Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates on our revolving credit agreements.
As of May 1, 2022, our existing U.S. revolving credit agreement required interest to be charged at a rate (applicable interest rate of 2.40%) as a variable spread over LIBOR based on the company’s ratio of debt to EBITDA as defined in the existing U.S. revolving credit agreement. As of May 1, 2022, there were no borrowings outstanding under our U.S. revolving credit agreement. Effective June 24, 2022, we entered into an amended and restated U.S. revolving credit agreement that requires interest to be charged at a rate that is calculated using an applicable margin over the Federal Reserve Bank of New York’s secured overnight fund rate (SOFR) as defined in the amended and restated U.S. revolving credit agreement.
Our revolving credit lines associated with our operations located in China bear interest at a rate determined by the Chinese government at the time of borrowing. As of May 1, 2022, there were no borrowings outstanding under 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 our subsidiaries domiciled in Canada and China. However, there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the U.S. dollar as their functional currency. A substantial portion of the company’s imports purchased outside the U.S. are denominated in U.S. dollars. A 10% change in the above exchange rates as of May 1, 2022, would not have materially affected our results of operations or financial position.
43
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Culp, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Culp, Inc. (a North Carolina corporation) and subsidiaries (the “Company”) as of May 1, 2022, and May 2, 2021, the related consolidated statements of net (loss) income, comprehensive (loss) income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended May 1, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of May 1, 2022, and May 2, 2021, and the results of its operations and its cash flows for each of the three years in the period ended May 1, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of May 1, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated July 15, 2022, expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2007.
Charlotte, North Carolina
July 15, 2022
44
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data and preferred and common stock shares)
May 1, 2022, and May 2, 2021
2022
2021
ASSETS
current assets:
cash and cash equivalents
$
14,550
$
37,009
short-term investments - available for sale
—
5,542
short-term investments - held to maturity
—
3,161
accounts receivable, net
22,226
37,726
inventories
66,557
55,917
current income taxes receivable
857
—
other current assets
2,986
3,852
total current assets
107,176
143,207
property, plant and equipment, net
41,702
44,003
right of use assets
15,577
11,730
long-term investments - rabbi trust
9,357
8,415
long-term investments - held-to-maturity
—
1,141
intangible assets
2,628
3,004
deferred income taxes
528
545
other assets
595
2,035
total assets
$
177,563
$
214,080
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
accounts payable - trade
$
20,099
$
42,540
accounts payable - capital expenditures
473
348
operating lease liability - current
3,219
2,736
deferred revenue
520
540
accrued expenses
7,832
14,839
income taxes payable - current
413
229
total current liabilities
32,556
61,232
operating lease liability - long-term
7,062
6,821
income taxes payable - long-term
3,097
3,326
deferred income taxes
6,004
5,330
deferred compensation
9,343
8,365
total liabilities
58,062
85,074
commitments and contingencies (notes 11 and 13)
shareholders' equity:
preferred stock, $ .05 par value, authorized 10,000,000 shares
—
—
common stock, $ .05 par value, authorized 40,000,000
shares, issued and outstanding 12,228,629 at May 1, 2022
and 12,312,822 at May 2, 2021
611
616
capital contributed in excess of par value
43,143
43,807
accumulated earnings
75,715
84,437
accumulated other comprehensive income
32
146
total equity
119,501
129,006
total liabilities and equity
$
177,563
$
214,080
The accompanying notes are an integral part of these consolidated financial statements.
45
CONSOLIDATED STATEMENTS OF NET (LOSS) INCOME
For the years ended May 1, 2022, May 2, 2021, and May 3, 2020
(dollars in thousands, except per share data)
2022
2021
2020
net sales
$
294,839
$
299,720
$
256,166
cost of sales
( 258,746
)
( 249,888
)
( 215,668
)
gross profit from continuing operations
36,093
49,832
40,498
selling, general and administrative expenses
( 35,415
)
( 37,756
)
( 34,424
)
asset impairments
—
—
( 13,712
)
restructuring credit
—
—
70
income (loss) from continuing operations
678
12,076
( 7,568
)
interest expense
( 17
)
( 51
)
( 106
)
interest income
373
244
897
gain on bargain purchase
—
819
—
other expense
( 1,359
)
( 2,208
)
( 902
)
(loss) income before income taxes from continuing operations
( 325
)
10,880
( 7,679
)
income tax expense
( 2,886
)
( 7,693
)
( 3,354
)
income (loss) from investment in unconsolidated joint venture
—
31
( 125
)
net (loss) income from continuing operations
( 3,211
)
3,218
( 11,158
)
loss before income taxes from discontinued operation
—
—
( 17,577
)
income tax benefit
—
—
68
net loss from discontinued operation
—
—
( 17,509
)
net (loss) income
$
( 3,211
)
$
3,218
$
( 28,667
)
net (loss) income from continuing operations per share-basic
$
( 0.26
)
$
0.26
$
( 0.90
)
net (loss) income from continuing operations per share-diluted
$
( 0.26
)
$
0.26
$
( 0.90
)
net loss from discontinued operation per share-basic
$
—
$
—
$
( 1.41
)
net loss from discontinued operation per share-diluted
$
—
$
—
$
( 1.41
)
net (loss) income per share-basic
$
( 0.26
)
$
0.26
$
( 2.32
)
net (loss) income per share-diluted
$
( 0.26
)
$
0.26
$
( 2.32
)
The accompanying notes are an integral part of these consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the years ended May 1, 2022, May 2, 2021, and May 3, 2020
2022
2021
2020
net (loss) income
$
( 3,211
)
$
3,218
$
( 28,667
)
other comprehensive (loss) income
unrealized holding (loss) gain on investments
( 144
)
162
( 60
)
reclassification adjustment for realized loss (gain) included in
net (loss) income
30
( 6
)
10
total unrealized (loss) gain on investments
( 114
)
156
( 50
)
comprehensive (loss) income
( 3,325
)
3,374
( 28,717
)
Plus: comprehensive loss attributable to non-controlling interest
associated with discontinued operation
—
—
4,674
comprehensive (loss) income attributable to Culp Inc. common shareholders
$
( 3,325
)
$
3,374
$
( 24,043
)
The accompanying notes are an integral part of the consolidated financial statements.
47
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Shareholders' equity attributable to Culp Inc.
(dollars in thousands, except common stock shares)
Capital
Accumulated
Non-Controlling
Contributed
Other
Interest
For the years ended May 1, 2022, May 2, 2021,
Common Stock
in Excess
Accumulated
Comprehensive
Discontinued
Total
and May 3, 2020
Shares
Amount
of Par Value
Earnings
Income(Loss)
Total
Operation
Equity
Balance, April 28, 2019
12,391,160
$
620
$
43,694
$
115,579
$
40
$
159,933
$
4,314
$
164,247
net loss
—
—
—
( 23,993
)
—
( 23,993
)
( 4,674
)
( 28,667
)
capital contribution from non-controlling
interest - discontinued operation
—
—
—
—
—
—
360
360
stock-based compensation
—
—
614
—
—
614
—
614
unrealized loss on investments
—
—
—
—
( 50
)
( 50
)
—
( 50
)
common stock issued in connection with
vesting of performance-based restricted
stock units
15,638
1
( 1
)
—
—
—
—
—
immediately vested common stock awards
23,664
1
( 1
)
—
—
—
—
—
common stock surrendered in connection
with payroll withholding taxes
( 3,020
)
—
( 51
)
—
—
( 51
)
—
( 51
)
common stock repurchased
( 142,496
)
( 7
)
( 1,673
)
—
—
( 1,680
)
—
( 1,680
)
dividends paid
—
—
—
( 5,075
)
—
( 5,075
)
—
( 5,075
)
Balance, May 3, 2020
12,284,946
615
42,582
86,511
( 10
)
129,698
—
129,698
net income
—
—
—
3,218
—
3,218
—
3,218
stock-based compensation
—
—
1,251
—
—
1,251
—
1,251
unrealized gain on investments
—
—
—
—
156
156
—
156
common stock issued in connection with
vesting of performance-based restricted
stock units
8,843
—
—
—
—
—
—
—
immediately vested common stock awards
21,220
1
( 1
)
—
—
—
—
—
common stock surrendered in connection
with payroll withholding taxes
( 2,187
)
—
( 25
)
—
—
( 25
)
—
( 25
)
dividends paid
—
—
—
( 5,292
)
—
( 5,292
)
—
( 5,292
)
Balance, May 2, 2021
12,312,822
616
43,807
84,437
146
129,006
—
129,006
net loss
—
—
—
( 3,211
)
—
( 3,211
)
—
( 3,211
)
stock-based compensation
—
—
1,133
—
—
1,133
—
1,133
unrealized loss on investments
—
—
—
—
( 114
)
( 114
)
—
( 114
)
common stock issued in connection with
vesting of performance-based restricted
stock units
10,863
—
—
—
—
—
—
—
immediately vested common stock awards
29,657
1
( 1
)
—
—
—
—
—
common stock surrendered in connection
with payroll withholding taxes
( 3,025
)
—
( 50
)
—
—
( 50
)
—
( 50
)
common stock repurchased
( 121,688
)
( 6
)
( 1,746
)
( 1,752
)
—
( 1,752
)
dividends paid
—
—
—
( 5,511
)
—
( 5,511
)
—
( 5,511
)
Balance, May 1, 2022
12,228,629
$
611
$
43,143
$
75,715
$
32
$
119,501
$
—
$
119,501
See accompanying notes to consolidated financial statements.
