segment was eliminated. Consequently, we determined that the results from operations and assets and liabilities associated with our home accessories segment were to be excluded from our continuing operations and presented as a discontinued operation in our consolidated financial statements in accordance with ASC Topic 205-20-45. As a result, we classified the results from operations of our home accessories segment separately in captions titled “Discontinued Operation” on our Consolidated Statement of Net Income for the three-month and six-month periods ending November 3, 2019. Additionally, assets and liabilities associated with our home accessories segment as of November 3, 2019, were reclassified from certain amounts reported in the prior period to present separately in captions titled “current assets – discontinued operation”, “noncurrent assets – discontinued operation”, “current liabilities - discontinued operation”, and “noncurrent liabilities – discontinued operation” to conform to current year financial statement presentation.

 

Consolidated Balance Sheet

 

The following is a summary of the assets and liabilities of the disposal group that are presented separately as a discontinued operation on the Consolidated Balance Sheet as of November 3, 2019.

 

 

 

November 3

 

(dollars in thousands)

 

2019

 

ASSETS

 

 

 

 

current assets:

 

 

 

 

cash and cash equivalents

 

$

228

 

accounts receivable

 

 

632

 

inventories

 

 

3,785

 

other current assets

 

 

115

 

total current assets - discontinued operation

 

 

4,760

 

property, plant, and equipment

 

 

1,752

 

goodwill

 

 

13,653

 

intangible asset

 

 

6,549

 

right of use asset

 

 

996

 

total noncurrent assets - discontinued operation

 

 

22,950

 

total assets

 

$

27,710

 

LIABILITIES AND NET ASSETS

 

 

 

 

current liabilities:

 

 

 

 

accounts payable

 

$

1,063

 

operating lease liability - current

 

 

192

 

accrued expenses

 

 

652

 

total current liabilities - discontinued operation

 

 

1,907

 

loan payable - Culp Inc.

 

 

1,800

 

subordinated loan payable - noncontrolling interest

 

 

925

 

operating lease liability - long-term

 

 

825

 

total noncurrent liabilities - discontinued operation

 

 

3,550

 

total liabilities

 

 

5,457

 

total net assets of discontinued operation

 

$

22,253

 

 

I-8

 


 

Net Loss from Discontinued Operation

 

The following is a summary of the major classes of financial statement line items constituting loss before income taxes from discontinued operation that are presented in the Consolidated Statements of Net Income for the three-month and six-month periods ending November 3, 2019:

 

 

 

Three Months Ended

 

 

 

November 3,

 

(dollars in thousands)

 

2019

 

net sales

 

$

3,276

 

cost of sales

 

 

(2,699

)

gross profit

 

 

577

 

selling, general and administrative expenses

 

 

(1,003

)

interest expense (1)

 

 

(27

)

other income

 

 

12

 

loss before income taxes from discontinued

   operation

 

 

(441

)

income tax benefit

 

 

381

 

net loss from discontinued operation

 

$

(60

)

 

 

 

 

Six Months Ended

 

 

 

November 3,

 

(dollars in thousands)

 

2019

 

net sales

 

$

7,578

 

cost of sales

 

 

(6,048

)

gross profit

 

 

1,530

 

selling, general and administrative expenses

 

 

(2,565

)

interest expense (1)

 

 

(47

)

other income

 

 

20

 

loss before income taxes from discontinued

   operation

 

 

(1,062

)

income tax benefit

 

 

392

 

net loss from discontinued operation

 

$

(670

)

 

 

(1)

Interest expense is directly attributable to our discontinued operation as it pertains to the loans payable assumed by the buyer (the former noncontrolling interest holder) or required to be paid to Culp, Inc. based on the terms of the sale agreement.

 

 

The following is a summary of net income (loss) from continuing operations, net loss from discontinued operation, and net income (loss) attributable to Culp, Inc. common shareholders and the noncontrolling interest associated with our discontinued operation for the three-month and six-month periods ending November 1, 2020, and November 3, 2019:

 

 

 

Three Months Ended

 

 

 

November 1,

 

 

November 3,

 

(dollars in thousands)

 

2020

 

 

2019

 

net income from continuing operations

 

$

2,384

 

 

$

2,252

 

net loss from continuing operations attributable to

   noncontrolling interest

 

 

 

 

 

 

net income from continuing operations attributable

   to Culp, Inc. common shareholders

 

$

2,384

 

 

$

2,252

 

net loss from discontinued operation

 

$

 

 

$

(60

)

net loss from discontinued operation attributable to

   noncontrolling interest

 

 

 

 

 

108

 

net income from discontinued operation attributable to Culp, Inc.

   common shareholders

 

$

 

 

$

48

 

net income

 

$

2,384

 

 

$

2,192

 

net loss from noncontrolling interest associated with a

   discontinued operation

 

 

 

 

 

108

 

net income attributable to Culp, Inc.

   common shareholders

 

$

2,384

 

 

$

2,300

 

 

I-9

 


 

 

 

Six Months Ended

 

 

 

November 1,

 

 

November 3,

 

(dollars in thousands)

 

2020

 

 

2019

 

net (loss) income from continuing operations

 

$

(349

)

 

$

4,036

 

net loss from continuing operations attributable to

   noncontrolling interest

 

 

 

 

 

 

net (loss) income from continuing operations attributable

   to Culp, Inc. common shareholders

 

$

(349

)

 

$

4,036

 

net loss from discontinued operation

 

$

 

 

$

(670

)

net loss from discontinued operation attributable to

   noncontrolling interest

 

 

 

 

 

272

 

net loss from discontinued operation attributable to Culp, Inc.

   common shareholders

 

$

 

 

$

(398

)

net (loss) income

 

$

(349

)

 

$

3,366

 

net loss from noncontrolling interest associated with a

   discontinued operation

 

 

 

 

 

272

 

net (loss) income attributable to Culp, Inc.

   common shareholders

 

$

(349

)

 

$

3,638

 

 

Cash Flow Disclosures

Our discontinued operation had net cash used in operating activities totaling $2.2 million during the six-months ending November 3, 2019. Our discontinued operation had net cash used in investing activities totaling $32,000 during the six-months ending November 3, 2019. Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions from Culp, Inc. and the former noncontrolling interest holder of eLuxury, totaling $2.4 million during the six-months ending November 3, 2019. We believe our liquidity has improved during the first half of fiscal 2021 in the absence of our former home accessories segment due to the significant losses that were incurred by that segment and the funding of its working capital requirements primarily by us through loans and capital contributions that are no longer required.

Continuing Obligations, Financial Commitments, and Continuing Relationships with the Discontinued Operation

Supply and Royalty Agreements

In connection with the sale of our entire ownership interest in eLuxury, we entered into supply and royalty agreements with eLuxury to preserve an additional sales channel for our core products – upholstery and mattress fabrics. The supply agreement requires eLuxury to purchase all its requirements at fair market prices for mattress and upholstery fabric products of the type we were supplying to eLuxury at the time of the sale transaction, as well as certain home accessories and soft good products, subject to our ability to provide competitive pricing and delivery terms for such products. The royalty agreement requires eLuxury to pay us a royalty fee based on a percentage of sales, as defined in the royalty agreement, for sales of eLuxury’s products to certain business-to-business customers, including customers which we referred to eLuxury prior to the sale transaction and new customer relationships we develop for eLuxury going forward, as well as sales of eLuxury products generated by sales representatives that we develop or introduce to eLuxury.

There are no guarantees or provisions under either the supply or royalty agreements that require eLuxury to purchase a minimum amount of our products or sell a certain amount of eLuxury products to customers or through sales representatives developed or introduced by us. As a result, the success of these agreements and the period of time in which our involvement with eLuxury is expected to continue are based on eLuxury’s ability to sell products that require mattress and upholstery fabrics and our ability to provide an additional sales channel for eLuxury to grow its business-to-business sales platform.

As a result of our continuing involvement with eLuxury, we reported net sales and the related cost of sales associated with our inventory shipments to eLuxury in accordance with Topic 205-20-50-4B, which requires us to report these transactions in continuing operations in our Consolidated Statement of Net Income for the three-month and six-month periods ending November 3, 2019. Therefore, we reported both net sales and cost of sales from continuing operations totaling $207,000 and $381,000 during the three-month and six-month periods ending November 3, 2019, respectively, that were previously eliminated in consolidation.

I-10

 


 

During the three-month and six-month periods ending November 1, 2020, shipments to eLuxury under the supply agreement totaled $41,000 and $285,000, respectively. During the three-month and six-month periods ending November 1, 2020, we received payments pursuant to the royalty agreement totaling $28,000 and $80,000, respectively.

Financial Guarantee

Currently, we have an agreement that guarantees 70% of any unpaid lease payments associated with eLuxury’s facility located in Evansville, Indiana. The lease agreement expires in September 2024 and requires monthly payments of $18,865. Under the terms of the sale of our controlling interest in eLuxury, the buyer (the former noncontrolling interest holder) must use commercially reasonable efforts to cause the lessor to release us from this financial guarantee of eLuxury’s lease agreement. Following the sale transaction, eLuxury and its sole owner have indemnified us from any liabilities and obligations that we would be required to pay regarding this lease agreement.

 

 

4. Allowance for Doubtful Accounts

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

 

 

 

Six Months Ended

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Beginning balance

 

$

472

 

 

$

393

 

Provision for bad debts

 

 

123

 

 

 

(27

)

Net write-offs, net of recoveries

 

 

 

 

 

 

Ending balance

 

$

595

 

 

$

366

 

 

During the six-month period ended November 1, 2020, we assessed the credit risk of our customers within our accounts receivable portfolio. Our risk assessment includes the respective customer’s (i) financial position; (ii) past payment history; (iii) management’s general ability; (iv) historical loss experience; and (v) the ongoing economic uncertainty associated with the COVID-19 global pandemic. After our risk assessment was completed, we assigned credit grades to our customers, which in turn, were used to determine our allowance for doubtful accounts totaling $595,000 as of November 1, 2020.

 

5. Revenue from Contracts with Customers

Nature of Performance Obligations

Continuing Operations

Our continuing operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. Additionally, Read Window Products LLC (“Read”), a wholly-owned subsidiary, is a turn-key provider of window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read’s products for the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows. Read is included in the upholstery fabrics segment.

Our primary performance obligations include the sale of mattress fabrics and upholstery fabrics, as well as the performance of customized fabrication and installation services of Read’s own products associated with window treatments.

Discontinued Operation – Home Accessories Segment

As disclosed in Note 3 of the consolidated financial statements, we sold our entire ownership interest in eLuxury on March 31, 2020, and consequently our home accessories segment was eliminated at such time. Thus, the results of operations associated with our home accessories segment were excluded from our continuing operations and are presented as a discontinued operation in our consolidated financial statements.

The home accessories segment was our finished products business that manufactured, sourced, and sold bedding accessories and home goods directly to consumers and businesses through global e-commerce, business-to-business, and other sales channels.

Prior to its disposal, our former home accessories segment reported net sales totaling $3.3 million and $7.6 million for the three-month and six-month periods ended November 3, 2019, respectively.  Revenue associated with the sales of home accessories products was recognized at the point-in-time when control was transferred to the customer.

I-11

 


 

Contract Assets & Liabilities

Certain contracts, primarily those for customized fabrication and installation services associated with Read, require upfront customer deposits that result in a contract liability which is recorded on the Consolidated Balance Sheets as deferred revenue. If upfront deposits or prepayments are not required, customers may be granted credit terms which generally range from 15 – 60 days.  For a limited time, extended terms were granted to certain customers in response to the challenging business conditions resulting from the COVID-19 global pandemic. Our customary terms, as well as the limited extended terms, are common within the industries in which we operate and are not considered financing arrangements. There were no contract assets recognized as of November 1, 2020, November 3, 2019, and May 3, 2020.

A summary of the activity associated with deferred revenue for the six-month periods ended November 1, 2020, and November 3, 2019, follows:

 

 

 

Six months ended

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Beginning balance

 

$

502

 

 

$

399

 

Revenue recognized on contract liabilities

 

 

(1,197

)

 

 

(1,536

)

Payments received for services not yet rendered

 

 

1,070

 

 

 

1,512

 

Ending balance

 

$

375

 

 

$

375

 

 

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 November 1, 2020:

 

 

 

Mattress

 

 

Upholstery

 

 

 

 

 

(dollars in thousands)

 

Fabrics

 

 

Fabrics

 

 

Total

 

Products transferred at a point in time

 

$

40,030

 

 

$

34,666

 

 

$

74,696

 

Services transferred over time

 

 

 

 

 

2,155

 

 

 

2,155

 

Total Net Sales

 

$

40,030

 

 

$

36,821

 

 

$

76,851

 

 

 

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending November 1, 2020:

 

 

 

Mattress

 

 

Upholstery

 

 

 

 

 

(dollars in thousands)

 

Fabrics

 

 

Fabrics

 

 

Total

 

Products transferred at a point in time

 

$

76,133

 

 

$

60,727

 

 

$

136,860

 

Services transferred over time

 

 

 

 

 

4,455

 

 

 

4,455

 

Total Net Sales

 

$

76,133

 

 

$

65,182

 

 

$

141,315

 

 

 

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 November 3, 2019:

 

 

 

 

Mattress

 

 

Upholstery

 

 

 

 

 

(dollars in thousands)

 

Fabrics

 

 

Fabrics

 

 

Total

 

Products transferred at a point in time

 

$

35,666

 

 

$

30,964

 

 

$

66,630

 

Services transferred over time

 

 

 

 

 

2,920

 

 

 

2,920

 

Total Net Sales

 

$

35,666

 

 

$

33,884

 

 

$

69,550

 

 

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending November 3, 2019:

 

 

 

Mattress

 

 

Upholstery

 

 

 

 

 

(dollars in thousands)

 

Fabrics

 

 

Fabrics

 

 

Total

 

Products transferred at a point in time

 

$

74,525

 

 

$

60,792

 

 

$

135,317

 

Services transferred over time

 

 

 

 

 

4,952

 

 

 

4,952

 

Total Net Sales

 

$

74,525

 

 

$

65,744

 

 

$

140,269

 

 

I-12

 


 

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)

 

November 1,

2020

 

 

November 3,

2019

 

 

May 3,

2020

 

Raw materials

 

$

8,594

 

 

$

6,872

 

 

$

7,823

 

Work-in-process

 

 

3,056

 

 

 

2,973

 

 

 

1,958

 

Finished goods

 

 

36,076

 

 

 

45,383

 

 

 

38,126

 

 

 

$

47,726

 

 

$

55,228

 

(1)

$

47,907

 

 

(1)

As of November 3, 2019, inventory totaled $55.2 million, of which $51.4 million and $3.8 million were classified as (i) inventory and (ii) within current assets – discontinued operation, respectively, in the accompanying Consolidated Balance Sheet.

 

7. Intangible Assets

A summary of intangible assets follows:

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

 

May 3, 2020

 

Tradenames

 

$

540

 

 

$

7,232

 

 

 

$

540

 

Customer relationships, net

 

 

2,087

 

 

 

2,388

 

 

 

 

2,238

 

Non-compete agreement, net

 

 

565

 

 

 

640

 

 

 

 

602

 

 

 

$

3,192

 

 

$

10,260

 

(1)

 

$

3,380

 

 

(1)

As of November 3, 2019, intangible assets totaled $10.3 million, of which $3.7 million and $6.6 million were classified as (i) intangible assets and (ii) within noncurrent assets – discontinued operation, respectively, in the accompanying Consolidated Balance Sheets.