48
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended May 1, 2022, May 2, 2021, and May 3, 2020
(dollars in thousands)
2022
2021
2020
cash flows from operating activities:
net (loss) income
$
( 3,211
)
$
3,218
$
( 28,667
)
adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
depreciation
6,994
6,846
7,827
amortization
559
466
647
asset impairments
—
—
33,914
reversal of contingent consideration associated with discontinued operation
—
—
( 6,081
)
loss on disposal of discontinued operation
—
—
1,606
stock-based compensation
1,133
1,251
614
deferred income taxes
691
3,760
( 1,694
)
gain on bargain purchase
—
( 819
)
—
gain on sale of property, plant, and equipment
—
( 57
)
( 238
)
(income) loss from investment in unconsolidated joint venture
—
( 31
)
125
realized loss (gain) from the sale of investments
450
( 6
)
10
foreign currency exchange loss
16
1,520
109
changes in assets and liabilities, net of effects of
acquisition and disposal of businesses:
accounts receivable
15,416
( 12,117
)
( 1,994
)
inventories
( 10,787
)
( 7,225
)
( 837
)
other current assets
946
( 1,442
)
342
other assets
( 1,386
)
( 1,452
)
( 48
)
accounts payable-trade
( 22,131
)
17,228
499
accrued expenses and deferred compensation
( 5,204
)
9,457
( 1,017
)
deferred revenue
( 20
)
38
103
accrued restructuring costs
—
—
( 124
)
income taxes
( 907
)
843
( 126
)
net cash (used in) provided by operating activities
( 17,441
)
21,478
4,970
cash flows from investing activities:
cash paid for acquisition of assets, net of cash acquired
—
( 892
)
—
capital expenditures
( 5,695
)
( 6,664
)
( 4,585
)
proceeds from the sale of property, plant, and equipment
—
12
672
proceeds from long-term note receivable associated with discontinued operation
—
—
1,523
investment in unconsolidated joint venture
—
( 90
)
( 220
)
proceeds from the sale of short-term investments (available for sale)
9,879
468
6,606
proceeds from the sale and maturity of investments (held to maturity)
13,486
10,165
6,100
purchase of short-term investments (available for sale)
( 4,391
)
( 5,044
)
( 7,555
)
purchase of investments (held-to-maturity)
( 9,751
)
( 8,173
)
( 7,465
)
proceeds from the sale of long-term investments (rabbi trust)
56
157
—
purchase of long-term investments (rabbi trust)
( 1,088
)
( 619
)
( 788
)
net cash provided by (used in) investing activities
2,496
( 10,680
)
( 5,712
)
cash flows from financing activities:
proceeds from lines of credit
9,000
—
30,765
payments associated with lines of credit
( 9,000
)
( 30,772
)
—
proceeds from Paycheck Protection Program loan
—
—
7,606
payments associated with Paycheck Protection Program loan
—
( 7,606
)
—
proceeds from subordinated loan payable associated with the
noncontrolling interest of discontinued operation
—
—
250
cash paid for acquisition of businesses
—
—
( 1,532
)
dividends paid
( 5,511
)
( 5,292
)
( 5,075
)
repurchases of common stock
( 1,752
)
—
( 1,680
)
common stock surrendered for payroll withholding taxes
( 50
)
( 25
)
( 51
)
capital contribution associated with the noncontrolling interest
of discontinued operation
—
—
360
payments for debt issuance costs
( 110
)
( 15
)
—
net cash (used in) provided by financing activities
( 7,423
)
( 43,710
)
30,643
effect of exchange rate changes on cash and cash equivalents
( 91
)
131
( 119
)
(decrease) increase in cash and cash equivalents
( 22,459
)
( 32,781
)
29,782
cash and cash equivalents at beginning of year
37,009
69,790
40,008
cash and cash equivalents at end of year
$
14,550
$
37,009
$
69,790
The accompanying notes are an integral part of these consolidated financial statements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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. We have mattress fabric operations located in Stokesdale, NC, High Point, NC, and Quebec, Canada. Additionally, we acquired the remaining fifty percent ownership interest in our former unconsolidated joint venture located in Ouanaminthe, Haiti during the fourth quarter of fiscal 2021. As a result, we are now the sole owner with full control of this cut and sew mattress cover operation (see Note 2 of the consolidated financial statements for further details regarding this business combination).
The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. We have upholstery fabric operations located in Shanghai, China and Burlington, NC. During the third quarter of fiscal 2022, we also commenced operation of a new facility in Ouanaminthe, Haiti dedicated to the production of cut and sewn upholstery kits. Additionally, Read Window Products, LLC (“Read”), a wholly-owned subsidiary with operations located in Knoxville, TN, provides window treatments and sourcing of upholstery fabrics and other products, as well as measuring and installation 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.
Discontinued Operation – Home Accessories Segment
Effective June 22, 2018, we acquired an 80 % ownership interest in eLuxury, LLC (“eLuxury”), a company that offers bedding accessories and home goods directly to consumers and businesses through its e-commerce platform. eLuxury’s financial information was included in our home accessories segment.
Effective March 31, 2020, we sold our entire ownership interest in eLuxury to its noncontrolling interest holder as part of our comprehensive response to the challenging conditions arising from the COVID-19 global pandemic. As a result of this sale, our home accessories segment was eliminated at such time, and therefore its results of operations and assets and liabilities were excluded from our continuing operations and presented as a discontinued operation in our consolidated financial statements. See Note 3 of the consolidated financial statements for further details.
Basis of Presentation
The consolidated financial statements of the company have been prepared in accordance with U.S. generally accepted accounting principles.
Principles of Consolidation
Overall
The consolidated financial statements include the accounts of the company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accounts of our subsidiaries located in Shanghai, China and Poznan, Poland are consolidated as of April 30, a calendar month end, which are required by the Chinese and Polish governments, respectively. No events occurred related to the difference between our fiscal year end on the Sunday closest to April 30 and our China and Polish subsidiaries, year end of April 30 that materially affected the company’s financial position, results of operations, or cash flows for fiscal years 2022, 2021, and 2020.
Class International Holdings, Ltd. (CIH)
Equity Method of Accounting and Consolidation
Effective January 1, 2017, Culp International Holdings, Ltd. (Culp International), a wholly-owned subsidiary of Culp, Inc. (“Culp”), entered into a joint venture agreement pursuant to which Culp International owned 50 % of CIH.
As a result of our initial 50 % ownership interest, Culp’s investment in CIH was accounted for under the equity method of accounting in accordance with ASC Topic 823 – Investments – Equity Method and Joint Ventures. The equity method of accounting is required for an investee entity (i.e., CIH) that is not consolidated but over which the reporting entity (i.e., Culp.) exercises significant influence. Whether or not a reporting entity exercises significant influence with respect to an investee depends on an evaluation of several factors, including representation on the investee’s board of directors, voting rights, and ownership level. In accordance with the equity
50
method of accounting, our 50 % proportionate share of earnings and losses from CIH w ere reflected in the caption “Income (loss) from investment in unconsolidated joint venture” in the Consolidated Statements of Net (Loss) Income for the first nine months of fiscal 2021 and the full fiscal 2020 year .
Effective February 1, 2021, Culp International entered into a Share Purchase Agreement to acquire the remaining 50% ownership interest in CIH. Pursuant to this transaction, Culp International is now the sole owner with full control over CIH. As a result, effective February 1, 2021, our consolidated financial statements now include all of the accounts of CIH, and any significant intercompany balances and transactions have been eliminated in consolidation. Furthermore, the equity method of accounting will no longer be used and the former investment in unconsolidated joint venture is now included in the net assets of our now 100 % interest in CIH. (see Note 2 of the consolidated financial statements for further details regarding this business combination).
Fiscal Year
Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. Fiscal 2022, 2021, and 2020 included 52 weeks, 52 weeks, and 53 weeks, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposit and money market accounts. We consider all highly liquid instruments with original maturities of three months or less to be cash equivalents.
A summary of our cash and cash equivalents by geographic area follows:
May 1,
May 2,
(dollars in thousands)
2022
2021
United States
$
4,430
$
24,621
China
9,502
10,635
Canada
267
1,525
Haiti
341
220
Cayman Islands
10
8
$
14,550
$
37,009
Throughout the year, we have cash balances regarding our U.S. operations of more than the federally insured amounts on deposit with a financial institution. We have not experienced any losses in such accounts. Management believes we are not exposed to any significant credit risk related to cash and cash equivalents.
Short-Term Investments (Available-for-Sale)
During fiscal 2022, we sold all our short-term investments classified as available-for-sale, and therefore we did not report short-term investments classified as available-for-sale in the accompanying Consolidated Balance Sheet as of May 1, 2022. As of May 2, 2021, our short-term investments classified as available-for-sale were recorded at their fair values of $ 5.5 million, had an accumulated unrealized gain of $ 24,000 , and resided with our U.S. operations. The fair value of our short-term investments approximated their cost basis.
Long-Term Investments (Rabbi Trust)
We have a rabbi trust to set aside funds for participants of our deferred compensation plan (the “Plan”) that enables our participants to credit their contributions to various investment options of the Plan. The investments associated with the rabbi trust consist of investments in a money market fund and various mutual funds that are classified as available-for-sale.
Our long-term investments classified as available-for-sale were recorded at their fair value of $ 9.4 million and $ 8.4 million as of May 1, 2022, and May 2, 2021, respectively. These investments had an accumulated unrealized gain totaling $ 32,000 and $ 122,000 as of May 1, 2022, and May 2, 2021, respectively. The fair value of our long-term investments associated with our rabbi trust approximates their cost basis and reside with our U.S. operations.
51
Investments (Held-To-Maturity)
During fiscal 2022, we sold all our short-term investments classified as held-to-maturity, and therefore we did not report short-term or long-term investments classified as held-to-maturity in the accompanying Consolidated Balance Sheet as of May 1, 2022. As of May 2, 2021, our investments classified as held-to-maturity consisted of investment grade U.S. corporate bonds, foreign bonds, and government bonds. These investments were classified as held-to-maturity as we had the positive intent and ability to hold these investments until maturity. Our held-to-maturity investments were recorded as either current or noncurrent in our Consolidated Balance Sheets, based on the maturity date in relation to the respective reporting period and recorded at amortized cost.
As of May 2, 2021, the amortized cost and fair value of our held-to-maturity investments were $ 4.3 million.
Our bond investments were classified as level 2 in accordance with the fair value hierarchy defined in Note 15 of the consolidated financial statements. Our bond investments 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 investments.
All our investments classified as held-to-maturity resided with our U.S. operations.
Accounts Receivable and Current Expected Credit Losses
Substantially all our accounts receivable were due from manufacturers in the bedding and furniture industries. We grant credit to customers and generally do not require collateral. We record an allowance for doubtful accounts that reflects estimates of probable credit losses. As of the end of each reporting period, we assess 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; and (iv) historical loss experience; as well as (v) any other ongoing economic conditions. After our risk assessment is completed, we assign credit grades to our customers, which in turn, are used to determine our allowance for doubtful accounts. We do not have any off-balance sheet credit exposure related to our customers.
Inventories
We account for inventories at the lower of first-in, first-out (FIFO) cost or net realizable value. Management continuously examines inventory to determine if there are indicators that the carrying value exceeds its net realizable value. Experience has shown that the most significant indicators of the need for inventory markdowns are the age of the inventory and the planned discontinuance of certain patterns. As a result, we provide inventory valuation write-downs based upon established percentages based on the age of the inventory that are continually evaluated as events and market conditions require. Our inventory aging categories are six, nine, twelve, and fifteen months. We also provide inventory valuation write-downs based on the planned discontinuance of certain products based on the current market values at that time as compared to their current carrying values.
Property, Plant and Equipment
Property, plant, and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. Major renewals and betterments are capitalized. Maintenance, repairs, and minor renewals are expensed as incurred. When properties or equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Amounts received on disposal less the book value of assets sold are charged or credited to income from operations.
Management reviews long-lived assets, which consist principally of property, plant, and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recovered. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to future net undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the excess of the carrying amount over the fair value of the asset. After the impairment loss is recognized, the adjusted carrying amount is the new accounting basis. Assets to be disposed of by sale are reported at the lower of the carrying value or fair value less cost to sell when the company has committed to a disposal plan and would be reported separately as assets held for sale in the Consolidated Balance Sheets.
Advertising Costs
Advertising costs are expensed as incurred. No advertising costs were incurred and presented in continuing operations during fiscal years 2022, 2021, or 2020. We did incur advertising costs totaling $ 1.7 million during fiscal 2020, which were included in net loss from discontinued operation in the fiscal 2020 Consolidated Statement of Net Loss.
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Interest Costs
Total interest costs incurred were $ 17,000 , $ 51,000 , and, $ 190,000 during fiscal 2022, 2021, and 2020, respectively. All of the total interest costs incurred during fiscal years 2022 and 2021 were presented in continuing operations. Of the $ 190,000 in total interest costs incurred during fiscal 2020, $ 106,000 and $ 84,000 were presented in continuing operations and discontinued operations, respectively.
We capitalize interest costs incurred on funds used to construct property, plant, and equipment. The capitalized interest is recorded as part of the asset to which it relates and is depreciated over the asset’s estimated useful life. No interest costs for the construction of qualifying fixed assets were capitalized during fiscal 2022, 2021, or 2020.
Foreign Currency Adjustments
The United States dollar is the functional currency for the company’s Canadian and Chinese subsidiaries. All monetary foreign currency asset and liability accounts are remeasured into U.S. dollars at year-end exchange rates. Non-monetary assets and liabilities such as property, plant, and equipment and right of use assets are recorded at historical exchange rates. Foreign currency revenues and expenses are remeasured at average exchange rates in effect during the year, except for certain expenses related to balance sheet amounts remeasured at historical exchange rates, such as depreciation expense. Exchange gains and losses from remeasurement of foreign currency denominated monetary assets and liabilities are recorded in the other expense line item in the Consolidated Statements of Net (Loss) Income in the period in which they occur.
A summary of our foreign currency exchange (losses) gains by geographic area follows:
(dollars in thousands)
2022
2021
2020
China
$
( 104
)
$
( 1,389
)
$
42
Canada
( 28
)
( 22
)
( 138
)
$
( 132
)
$
( 1,411
)
$
( 96
)
Goodwill and Intangible Assets
Fiscal 2022 and 2021
No asset impairment charges were recorded during fiscal 2022 or fiscal 2021.
Fiscal 2020
In accordance with ASC Topic 350, Intangibles – Goodwill and Other, our business was classified into four reporting units during fiscal 2020: mattress fabrics, upholstery fabrics, Read, and home accessories. Effective March 31, 2020, we sold our entire ownership interest in eLuxury to its noncontrolling interest holder, and our home accessories reporting unit was eliminated at such time. As a result of this sale, we met the criteria outlined in ASC Topic 205-20 for our goodwill to be classified as held for sale and the results of operations and assets and liabilities for our home accessories segment were excluded from our continuing operations and presented as a discontinued operation in our consolidated financial statements (see Note 3 to the consolidated financial statements for further details).
ASC Topic 350 requires us to assess goodwill for impairment annually (the last day of our fiscal year) or between annual tests if we believe certain indicators of impairment exist. Such indicators could include but are not limited to (1) deterioration in the environment of the industry and markets in which we operate, (2) unanticipated competition, (3) a deterioration in general economic conditions, (4) overall decline in financial performance such as negative and declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results or relevant prior periods, and (5) a decrease in the price per share of our common stock. As a result, we first assess qualitative factors, such as the indicators outlined above, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a quantitative goodwill impairment test. The quantitative impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. We estimate the fair values of our reporting units using a combination of income, discounted cash flows, and market approaches, which utilize comparable companies’ data. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
As a result of our third quarter and annual impairment assessments during the fourth quarter, we recorded asset impairment charges associated with our goodwill and tradenames totaling $ 33.9 million during fiscal 2020. Of the total $33.9 million, $ 20.2 million and $ 13.7 million were reported in discontinued operations and continuing operations, respectively. Also, of the total $33.9 million asset impairment charges, $ 27.2 million and $ 6.7 million pertained to goodwill and tradenames, respectively. Due to the asset impairment charges of $27.2 million associated with our goodwill, no goodwill was reported on our Consolidated Balance Sheet as of May 1, 2022, and May 2, 2021.