 

Tradenames

Our tradename totaling $540,000 as of November 1, 2020, pertained to Read, a separate reporting unit within the upholstery fabrics segment. This tradename was determined to have an indefinite useful life at the time of its acquisition, and therefore, is not being amortized. However, we are required to assess this tradename annually or between annual tests if we believe indicators of impairment exist. Based on our assessment as of November 1, 2020, no indicators of impairment existed.  

However, during our annual assessment as of May 3, 2020, we performed a qualitative assessment in which we concluded that it was more-likely-than-not that the fair value of Read’s tradename was less than its carrying amount. This conclusion was based on impairment indicators that existed, such as our unfavorable financial performance during the fourth quarter of fiscal 2020 and the significant decline in the price per share of our common stock and market capitalization stemming from the COVID-19 global pandemic. Since we determined it was more-likely-than-not that the fair market value of Read’s tradename was less than its carrying amount, we performed a quantitative impairment test. Our quantitative impairment test involved determining the fair value of Read’s tradename and comparing the respective fair value of Read’s tradename with its carrying amount. Consequently, based on our quantitative impairment test, we recorded an asset impairment charge totaling $143,000 during the fourth quarter of fiscal 2020.

As a result of our quantitative impairment test, we determined the fair value of our tradename was $540,000 using the relief from royalty method. This method used significant unobservable inputs and therefore, the fair value of our tradename was classified as level 3 within the fair value hierarchy. Refer to Note 11 of the consolidated financial statements for further information about our determination to classify this tradename as level 3 within the fair value hierarchy in accordance with Topic 820.

Customer Relationships

A summary of the change in the carrying amount of our customer relationships follows:

 

 

 

Six months ended

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Beginning balance

 

$

2,238

 

 

$

2,538

 

Amortization expense

 

 

(151

)

 

 

(150

)

Ending balance

 

$

2,087

 

 

$

2,388

 

 

 

I-13

 


 

Our customer relationships are amortized on a straight-line basis over useful lives ranging from nine to seventeen years.

The gross carrying amount of our customer relationships was $3.1 million as of November 1, 2020, November 3, 2019, and May 3, 2020, respectively. Accumulated amortization for these customer relationships was $1.0 million, $727,000, and $877,000 as of November 1, 2020, November 3, 2019, and May 3, 2020, respectively.

The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2021 - $151,000; FY 2022 - $301,000; FY 2023 - $301,000; FY 2024 - $301,000; FY 2025 - $301,000; and thereafter - $732,000.

The weighted average amortization period for our customer relationships is 7.1 years as of November 1, 2020.

Non-Compete Agreement

A summary of the change in the carrying amount of our non-compete agreement follows:

 

 

 

Six months ended

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Beginning balance

 

$

602

 

 

$

678

 

Amortization expense

 

 

(37

)

 

 

(38

)

Ending balance

 

$

565

 

 

$

640

 

 

Our non-compete agreement is amortized on a straight-line basis over the fifteen-year life of the agreement.

The gross carrying amount of our non-compete agreement was $2.0 million as of November 1, 2020, November 3, 2019, and May 3, 2020, respectively. Accumulated amortization for our non-compete agreement was $1.5 million as of November 1, 2020, $1.4 million as of November 3, 2019, and $1.4 million as of May 3, 2020.

The remaining amortization expense for the next five years and thereafter follows: FY 2021 - $37,000; FY 2022 - $76,000; FY 2023 - $76,000; FY 2024 - $76,000; FY 2025 - $76,000, and thereafter - $224,000.

The weighted average amortization period for the non-compete agreement is 7.5 years as of November 1, 2020.

 

8. 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 in an 80,000 square foot facility located in a modern industrial park on the northeastern border of Haiti, which borders the Dominican Republic. CLIH complements our mattress fabric operations with a reactive platform that enhances our ability to meet customer demand while adding a lower cost operation to our platform.

On December 20, 2019, CLIH entered into an agreement to construct an additional plant facility totaling 40,000 square feet, which was completed during September 2020. This new plant facility is near our existing operations and provides additional capacity that enhances our ability to produce sewn covers. This agreement requires payments totaling $1.2 million, of which $600,000 was paid in February 2020, $180,000 was paid in May 2020, and $420,000 was paid in September 2020.

CLIH reported net income totaling $334,000 for the six-month period ending November 1, 2020, and a net loss of  $6,000 for the six-month period ending November 3, 2019. Our equity interest in CLIH’s net income was $167,000 for the six-month period ending November 1, 2020. Our equity interest in CLIH’s net loss was $3,000 for the six-month period ending November 3, 2019. 

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

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

May 3, 2020

 

Total assets

 

$

3,951

 

 

$

3,190

 

 

$

3,338

 

Total liabilities

 

$

232

 

 

$

182

 

 

$

133

 

Total members’ equity

 

$

3,719

 

 

$

3,008

 

 

$

3,205

 

 

 

As of November 1, 2020, November 3, 2019, and May 3, 2020, our investment in CLIH totaled $1.9 million, $1.5 million, and $1.6 million, respectively, which represents the company’s fifty percent ownership interest in CLIH.

I-14

 


 

9. Accrued Expenses

A summary of accrued expenses follows:

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

May 3, 2020

 

Compensation, commissions and related benefits

 

$

7,144

 

 

$

4,489

 

 

$

3,038

 

Interest

 

 

 

 

 

3

 

 

 

9

 

Other accrued expenses

 

 

4,540

 

 

 

4,756

 

 

 

2,807

 

 

 

$

11,684

 

 

$

9,248

 

 

$

5,854

 

 

As of November 1, 2020, our entire accrued expenses totaling $11.7 million were classified as current accrued expenses in the accompanying Consolidated Balance Sheets. As of November 3, 2019, we had accrued expenses totaling $9.2 million, of which $8.3 million, $333,000, and $652,000 were classified as (i) current accrued expenses, (ii) long-term accrued expenses, and (iii) within current liabilities – discontinued operation, respectively, in the accompanying Consolidated Balance Sheets. As of May 3, 2020, we had accrued expenses totaling $5.9 million, of which $5.7 million and $167,000 were classified as (i) current accrued expenses and (ii) long-term accrued expenses, respectively, in the accompanying Consolidated Balance Sheets.

 

10. Lines of Credit and Paycheck Protection Program Loan

Revolving Credit Agreement – United States

Our Credit Agreement (“Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”) provides a revolving loan commitment of $30 million, is set to expire on August 15, 2022, and allows us to issue letters of credit not to exceed $1 million.

Interest is charged at a rate (applicable interest rate of 1.74%, 3.22%, and 1.75% as of November 1, 2020, November 3, 2019, and May 3, 2020, respectively) as a variable spread over LIBOR based on our ratio of debt to EBITDA. Outstanding borrowings are secured by a pledge of 65% of the common stock of Culp International Holdings Ltd. (our subsidiary located in the Cayman Islands).

As a result of the COVID-19 global pandemic and the uncertainty relating to the unknown duration and overall effect on the company, we proactively took a precautionary measure and borrowed the maximum amount available from this line of credit during the fourth quarter of fiscal 2020. Consequently, we had outstanding borrowings of $29.8 million under the Credit Agreement as of May 3, 2020. During June 2020, we repaid the entire $29.8 million outstanding balance and there were no additional borrowings made during the first half of fiscal 2021. As a result, there were no borrowings outstanding under the Credit Agreement as of November 1, 2020. Additionally, there were no borrowings outstanding under the Credit Agreement as of November 3, 2019.    

As of November 1, 2020, November 3, 2019, and May 3, 2020, there were $250,000 in outstanding letters of credit (all of which related to workers compensation) provided by the Credit Agreement.  As of November 1, 2020, we had $750,000 remaining for the issuance of additional letters of credit.

Seventh Amendment to the Credit Agreement

Effective June 30, 2020, we entered into a Seventh Amendment to our Credit Agreement (the “Seventh Amendment”) which includes provisions that (i) modify the method for calculating the company’s debt to EBITDA covenant under the Credit Agreement solely during the temporary period beginning on the date of the Seventh Amendment and ending on the Rate Determination Date (as defined in the Credit Agreement), following the end of the company’s fiscal 2021 fourth quarter (such temporary period, the “Modification Period,”), and (ii) amend the pricing matrix used to determine the interest rate payable on loans made under the Credit Agreement solely during the Modification Period.

Specifically, the Seventh Amendment provides that during Modification Period, the company’s ratio of debt to EBITDA shall be determined by excluding the fourth quarter of fiscal 2020 from the calculation thereof, such that the ratio shall be determined using the four most recent quarterly periods other than (i.e. excluding) the fourth quarter of fiscal 2020, rather than calculating on a rolling four-quarter basis. It further provides that during the Modification Period, the Applicable Margin (as defined in the Credit Agreement) set forth the pricing matrix is increased to 1.6% for price level I, 2.05% for price level II, 2.5% for price level III, and 3.0% for price level IV.

Additionally, the Seventh Amendment (i) changes the capital expenditure covenant by reducing permitted annual capital expenditures to $10 million during fiscal year 2021, (ii) changes the liens and other indebtedness covenant to reduce the permitted amount of allowable liens and other indebtedness to 5% of consolidated net worth, and (iii) adds a new covenant that prohibits the company, solely during the Modification Period, from paying dividends or repurchasing stock in excess of $10 million in the aggregate during the Modification Period.

I-15

 


 

Revolving Credit Agreements – China Operations

Denominated in Chinese Yuan Renminbi (“RMB”)

We have an unsecured credit agreement denominated in Chinese Renminbi with a bank located in China that provides for a line of credit up to 40 million RMB’s ($6.0 million USD as of November 1, 2020). This agreement has an interest rate determined by the Chinese government at the time of borrowing and was set to expire on December 4, 2020. As of May 3, 2020, there were outstanding borrowings under this agreement totaling $1.0 million at an applicable interest rate of 2.41%. During June 2020, we repaid the entire $1.0 million and there were no additional borrowings made during the first half of fiscal 2021. As a result, there were no borrowing outstanding under this agreement as of November 1, 2020. Additionally, there were no borrowing outstanding under this agreement as of November 3, 2019.

On December 1, 2020, we renewed this agreement to extend the expiration date to December 1, 2021, and maintain our borrowing capacity of 40 million RMB’s.

Denominated in United States Dollar (“USD”)

We have an unsecured credit agreement denominated in USD with another bank located in China that provides for a line of credit up to $2 million USD. This agreement has an interest rate determined by the Chinese government at the time of borrowing and is set to expire on July 7, 2021. As of November 1, 2020, there are no borrowings outstanding under this agreement.

Small Business Administration - Paycheck Protection Program  

On April 15, 2020, we received a loan of $7.6 million (the “Loan”) pursuant to the U.S. Small Business Administration (the “SBA”) Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief and Economic Security Act of 2020 (the “CARES Act”).  We planned to use the proceeds from the Loan for covered payroll costs, rent, and utilities in accordance with the applicable terms and conditions of the CARES Act. We believed the Loan would enable us to retain more of our employees, maintain payroll and benefits, and make lease and utility payments while producing and supplying critical products for essential businesses during the COVID-19 global pandemic.

Following our application and receipt of the Loan, the SBA and U.S. Treasury Department issued new guidance regarding eligibility requirements under the PPP, raising questions regarding the eligibility of publicly traded companies to receive loans under the program.  As a result, out of an abundance of caution, we voluntarily repaid the Loan in full on May 13, 2020.

Overall

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of November 1, 2020, we were in compliance with these financial covenants.

11. Fair Value

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.

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

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.

I-16

 


 

Recurring Basis

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

 

 

 

Fair value measurements as of November 1, 2020 using:

 

 

 

Quoted prices

 

 

Significant

 

 

 

 

 

 

 

 

in active

 

 

other

 

Significant

 

 

 

 

 

 

markets for

 

 

observable

 

unobservable

 

 

 

 

 

 

identical assets

 

 

inputs

 

inputs

 

 

 

 

(amounts in thousands)

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Premier Money Market Fund

 

$

7,665

 

 

N/A

 

N/A

 

$

7,665

 

Short Term Bond Funds

 

 

5,462

 

 

N/A

 

N/A

 

 

5,462

 

Growth Allocation Fund

 

 

255

 

 

N/A

 

N/A

 

 

255

 

Moderate Allocation Fund

 

 

73

 

 

N/A

 

N/A

 

 

73

 

Other

 

 

67

 

 

N/A

 

N/A

 

 

67

 

 

 

 

Fair value measurements as of November 3, 2019 using:

 

 

 

Quoted prices

 

 

Significant

 

 

 

 

 

 

 

 

in active

 

 

other

 

Significant

 

 

 

 

 

 

markets for

 

 

observable

 

unobservable

 

 

 

 

 

 

identical assets

 

 

inputs

 

inputs

 

 

 

 

(amounts in thousands)

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Premier Money Market Fund

 

$

7,133

 

 

N/A

 

N/A

 

$

7,133

 

Growth Allocation Fund

 

 

222

 

 

N/A

 

N/A

 

 

222

 

Moderate Allocation Fund

 

 

132

 

 

N/A

 

N/A

 

 

132

 

Other

 

 

88

 

 

N/A

 

N/A

 

 

88

 

 

 

 

Fair value measurements as of May 3, 2020 using:

 

 

 

Quoted prices

 

 

Significant

 

 

 

 

 

 

 

 

in active

 

 

other

 

Significant

 

 

 

 

 

 

markets for

 

 

observable

 

unobservable

 

 

 

 

 

 

identical assets

 

 

inputs

 

inputs

 

 

 

 

(amounts in thousands)

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Premier Money Market Fund

 

$

7,496

 

 

N/A

 

N/A

 

$

7,496

 

Short Term Bond Funds

 

 

923

 

 

N/A

 

N/A

 

 

923

 

Growth Allocation Fund

 

 

219

 

 

N/A

 

N/A

 

 

219

 

Moderate Allocation Fund

 

 

63

 

 

N/A

 

N/A

 

 

63

 

Other

 

 

56

 

 

N/A

 

N/A

 

 

56

 

 

Short-Term Investments – Available for Sale

Our short-term investments classified as available for sale consisted of short-term bond mutual funds and had an accumulated unrealized loss totaling $29,000 as of November 1, 2020, and $9,000 as of May 3, 2020. Our short-term investments classified as available for sale were recorded at their fair values of $5.5 million and $923,000 as of November 1, 2020, and May 3, 2020, respectively. As of November 1, 2020, and May 3, 2020, the fair value of our short-term investments approximated their cost basis.  There were no short-term investments classified as available for sale as of November 3, 2019.

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

Our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds with original maturities that range from 2 to 10 years, all of which have remaining maturities of less than 2 years as of November 1, 2020. 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 on our Consolidated Balance Sheets, based on the maturity date in relation to the respective reporting period, and were recorded at amortized cost.

As of November 1, 2020, and May 3, 2020, our held-to-maturity investments recorded at amortized cost totaled $5.8 million and $6.3 million, respectively. The fair value of our held-to-maturity investments as of November 1, 2020, and May 3, 2020, totaled $5.8 million and $6.4 million, respectively.  There were no investments classified as held-to-maturity on November 3, 2019.