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See Notes 8 and 9 to the consolidated financial statements for further details of our assessment s of impairment, conclusions reached, and the performance of our quantitative test.
Income Taxes
Deferred Income Taxes – Overall
Income taxes are accounted for under the asset and liability method. Deferred income taxes are recognized for temporary differences between the financial statement carrying amounts and the tax basis of our assets, liabilities, U.S. loss carryforwards, and foreign income tax credits at income tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred income taxes of a change in tax rates is recognized in income tax (expense) benefit in the period that includes the enactment date.
Deferred Income Taxes – Valuation Allowance
We evaluate our deferred income taxes to determine if a valuation allowance is required. We 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 we operate in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, considering the effects of local tax law.
Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries
We assess whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company. We are required to record a deferred tax liability for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As a result of the 2017 Tax Cuts and Jobs Act, a U.S. corporation is allowed a 100 % dividend received deduction for earnings and profits received from a 10 % owned foreign corporation. Therefore, a deferred tax liability will only be required for unremitted withholding taxes associated with earnings and profits generated by our foreign subsidiaries that will ultimately be repatriated to the U.S. parent company.
Uncertain Income Tax Positions
We recognize an income tax benefit for a tax position taken or expected to be taken in an income tax return if the more-likely-than-not recognition threshold is met by the end of the reporting period, or is effectively settled through examination, or litigation, or negotiation, or if the statute of limitations for the relevant taxing authority to examine and challenge the tax position has expired. The income tax effect recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. Penalties and interest related to uncertain income tax positions are recorded as income tax expense. Significant judgment is required in the identification of uncertain income tax positions and in the estimation of penalties and interest on uncertain income tax positions.
Revenue from Contracts with Customers
Revenue Recognition
Revenue is recognized upon the transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We determined that our customer purchase orders represent contracts. In addition to purchase orders, we also have supply contracts with certain customers that define standard terms and conditions. Our contracts generally include promises to sell upholstery fabrics, mattress fabrics, or home goods products. In addition, we provide fabrication and installation services of our own products associated with customized window treatments.
Revenue associated with sales of our products is recognized at the point in time when control of the promised goods has been transferred to the customer. The point in time when control transfers to the customer depends on the contractually agreed upon shipping terms, but typically occurs once the product has been shipped or once it has been delivered to a location specified by the customer. For certain warehousing arrangements, transfer of control to the customer is deemed to have occurred when the customer pulls the inventory for use in their production.
Revenue associated with our customized fabrication services, which are performed on various types of window treatments, is recognized over time once the customized products are deemed to have no alternative use and for which we have an enforceable right to payment for the services performed. Revenue for our customized fabrication services is recognized over time using the output method based on units produced. Revenue associated with our installation services of our own products is also recognized over time as the customer receives and consumes the benefits of the promised installation services. Revenue associated with our installation services is recognized over time using the output method based on units installed.
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Transaction Price
The transaction price is typically allocated to performance obligations based upon stand-alone selling prices. We did not disclose the value of unsatisfied performance obligations as substantially all of any unsatisfied performance obligations as of May 1, 2022, will be satisfied within one year or less.
Revenue Measurement
Revenue is measured as the amount of consideration we expect to receive in exchange for the transfer of the promised products and services. The amount of consideration we expect to receive changes due to variable consideration is associated with allowances for sales returns, early payment discounts, and volume rebates that we offer to customers. The amount of variable consideration which is included in the transaction price is only included in net sales to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur in a future period.
Our mattress fabrics and upholstery fabrics business segments only allow product returns to the extent that the products or services did not meet the contractually agreed upon specifications at the time of sale. Customers must receive authorization prior to returning products. Our former home accessories business segment allowed returns for any reason provided the product was returned within the stated time frame, generally 30 days, unless the product was customized in which case a defect must be present in order to return the product. Estimates of allowances for sales returns are based on historical data, current potential product return issues, and known sales returns for which customers have been granted return authorization. Known sales returns for which customers have been granted permission to return products for a refund or credit, continue to be recorded as a contra account receivable. Estimates for potential future sales returns and related customer accommodations are recorded within accrued expenses. We record estimates for sales returns on a gross basis rather than a net basis and an estimate for a right of return asset is recorded in other current assets and cost of goods sold. Variable consideration associated with early payment cash discounts are estimated using current payment trends and historical data on a customer-by-customer basis. The variable consideration associated with volume rebates is based on the portion of the rebate earned relative to the total amount of rebates the customer is expected to earn over the rebate period, as determined using historical data and projections.
We evaluated the nature of our warranties related to our contracts with customers and determined that any such warranties are assurance-type warranties that cover only compliance with agreed upon specifications, and therefore are not considered separate performance obligations.
Shipping and Handling Costs
Revenue received for shipping and handling costs, which is immaterial for all periods presented, is included in net sales. Shipping costs, principally freight, that comprise payments to third-party shippers are classified as cost of sales. Handling costs represent finished goods warehousing costs incurred to store, move, and prepare products for shipment in the company’s various distribution facilities. Handling costs were $ 4.3 million, $ 3.9 million, and $ 4.0 million fiscal 2022, 2021, and 2020, respectively, and are included in selling, general and administrative expenses.
Sales and Other Taxes
Sales and other taxes collected from customers and remitted to governmental authorities are presented on a net basis and, as such, are excluded from revenues.
Leases
We lease manufacturing facilities, office space, distribution centers, and equipment under operating lease arrangements. We determine if an arrangement is a lease at its inception if it conveys the right to control the use of identified property, plant, or equipment for a period of time in exchange for consideration. Operating leases with an initial term of 12 months or less are not recognized in our Consolidated Balance Sheets. We account for lease components separately from non-lease components. We recognize a ROU asset and lease liability on the commencement date of a lease arrangement based on the present value of lease payments over the lease term.
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 to exercise the renewal option on the date a lease arrangement is commenced.
For our leases, an estimated incremental borrowing rate (“IBR”) is utilized, based on information available at the inception of the lease. The IBR represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease.
55
Stock-Based Compensation
Our equity incentive plans are described more fully in Note 14 to the notes to the consolidated financial statements. ASC Topic 718, “Compensation – Stock Compensation”, requires that all stock-based compensation be recognized as compensation expense in the financial statements and that such cost be measured at the grant date for awards issued to employees and the company’s board of directors. Equity awards issued to a non-employee are measured at the earlier date of when the performance criteria are met or at the end of each reporting period. Compensation expense for time-vested restricted stock awards is amortized on a straight-line basis over the respective vesting period. Compensation expense for performance-based restricted stock units is recorded based on an assessment each reporting period to determine the probability of whether or not certain performance targets will be met and how many common stock shares are expected to be earned as of the end of the vesting period. If certain performance targets are not expected to be achieved, compensation expense will not be recorded, and any previously recognized compensation expense will be reversed.
Fair Value of Financial Instruments
The accompanying consolidated financial statements include certain financial instruments, and the fair market value of such instruments may differ from amounts reflected on a historical basis. These financial instruments include our short-term and long-term investments classified as available-for-sale. The fair value measurements of our financial instruments are described more fully in Note 15 of the consolidated financial statements.
The carrying amount of cash and cash equivalents, accounts receivable, other current assets, lines of credit, accounts payable, and accrued expenses approximate their fair value because of the short maturity of these financial instruments.
Recently Adopted Accounting Pronouncements
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 of 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 was effective for fiscal years, and periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. As a result, we adopted the provisions of ASU 2019-12 on May 3, 2021 (the beginning of fiscal 2022). The adoption of ASU 2019-12 did not affect our financial position, results of operations, or cash flows.
Recently Issued Accounting Pronouncements
Currently, there are no new accounting pronouncements that are expected to have a material effect on our consolidated financial statements.
56
2.
BUSINESS COMBINATION ACHIEVED IN STAGES
Overview
Effective January 1, 2017, Culp International Holdings, Ltd. (“Culp International”), a wholly-owned subsidiary of the company, entered into a joint venture agreement pursuant to which Culp International owned 50 % of CLASS International Holdings, Ltd. (“CIH). CIH produces cut and sewn mattress covers housed in two facilities totaling 120,000 square feet, located in a modern industrial park on the northeastern border of Haiti. Effective February 1, 2021 (sometimes referred to as the “acquisition date”), Culp International entered into a Share Purchase Agreement with its former joint venture partner pursuant to which Culp International acquired the remaining 50 % ownership interest in CIH. We believe having sole ownership of this operation increases our flexibility and enhances our capacity by having near-shore capabilities that help us meet the needs of our mattress cover customers.