I-17

 


 

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 bond investments was determined based on a published source that provided an average bid price. The average bid price was based on various broker prices that were determined based on market conditions, interest rates, and the rating of the respective bond investment.

Current Expected Credit Loses (“CECL”)- Available for Sale and Held-To-Maturity Investments

As of May 4, 2020, we did not have an allowance for credit losses related to our short-term available for sale and held-to-maturity investments, which are comprised mostly of fixed income securities that are predominantly high-grade U.S. and foreign corporate bonds, U.S. Treasury bonds, and short-term mutual bond funds.

As a result of our adoption of Topic 326 effective May 4, 2020, we determined that our credit loss exposure was immaterial due to the short-term nature of our mutual bond funds, and we have experienced historically low unrealized losses and gains during past reporting periods. In addition, it is not our intention to sell, and it is not likely that we will be required to sell, our held-to-maturity investments before the recovery of their amortized cost basis.

As of November 1, 2020, we reported an accumulated unrealized loss of $29,000 associated with our short-term investments classified as available for sale. As mentioned above, it is not our intention to sell nor is it likely that we will be required to sell, our held-to-maturity investments before the recovery of their amortized cost basis. Accordingly, we did not record any credit loss expense during the six-month period ending November 1, 2020.

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 its 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.

The long-term investments associated with our rabbi trust were recorded at their fair values of $8.1 million, $7.6 million, and $7.8 million as of November 1, 2020, November 3, 2019, and May 3, 2020, respectively. The long-term investments associated with our rabbi trust had an accumulated unrealized gain of $55,000, $55,000, and $19,000 as of November 1, 2020, and  November 3, 2019, and May 3, 2020, respectively. The fair value of our long-term investments associated with our rabbi trust approximates their 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 – Fourth Quarter Fiscal 2020

Continuing Operations

 

In accordance with ASC Topic 350 Intangibles – Goodwill and Other, we are required to assess our goodwill and tradename for impairment annually or between annual tests if we believe indicators of impairment exist. Accordingly, we performed our annual assessment of goodwill associated with our mattress fabrics segment and goodwill and tradename affiliated with Read as of May 3, 2020. Based on our qualitative assessment we concluded that impairment indicators existed, such as our unfavorable financial performance during the fourth quarter of fiscal 2020 and the significant decline in the price per share of our common stock and market capitalization stemming from the COVID-19 global pandemic. As a result, we determined it was more-likely-than-not that the goodwill associated with our mattress fabrics segment and the goodwill and tradename affiliated with Read were impaired, and therefore, we conducted quantitative asset impairment tests. Consequently, based on the results of our quantitative asset impairment tests as of May 3, 2020, we recorded an asset impairment charge totaling $13.6 million during our fourth quarter of fiscal 2020 for the entire carrying amount of our goodwill associated with our mattress fabrics segment and Read.  Additionally, we recorded an asset impairment charge of $143,000 during the fourth quarter of fiscal 2020 which reduced the carrying amount of Read’s tradename to its fair value of $540,000.

Our fair values associated with our goodwill and tradename were determined using a discounted cash flow and the relief from royalty methods, respectively. These methods used significant unobservable inputs, and therefore, the fair values of our goodwill and tradename were classified within level 3 of the fair value hierarchy.

I-18

 


 

Discontinued Operation – Home Accessories Segment

During the fourth quarter of fiscal 2020, we recorded asset impairment charges totaling $6.6 million, of which $4.2 million and $2.4 million were for the entire remaining carrying value associated with our former home accessories segment’s tradename and goodwill. These impairment charges were based on the expected selling price of our entire ownership interest in eLuxury in comparison to its carrying amount. As disclosed in Note 3 of the consolidated financial statements, effective March 31, 2020, we sold our entire ownership interest in eLuxury to its noncontrolling interest holder resulting in the elimination of the home accessories segment at such time. Based on the terms of the sale agreement, we did not receive any consideration for eLuxury’s net assets associated with the sale of our entire ownership in eLuxury. We believe the expected selling price represents a significant observable input and therefore, the fair values of our former home accessories segment’s tradename and goodwill were classified within level 2 of the fair value hierarchy.

12. Cash Flow Information

Interest and income taxes paid (refunded) are as follows:

 

 

 

Six months ended

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Interest

 

$

60

 

 

$

40

 

Income taxes (1) (2)

 

 

(556

)

 

 

2,782

 

 

(1)

In accordance with the provisions of the 2017 Tax Cuts and Jobs Act (“TCJA”), corporate taxpayers were eligible to treat prior AMT credit carryforwards as refundable. Accordingly, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable, and as a result, 50% of the $1.5 million refundable balance was expected to be received in each our fiscal years 2021 and 2022, respectively. We received our first 50% installment totaling $746,000 during the first quarter of fiscal 2021. 

In accordance with the provisions of the CARES Act, 100% of AMT credit carryforwards for tax years beginning in the 2019 tax year were immediately refundable. Accordingly, we claimed credit for the remaining 50% installment of our refundable AMT credit carryforward in May 2020. We received our remaining 50% installment plus interest totaling $764,000 during the second quarter of fiscal 2021.

 

(2)

The net income tax refund totaling $556,000 during the first six months of fiscal 2021 represented AMT refunds totaling $1.5 million as referenced in note (1) above that were partially offset by a U.S. federal transition tax payment of $227,000 as required by the TCJA, and income tax payments associated with our foreign jurisdictions totaling $726,000. The income tax payments totaling $2.8 million during the first half of fiscal 2020 represented income tax payments associated with our foreign jurisdictions totaling $1.9 million and a withholding tax payment of $838,000 paid to the Chinese government for earnings and profits repatriated to the U.S. parent company.

 

13. Net Income (Loss) from Continuing Operations Per Share

Basic net income (loss) from continuing operations per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income (loss) from continuing operations per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method.

Weighted average shares used in the computation of basic and diluted net income (loss) from continuing operations per share are as follows:

 

 

 

Three months ended

 

(amounts in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Weighted average common shares outstanding, basic

 

 

12,298

 

 

 

12,408

 

Dilutive effect of stock-based compensation

 

 

26

 

 

 

 

Weighted average common shares outstanding, diluted

 

 

12,324

 

 

 

12,408

 

 

During the second quarter of fiscal 2021, 1,101 shares of unvested common stock were not included in the computation of diluted net income from continuing operations per share, as their effect would be antidilutive resulting from the decrease in the price per share of our common stock during the reporting period in relation to the price per share of our common stock as of the respective grant dates of our outstanding stock-based compensation awards. 

 

During the second quarter of fiscal 2020, 6,938 shares of unvested common stock were not included in the computation of diluted net income from continuing operations per share, as their effect would be antidilutive as result of the decrease in the price

I-19

 


 

per share of our common stock during the reporting period in relation to the price per share of our common stock as of the respective grant dates of our outstanding stock-based compensation awards.

 

 

 

Six months ended

 

(amounts in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Weighted average common shares outstanding, basic

 

 

12,293

 

 

 

12,403

 

Dilutive effect of stock-based compensation

 

 

 

 

 

10

 

Weighted average common shares outstanding, diluted

 

 

12,293

 

 

 

12,413

 

 

 

During the first half of fiscal 2021, we did not include a total of 38,313 shares of unvested common stock in the computation of diluted net loss from continuing operations per share. Of the total 38,313 shares of unvested common stock, (i) 26,099 shares were antidilutive resulting from the decrease in the price per share of our common stock during the reporting period in relation to the price per share of our common stock as of the respective grant dates of our outstanding stock-based compensation awards and (ii) 12,214 shares were antidilutive as we incurred a net loss during the reporting period.

 

During the first half of fiscal 2020, 1,407 shares of unvested common stock were not included in the computation of diluted net income from continuing operations per share, as their effect would be antidilutive, as result of the decrease in the price per share of our common stock during the reporting period in relation to the price per share of our common stock as of the respective grant dates of our outstanding stock-based compensation awards.

 

 

14. Segment Information

Overall

Continuing Operations

Our continuing operations are classified into two business segments: mattress fabrics and upholstery fabrics.

Mattress Fabrics

The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers.

Upholstery Fabrics

The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. Additionally, the segment includes Read, a wholly-owned subsidiary, which is a turn-key provider of window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read’s products for the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.

Discontinued Operation – Home Accessories Segment

As disclosed in Note 3 of the consolidated financial statements, we sold our entire ownership interest in eLuxury on March 31, 2020, and consequently our home accessories segment was eliminated at such time. Thus, the results of operations associated with our home accessories segment were excluded from our continuing operations and presented as a discontinued operation in our consolidated financial statements.

Our former home accessories segment was our finished products business that manufactured, sourced, and sold bedding accessories and home goods directly to consumers and businesses through global e-commerce, business-to-business, and other sales channels.

See Note 3 of the consolidated financial statements for detailed financial information of our former home accessories segment. As disclosed in Note 3, a reconciliation is provided that has detailed balance sheet information as of November 3, 2019, that is reconciled to captions titled “current assets – discontinued operation”, “noncurrent assets – discontinued operation”, current liabilities – discontinued operation”, and “noncurrent liabilities – discontinued operation” presented in the Consolidated Balance Sheet as of November 3, 2019. Also, a reconciliation is provided that pertains to detailed income statement information disclosed in Note 3 and is reconciled to net loss from discontinued operation presented in the Consolidated Statements of Net Income for the three-month and six-month periods ending November 3, 2019.  

I-20

 


 

Financial Information

We evaluate the operating performance of our current business segments based upon income (loss) from continuing operations before certain unallocated corporate expenses, asset impairments, restructuring credit (expense) and restructuring related charges, and other non-recurring items. Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their staff, all costs associated with being a public company, and other miscellaneous expenses. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. The mattress fabrics segment also includes in segment assets its investment in an unconsolidated joint venture. Goodwill and intangible assets are not included in segment assets as these assets are not used by the Chief Operating Decision Maker to evaluate the respective segment’s operating performance, allocate resources to individual segments, or determine executive compensation.

Statements of operations for our current operating segments are as follows:

 

 

 

Three months ended

 

 

 

November 1, 2020

 

 

November 3, 2019

 

net sales by segment:

 

 

 

 

 

 

 

 

mattress fabrics

 

$

40,030

 

 

$

35,666

 

upholstery fabrics

 

 

36,821

 

 

 

33,884

 

net sales

 

$

76,851

 

 

$

69,550

 

gross profit from continuing operations by segment:

 

 

 

 

 

 

 

 

mattress fabrics

 

$

7,584

 

 

$

6,247

 

upholstery fabrics

 

 

6,677

 

 

 

7,279

 

gross profit from continuing operations

 

$

14,261

 

 

$

13,526

 

selling, general, and administrative expenses by segment:

 

 

 

 

 

 

 

 

mattress fabrics

 

$

3,202

 

 

$

2,953

 

upholstery fabrics

 

 

3,390

 

 

 

3,806

 

unallocated corporate expenses

 

 

3,151

 

 

 

2,358

 

selling, general, and administrative expenses

 

$

9,743

 

 

$

9,117

 

income (loss) from continuing operations by segment:

 

 

 

 

 

 

 

 

mattress fabrics

 

$

4,382

 

 

$

3,294

 

upholstery fabrics

 

 

3,287

 

 

 

3,473

 

unallocated corporate expenses

 

 

(3,151

)

 

 

(2,358

)

total income from continuing operations

 

 

4,518

 

 

 

4,409

 

interest expense

 

 

 

 

 

(21

)

interest income

 

 

59

 

 

 

258

 

other expense

 

 

(680

)

 

 

(99

)

income before income taxes from continuing operations

 

$

3,897

 

 

$

4,547

 

 

I-21

 


 

 

 

 

Six months ended

 

 

 

November 1, 2020

 

 

November 3, 2019

 

net sales by segment:

 

 

 

 

 

 

 

 

mattress fabrics

 

$

76,133

 

 

$

74,525

 

upholstery fabrics

 

 

65,182

 

 

 

65,744

 

net sales

 

$

141,315

 

 

$

140,269

 

gross profit from continuing operations by segment:

 

 

 

 

 

 

 

 

mattress fabrics

 

$

12,191

 

 

$

11,938

 

upholstery fabrics

 

 

11,971

 

 

 

14,000

 

gross profit from continuing operations

 

$

24,162

 

 

$

25,938

 

selling, general, and administrative expenses by segment:

 

 

 

 

 

 

 

 

mattress fabrics

 

$

5,964

 

 

$

6,025

 

upholstery fabrics

 

 

6,570

 

 

 

7,652

 

unallocated corporate expenses

 

 

5,227

 

 

 

4,589

 

selling, general, and administrative expenses

 

$

17,761

 

 

$

18,266

 

income (loss) from continuing operations by segment:

 

 

 

 

 

 

 

 

mattress fabrics

 

$

6,227

 

 

$

5,913

 

upholstery fabrics

 

 

5,401

 

 

 

6,348

 

unallocated corporate expenses

 

 

(5,227

)

 

 

(4,589

)

subtotal

 

 

6,401

 

 

 

7,672

 

restructuring credit

 

 

 

 

 

35

 

total income from continuing operations

 

 

6,401

 

 

 

7,707

 

interest expense

 

 

(51

)

 

 

(21

)

interest income

 

 

117

 

 

 

518

 

other expense

 

 

(1,046

)

 

 

(194

)

income before income taxes from continuing operations

 

$

5,421

 

 

$

8,010

 

 

Balance sheet information for our current operating segments follows:

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

May 3, 2020

 

Segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

Mattress Fabrics

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

15,914

 

 

$

11,224

 

 

$

12,212

 

Inventory

 

 

24,200

 

 

 

27,751

 

 

 

26,620

 

Property, plant and equipment (1)

 

 

38,818

 

 

 

42,899

 

 

 

40,682

 

Right of use assets (2)

 

 

1,186

 

 

 

170

 

 

 

362

 

Investment in unconsolidated joint venture

 

 

1,859

 

 

 

1,504

 

 

 

1,602

 

Total mattress fabrics assets

 

 

81,977

 

 

 

83,548

 

 

 

81,478

 

Upholstery Fabrics

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

17,046

 

 

 

12,666

 

 

 

12,881

 

Inventory

 

 

23,526

 

 

 

23,692

 

 

 

21,287

 

Property, plant and equipment (3)

 

 

2,014

 

 

 

1,774

 

 

 

1,633

 

Right of use assets (4)

 

 

3,269

 

 

 

2,610

 

 

 

1,633

 

Total upholstery fabrics assets

 

 

45,855

 

 

 

40,742

 

 

 

37,434

 

Total segment assets

 

 

127,832

 

 

 

124,290

 

 

 

118,912

 

Non-segment assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

45,288

 

 

 

46,955

 

 

 

69,790

 

Short-term investments - available for sale

 

 

5,462

 

 

 

 

 

 

923

 

Short-term investments - held-to-maturity

 

 

5,005

 

 

 

 

 

 

4,271

 

Current income taxes receivable

 

 

 

 

 

776

 

 

 

1,585

 

Current assets - discontinued operation

 

 

 

 

 

4,760

 

 

 

 

Other current assets

 

 

3,509

 

 

 

2,745

 

 

 

2,116

 

Deferred income taxes

 

 

645

 

 

 

511

 

 

 

793

 

Property, plant and equipment (5)

 

 

767

 

 

 

548

 

 

 

832

 

Right of use assets (6)

 

 

1,710

 

 

 

2,103

 

 

 

1,908

 

Goodwill

 

 

 

 

 

13,569

 

 

 

 

Intangible assets

 

 

3,192

 

 

 

3,711

 

 

 

3,380

 

Long-term investments - rabbi trust

 

 

8,060

 

 

 

7,575

 

 

 

7,834

 

Long-term investments - held-to-maturity

 

 

759

 

 

 

 

 

 

2,076

 

Noncurrent income taxes receivable

 

 

 

 

 

733

 

 

 

 

Other assets

 

 

547

 

 

 

496

 

 

 

664

 

Long-term note receivable affiliated with discontinued operation

 

 

 

 

 

1,800

 

 

 

 

Noncurrent assets - discontinued operation

 

 

 

 

 

22,950

 

 

 

 

Total assets

 

$

202,776

 

 

$

233,522

 

 

$

215,084

 

 

I-22

 


 

 

 

 

Six months ended

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Capital expenditures (7):

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

1,710

 

 

$

2,212

 

Upholstery Fabrics

 

 

181

 

 

 

229

 

Unallocated Corporate

 

 

111

 

 

 

266

 

Discontinued Operation

 

 

 

 

 

33

 

Total capital expenditures

 

$

2,002

 

 

$

2,740

 

Depreciation expense:

 

 

 

 

 

 

 

 

Mattress Fabrics

 

$

3,132

 

 

$

3,321

 

Upholstery Fabrics

 

 

406

 

 

 

382

 

Discontinued Operation

 

 

 

 

 

190

 

Total depreciation expense

 

$

3,538

 

 

$

3,893

 

(1)

The $38.8 million as of November 1, 2020, represents property, plant, and equipment of $26.5 million and $12.3 million located in the U.S. and Canada, respectively. The $42.9 million as of November 3, 2019, represents property, plant, and equipment of $30.5 million and $12.4 million located in the U.S. and Canada, respectively.   The $40.7 million as of May 3, 2020, represents property, plant, and equipment of $27.7 million and $13.0 million located in the U.S. and Canada, respectively.