Prior to the acquisition of the remaining 50 % ownership interest in CIH, we accounted for our initial 50 % ownership interest in CIH as an unconsolidated joint venture under the equity method of accounting. In connection with the acquisition of the remaining 50% ownership interest in CIH, our consolidated financial statements now include all of the accounts of CIH, and any significant intercompany balances and transactions have been eliminated in consolidation.
The consideration transferred for our now- 100 % ownership interest in connection with this acquisition totaled $ 2.7 million, of which $ 1.7 million represents the fair value of our previously held 50% ownership interest in CIH, and $ 954,000 represented the purchase price that was mostly paid at closing on February 1, 2021, for the remaining 50% ownership interest in CIH. We remeasured our previously held 50% ownership interest in CIH at its acquisition date fair value. As of the acquisition date, the fair value of our previously held 50% ownership interest totaling $ 1.7 million represented its carrying amount, and therefore, no gain or loss was recognized in earnings for the remeasurement of our previously held 50% ownership interest.
Assets Acquired and Liabilities Assumed
The following table presents the final allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values.
(dollars in thousands)
Fair Value
Cash and cash equivalents
$
62
Accounts receivable
169
Inventory
31
Right of use assets
2,544
Equipment and leasehold improvements
846
Accounts payable
( 155
)
Gain on bargain purchase
( 819
)
$
2,678
Equipment and leasehold improvements will be depreciated on a straight-line basis over their remaining useful lives ranging from 1 to 10 years .
Gain on Bargain Purchase
Concurrent with our acquisition of the remaining 50% ownership interest in CIH, our former joint venture partner sold its mattress related business to a third party. Our acquisition of the remaining 50% ownership interest in CIH was undertaken due to this sale and the terms negotiated therewith. As a result, the $ 3.5 million fair value of the identifiable assets acquired and liabilities assumed exceeded the consideration transferred of $ 2.7 million. Consequently, we (i) reassessed the recognition and measurement of the assets acquired, liabilities assumed, and previously held ownership interest; (ii) gained an understanding of why there was a bargain purchase; and (iii) reviewed the rebate and supply agreements that were executed concurrent with the Share Purchase Agreement. As part of our review of the rebate and supply agreements, we verified that the terms of these agreements were consistent with fair market value terms and are considered separate transactions and not considered part of the business combination. Accordingly, this acquisition has been accounted for as a bargain purchase and, as a result, we recognized a gain of $ 819,000 , which is reported in the line-item “gain on bargain purchase” in the fiscal 2021 Consolidated Statement of Net Income.
Separate Transactions
Supply and Rebate Agreements
In connection with the Share Purchase Agreement, we entered into supply and rebate agreements with an affiliated company of our former joint venture partner to secure plant capacity utilization and preserve sales channels of certain mattress fabric products. The
57
supply and rebate agreement s are effective as of the acquisition date and are based on future sales orders consistent with current market conditions.
The transactions associated with the supply and rebate agreements will be accounted for in accordance with ASC Topic 606 Revenue from Contract with Customers. During fiscal 2022 and the period from February 1, 2021, through May 2, 2021, shipments pursuant to the supply agreement were $ 1.6 million and $ 379,000 , respectively. During fiscal 2022 and the period from February 1, 2021, through May 2, 2021, charges of $ 73,000 and $ 25,000 pursuant to the rebate agreement were included in net sales in the Consolidated Statement of Net (Loss) Income.
Acquisition-Related Costs
Acquisition-related costs totaling $ 30,000 were included in selling, general, and administrative expenses in the fiscal 2021 Consolidated Statement of Net Income.
Other
Actual revenue and net loss from the acquisition date of February 1, 2021, through May 2, 2021, included in our fiscal 2021 Consolidated Statement of Net Income totaled $ 379,000 and $( 2,000 ), respectively.
(Unaudited) Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the fiscal years ending May 2, 2021, and May 3, 2020, have been prepared as if this acquisition had occurred on April 29, 2019.
(dollars in thousands, except per share data)
May 2,
2021
May 3,
2020
Net Sales
$
300,995
$
256,960
Income (loss) from continuing operations
12,138
( 7,820
)
Net income (loss) from continuing operations
2,430
( 11,283
)
Net loss from discontinued operation
—
( 17,509
)
Net income (loss)
$
2,430
$
( 28,792
)
net income (loss) from continuing operations per share-basic
$
0.20
$
( 0.91
)
net income (loss) from continuing operations per share-diluted
$
0.20
$
( 0.91
)
net loss from discontinued operation per share-basic
$
—
$
( 1.41
)
net loss from discontinued operation per share-diluted
$
—
$
( 1.41
)
Net income (loss) per share - basic
$
0.20
$
( 2.33
)
Net income (loss) per share - diluted
$
0.20
$
( 2.33
)
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
Equity Method of Accounting
In accordance with the equity method of accounting, we reported our previous 50% proportionate share of net income (loss) of CIH as a separate line titled “income (loss) from investment in consolidated joint venture” in the accompanying Consolidated Statements of Net (Loss) Income. Our 50% proportionate share of the net income (loss) of the unconsolidated joint venture was $ 31,000 and $( 125,000 ) during fiscal 2021 and 2020, respectively.
3.
HOME ACCESSORIES SEGMENT
Overview
Effective June 22, 2018, we entered into an Equity Purchase Agreement (the “Equity Agreement”) in which we acquired an 80 % ownership interest in eLuxury, LLC (eLuxury) a company that offers bedding accessories and home goods directly to consumers. eLuxury’s primary products include a line of mattress pads manufactured at eLuxury’s facility located in Evansville, Indiana. eLuxury also offers handmade platform beds, cotton bed sheets, as well as other bedding items sourced from other suppliers. Its products are available on eLuxury’s own branded website, eLuxury.com , Amazon, and other leading online retailers for specialty home goods.
On March 31, 2020, we sold our entire ownership interest in 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 was expected to increase our
58
liquidity and allow us to focus on our core businesses of upholstery and mattress fabrics and was part of our comprehensive response to the challenging business conditions arising from the COVID-19 global pandemic.
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 entered into an amended and restated credit and security agreement with eLuxury and the buyer (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 was 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. As a result, we classified the results from operations of our home accessories segment separately in captions titled “Discontinued Operations” within our fiscal 2020 Consolidated Statements of Net Loss.
Consolidated Balance Sheet as of Disposal Date
The following is a summary of the assets and liabilities that were sold on March 31, 2020:
March 31,
(dollars in thousands)
2020
ASSETS
current assets:
cash and cash equivalents
$
285
accounts receivable
588
inventories
3,344
other current assets
170
total current assets held for sale - discontinued operation
4,387
property, plant, and equipment
1,694
goodwill
—
intangible asset
—
right of use assets
918
total noncurrent assets held for sale - discontinued operation
2,612
total assets
$
6,999
LIABILITIES AND NET ASSETS
current liabilities:
accounts -payable trade
$
1,394
operating lease liability - current
195
accrued expenses
351
total current liabilities held for sale - discontinued operation
1,940
loan payable - Culp Inc.
1,500
subordinated loan payable - noncontrolling interest
925
operating lease liability - long-term
743
total noncurrent liabilities held for sale - discontinued operation
3,168
total liabilities
5,108
total net assets of discontinued operation
$
1,891
59
Net Loss from Discontinued Operation
The following is a reconciliation of the major classes of financial statement line items constituting loss before income taxes from discontinued operation that are disclosed in the notes to the financial statements to loss from discontinued operation that are presented in the fiscal 2020 Consolidated Statements of Net Loss:
(dollars in thousands)
2020
net sales
$
13,763
cost of sales
( 10,953
)
gross profit
2,810
selling, general and administrative expenses
( 4,100
)
asset impairments (1)
( 20,202
)
reversal of contingent consideration - earn-out obligation (2)
5,856
interest expense (3)
( 84
)
other income
34
loss from discontinued operation related to major classes
of loss before income taxes
( 15,686
)
loss on disposal of discontinued operation (4)
( 1,891
)
loss before income taxes from discontinued operation
( 17,577
)
income tax benefit
68
net loss from discontinued operation
$
( 17,509
)
(1)
During fiscal 2020, we recorded asset impairment charges totaling $ 20.2 million, of which $ 13.6 million and $ 6.6 million pertained to the goodwill and tradename, respectively. See Notes 8, 9, and 15 of the notes to the consolidated financial statements for further details of our assessments that resulted in the impairment of the goodwill and tradename associated with this discontinued operation.
(2)
See separate section below titled “Contingent Consideration” for further details.
(3)
Interest expense is directly attributable to our discontinued operation as it pertains to loans payable assumed by the buyer, (the noncontrolling interest) or required to be paid to Culp Inc. based on the terms of the sale agreement.
(4)
See separate section below titled “Consolidation and Deconsolidation” for further details.
The following is a summary of net loss from continuing operations, net loss from discontinued operation, and net loss attributable Culp Inc. common shareholders and the noncontrolling interest for fiscal year 2020:
(dollars in thousands)
2020
net loss from continuing operations
$
( 11,158
)
net loss from continuing operations attributable to
noncontrolling interest
—
net loss from continuing operations attributable
to Culp Inc. common shareholders
$
( 11,158
)
net loss from discontinued operation
$
( 17,509
)
net loss from discontinued operation attributable to
noncontrolling interest
4,674
net loss from discontinued operation attributable to Culp Inc.
common shareholders
$
( 12,835
)
net loss
$
( 28,667
)
net loss from noncontrolling interest
4,674
net loss attributable to Culp Inc.
common shareholders
$
( 23,993
)
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Cash Flow Disclosures
Our discontinued operation had net cash used in operating activities totaling $( 2.3 ) million during fiscal 2020. Our discontinued operation had net cash used in investing activities totaling $( 134,000 ) during fiscal 2020. Our discontinued operation had net cash provided by financing activities, all of which were loan proceeds and capital contributions from Culp Inc. and the noncontrolling interest holder of eLuxury totaling $ 2.4 million during fiscal 2020.
We incurred a $ 1.9 million loss on disposal of discontinued operation that was reported within loss before income taxes from discontinued operation in the fiscal 2020 Consolidated Statement of Net Loss. In addition, we reported a loss on disposal of discontinued operation of $ 1.6 million in the fiscal 2020 Consolidated Statement of Cash Flows, as the buyer (former noncontrolling interest holder) retained the cash held with eLuxury totaling $ 285,000 .
Contingent Consideration
The Equity Agreement related to the acquisition of our ownership interest in eLuxury contained a contingent consideration arrangement that required us to pay the seller, who was also the owner of the noncontrolling interest, an earn-out payment based on a multiple of adjusted EBITDA, as defined in the Equity Agreement, for the twelve-month period ending August 31, 2021, less $12.0 million. We recorded a contingent liability at the acquisition date for this earn-out obligation at its fair value totaling $5.6 million based on the Black Scholes pricing model.
We were required to assess the fair value of this earn-out obligation each quarterly reporting period. Based on management’s assessment as of the end of our third quarter of fiscal 2020, we determined it was necessary to adjust forecasted EBITDA as it related to this earn-out obligation. This determination was based on the future outlook of our former home accessories segment and its slower than expected business improvement, as well as updated assumptions on economic conditions in the e-commerce space, combined with the upcoming timeframe for determining the amount associated with this contingent consideration arrangement. As a result of these factors, we recorded a reversal of $ 6.1 million for the full amount of our earn-out obligation at the end of our third quarter of fiscal 2020. In connection with the sale agreement of our entire ownership interest in eLuxury, this contingent consideration arrangement was nullified on March 31, 2020. Since the earn-out obligation was solely based on the financial performance of our home accessories segment and the contingent consideration arrangement was nullified as a result of the disposal, the reversal of this earn-out obligation is directly attributable to our discontinued operation.
Consolidation and Deconsolidation
Consolidation
Prior to the disposal of eLuxury, we included all the accounts of eLuxury in our consolidated financial statements and eliminated all significant intercompany balances and transactions during the first nine months of fiscal 2020. Net loss attributable to the noncontrolling interest in eLuxury was excluded from net loss attributable to Culp Inc. common shareholders during the first nine months of fiscal 2020.
Substantive Profit-Sharing Provisions
T he Equity Agreement related to the acquisition of our ownership interest in eLuxury contained substantive profit-sharing provisions which explicitly stated the ownership interests as of the acquisition date of June 22, 2018, and the allocation of net income or loss between us, as the controlling interest holder, and the noncontrolling interest holder. The Equity Agreement stated that as of the acquisition date, we acquired an 80 % ownership interest in eLuxury, with the seller retaining a 20 % noncontrolling interest. Additionally, eLuxury’s net income or loss, future capital contributions and equity distributions were allocated at a percentage of 70 % to or from us and 30 % to or from the noncontrolling interest holder. Also, the Equity Agreement included certain loss limitations pursuant to which net losses allocated pursuant to the Equity Agreement would not exceed the maximum amount of net loss that could be allocated without causing any owners to have a capital account deficit as defined in the agreement.
The carrying value of our controlling interest and the noncontrolling interest was recorded based on the terms of the substantive profit-sharing provisions of the Equity Agreement. As a result, eLuxury’s total net asset balance of $ 1.9 million as of March 31, 2020 (the disposal date), represented the carrying value of our interest (the controlling interest holder) in eLuxury.
Deconsolidation
A parent company must deconsolidate a subsidiary as of the date the parent ceases to have a controlling interest in that subsidiary and recognize a gain or loss in net income at that time. As a result, we deconsolidated eLuxury from our consolidated financial statements on March 31, 2020, and recognized a loss on disposal of discontinued operation totaling $ 1.9 million. The $ 1.9 million loss on disposal of discontinued operation represented the entire carrying amount of eLuxury’s assets less liabilities as of the disposal date of March 31, 2020. 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 interest in eLuxury, and we did not retain a noncontrolling interest in eLuxury. Additionally,
61
based on the terms of the substantive profit-sharing provisions stated in the Equity Agreement, the noncontrolling interest holder did not have a carrying amount for its interest in eLuxury .
Continuing Obligations, Financial Commitments, and Continuing Relationships with the Discontinued Operation
Supply Agreement
In connection with the sale of our entire ownership interest in eLuxury, we entered into a supply agreement 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 fabrics products of the type we were supplying to eLuxury at the time of the sale transaction, as well as certain home accessories and soft goods products, subject to our ability to provide competitive pricing and delivery terms for such products. There are no guarantees or provisions under the supply agreement that require eLuxury to purchase a minimum amount of our products.
On January 12, 2022, we entered into an agreement with eLuxury that extended the term of the supply agreement from its original expiration date of March 31, 2022, to March 31, 2027.
During fiscal 2022 and 2021, shipments to eLuxury pursuant to the supply agreement were $ 103,000 and $ 331,000 , respectively. During the three-month period after the disposal date of March 31, 2020, and through our fiscal year end date of May 3, 2020, shipments to eLuxury pursuant to the supply agreement totaled $ 7,000 .
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, which required us to report these transactions in continuing operations for all periods presented in our Consolidated Statements of Net (Loss) Income. During fiscal 2020, we reported both net sales and cost of sales totaling $ 968,000 that were previously eliminated in consolidation and occurred prior to the March 31, 2020, disposal date.
Royalty Agreement
Also in connection with the sale of our entire ownership interest in eLuxury, we entered into a royalty agreement with eLuxury that required eLuxury to pay us a royalty fee based on a percentage of sales, as defined in the royalty agreement. On January 12, 2022, we entered into an agreement with eLuxury that terminated this royalty agreement and required eLuxury to pay us a termination fee of $ 150,000 .
During fiscal years 2022, 2021, and 2020, royalty payments received pursuant to the royalty agreement were immaterial.
Financial Guarantee
As of May 2, 2021, we had an agreement that guaranteed 70 % of any unpaid lease payments associated with eLuxury’s facility located in Evansville, Indiana. The lease agreement expires during September 2024 and requires monthly payments of $ 18,865 . In connection with the termination of the royalty agreement noted above, we were fully released from our guarantee associated with this lease.
4 .
ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
May 1,
May 2,
(dollars in thousands)
2022
2021
customers
$
22,613
$
38,455
allowance for doubtful accounts
( 292
)
( 591
)
allowance for cash discounts
( 74
)
( 124
)
reserve for returns and allowances and discounts
( 21
)
( 14
)
$
22,226
$
37,726
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands)
2022
2021
2020
beginning balance
$
( 591
)
$
( 472
)
$
( 393
)
provision for bad debts
74
( 119
)
( 79
)
write-offs, net of recoveries
225
—
—
ending balance
$
( 292
)
$
( 591
)
$
( 472
)
62
As of May 1, 2022, and May 2, 2021, 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; and (iv) historical loss experience; as well as (v) any other ongoing economic conditions. 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 $ 292,000 and $ 591,000 as of May 1, 2022, and May 2, 2021, respectively.