(2)

The $1.2 million as of November 1, 2020, represents right of use assets of $696,000 and $490,000 located in the U.S. and Canada, respectively.  The $170,000 as of November 3, 2019, and the $362,000 as of May 3, 2020, represents right of use assets located in the U.S.

(3)

The $2.0 million as of November 1, 2020, represents property, plant, and equipment of $1.1 million and $904,000 located in the U.S. and China, respectively. The $1.8 million as of November 3, 2019, represents property, plant, and equipment of $1.3 million and $500,000 located in the U.S. and China, respectively.   The $1.6 million as of May 3, 2020, represents property, plant, and equipment of $1.2 million and $471,000 located in the U.S. and China, respectively.

(4)

The $3.3 million as of November 1, 2020, represents right of use assets of $2.7 million and $561,000 located in China and the U.S., respectively.  The $2.6 million as of November 3, 2019, represents right of use assets of $1.5 million and $1.1 million located in China and the U.S., respectively.  The $1.6 million as of May 3, 2020, represents right of use assets of $857,000 and $776,000 located in the U.S. and China, respectively.

(5)

The $767,000, $548,000, and $832,000 as of November 1, 2020, November 3, 2019, and May 3, 2020, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by our mattress fabrics and upholstery fabrics segments. Property, plant, and equipment associated with our corporate departments reside in the U.S.

(6)

The $1.7 million, $2.1 million, and $1.9 million as of November 1, 2020, November 3, 2019, and May 3, 2020, respectively, represents right of use assets located in the U.S.

(7)

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

15. Income Taxes

Income Tax Expense

Total income tax expense (benefit) for the six-month periods ending November 1, 2020, and November 3, 2019, were allocated as follows:

 

 

 

November 1,

 

 

November 3,

 

(dollars in thousands)

 

2020

 

 

2019

 

Income from continuing operations

 

$

5,937

 

 

$

3,971

 

Loss from discontinued operations

 

 

 

 

 

(392

)

Total income tax expense

 

$

5,937

 

 

$

3,579

 

I-23

 


 

Effective Income Tax Rate

We recorded income tax expense of $5.9 million, or 109.5% of income before income taxes from continuing operations, for the six-month period ended November 1, 2020, compared with income tax expense of $4.0 million, or 49.6% of income before income taxes from continuing operations, for the six-month period ended November 3, 2019.

Our effective income tax rates associated with our continuing operations for the six-month periods ended November 1, 2020, and November 3, 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. When calculating the annual estimated effective income tax rate for the six-months ended November 1, 2020, we were subject to a loss limitation rule in accordance with ASC Topic 740-270-30-36(a). This loss limitation rule required the taxable loss associated with our U.S. operations to be excluded from the annual estimated effective income tax rate calculation as it was determined that no tax benefit could be recognized resulting from the full valuation allowance against our U.S. income tax loss carryforward that is expected to originate during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China and Canada versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense from continuing operations at the U.S. federal income tax rate and the effective income tax rate from continuing operations reflected in the consolidated financial statements for the six-month periods ending November 1, 2020 and November 3, 2019:

 

 

 

November 1,

 

 

November 3,

 

 

 

2020

 

 

2019

 

U.S. federal income tax rate

 

 

21.0

%

 

 

21.0

%

U.S. valuation allowance

 

141.6

 

 

 

 

U.S. income tax law change

 

 

(65.1

)

 

 

 

Global Intangible Low Taxed Income Tax ("GILTI")

 

 

 

 

 

12.7

 

Withholding taxes associated with foreign jurisdictions

 

 

8.4

 

 

 

6.1

 

Foreign income tax rate differential

 

 

6.6

 

 

 

3.5

 

Tax effects of foreign exchange rate (losses) gains

 

 

(4.0

)

 

 

2.3

 

Other

 

 

1.0

 

 

 

4.0

 

 

 

 

109.5

%

 

 

49.6

%

 

 

U.S. Tax Law Change

Effective July 20, 2020, the U.S Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the TCJA. Prior to this enactment, GILTI represented a significant U.S. income tax on our foreign earnings during fiscal 2019 ($2.1 million) and fiscal 2020 ($1.9 million). With the enactment of these final regulations, we are now eligible for an exclusion from GILTI since we meet the provisions for the GILTI High-Tax exception included in the final regulations. In addition, the enactment of the new regulations and our eligibility for the GILTI High-Tax exception are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years.

As a result of the newly enacted regulations, we recorded a non-cash income tax benefit of $3.5 million resulting from the re-establishment of certain U.S. federal net operating loss carryforwards. This $3.5 million income tax benefit was recorded as a discrete event in which its full income tax effects were recorded in the first quarter and the six-month year-to-date period of fiscal 2021.

 

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, considering the effects of local tax law.

As a result of the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income taxes, as GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and 2020 that offset our U.S. pre-tax losses during such years, and which offset is now reversed as a result of the retroactivity of the new regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S. taxable losses during our last two fiscal years and we currently expect our history of U.S. pre-tax losses to continue into fiscal 2021, as a result of the continuing economic uncertainty associated with the COVID-19 global pandemic. As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S. net

I-24

 


 

deferred income tax assets will not be fully realizable. Accordingly, we recorded a non-cash income tax charge of $7.0 million to provide for a full valuation allowance against our U.S. net deferred income tax assets. This $7.0 million income tax charge was recorded as a discrete event in which its full income tax effects were recorded during the first quarter and the six-month year-to-date period of fiscal 2021.

Additionally, we recorded a $713,000 income tax charge to provide for a full valuation allowance against a U.S. income tax loss carryforward that originated during the first half of fiscal 2021.   

Based on our assessments as of November 1, 2020, November 1, 2019, and May 3, 2020, valuation allowances against our net deferred income taxes pertain to the following:

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

May 3, 2020

 

U.S. federal and state net deferred income tax assets

 

$

8,543

 

 

 

711

 

 

 

867

 

U.S. capital loss carryforward

 

 

2,281

 

 

 

 

 

 

2,281

 

 

 

$

10,824

 

 

 

711

 

 

 

3,148

 

 

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. As of November 1, 2020, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings from our foreign subsidiaries would not be reinvested indefinitely and would be eventually distributed to our U.S. parent company. The conclusion reached from our assessment has been consistent with prior years. ASC Topic 740 requires that a deferred income tax liability should be recorded for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely, and as a result we recorded a deferred income tax liability associated with undistributed earnings from our foreign subsidiaries. Also, we assess the recognition of U.S. foreign income tax credits associated with foreign withholding and income tax payments and whether it is more-likely-than-not that our foreign income tax credits will not be realized. If it is determined that any foreign income tax credits need to be recognized or it is more-likely-than-not our foreign income tax credits will not be realized, an adjustment to our provision for income taxes will be recognized at that time.

As a result of the TCJA, 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 income tax liability will be required only for withholding taxes that are incurred by our foreign subsidiaries. As a result, as of November 1, 2020, November 3, 2019, and May 3, 2020, we recorded a deferred income tax liability of $3.9 million, $3.2 million, and $3.4 million, respectively, for withholding taxes on undistributed earnings and profits from our foreign subsidiaries.

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 during which 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.

As of November 1, 2020, we had a $1.4 million total gross unrecognized income tax benefit, of which $1.1  million and $380,000 were recorded to income taxes payable-long-term and noncurrent deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets. As of November 3, 2019, we had a $914,000 total gross unrecognized income tax benefit of which the entire amount was recorded to income taxes payable-long-term in the accompanying Consolidated Balance Sheets. As of May 3, 2020, we had a $1.3 million total gross income tax benefit of which the entire amount was recorded to income taxes payable-long term in the accompanying Consolidated Balance Sheets.

As of November 1, 2020, we had a $1.4 million total gross unrecognized income tax benefit, of which $1.1 million would favorably affect the income tax rate in future periods. As of November 3, 2019, the entire $914,000 total gross unrecognized income tax benefit would have favorably affected the income tax rate in future periods. As of May 3, 2020, the entire $1.3 million total gross unrecognized income would have favorably affected the income tax rate in future periods.

Our gross unrecognized income tax benefit of $1.4  million relates to income tax positions for which significant change is currently not expected within the next year. This amount primarily relates to double taxation under applicable income tax treaties with foreign tax jurisdictions.

I-25

 


 

16. Stock-Based Compensation

Equity Incentive Plan Description

On September 16, 2015, our shareholders approved an equity incentive plan titled the Culp, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan authorizes the grant of stock options intended to qualify as incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance units, and other equity and cash related awards as determined by our Compensation Committee. An aggregate of 1,200,000 shares of common stock were authorized for issuance under the 2015 Plan, with certain sub-limits that would apply with respect to specific types of awards that may be issued as defined in the 2015 Plan.

As of November 1, 2020, there were 548,729 shares available for future equity-based grants under our 2015 plan.

Performance-Based Restricted Stock Units

Senior Executives

We grant performance-based restricted stock units to certain senior executives which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements. The number of shares of common stock that are earned based on the performance targets that have been achieved may be adjusted based on a market-based total shareholder return component as defined in the related restricted stock unit agreements.

Compensation cost for share-based awards is measured based on their fair market value on the date of grant. The fair market value per share was 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.

There were no performance-based restricted stock units granted to certain senior executives during the six-months ended November 1, 2020.

The following table provides assumptions used to determine the fair market value of the market-based total shareholder return component using the Monte Carlo simulation model on our outstanding performance-based restricted units granted to certain senior executives on July 18, 2019 and August 2, 2018:

 

 

 

July 18,

 

 

August 2,

 

 

 

2019

 

 

2018

 

Closing price of our common stock

 

$

18.49

 

 

$

24.35

 

Expected volatility of our common stock

 

 

30.0

%

 

 

33.5

%

Expected volatility of peer companies (1) (2)

 

29.9% - 82.3%

 

 

 

16.0

%

Risk-free interest rate

 

 

1.73

%

 

 

2.74

%

Dividend yield

 

 

2.10

%

 

 

1.35

%

Correlation coefficient of peer companies (1) (2)

 

0.00 - 0.43

 

 

 

0.47

 

 

(1)

The expected volatility and correlation coefficient of our peer companies for the July 18, 2019 grant date 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 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 the August 2, 2018 grant date 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.

Key Employees and a Non-Employee

We grant performance-based restricted stock units which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period as defined in the related restricted stock unit agreements.

Our performance-based restricted stock units granted to key employees were measured based on the fair market value (the closing price of our common stock) on the date of grant. No market-based total shareholder return component was included in these awards. Our performance-based restricted stock units granted to a non-employee, which vested during the first quarter of fiscal 2020, were measured based on the fair market value (closing price of our common stock) on the date when the performance criteria were met.

I-26

 


 

There were no performance-based restricted stock units granted to our key employees or any non-employees during the six-months ended November 1, 2020.

Overall

The following table summarizes information related to our grants of performance-based restricted stock units associated with certain senior executives and key employees that are currently unvested as of November 1, 2020:

 

 

 

(3)

 

 

(4)

 

 

 

 

 

 

 

 

 

 

Performance-Based

 

 

Restricted Stock

 

 

 

 

 

 

 

 

 

 

Restricted Stock

 

 

Units Expected

 

 

 

 

 

 

 

 

Date of Grant

 

Units Awarded

 

 

to Vest

 

 

Price Per Share

 

 

 

Vesting Period

July 18, 2019 (1)

 

 

93,653

 

 

 

1,725

 

 

$

19.04

 

(5)

 

3 years

July 18, 2019 (2)

 

 

29,227

 

 

 

1,489

 

 

$

18.49

 

(7)

 

3 years

August 2, 2018 (1)

 

 

86,599

 

 

 

3,509

 

 

$

18.51

 

(6)

 

3 years

August 2, 2018 (2)

 

 

47,800

 

 

 

2,101

 

 

$

24.35

 

(7)

 

3 years

 

(1)

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

(2)

Performance-based restricted stock units awarded to key employees.

(3)

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

(4)

Compensation cost is based on an assessment each reporting period to determine the probability of whether or not certain performance goals will be met as of the end of the vesting period, and in turn the number of shares that are expected to be awarded at the end vesting period. These amounts represent the number of shares that were expected to vest as of November 1, 2020.

(5)

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 our 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 component of the performance-based restricted stock units granted to certain senior executives on July 18, 2019.

(6)

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 component of the performance-based restricted stock units granted to certain senior executives on August 2, 2018.

(7)

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

The following table summarizes information related to our performance-based restricted stock units that vested during the six-month periods ending November 1, 2020 and November 3, 2019:

 

 

 

Performance-Based

 

 

 

 

 

 

(4)

 

 

Restricted Stock

 

 

(3)

 

 

Price

Fiscal Year

 

Units Vested

 

 

Fair Value

 

 

Per Share

Fiscal 2021 (1)

 

 

3,277

 

 

$

33

 

 

$

9.96

 

 

Fiscal 2021 (1)

 

 

3,710

 

 

$

37

 

 

$

9.96

 

 

Fiscal 2020 (1)

 

 

11,351

 

 

$

197

 

 

$

17.36

 

 

Fiscal 2020 (2)

 

 

4,961

 

 

$

86

 

 

$

17.36

 

 

 

(1)

Certain senior executives and key employees.

(2)

Non-employee

(3)

Dollar amounts are in thousands.

(4)

Price per share is derived from the closing price of our common stock on the date the respective performance-based restricted stock units vested.

We recorded compensation expense of $89,000 and $275,000 within selling, general, and administrative expenses for the six-month periods ending November 1, 2020, and November 3, 2019, respectively. Compensation cost is recorded based on an

I-27

 


 

assessment each reporting period to determine the probability of whether or not certain performance targets will be met as of the end of the vesting period. If certain performance goals are not expected to be achieved, compensation cost would not be recorded, and any previously recognized compensation cost would be reversed.

As of November 1, 2020, the remaining unrecognized compensation cost related to our performance-based restricted stock units was $73,698, which is expected to be recognized over a weighted average vesting period of 1.5 years. As of November 1, 2020, the performance-based restricted stock units that were expected to vest had a fair value totaling $110,000.

Time-Based Restricted Stock Units

The following table summarizes information related to our grants of time-based restricted stock unit awards associated with certain senior executives and key members of management that are unvested as of November 1, 2020:

 

 

 

Time-Based

 

 

 

 

 

 

 

 

 

 

Restricted Stock

 

 

(1)

 

 

 

 

Date of Grant

 

Units Awarded

 

 

Price Per Share

 

Vesting Period

August 6, 2020

 

 

129,896

 

 

$

11.01

 

 

 

3 years

July 18, 2019

 

 

34,399

 

 

$

18.49

 

 

 

3 years

August 2, 2018

 

 

10,000

 

 

$

24.35

 

 

 

5 years

 

(1)

Price per share represents closing price of common stock on the date the respective award was granted.

 

Overall

We recorded compensation expense of $245,000 and $52,000 within selling, general, and administrative expenses associated with our time-based restricted stock unit awards for the six-month periods ending November 1, 2020, and November 3, 2019, respectively.

As of November 1, 2020, the remaining unrecognized compensation cost related to our time-based restricted stock units was $1.8 million, which is expected to be recognized over a weighted average vesting period of 2.5 years. As of November 1, 2020, the time-based restricted stock units that are expected to vest had a fair value totaling $2.2 million.

Common Stock Award

We granted a total of 5,193 and 7,000 shares of common stock to our outside directors on October 1, 2020 and July 1, 2020, 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 $13.48 and $10.00 per share on October 1, 2020 and July 1, 2020, respectively, which represents the closing price of our common stock on the date of grant.

We granted a total of 4,519 and 3,659 shares of common stock to our outside directors on October 1, 2019 and July 1, 2019, 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 $15.49 and $19.21 per share on October 1, 2019 and July 1, 2019, respectively, which represents the closing price of our common stock on the date of grant.

We recorded $140,000 of compensation expense within selling, general, and administrative expenses for common stock awards to our outside directors for each of the six-month periods ending November 1, 2020, and November 3, 2019.

17. 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 twelve months or less are not recognized in our Consolidated Balance Sheets. For leases of more than twelve months, 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 one to six years, with renewal options for additional periods ranging up to ten 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 ASC Topic 842, to exercise the renewal option on the date a lease arrangement is commenced. Currently, renewal

I-28

 


 

options are not included in the lease terms for any of our leases, as there is not a significant economic incentive for us to exercise any of our renewal options.

Most of our leases do not provide an implicit interest rate, and as a result, we use our incremental borrowing rate, which approximates a collateralized rate, based on information available on the commencement date of a lease arrangement in determining the present value of lease our payments.

Balance Sheet

The right of use assets and lease liabilities associated with our operating leases as of November 1, 2020, November 3, 2019, and May 3, 2020, are as follows:

 

 

 

 

 

 

 

(1)

 

 

 

 

 

(dollars in thousands)

 

November 1,

2020

 

 

November 3,

2019

 

 

May 3,

2020

 

Right of use assets

 

$

6,165

 

 

$

5,879

 

 

$

3,903

 

Operating lease liability - current

 

 

2,316

 

 

 

2,282

 

 

 

1,805

 

Operating lease liability – noncurrent

 

 

4,008

 

 

 

3,439

 

 

 

2,016

 

 

(1)

As of November 3, 2019, right of use assets totaled $5.9 million, of which $4.9 million and $1.0 million were classified as (i) right of use asset and (ii) within noncurrent assets – discontinued operation, respectively, in the accompanying Consolidated Balance Sheets.  At November 3, 2019, operating lease liabilities totaled $5.7 million, of which $2.1 million, $192,000, $2.6 million, and $825,000 were classified as (i) operating lease liability – current, (ii) within current liabilities – discontinued operation, (iii) operating lease liability – long-term, and (iv) within noncurrent liabilities – discontinued operation, respectively, in the accompanying Consolidated Balance Sheets.

Supplemental Cash Flow Information

 

 

 

Six Months

Ended

 

 

Six Months

Ended

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

Operating lease liability payments

 

$

1,232

 

 

$

1,408

 

Right of use assets exchanged for lease liabilities

 

 

3,618

 

 

 

22

 

 

 

Operating lease expense for the three-months ended November 1, 2020, and November 3, 2019, was $696,000 and $706,000, respectively. Operating lease expense for each of the six-month periods ended November 1, 2020, and November 3, 2019, was $1.4 million.  Short-term lease and variable lease expenses were immaterial for the three-months and six-months ended November 1, 2020, and November 3, 2019.

Other Information

Maturity of our operating lease liabilities for the remainder of fiscal 2021, the subsequent next four fiscal years, and thereafter follows:

 

(dollars in thousands)

 

 

 

 

2021

 

$

1,244

 

2022

 

 

1,955

 

2023

 

 

1,536

 

2024

 

 

1,172

 

2025

 

 

679

 

Thereafter

 

 

 

 

 

$

6,586

 

Less: interest

 

 

(262

)

Present value of lease liabilities

 

$

6,324

 

 

As of November 1, 2020, the weighted average remaining lease term and discount rate for our operating leases follows:

 

 

 

November 1, 2020

 

Weighted average lease term

 

3.3 years

 

Weighted average discount rate

 

 

2.51

%

 

I-29

 


 

As of November 3, 2019, the weighted average remaining lease term and discount rate for our operating leases follows:

 

 

 

November 3, 2019

 

Weighted average lease term

 

3.4 years

 

Weighted average discount rate

 

 

3.82

%

 

18. 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

As of November 1, 2020, November 3, 2019, and May 3, 2020, we had total amounts due regarding capital expenditures totaling $68,000, $402,000, and $107,000, respectively, which pertained to outstanding vendor invoices, none of which were financed. As of November 3, 2019, the total amount due of $402,000 consisted of $398,000 and $4,000 that were classified as (i) accounts payable – capital expenditures and (ii) within current liabilities – discontinued operation, respectively.  These total outstanding amounts were required to be paid based on normal credit terms.

Purchase Commitments – Capital Expenditures

As of November 1, 2020, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $5.0 million.

19. Statutory Reserves

Our subsidiary located in China was required to transfer 10% of its 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. As of November 1, 2020, the statutory surplus reserve fund represents the 50% registered capital limit, and therefore, our subsidiary in China is not required to transfer 10% of its net income in accordance with PRC accounting rules and regulations.

The transfer to this reserve must be made before distributions of any dividend to shareholders. As of November 1, 2020, the company’s statutory surplus reserve was $4.3 million. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any. The surplus reserve fund 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 except for the statutory surplus reserve of $4.3 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.

20. Common Stock Repurchase Program

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased, and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

As part of our comprehensive response to the COVID-19 pandemic, we announced on April 3, 2020, that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty. Accordingly, we did not purchase any shares of our common stock during the six-month period ending November 1, 2020. Additionally, we did not purchase any shares of our common stock during the six-month period ending November 3, 2019.

As of November 1, 2020, we had $5.0 million available for repurchases of our common stock.

 

I-30

 


 

21. Dividend Program

On December 3, 2020, we announced that our board of directors approved a quarterly cash dividend of $0.11 per share. This payment will be made on January 18, 2021, to shareholders of record as of January 8, 2021.

During the six-months ended November 1, 2020, dividend payments totaled $2.6 million, which represented quarterly dividend payments of $0.105 per share. During the six-months ended November 3, 2019, dividend payments totaled $2.5 million, which represented quarterly dividend payments of $0.10 per share.

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. Future dividend payments are subject to final determination by our board of directors and will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.

 

 

I-31

 


 

CAUTIONARY STATEMENT CONCERNING 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,” “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, customers, suppliers, and the global economy, such as the global coronavirus pandemic currently affecting countries around the world, could also adversely affect our operations and financial performance. In addition, the impact of potential goodwill or intangible asset impairments or valuation allowances could affect our financial results. Finally, increases in market prices for petrochemical products can significantly affect the prices we pay for raw materials, and in turn, increase our operating costs and decrease our profitability. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements, are included in Item 1A “Risk Factors” section in our most recent Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission. A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur.  

I-32

 


 

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.

We sold our majority ownership interest in eLuxury, LLC (“eLuxury”) on March 31, 2020, resulting in the elimination of our home accessories segment at such time. Accordingly, the results of operations and assets and liabilities for this segment are excluded from the company’s continuing operations for the three-month and six-month periods ended November 3, 2019 and presented as a discontinued operation in this report. See Note 3 - Home Accessories Segment - Discontinued Operation, of the consolidated financial statements for further details.

General

Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. The six months ended November 1, 2020, and November 3, 2019, represent 26-week and 27-week periods, respectively.

Our continuing operations are classified into two business segments: mattress fabrics and upholstery fabrics. 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, as 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. Additionally, Read Window Products, LLC (“Read”), a wholly owned subsidiary located in Knoxville, TN, provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation services of Read’s products, to customers in the hospitality and commercial industries. Read also supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows.  

We evaluate the operating performance of our current business segments based upon income (loss) from continuing operations before certain unallocated corporate expenses, asset impairments, restructuring credit (expense) and related charges, and other non-recurring items. Cost of sales in each segment includes costs to develop, manufacture, or source our products, including costs such as raw material costs and finished goods purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, and other miscellaneous expenses.

Executive Summary

Results of Continuing Operations

 

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

Change

 

Net sales

 

$

76,851

 

 

$

69,550

 

 

10.5%

 

Gross profit from continuing operations

 

 

14,261

 

 

 

13,526

 

 

5.4%

 

Gross profit margin from continuing operations

 

 

18.6

%

 

 

19.4

%

 

(80)bp

 

Selling, general, and administrative expenses

 

 

9,743

 

 

 

9,117

 

 

6.9%

 

Income from continuing operations

 

 

4,518

 

 

 

4,409

 

 

2.5%

 

Operating margin from continuing operations

 

 

5.9

%

 

 

6.3

%

 

(40)bp

 

Income before income taxes from continuing operations

 

 

3,897

 

 

 

4,547

 

 

(14.3)%

 

Income tax expense

 

 

1,613

 

 

 

2,279

 

 

(29.2)%

 

Net income from continuing operations

 

 

2,384

 

 

 

2,252

 

 

5.9%

 

 

 

 

 

Six Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

Change

 

Net sales

 

$

141,315

 

 

$

140,269

 

 

0.7%

 

Gross profit from continuing operations

 

 

24,162

 

 

 

25,938

 

 

(6.8)%

 

Gross profit margin from continuing operations

 

 

17.1

%

 

 

18.5

%

 

(140)bp

 

Selling, general, and administrative expenses

 

 

17,761

 

 

 

18,266

 

 

(2.8)%

 

Income from continuing operations

 

 

6,401

 

 

 

7,707

 

 

(16.9)%

 

Operating margin from continuing operations

 

 

4.5

%

 

 

5.5

%

 

(100)bp

 

Income before income taxes from continuing operations

 

 

5,421

 

 

 

8,010

 

 

(32.3)%

 

Income tax expense

 

 

5,937

 

 

 

3,971

 

 

49.5%

 

Net (loss) income from continuing operations

 

 

(349

)

 

 

4,036

 

 

(108.6)%

 

I-33

 


 

 

Net Sales

Overall, our net sales for the second quarter of fiscal 2021 increased by 10.5% compared with the same period a year ago, with mattress fabrics sales increasing 12.2% and upholstery fabrics sales increasing 8.7%.  Our net sales for the first half of fiscal 2021 increased by 0.7% compared with the same period a year ago, with mattress fabrics sales increasing 2.2% and upholstery fabrics sales decreasing 0.9%.  The first half of fiscal 2021 had 26 weeks compared to 27 weeks for the first half of fiscal 2020.

The increase in net sales for both our mattress and upholstery fabrics segments for the second quarter reflects a surge in demand driven by a greater consumer focus on the home environment.  It also reflects our ability to service this increase in demand and respond quickly to meet the needs of our customers through our flexible global platform and the support of our long-term supplier relationships.  

This increase in net sales for the second quarter reversed a decrease in net sales for both segments during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially in the beginning of the first quarter as customers and retail stores began to resume operations following pandemic-related shutdowns.  The net result was an increase in mattress fabrics net sales and a decrease in upholstery fabrics net sales for the first half of fiscal 2021 compared with the prior-year period.

See the Segment Analysis section below for further details.

Income Before Income Taxes from Continuing Operations

Overall, our income before income taxes from continuing operations for the second quarter was $3.9 million, compared with $4.5 million for the prior-year period, while income before income taxes from continuing operations for the first six months of fiscal 2021 was $5.4 million, compared with $8.0 million for the prior year period.

Operating performance for the second quarter of fiscal 2021 was materially affected by unfavorable foreign exchange rate fluctuations associated with our operations in China.  It was also pressured by an increase in SG&A expense primarily due to higher accrued incentive compensation expense, offset somewhat by reduced spending on travel and entertainment and marketing expenses, as compared with the same period a year ago.  In addition to these factors, operating performance for the first half of fiscal 2020 was affected by the disruption form the COVID-19 pandemic during the first quarter, as well as significant inventory reductions and manufacturing inefficiencies associated with the dramatic ramp up in operations for our mattress fabrics segment during the first quarter.  

See the Segment Analysis section below for further details.

Income Taxes

We recorded income tax expense of $5.9 million, or 109.5% of income before income tax expense from continuing operations for the six-month period ending November 1, 2020, compared with income tax expense of $4.0 million, or 49.6% of income before income tax expense from continuing operations for the prior year period. Income tax expense during the first half of fiscal 2021 included a $4.1 million net income tax charge, which consists of a $7.6 million non-cash income tax charge to record a full valuation allowance against the company’s U.S. net deferred income tax assets, partially offset by a $3.5 million non-cash income tax benefit resulting from the re-establishing of certain U.S. federal net operating loss carryforwards in connection with U.S. Treasury regulations enacted during the first quarter of fiscal 2021 regarding the Global Intangible Low Taxed Income (“GILTI”) tax provisions of the Tax Cuts and Jobs Act of 2017. Income tax expense during the first half of fiscal 2020 included $1.0 million of GILTI tax that did not recur in fiscal 2021 due to the recent change in the GILTI tax regulations as noted above. Additionally, our effective income tax rates for the first half of fiscal 2021 and fiscal 2020 were adversely affected by the continued shift in the mix of our taxable income that has been mostly earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S.  

Refer to Note 15 of the consolidated financial statements for further details regarding our provision for income taxes from continuing operations.