A summary of the activity in the allowance for returns and allowances and discounts follow:
(dollars in thousands)
2022
2021
2020
beginning balance
$
( 138
)
$
( 84
)
$
( 226
)
provision for returns and allowances and discounts
( 1,386
)
( 1,665
)
( 1,603
)
credits issued and discounts taken
1,429
1,611
1,745
ending balance
$
( 95
)
$
( 138
)
$
( 84
)
Subsequent Event
On June 25, 2022, a customer and its affiliates associated with our mattress fabrics segment announced that they filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Subject to court approval, our customer and its affiliates entered into an asset purchase agreement for the sale of substantially all of its assets. The proposed buyer under the asset purchase agreement has also provided a commitment for debtor-in-possession financing to allow our customer and its affiliates to conduct normal business operations pending the anticipated closing of the sale. A credit loss associated with accounts receivable outstanding as of May 1, 2022, for this customer and its affiliates was not recorded as we received payment in full regarding these invoices and, based on information available to us at this time, we do not believe there is a risk of loss on these accounts. In addition, based on the information available to us at this time, we currently do not expect to record a material credit loss associated with accounts receivable for this customer and its affiliates for outstanding invoices after May 1, 2022 relating to products sold prior to the bankruptcy filing.
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. In addition, the upholstery fabrics segment includes Read, which 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.
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 products associated with window treatments.
Discontinued Operation – Home Accessories Segment
As disclosed in Note 3 of the notes to 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. Additionally, net sales associated with our home accessories segment were excluded from our continuing operations and presented within discontinued operation in our Consolidated Statement of Net Loss for fiscal 2020.
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 $ 13.8 million during fiscal 2020. Revenue associated with the sales of home accessories products was recognized at the point-in-time when control was transferred to the customer.
Significant Judgments
See Note 1 of the consolidated financial statements for disclosure of our accounting policies regarding our significant judgements associated with revenue recognition, determining our transaction prices, and revenue measurement.
63
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. Our terms are customary within the industries in which we operate and are not considered financing arrangements. There were no contract assets recognized as of May 1, 2022, or May 2, 2021.
A summary of the activity of deferred revenue follows:
(dollars in thousands)
Fiscal 2022
Fiscal 2021
Beginning Balance
$
540
$
502
Revenue recognized on contract liabilities
( 3,434
)
( 2,459
)
Payments received for services not yet rendered
3,414
2,497
Ending Balance
$
520
$
540
Disaggregation of Revenue
The following table presents our disaggregated revenue related to continuing operations by segment, timing of revenue recognition, and product sales versus services rendered for fiscal 2022:
(dollars in thousands)
Mattress
Fabrics
Upholstery
Fabrics
Total
Products transferred at a point in time
$
152,159
$
133,622
$
285,781
Services transferred over time
—
9,058
9,058
Total Net Sales
$
152,159
$
142,680
$
294,839
The following table presents our disaggregated revenue related to continuing operations by segment, timing of revenue recognition, and product sales versus services rendered for fiscal 2021:
(dollars in thousands)
Mattress
Fabrics
Upholstery
Fabrics
Total
Products transferred at a point in time
$
157,671
$
133,501
$
291,172
Services transferred over time
—
8,548
8,548
Total Net Sales
$
157,671
$
142,049
$
299,720
The following table presents our disaggregated revenue related to continuing operations by segment, timing of revenue recognition, and product sales versus services rendered for fiscal 2020:
(dollars in thousands)
Mattress
Fabrics
Upholstery
Fabrics
Total
Products transferred at a point in time
$
131,412
$
114,154
$
245,566
Services transferred over time
—
10,600
10,600
Total Net Sales
$
131,412
$
124,754
$
256,166
6 .
INVENTORIES
A summary of inventories follows:
(dollars in thousands)
May 1,
2022
May 2,
2021
raw materials
$
13,477
$
7,742
work-in-process
4,237
3,156
finished goods
48,843
45,019
$
66,557
$
55,917
64
7 .
PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant, and equipment follows:
(dollars in thousands)
depreciable lives
(in years)
May 1,
2022
May 2,
2021
land and improvements
0-10
$
947
$
937
buildings and improvements
7-40
31,628
31,205
leasehold improvements
**
3,474
2,884
machinery and equipment
3-15
67,827
65,258
data processing equipment and software
3-7
8,706
8,261
office furniture and equipment
3-10
1,643
1,313
capital projects in progress
613
3,077
114,838
112,935
accumulated depreciation
( 73,136
)
( 68,932
)
$
41,702
$
44,003
**
Shorter of life of lease or useful life.
8 .
INTANGIBLE ASSETS
A summary of intangible assets follows:
(dollars in thousands)
May 1,
2022
May 2,
2021
Tradenames
$
540
$
540
Customer relationships, net
1,636
1,937
Non-compete agreement, net
452
527
$
2,628
$
3,004
Tradename
A summary of the change in the carrying amount of our tradename follows:
(dollars in thousands)
2022
2021
2020
beginning balance
$
540
$
540
7,232
loss on impairment - continuing operations
—
—
( 143
)
loss on impairment - discontinued operation (note 3)
—
—
( 6,549
)
ending balance
$
540
$
540
540
Our tradename as of May 1, 2022, and May 2, 2021, 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 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 assessments as of May 1, 2022, and May 2, 2021, no indicators of impairment existed, and therefore we did no t record any asset impairment charges associated with our tradename during fiscal 2022 or fiscal 2021.
Continuing Operations (Fiscal 2020)
As of April 28, 2019, the tradename associated with our continuing operations totaled $ 683,000 and was associated with Read.
In accordance with ASC Topic 350 Intangibles – Goodwill and Other, we are required to assess our tradenames for impairment annually or between annual tests if we believe indicators of impairment exist. Accordingly, we performed an annual assessment of Read’s tradename as of May 3, 2020. First, 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 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 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 utilizing the relief from royalty method and comparing the
65
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 in the fiscal 2020 Consolidated Statement of Net Loss.
Discontinued Operation – Home Accessories Segment (Fiscal 2020)
As of April 28, 2019, the tradename associated with our discontinued operation totaled $ 6.6 million. During the fiscal 2020 year, we recorded asset impairment charges totaling $ 6.6 million, of which $ 2.4 million and $ 4.2 million were recorded in the third and fourth quarters, respectively.
Third Quarter of Fiscal 2020
As of February 2, 2020 (the end of our third quarter), we believed indicators of impairment existed that pertained to the future outlook of our former home accessories segment and its slower than expected business improvement, as well as economic conditions that existed within the e-commerce bedding space. Since we determined it was more-likely-than-not that the fair value of the tradename associated with our former home accessories segment was less than its carrying amount, we performed a quantitative impairment test. Our quantitative impairment test involved determining the fair value of the tradename associated with our former home accessories segment utilizing a relief from royalty method and comparing the respective fair value with its carrying amount. Consequently, based on our quantitative impairment test, we recorded an asset impairment charge totaling $ 2.4 million that is presented within the discontinued operation section of our fiscal 2020 Consolidated Statement of Net Loss.
Fourth Quarter of Fiscal 2020
During the fourth quarter of fiscal 2020, management made a strategic decision to sell our entire ownership interest in eLuxury to focus on our core products of mattress and upholstery fabrics, which we believed would increase our liquidity and assist with our comprehensive response to the COVID-19 global pandemic. As a result, we recorded an additional asset impairment charge of $ 4.2 million based on the expected selling price of our entire ownership in eLuxury in comparison to its carrying amount. As disclosed in Note 3 of the notes to 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 interest in eLuxury. The $ 4.2 million asset impairment charge recorded during the fourth quarter is presented within the discontinued operation section of our fiscal 2020 Consolidated Statement of Net Loss.
Customer Relationships
A summary of the change in the carrying amount of our customer relationships follows:
(dollars in thousands)
2022
2021
2020
beginning balance
$
1,937
2,238
2,538
amortization expense
( 301
)
( 301
)
( 300
)
ending balance
$
1,636
1,937
2,238
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 May 1, 2022, and May 2, 2021. Accumulated amortization for these customer relationships was $ 1.5 million and $ 1.2 million as of May 1, 2022, and May 2, 2021, respectively.
The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2023 - $ 301,000 ; FY 2024 - $ 301,000 ; FY 2025 - $ 301,000 ; FY 2026 - $ 301,000 ; FY 2027 - $ 278,000 ; and thereafter - $ 154,000 .
The weighted average amortization period for our customer relationships is 5.7 years as of May 1, 2022.