Liquidity

As of November 1, 2020, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively “cash and investments”) totaled $56.5 million compared with $77.1 million as of May 3, 2020.

I-34

 


 

The decrease in our cash and investments from the end of fiscal 2020 is attributable to repayment of all of the outstanding borrowings associated with our U.S. and China lines of credit and the loan we received under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) of 2020 (such loan, the “PPP loan”), which borrowings totaled $38.4 million. Excluding the repayments made on our lines of credit and the PPP loan, our cash and investments as of November 1, 2020, would have increased $17.8 million as compared to May 3, 2020. This increase was mostly due to (i) net cash provided by operating activities totaling $22.7 million, partially offset by (ii) cash payments of $2.6 million in the form of a regular quarterly dividend payment to shareholders; and (iii) $2.0 million of capital expenditures that were primarily related to our mattress fabrics segment.

Our net cash provided by operating activities was $22.7 million during the first half of fiscal 2021, compared with $8.2 million during the first half of fiscal 2020. This increase reflects a focused attention on working capital management. Additionally, our discontinued operation had net cash used in operating activities totaling $2.2 million and net cash used in investing activities totaling $32,000 during the first half of fiscal 2020. Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions from the company and the former non-controlling interest holder of eLuxury, totaling $2.4 million during the first half of fiscal 2020. We believe our liquidity has improved in the absence of the former home accessories segment due to the significant losses incurred by that segment and the funding of its working capital requirements primarily by us through loans and capital contributions that are no longer required.

As of November 1, 2020, there were no outstanding borrowings under our lines of credit.

Dividend Program

On December 3, 2020, we announced that our board of directors approved a quarterly cash dividend of $0.11 per share, or $0.44 per share on an annualized basis. This payment will be made on January 18, 2021, to shareholders of record as of January 8, 2021.

During the six-month period ended November 1, 2020, dividend payments totaled $2.6 million, which represented quarterly dividend payments of $0.105 per share. During the six-month period ended November 3, 2019, dividend payments totaled $2.5 million, which represented quarterly dividend payments of $0.10 per share.

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. Future dividend payments are subject to final determination by our board of directors and will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.

Common Stock Repurchase Program

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased, and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

As part of our comprehensive response to the COVID-19 global pandemic, we announced on April 3, 2020, that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty. Accordingly, we did not purchase any shares of our common stock through the end of our second quarter of fiscal 2021.  Additionally, we did not purchase any share of our common stock during the six-month period ended November 3, 2019.

As of November 1, 2020, we had $5.0 million available for repurchases of our common stock.

I-35

 


 

Segment Analysis

Mattress Fabrics Segment

 

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

Change

 

Net sales

 

$

40,030

 

 

$

35,666

 

 

12.2%

 

Gross profit from continuing operations

 

 

7,584

 

 

 

6,247

 

 

21.4%

 

Gross profit margin from continuing operations

 

 

18.9

%

 

 

17.5

%

 

140bp

 

Selling, general, and administrative expenses

 

 

3,202

 

 

 

2,953

 

 

8.4%

 

Income from continuing operations

 

 

4,382

 

 

 

3,294

 

 

33.0%

 

Operating margin from continuing operations

 

 

10.9

%

 

 

9.2

%

 

170bp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

Change

 

Net sales

 

$

76,133

 

 

$

74,525

 

 

2.2%

 

Gross profit from continuing operations

 

 

12,191

 

 

 

11,938

 

 

2.1%

 

Gross profit margin from continuing operations

 

 

16.0

%

 

 

16.0

%

 

0bp

 

Selling, general, and administrative expenses

 

 

5,964

 

 

 

6,025

 

 

(1.0)%

 

Income from continuing operations

 

 

6,227

 

 

 

5,913

 

 

5.3%

 

Operating margin from continuing operations

 

 

8.2

%

 

 

7.9

%

 

30bp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

The increase in mattress fabrics net sales for the second quarter of fiscal 2021 reflects an increase in demand driven by greater consumer awareness and appreciation for overall comfort and wellness within the home environment as a result of the COVID-19 pandemic. This has led to an increase in discretionary spending on home furnishing products, including mattresses.  

During the quarter, we built on the sales momentum generated during the last eight weeks of the first quarter by utilizing our product-driven strategy for both mattress fabrics and sewn covers, as well as our global supply chain and dedicated attention to our customers. Our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey have enabled us to support current demand and serve the needs of our customers.

Our sewn mattress cover business also experienced continued growth, with demand trends exceeding pre-COVID levels. This trend reflects the ongoing growth in the boxed bedding space, and we continue to work collaboratively with both new and existing customers to develop fresh, innovative products. Our efficient global platform, along with our ability to maximize our fully vertical supply chain with product offerings from fabrics to sewn covers, allows us to support the rapidly changing demands of our customers. Additionally, our building expansion in Haiti was completed during the second quarter, providing additional capacity and enhancing our ability to produce sewn covers.

The increase in net sales for the second quarter reversed a decrease in net sales during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially in the beginning of the first quarter as customers and retail stores began to resume operations following pandemic-related shutdowns.  The net result was an increase in mattress fabrics net sales for the first half of fiscal 2021 compared with the prior-year period.  The first half of fiscal 2021 was a 26-week period, compared with a 27-week period for the first half of fiscal 2020.

During this uncertain environment, we have managed our business with a firm focus on creative designs, innovative fabric and sewn cover products, and customer service.  These efforts are supported by our ongoing developments in product innovation, including expanding our specialty finish options and leveraging our virtual 3D image rendering services for design collaboration opportunities.  We expect that our increased capacity in North America resulting from our $4.0 million investment in additional knit machines will be available during the fourth quarter of fiscal 2021. We also believe that the domestic mattress industry, and, in turn, our business, will benefit from the recent preliminary anti-dumping duties imposed by the U.S. Department of Commerce on mattress imports from seven countries for engaging in unfair trade practices relating to low-priced mattress imports.  

Despite positive sales trends during the second quarter and first six months of fiscal 2021, our customers’ ability to meet their demand is being challenged by supply chain constraints related primarily to non-fabric components, as well as labor shortages, which could temporarily delay their scheduled delivery of orders for mattress fabrics and sewn mattress covers during the second half of fiscal 2021. Additionally, the ongoing impact and duration of the COVID-19 pandemic remains unknown and depends on factors beyond our knowledge or control, including the duration and severity of the outbreak, actions taken to contain its spread and mitigate the public health and economic effects, the short- and long-term disruption of the global economy, consumer confidence, unemployment, employee health, and the financial health of our customers, suppliers, and distribution channels. At

I-36

 


 

this time, we cannot reasonably estimate the ongoing impact of the COVID-19 pandemic on our mattress fabrics segment; however, if conditions relating to the pandemic worsen, the disruption could adversely affect our operations and financial performance.

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

The increase in mattress fabrics profitability during the second quarter and first six months of fiscal 2021 was primarily due to the benefits of fixed cost absorption from higher sales and improved operating efficiencies resulting from fully maximizing our production capacity.  

Segment assets

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

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

May 3, 2020

 

Accounts receivable

 

$

15,914

 

 

$

11,224

 

 

$

12,212

 

Inventory

 

 

24,200

 

 

 

27,751

 

 

 

26,620

 

Property, plant & equipment

 

 

38,818

 

 

 

42,899

 

 

 

40,682

 

Right of use assets

 

 

1,186

 

 

 

170

 

 

 

362

 

Investment in unconsolidated joint venture

 

 

1,859

 

 

 

1,504

 

 

 

1,602

 

 

 

$

81,977

 

 

$

83,548

 

 

$

81,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to Note 14 of the consolidated financial statements for disclosures regarding determination of our segment assets.

Accounts Receivable

As of November 1, 2020, accounts receivable increased by $4.7 million, or 41.8%, compared with November 3, 2019. This increase reflects the increase in net sales during the second quarter of fiscal 2021 compared with the prior-year period. Net sales during the second quarter of fiscal 2021 were $40.0 million compared with $35.7 million during the second quarter of fiscal 2020.  Additionally, this increase reflects slower cash collections on accounts receivable during the second quarter of fiscal 2021 compared with the second quarter of fiscal 2020 stemming from current economic conditions associated with the COVID-19 pandemic that were not present during the second quarter of fiscal 2020.

As of November 1, 2020, accounts receivable increased by $3.7 million, or 30.3%, compared with May 3, 2020. This increase reflects the substantial increase in net sales during the second quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020. Net sales during the second quarter of fiscal 2021 were $40.0 million, an increase of $16.6 million, or 71%, compared with net sales of $23.4 million during the fourth quarter of fiscal 2020. Although we experienced a substantial increase in net sales during the second quarter of fiscal 2021, the increase in our accounts receivable also reflects faster cash collections during the second quarter of fiscal 2021 as compared with the fourth quarter of fiscal 2020. The faster cash collections stem from our customers’ return to making payments based on normal credit terms as opposed to the extended terms granted during the fourth quarter of fiscal 2020 in response to the COVID-19 pandemic.

Days’ sales outstanding was 36 days for the second quarter of fiscal 2021, as compared with 29 days for the second quarter of fiscal 2020 and 48 days for the fourth quarter of fiscal 2020.

Inventory

As of November 1, 2020, inventory decreased by $3.6 million, or 12.8%, compared with November 3, 2019. Additionally, as of November 1, 2020, inventory decreased by $2.4 million, or 9.1%, compared with May 3, 2020. Although our net sales increased during the second quarter of fiscal 2021 compared with the second quarter and fourth quarter of fiscal 2020, our trends in inventory reflect improved inventory management by better aligning our inventory purchases to reflect current demand trends.

Property, Plant, & Equipment

 

The $38.8 million as of November 1, 2020, represents property, plant, and equipment of $26.5 million and $12.3 million located in the U.S. and Canada, respectively. The $42.9 million as of November 3, 2019, represents property, plant, and equipment of $30.5 million and $12.4 million located in the U.S. and Canada, respectively.   The $40.7 million as of May 3, 2020, represents property, plant, and equipment located of $27.7 million and $13.0 million located in the U.S. and Canada, respectively.

I-37

 


 

As of November 1, 2020, property, plant, and equipment decreased as compared with November 3, 2019, and May 3, 2020. This trend represents a decrease in capital expenditures resulting from prior cost cutting measures as part of our comprehensive response to COVID-19.

 

During the second half of fiscal 2021, we plan to invest $4 million in additional knit machines to expand our capacity in North America to support our future growth plan.

Right of Use Assets

The $1.2 million as of November 1, 2020, represents right of use assets of $696,000 and $490,000 located in the U.S. and Canada, respectively.  The $170,000 as of November 3, 2019, and the $362,000 as of May 3, 2020, represent right of use assets located in the U.S.

As of November 1, 2020, right of use assets increased as compared with November 3, 2019, and May 3, 2020. This increase reflects the addition of a new warehouse lease agreement associated with our operation located in Canada that was entered into during the first quarter of fiscal 2021. This lease agreement has a three-year term and is set to expire during fiscal 2023. The amount of the change associated with our right of use assets between reporting periods is based on the length of the lease term remaining on our leases prior to their expiration or option to renew in relation to the reporting periods presented.

Investment in Unconsolidated Joint Venture

Our investment in unconsolidated joint venture represents our fifty percent ownership of Class International Holdings Ltd. (See Note 8 to the consolidated financial statements for further details).

Upholstery Fabrics Segment

Net Sales

 

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

 

 

 

 

November 3, 2019

 

 

 

 

 

 

% Change

 

Non-U.S. Produced

 

$

34,473

 

 

 

94

%

 

$

30,805

 

 

 

91

%

 

 

11.9

%

U.S. Produced

 

 

2,348

 

 

 

6

%

 

 

3,079

 

 

 

9

%

 

 

(23.7

)%

Total

 

$

36,821

 

 

 

100

%

 

$

33,884

 

 

 

100

%

 

 

8.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

 

 

 

 

November 3, 2019

 

 

 

 

 

 

% Change

 

Non-U.S. Produced

 

$

60,484

 

 

 

93

%

 

$

60,434

 

 

 

92

%

 

 

0.1

%

U.S. Produced

 

 

4,698

 

 

 

7

%

 

 

5,310

 

 

 

8

%

 

 

(11.5

)%

Total

 

$

65,182

 

 

 

100

%

 

$

65,744

 

 

 

100

%

 

 

(0.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The increase in upholstery fabrics net sales during the second quarter of fiscal 2021 reflects a significant increase in sales for our residential upholstery business, which was driven primarily by the increased consumer focus on the at-home experience and overall comfort. Through our platform in Asia, including our expanded cut and sew capabilities in Vietnam and our long-term supplier relationships, we were able to respond quickly to meet this upsurge in demand.  

 

Our line of highly durable, stain-resistant LiveSmart® performance fabrics, as well as our line of LiveSmart Evolve® performance plus sustainability fabrics, continued to experience favorable demand trends during the second quarter.  We also recently launched LiveSmart Ultra™, which features a new antimicrobial finish as the next step in our LiveSmart performance brand evolution. These Livesmart performance fabrics are important drivers of our residential growth.

 

Our hospitality business remained under pressure by the ongoing COVID-19 disruption that continued to affect the travel and leisure industries.  These lingering pressures also affected Read Window Products, our window treatment and installation business, during the quarter.  While sales for our hospitality business remained relatively stable as compared to the first quarter, we expect that the disruption in hospitality and leisure will continue to affect this business in the near term, as it remains uncertain whether hotels and other hospitality venues will undertake new refurnishing projects in the current environment. 

The increase in upholstery fabrics net sales for the second quarter reversed a decrease in net sales during the first quarter of fiscal 2021 that resulted from the economic disruption caused by the COVID-19 pandemic, especially in the beginning of the first quarter as customers and retail stores began to resume operations following pandemic-related shutdowns.  The net result was a decrease in upholstery fabrics net sales for the first half of fiscal 2021 compared with the prior-year period.  The first half of fiscal 2021 was a 26-week period, compared with a 27-week period for the first half of fiscal 2020.

I-38

 


 

Looking ahead, we are encouraged by the strong backlog in our residential upholstery business and our ability to meet this demand.  However, despite these positive trends, our customers’ ability to meet their demand is being challenged by supply chain constraints related primarily to non-fabric components, as well as labor shortages, which could temporarily delay their scheduled delivery of orders for upholstery fabrics during the second half of fiscal 2021. Additionally, the ongoing economic and health effects of the COVID-19 pandemic, as well as the duration of such effects, remain unknown and depend on factors beyond our knowledge or control. At this time, we cannot reasonably estimate the ongoing impact of the pandemic on our upholstery fabrics segment; however, if conditions worsen, the impact on our 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)

 

November 1, 2020

 

 

November 3, 2019

 

 

Change

 

Gross profit from continuing operations

 

 

6,677

 

 

 

7,279

 

 

(8.3)%

 

Gross profit margin from continuing operations

 

 

18.1

%

 

 

21.5

%

 

(340)bp

 

Selling, general, and administrative expenses

 

 

3,390

 

 

 

3,806

 

 

(10.9)%

 

Income from continuing operations

 

 

3,287

 

 

 

3,473

 

 

(5.4)%

 

Operating margin from continuing operations

 

 

8.9

%

 

 

10.2

%

 

(130)bp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

Change

 

Gross profit from continuing operations

 

 

11,971

 

 

 

14,000

 

 

(14.5)%

 

Gross profit margin from continuing operations

 

 

18.4

%

 

 

21.3

%

 

(290)bp

 

Selling, general, and administrative expenses

 

 

6,570

 

 

 

7,652

 

 

(14.1)%

 

Income from continuing operations

 

 

5,401

 

 

 

6,348

 

 

(14.9)%

 

Operating margin from continuing operations

 

 

8.3

%

 

 

9.7

%

 

(140)bp

 

Restructuring credit

 

 

 

 

 

35

 

 

(100.0)%

 

 

The decrease in upholstery fabrics profitability for the second quarter was primarily due to unfavorable China foreign exchange rate fluctuations, as well as some impact from sales mix, partially offset by lower spending on travel and entertainment and marketing expenses.  The decrease in upholstery fabrics profitability for the first half of fiscal 2021 was also due to these factors, along with a decrease in sales during the first quarter of fiscal 2021.

 

Looking ahead, we expect that unfavorable foreign exchange rate fluctuations associated with our operations in China, as well as some impact from sales mix due to the ongoing pressures on our hospitality business, will adversely affect our profitability at least through the third quarter of fiscal 2021.

Segment Assets

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

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

May 3, 2020

 

Accounts receivable

 

$

17,046

 

 

$

12,666

 

 

$

12,881

 

Inventory

 

 

23,526

 

 

 

23,692

 

 

 

21,287

 

Property, plant & equipment

 

 

2,014

 

 

 

1,774

 

 

 

1,633

 

Right of use assets

 

 

3,269

 

 

 

2,610

 

 

 

1,633

 

 

 

$

45,855

 

 

$

40,742

 

 

$

37,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to Note 14 of the consolidated financial statements for disclosures regarding determination of our segment assets.

I-39

 


 

Accounts Receivable

As of November 1, 2020, accounts receivable increased by $4.4 million, or 34.6%, compared with November 3, 2019. This increase primarily reflects the increase in net sales during the second quarter of fiscal 2021 compared with the prior-year period. Net sales during the second quarter of fiscal 2021 were $36.8 million compared with $33.9 million during the second quarter of fiscal 2020. Additionally, this increase reflects slower cash collections on accounts receivable during the second quarter of fiscal 2021 compared with the second quarter of fiscal 2020 stemming from current economic conditions associated with the COVID-19 pandemic that were not present during the second quarter of fiscal 2020.

As of November 1, 2020, accounts receivable increased by $4.2 million, or 32.3%, compared with May 3, 2020. This increase reflects the substantial increase in net sales during the second quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020. Net sales during the second quarter of fiscal 2021 were $36.8 million, an increase of $12.8 million, or 53%, compared with net sales of $24.0 million during the fourth quarter of fiscal 2020. Although we experienced a substantial increase in net sales during the second quarter of fiscal 2021, the increase in our accounts receivable also reflects faster cash collections during the second quarter of fiscal 2021 as compared with the fourth quarter of fiscal 2021. The faster cash collections stem from our customers’ return to making payments based on normal credit terms as opposed to the extended terms granted during the fourth quarter of fiscal 2020 in response to the COVID-19 pandemic.

Days’ sales outstanding was 41 days during the second quarter of fiscal 2021, as compared with 33 days during the second quarter of fiscal 2020 and 47 days during the fourth quarter of fiscal 2020.

Inventory

As of November 1, 2020, inventory totaling $23.5 million was comparable with inventory totaling $23.7 million as of November 3, 2019. Additionally, as of November 1, 2020, inventory totaling $23.5 million was comparable with inventory totaling $21.3 million as of May 3, 2020. Although our net sales increased during the second quarter of fiscal 2021 compared with the second quarter and fourth quarter of fiscal 2020, our inventory levels remained consistent for the reporting periods presented, which reflects improved inventory management by better aligning our inventory purchases to reflect current demand trends.

Property, Plant, & Equipment

The $2.0 million as of November 1, 2020, represents property, plant, and equipment of $1.1 million and $904,000 located in the U.S. and China, respectively. The $1.8 million as of November 3, 2019, represents property, plant, and equipment of $1.3 million and $500,000 located in the U.S. and China, respectively. The $1.6 million as of May 3, 2020, represents property, plant, and equipment of $1.2 million and $471,000 located in the U.S. and China, respectively.

Right of Use Assets

The $3.3 million as of November 1, 2020, represents right of use assets of $2.7 million and $561,000 located in China and the U.S., respectively. The $2.6 million as of November 3, 2019, represents right of use assets of $1.5 million and $1.1 million located in China and the U.S., respectively. The $1.6 million as of May 3, 2020, represents right of use assets of $857,000 and $776,000 located in the U.S. and China, respectively.

As of November 1, 2020, right of use assets increased by $1.7 million, or 106.3%, compared with May 3, 2020. This increase primarily reflects the renewal of certain lease agreements that extended the lease terms for two buildings associated with our operations located in China during the first quarter of fiscal 2021. The amount of the change associated with our right of use assets between reporting periods is based on the length of the lease term remaining on our leases prior to their expiration or option to renew in relation to the reporting periods presented.

Discontinued Operation - Home Accessories Segment

 

As previously disclosed, we sold our majority ownership interest in eLuxury, LLC (“eLuxury”) during the fourth quarter of fiscal 2020, resulting in the elimination of our home accessories segment at such time. Accordingly, there are no results of operations and assets and liabilities for the home accessories segment in the company’s continuing operations for fiscal 2021, and the financial results for this segment are excluded from the company’s continuing operations for the three-month and six-month periods ended November 3, 2019 and have been reclassified and presented as a discontinued operation in our consolidated financial statements. See Note 3 - Home Accessories Segment - Discontinued Operation, of the consolidated financial statements for further details, and see also the section titled “Item 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION – 2020 compared with 2019 – Segment Analysis - Discontinued Operation – Home Accessories Segment” in our Form 10-K filed with the Securities and Exchange Commission on July 17, 2020, for the fiscal year ended May 3, 2020, for additional information.

 

I-40

 


 

Other Income Statement Categories

 

 

 

Three Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

% Change

 

SG&A expenses

 

$

9,743

 

 

$

9,117

 

 

 

6.9

%

Interest expense

 

 

 

 

 

21

 

 

 

(100.0

)%

Interest income

 

 

59

 

 

 

258

 

 

 

(77.1

)%

Other expense

 

 

680

 

 

 

99

 

 

 

586.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

% Change

 

SG&A expenses

 

$

17,761

 

 

$

18,266

 

 

 

(2.8

)%

Interest expense

 

 

51

 

 

 

21

 

 

 

142.9

%

Interest income

 

 

117

 

 

 

518

 

 

 

(77.4

)%

Other expense

 

 

1,046

 

 

 

194

 

 

 

439.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, General, and Administrative Expenses

The increase in selling, general, and administrative expenses during the second quarter of fiscal 2021 compared with the second quarter of fiscal 2020 is mostly due to higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets, partially offset by significant cost cutting measures associated with discretionary spending such as professional fees, travel and entertainment expenses, and certain marketing expenses.

The decrease in selling, general, and administrative expenses during the first half of fiscal 2021 compared with the first half of fiscal 2020 is mostly due to our significant cost cutting measures during the fourth quarter of fiscal 2020 that continued into the first quarter of fiscal 2021 as part of our comprehensive response to the COVID-19 global pandemic. These significant cost cutting measures primarily related to compensation and included (i) implementing temporary salary reductions, (ii) making workforce adjustments to align with demand, (iii) suspending merit pay increases, and (iv) aggressive reduction in discretionary spending such as professional fees, travel and entertainment expenses, and certain marketing expenses. The decrease in selling, general, and administrative expense as a result of these cost cutting measures was partially offset by higher incentive compensation expense reflecting stronger financial results in relation to pre-established performance targets that were primarily incurred during the second quarter of fiscal 2021.

Interest Expense

During the six-month period ending November 1, 2020, our interest expense is attributable to interest paid on amounts borrowed during the fourth quarter of fiscal 2020 in connection with the economic uncertainty associated with the COVID-19 global pandemic. As a result of the economic uncertainty relating to the duration of the pandemic and its overall effect on our business, we proactively borrowed $30.8 million under our lines of credit and applied for and received a $7.6 million loan under the SBA’s Paycheck Protection Program. During the first quarter of fiscal 2021, we repaid in full the PPP loan and all the borrowings that were outstanding under our lines of credit as of May 3, 2020. Additionally, we did not incur any interest expense during the three-month period ending November 1, 2020, as there were no borrowings outstanding under our line of credit agreements during such time.

The interest expense incurred during the three-month and six-month periods ending November 3, 2019, reflect our historically low amount of borrowings outstanding.

Interest Income

Interest income reflects interest earned on our current investments of excess cash held in money market funds, short-term bond funds, and investment-grade U.S. corporate, foreign, and government bonds, as well as interest earned on money market and mutual fund investments associated with our rabbi trust that funds our deferred compensation plan. The decrease in interest income during fiscal 2021 compared with fiscal 2020 is due mostly to a decrease in interest rates associated with these investments.

I-41

 


 

Other Expense

The increase in other expense during fiscal 2021 compared with fiscal 2020 was due mostly to less favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S dollar financial reporting amount. During the first half of fiscal 2021, we reported a foreign exchange rate loss of $689,000 compared with a foreign exchange rate gain of $150,000 during the first half of fiscal 2020. However, the $689,000 foreign exchange rate loss that was incurred during the first half of fiscal 2021 was mostly offset by an income tax benefit totaling $650,000 that was associated with deductible foreign exchange rate losses as our China operations pay income taxes in their local currency (see Income Taxes – Effective Income Tax Rate section below for further details).

Income Taxes

Effective Income Tax Rate

We recorded income tax expense of $5.9 million, or 109.5% of income before income taxes from continuing operations, for the six-month period ended November 1, 2020, compared with income tax expense of $4.0 million, or 49.6% of income before income taxes from continuing operations, for the six-month period ended November 3, 2019.

Our effective income tax rates associated with our continuing operations for the six-month periods ended November 1, 2020, and November 3, 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. When calculating the annual estimated effective income tax rate for the six months ended November 1, 2020, we were subject to a loss limitation rule in accordance with ASC Topic 740-270-30-36(a). This loss limitation rule required the taxable loss associated with our U.S. operations to be excluded from the annual estimated effective income tax rate calculation as it was determined that no tax benefit could be recognized resulting from the full valuation allowance against our U.S income tax loss carryforward that is expected to originate during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China and Canada versus annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.

The following schedule summarizes the principal differences between income tax expense from continuing operations at the U.S. federal income tax rate and the effective income tax rate from continuing operations reflected in the consolidated financial statements for the six-month periods ending November 1, 2020 and November 3, 2019:

 

 

 

Six Months Ended

 

 

 

November 1, 2020

 

 

November 3, 2019

 

U.S. federal income tax rate

 

 

21.0

%

 

 

21.0

%

U.S. valuation allowance

 

 

141.6

 

 

 

 

U.S. income tax law change

 

 

(65.1

)

 

 

 

Global Intangible Low Taxed Income Tax ("GILTI")

 

 

 

 

 

12.7

 

Withholding taxes associated with foreign jurisdictions

 

 

8.4

 

 

 

6.1

 

Foreign income tax rate differential

 

 

6.6

 

 

 

3.5

 

Tax effects of foreign exchange rate (losses) gains

 

 

(4.0

)

 

 

2.3

 

Other

 

 

1.0

 

 

 

4.0

 

 

 

 

109.5

%

 

 

49.6

%

U.S. Tax Law Change

Effective July 20, 2020, the U.S Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the Tax Cuts and Jobs Act of 2017 (“TCJA”). Prior to this enactment, GILTI represented a significant U.S. income tax on our foreign earnings during fiscal 2019 ($2.1 million) and fiscal 2020 ($1.9 million). With the enactment of these final regulations, we are now eligible for an exclusion from GILTI since we meet the provisions for the GILTI High-Tax exception included in the final regulations. In addition, the enactment of the new regulations and our eligibility for the GILTI High-Tax exception are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years.

As a result of the newly enacted regulations, we recorded a non-cash income tax benefit of $3.5 million resulting from the re-establishment of certain U.S. federal net operating loss carryforwards. This $3.5 million income tax benefit was recorded as a discrete event in which its full income tax effects were recorded in the first quarter and six-month year-to-date period of fiscal 2021.

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

I-42

 


 

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, considering the effects of local tax law.

As a result of the U.S. tax law change relating to the GILTI tax provisions of the TCJA, we assessed the need for an additional valuation allowance against our U.S. net deferred income taxes, as GILTI represented a significant source of our U.S. taxable income during fiscal 2019 and fiscal 2020 that offset our U.S. pre-tax losses during such years, and which offset is now reversed as a result of the retroactivity of the new regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S. taxable losses during our last two fiscal years, and we currently expect our history of U.S. pre-tax losses to continue into fiscal 2021 as a result  of the continuing economic uncertainty associated with the COVID-19 global pandemic. As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S. net deferred income tax assets will not be fully realizable. Accordingly, we recorded a non-cash income tax charge of $7.0 million to provide for a full valuation allowance against our U.S. net deferred income tax assets. This $7.0 million income tax charge was recorded as a discrete event in which its full income tax effects were recorded during the first quarter and six-month year-to-date period of fiscal 2021.

Additionally, we recorded a $713,000 income tax charge to provide for a full valuation allowance against a U.S. income tax loss carryforward that originated during the first half of fiscal 2021.

Based on our assessments as of November 1, 2020, November 3, 2019, and May 3, 2020, valuation allowances against our net deferred income taxes pertain to the following:

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019

 

 

May 3, 2020

 

U.S. federal and state net deferred income tax assets

 

$

8,543

 

 

 

711

 

 

 

867

 

U.S. capital loss carryforward

 

 

2,281

 

 

 

 

 

 

2,281

 

 

 

$

10,824

 

 

 

711

 

 

 

3,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 income 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 15 of the consolidated 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 November 1, 2020, November 3, 2019, and May 3, 2020, 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 during which 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.

Refer to Note 15 located of the consolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of November 1, 2020, November 3, 2019, and May 3, 2020, respectively.

Income Taxes Paid

During the first half of fiscal 2021, we received income tax refunds exceeding income tax payments, resulting in net cash tax payments of $556,000. The $556,000 resulted from (i) income tax refunds totaling $1.5 million associated with U.S. alternative minimum taxes (see United States section below for further details) that were partially offset by (ii) U.S. transition tax payments of $227,000 as required by the TCJA and (iii) income tax payments associated with our foreign jurisdictions totaling $726,000.

I-43

 


 

During the first half of fiscal 2020, income tax payments totaling $2.8 million represented (i) income tax payments associated with foreign jurisdictions totaling $1.9 million and (ii) a withholding tax payment of $838,000 paid to the Chinese government for earnings and profits repatriated to our U.S. parent company.

United States

Alternative Minimum Tax (AMT)

Our AMT refunds totaling $1.5 million that were received during the first half of fiscal 2021 stem from the provisions of the TCJA, as corporate taxpayers were eligible to treat prior AMT credit carryforwards as refundable. Accordingly, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable, and as a result, 50% of the $1.5 million refundable balance was expected to be received in each of our fiscal 2021 and fiscal 2022 years, respectively. We received our first 50% installment totaling $746,000 during the first quarter of fiscal 2021.

In accordance with the provisions of the CARES Act, 100% of AMT credit carryforwards for tax years beginning in the 2019 tax year were immediately refundable. Accordingly, we claimed credit for the remaining 50% installment of our refundable AMT credit carryforward in May 2020. We received our remaining 50% installment, plus interest, totaling $764,000 during the second quarter of fiscal 2021.

Future Liquidity

We currently do not expect to pay income taxes in the U.S. on a cash basis during fiscal 2021 due to: (i) our exclusion from the GILTI tax as a result of the U.S. Treasury regulations finalized and enacted on July 20, 2020; (ii) AMT income tax refunds totaling $1.5 million received during the first and second quarters of fiscal 2021; (iii) the immediate expensing of U.S. capital expenditures, and (iv) our existing U.S. federal net operating loss carryforwards totaling $21.9 million.

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 cash and cash equivalents of $45.3 million and short-term investments (available for sale) of $5.5 million as of November 1, 2020, cash flow from operations, and the current availability ($38.0 million) under our revolving credit lines will be sufficient to fund our foreseeable business needs and our contractual obligations.

As of November 1, 2020, our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) (collectively “cash and investments”) totaled $56.5 million, compared with $77.1 million as of May 3, 2020.

The decrease in our cash and investments from the end of fiscal 2020 is attributable to repayment of all of the outstanding borrowings associated with our U.S. and China lines of credit and the loan we received under the Paycheck Protection Program of the CARES Act (such loan, the “PPP loan”), which borrowings totaled $38.4 million. Excluding the repayments made on our lines of credit and the PPP loan, our cash and investments as of November 1, 2020, would have increased $17.8 million as compared to May 3, 2020. This increase was mostly due to (i) net cash provided by operating activities totaling $22.7 million, partially offset by (ii) cash payments of $2.6 million in the form of a regular quarterly dividend payment to shareholders; and (iii) $2.0 million of capital expenditures that were primarily related to our mattress fabrics segment.

Our net cash provided by operating activities was $22.7 million during the first half of fiscal 2021, compared with $8.2 million of net cash provided by operating activities during the first half of fiscal 2020. This increase reflects a focused attention on working capital management. Additionally, our discontinued operation had net cash used in operating activities totaling $2.2 million and net cash used in investing activities totaling $32,000 during the first half of fiscal 2020.  Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions from the company and the former non-controlling interest holder of eLuxury, totaling $2.4 million during the first half of fiscal 2020. We believe our liquidity has improved in the absence of the former home accessories segment due to the significant losses incurred by that segment and the funding of its working capital requirements primarily by us through loans and capital contributions that are no longer required.

I-44

 


 

As of November 1, 2020, there were no outstanding borrowings under our lines of credit.

The income taxes we pay also affects our liquidity.  See the section titled “Income Taxes Paid” of this Item 2 - Management’s Discussion and Analysis of Financial Condition section for further details.

 

Our cash and cash equivalents and short-term investments (available for sale) balance may be adversely affected by factors beyond our control, such as the continuing uncertainty of the COVID-19 global pandemic, lower net sales due to consumer demand, and delays in receipt of payment on accounts receivable. Additionally, our cash liquidity will be affected by our strategic investments in working capital and planned capital expenditures during the last half of fiscal 2021.  

By Geographic Area

A summary of our cash and cash equivalents, short-term investments (available for sale), and short-term and long-term investments (held-to-maturity) by geographic area follows:

 

(dollars in thousands)

 

November 1, 2020

 

 

November 3, 2019 (1)

 

 

May 3, 2020

 

United States

 

$

49,288

 

 

$

35,735

 

 

$

65,327

 

China

 

 

5,778

 

 

 

9,439

 

 

 

10,531

 

Canada

 

 

1,439

 

 

 

1,967

 

 

 

1,160

 

Cayman Islands

 

 

9

 

 

 

42

 

 

 

42

 

 

 

$

56,514

 

 

$

47,183

 

 

$

77,060

 

 

(1)

As of November 3, 2019, cash and cash equivalents totaled $47.2 million, of which $47.0 million and $228,000 were classified as (i) cash and cash equivalents and (ii) within current assets – discontinued operation, respectively, in the accompanying Consolidated Balance Sheets.

 

As discussed above, the decrease in our cash and investments, specifically in the U.S., as of November 1, 2020, compared with May 3, 2020, is attributable to repayment of all of the outstanding borrowings associated with our lines of credit and PPP loan, which totaled $38.4 million.

Common Stock Repurchase Program

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.

As part of our comprehensive response to the COVID-19 global pandemic, we announced on April 3, 2020, that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty. Accordingly, we did not purchase any shares of our common stock through the end of our second quarter of fiscal 2020.  Additionally, we did not purchase any share of our common stock during the six-month period ended November 3, 2019.

As of November 1, 2020, we had $5.0 million available for repurchases of our common stock.

Dividend Program

On December 3, 2020, we announced that our board of directors approved a quarterly cash dividend of $0.11 per share, or $0.44 per share on an annualized basis. This payment will be made on January 18, 2021, to shareholders of record as of January 8, 2021.

During the six-month period ended November 1, 2020, dividend payments totaled $2.6 million, which represented quarterly dividend payments of $0.105 per share. During the six-month period ended November 3, 2019, dividend payments totaled $2.5 million, which represented quarterly dividend payments of $0.10 per share.

Our board of directors has sole authority to determine if and when we will declare future dividends and on what terms. Future dividend payments are subject to final determination by our board of directors and will depend on our earnings, capital requirements, financial condition, excess availability under our lines of credit, market and economic conditions, and other factors we consider relevant.

I-45

 


 

Working Capital

Operating Working Capital

Operating working capital (accounts receivable and inventories, less accounts payable-trade, accounts payable-capital expenditures, and deferred revenue) was $42.0 million as of November 1, 2020, compared with $48.2 million as of November 3, 2019, and $49.4 million as of May 3, 2020. Operating working capital turnover was 5.3 during the second quarter of fiscal 2021, compared with 5.7 during the second quarter of fiscal 2020 and 5.1 during the fourth quarter of fiscal 2020.

Accounts Receivable

Accounts receivable as of November 1, 2020, totaling $33.0 million, increased $9.1 million, or 38.0%, compared with $23.9 million as of November 3, 2019. This increase reflects the increase in net sales during the second quarter of fiscal 2021 compared with the prior-year period. Net sales during the second quarter of fiscal 2021 were $76.9 million compared with $69.6 million during the second quarter of fiscal 2020. Additionally, this increase reflects slower cash collections on accounts receivable during the second quarter of fiscal 2021 compared with the second quarter of fiscal 2020 stemming from current economic conditions associated with the COVID-19 pandemic that were not present during the second quarter of fiscal 2020.

Accounts receivable as of November 1, 2020, totaling $33.0 million, increased $7.9 million, or 31.4%, compared with $25.1 million as of May 3, 2020. This increase reflects the substantial increase in net sales during the second quarter of fiscal 2021 compared with the fourth quarter of fiscal 2020. Net sales during the second quarter of fiscal 2021 were $76.9 million, an increase of $29.5 million, or 62%, compared with net sales of $47.4 million during the fourth quarter of fiscal 2020. Although we experienced a substantial increase in net sales during the second quarter of fiscal 2021, the increase in our accounts receivable also reflects faster cash collections during the second quarter of fiscal 2021 as compared to the fourth quarter of fiscal 2020. The faster cash collections stem from our customers’ return to making payments based on normal credit terms as opposed to the extended terms granted during the fourth quarter of fiscal 2020 in response to the COVID-19 pandemic.

Days’ sales outstanding were 39 days for the second quarter of fiscal 2021, compared with 30 days for the second quarter of fiscal 2020 and 48 days for the fourth quarter of fiscal 2020.

Inventory

Inventories as of November 1, 2020, totaling $47.7 million, decreased $3.7 million, or 7.2%, compared with $51.4 million as of November 3, 2019. Additionally, inventories as of November 1, 2020, totaling $47.7 million, were comparable with inventories totaling $47.9 million as of May 3, 2020. Although our net sales increased during the second quarter of fiscal 2021 compared with the second and fourth quarters of fiscal 2020, our trends in inventory reflect improved inventory management by better aligning our inventory purchases to reflect current demand trends.

Inventory turns were 5.6 for the second quarter of fiscal 2021, compared with 4.5 for the second quarter of fiscal 2020 and 3.5 for the fourth quarter of fiscal 2020.

Accounts Payable

Accounts payable- trade as of November 1, 2020, totaling $38.2 million, increased $11.9 million, or 45.2%, compared with $26.3 million as of November 3, 2019. Additionally, accounts payable- trade as of November 1, 2020, totaling $38.2 million, increased $15.2 million, or 66.3%, compared with $23.0 million as of May 3, 2020. The increase in accounts payable reflects our increase in net sales (and related raw material purchases) during the second quarter of fiscal 2021 compared with the second quarter and fourth quarters of fiscal 2020, as well as the negotiation of temporary credit terms with our vendors and landlords as part of our comprehensive response to the COVID-19 global pandemic.

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 our U.S. parent company to take advantage of the TCJA, 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.

As of November 1, 2020, we did not have any outstanding borrowings associated with our revolving credit agreements.

Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of November 1, 2020, we were in compliance with these financial covenants.

I-46

 


 

Refer to Note 10 of the consolidated financial statements for further details of our revolving credit agreements.

Capital Expenditures and Depreciation

Overall

Capital expenditures on a cash basis were $2.0 million for the first half of fiscal 2021, compared with $2.4 million for the same period a year ago. Capital expenditures primarily related to our mattress fabrics segment for both periods.

Depreciation expense was $3.5 million for the first half of fiscal 2021, compared with $3.9 million for the same period a year ago. Depreciation expense mostly related to our mattress fabrics segment for both periods.

For fiscal 2021, we are projecting cash capital expenditures to be in the range of $8.5 million to $9.0 million. Depreciation expense is projected to be approximately $7.0 million in fiscal 2021. The estimated capital expenditures and depreciation expense for fiscal 2021 mostly relate to the mattress fabrics segment. These are management’s current expectations only, and changes in our business and the unknown duration and financial impact of the COVID-19 global pandemic could cause changes in plans for capital expenditures and expectations related to depreciation expense. Funding for capital expenditures is expected to be primarily from cash provided by operating activities.

Accounts Payable – Capital Expenditures

As of November 1, 2020, we had total amounts due regarding capital expenditures totaling $68,000 pertaining to outstanding vendor invoices, none of which were financed. The total amount outstanding of $68,000 is required to be paid based on normal credit terms.

Purchase Commitments – Capital Expenditures

As of November 1, 2020, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $5.0 million.

Critical Accounting Policies and Recent Accounting Developments

As of November 1, 2020, there were no changes in our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended May 3, 2020.

Refer to Note 2 of the consolidated financial statements for recently adopted and issued accounting pronouncements since the filing of our Form 10-K for the year ended May 3, 2020.

Contractual Obligations

Other than as disclosed in Notes 17 and 18 of the consolidated financial statements, as of November 1, 2020, there were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended May 3, 2020.

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

We are exposed to market risk from changes in interest rates with regards to our revolving credit agreements.

Our U.S. revolving credit agreement requires interest to be charged at a rate (applicable interest rate of 1.74% at November 1, 2020) as a variable spread over LIBOR based on the company’s ratio of debt to EBITDA as defined in the U.S. revolving credit agreement. As of November 1, 2020, there were no outstanding borrowings under our U.S. revolving credit agreement. Our revolving credit agreements associated with our operations located in China bear interest at a rate determined by the Chinese government at the time of borrowing. As of November 1, 2020, there were not any borrowing outstanding pursuant to our revolving credit agreements associated with our operations located in China.

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

I-47

 


 

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. As a result, a 10% change in the above exchange rates as of November 1, 2020, would not have materially affected our results of operations or financial position.

ITEM 4.CONTROLS AND PROCEDURES

As of November 1, 2020, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This evaluation was conducted under the supervision and with the participation of our management, including our Executive Chairman, Chief Executive Officer, and Chief Financial Officer. Based upon that evaluation, our Executive Chairman, Chief Executive Officer, and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of such date, in all material respects, to ensure that information required to be disclosed in the reports filed by us and submitted under the Exchange Act, is recorded, processed, summarized, and reported as and when required, and that these disclosure controls and procedures were effective as of such date 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 disclosure.

During the quarter ended November 1, 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

I-48

 


 

Part II – Other Information

There have not been any material changes to our legal proceedings during the three months ended November 1, 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 17, 2020, for the fiscal year ended May 3, 2020.

Item 1A.Risk Factors

There have not been any material changes to our risk factors during the three months ended November 1, 2020. Our risk factors are disclosed in Item 1A “Risk Factors” of the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 17, 2020 for the fiscal year ended May 3, 2020.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

 

 

 

 

 

 

 

 

(c)

 

 

(d)

 

 

 

 

 

 

 

 

 

 

 

Total Number of

 

 

Approximate

 

 

 

(a)

 

 

 

 

 

 

Shares Purchased

 

 

Dollar Value of

 

 

 

Total

 

 

(b)

 

 

as Part of

 

 

Shares that May

 

 

 

Number

 

 

Average

 

 

Publicly

 

 

Yet Be Purchased

 

 

 

of Shares

 

 

Price Paid

 

 

Announced Plans

 

 

Under the Plans or

 

Period

 

Purchased

 

 

per Share

 

 

or Programs

 

 

Programs (1)

 

August 3, 2020 to September 6, 2020

 

 

 

 

 

 

 

 

 

 

$

5,000,000

 

September 7, 2020 to October 4, 2020

 

 

 

 

 

 

 

 

 

 

$

5,000,000

 

October 5, 2020 to November 1, 2020

 

 

 

 

 

 

 

 

 

 

$

5,000,000

 

Total

 

 

 

 

 

 

 

 

 

 

$

5,000,000

 

 

(1)

In March 2020, our board of directors approved an authorization for us to acquire up to $5.0 million of our common stock. As part of our comprehensive response to the COVID-19 pandemic, we announced on April 3, 2020, that our board of directors temporarily suspended the share repurchase program given the ongoing economic disruption and uncertainty.

II-1

 


 

Item 6.Exhibits

The following exhibits are submitted as part of this report.

 

  10.1

 

Form of Annual Incentive Award Agreement.

 

 

 

 

 

  10.2

 

Form of Restricted Stock Unit Agreement for restricted stock units granted to executive officers pursuant to the 2015 Equity Incentive Plan.

 

 

 

 

 

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

 

 

 

 

 

101.INS

 

Inline XBRL Instance Document

 

 

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).

 

 

II-2

 


 

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: December 11, 2020

 

By:

 

/s/ Kenneth R. Bowling

 

 

 

 

Kenneth R. Bowling

 

 

 

 

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)

 

 

II-3

 


 

EXHIBIT INDEX

 

Exhibit Number

 

Exhibit

 

 

 

  10.1

 

Form of Annual Incentive Award Agreement.

 

 

 

  10.2

 

Form of Restricted Stock Unit Agreement for restricted stock units granted to executive officers pursuant to the 2015 Equity Incentive Plan.

 

 

 

  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 Chief 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 Chief 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

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

 

II-4