Non-Compete Agreement
A summary of the change in the carrying amount of our non-compete agreement follows:
(dollars in thousands)
2022
2021
2020
beginning balance
$
527
$
602
678
amortization expense
( 75
)
( 75
)
( 76
)
ending balance
$
452
$
527
602
66
Our non-compete agreement is associated with a prior acquisition by our mattress fabrics segment and is amortized on a straight-line basis over the fifteen-year life of the agreement.
The gross carrying amount of this non-compete agreement was $ 2.0 million as of May 1, 2022, and May 2, 2021. Accumulated amortization for this non-compete agreement was $ 1.6 million and $ 1.5 million as of May 1, 2022, and May 2, 2021, respectively.
The remaining amortization expense for the next five years and thereafter follows: FY 2023 - $ 76,000 ; FY 2024 - $ 76,000 ; FY 2025 - $ 76,000 ; FY 2026 - $ 76,000 ; FY 2027 - $ 75,000 , and thereafter - $ 73,000 .
The weighted average amortization period for the non-compete agreement is 6.0 years as of May 1, 2022.
9 .
GOODWILL
A summary of the change in the carrying amount of goodwill follows:
(dollars in thousands)
2020
beginning balance
$
27,222
loss on impairment - continuing operations
( 13,569
)
loss on impairment - discontinued operation (note 3)
( 13,653
)
ending balance
—
As a result of asset impairments incurred during fiscal 2020 described below, we did not report goodwill in the accompanying Consolidated Balance Sheets as of May 1, 2022, and May 2, 2021.
Continuing Operations (Fiscal 2020)
As of April 28, 2019, goodwill associated with our continuing operations totaled $ 13.6 million, of which $ 11.5 million was associated with our mattress fabrics reporting unit and $ 2.1 million was associated with Read, a separate reporting unit within the upholstery fabrics segment.
In accordance with ASC Topic 350 Intangibles – Goodwill and Other, we are required to assess goodwill for impairment annually or between annual tests if we believe indicators of impairment exist. Accordingly, we performed our annual assessment of goodwill as of May 3, 2020. First, we performed a qualitative assessment in which we concluded that it was more likely than not that the fair value of both our mattress fabrics and Read reporting units were less than their carrying amounts, including goodwill. This conclusion was based on impairment indicators that existed, such as our unfavorable financial performance 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 value for both our mattress fabrics and Read reporting units were less than their carrying amounts, we conducted a quantitative goodwill impairment test. Our quantitative goodwill impairment test involved determining the fair value of each of our mattress fabrics and Read reporting units utilizing a discounted cash flows method and comparing the respective fair value of our mattress fabrics and Read reporting units with their respective carrying amounts, including goodwill. Consequently, based on our quantitative goodwill impairment test, we recorded an asset impairment charge totaling $ 13.6 million in asset impairments in the fiscal 2020 Consolidated Statement of Net Loss.
Discontinued Operation – Home Accessories Segment (Fiscal 2020)
As of April 28, 2019, goodwill associated with our discontinued operation totaled $ 13.6 million. During fiscal 2020, we recorded asset impairment charges totaling $ 13.6 million, of which $ 11.2 million and $ 2.4 million were recorded in the third and fourth quarters, respectively.
Third Quarter of Fiscal 2020
As of February 2, 2020 (the end of our third quarter), we believed indicators of impairment existed that pertained to the future outlook of our former home accessories segment and its slower than expected business improvement, as well as economic conditions that existed within the e-commerce bedding space. Since we determined it was more likely than not that the fair value of our former home accessories reporting unit was less than its carrying amount, we performed a quantitative goodwill impairment test. Our quantitative goodwill impairment test involved determining the fair value of our former home accessories segment utilizing a discounted cash flows method and comparing the respective fair value of our former home accessories reporting unit with its respective carrying amount, including goodwill. Consequently, based on our quantitative goodwill impairment test, we recorded an asset impairment charge totaling $ 11.2 million that is presented within the discontinued operation section of our fiscal 2020 Consolidated Statement of Net Loss.
67
Fourth Quarter of Fiscal 2020
During the fourth quarter of fiscal 2020, management made a strategic decision to sell our entire ownership interest in eLuxury to focus on our core products of mattress and upholstery fabrics, which we believed would increase our liquidity and assist with our comprehensive response to the COVID-19 global pandemic. As a result, we recorded an additional asset impairment charge of $ 2.4 million based on the expected selling price of our entire ownership in eLuxury in comparison to its carrying amount, including goodwill. 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 that were associated with the sale of our entire ownership interest in eLuxury. The $ 2.4 million asset impairment charge recorded during the fourth quarter is presented within the discontinued operation section of our fiscal 2020 Consolidated Statement of Net Loss.
1 0 .
ACCRUED EXPENSES
(dollars in thousands)
May 1,
2022
May 2,
2021
compensation and related benefits
$
4,248
$
9,816
other
3,584
5,023
$
7,832
$
14,839
1 1 .
LINES OF CREDIT
Revolving Credit Agreement – United States
Overall
As of May 1, 2022, our Credit Agreement (the “Existing Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”) provided a revolving loan commitment of $ 30 million, was set to expire on August 15, 2022 , and allowed us to issue letters of credit not to exceed $ 1 million.
Interest was charged under the Existing Credit Agreement at a rate (applicable interest rate of 2.40 % and 1.71 % as of May 1, 2022, and May 2, 2021, respectively) as a variable spread over LIBOR based on our ratio of debt to EBITDA. Outstanding borrowings were secured by a pledge of 65 % of the common stock of Culp International Holdings, Ltd. (a subsidiary located in the Cayman Islands).
There were $ 275,000 of outstanding letters of credit provided by the Existing Credit Agreement as of May 1, 2022, and May 2, 2021. As of May 1, 2022, we had $ 725,000 remaining for the issuance of additional letters of credit.
There were no borrowings outstanding under the Existing Credit Agreement as of May 1, 2022, or May 2, 2021.
Subsequent Event
Effective June 24, 2022, we entered into an Amended and Restated Credit Agreement (the “Amended Agreement”) with Wells Fargo. The Amended Agreement amends, restates, supersedes, and serves as a replacement for the Existing Credit Agreement. The Amended Agreement provides a revolving credit facility of up to $ 40 million, is secured by a lien on the company’s assets, and expires in June 2025 . The proceeds of borrowings under the Amended Agreement are to be used for working capital and other general corporate purposes.
The company’s available borrowings under the Amended Agreement are based on a borrowing base calculation using certain accounts receivable and inventory of the company, subject to certain sub-limits as defined in the Amended Agreement, to be calculated on a monthly basis. Similar to the Existing Credit Agreement, the Amended Agreement contains a sub-facility that allows the company to issue letters of credit in an aggregate amount not to exceed $ 1 million.
Borrowings under the Amended Agreement bear interest at a rate calculated using a margin (the “Applicable Margin”) over the Federal Reserve Bank of New York’s secured overnight funding rate (SOFR). The Applicable Margin is set initially at 1.35 % and may vary under the terms of the Amended Agreement from 1.35 % to 2.50 %, depending on the ratio of the company’s consolidated debt to consolidated EBITDA, as defined in the Amended Agreement, determined on a quarterly basis. The Amended Agreement contains customary affirmative and negative covenants and requires compliance by the company with certain financial covenants, including minimum tangible net worth of $ 100 million plus 50 % of annual net income, and a minimum ratio of consolidated EBITDA to consolidated net interest expense of 3.0 to 1.0 as defined in the Amended Agreement. The EBITDA to interest expense covenant does
68
not apply during the first three quarters of the company’s fiscal 2023, but during that period, the company must maintain minimum “access to liquidity” of $ 15 million, which is defined as unencumbered liquid assets plus available and unused credit under the revolving credit facility as calculated using the borrowing base, all as defined in the Amended Agreement.
Revolving Credit Agreements – China
Denominated in Chinese Yuan Renminbi (RMB)
We have an unsecured credit agreement denominated in RMB with a bank located in China that provides for a line of credit of up to 40 million RMB ($ 6.1 million USD as of May 1, 2022). This agreement has an interest rate determined by the Chinese government at the time of borrowing and was renewed during the third quarter of fiscal 2022 to extend the expiration date to November 15, 2022 .
There were no borrowings outstanding under this agreement as of May 1, 2022, or May 2, 2021, respectively.
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 of up to $ 2 million USD and expires on August 30, 2022 . The interest rate regarding this agreement is determined by the Chinese government at the time of borrowing.
There were no borrowings outstanding under this agreement as of May 1, 2022, or May 2, 2021, respectively.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of May 1, 2022, we were in compliance with our financial covenants.
Interest paid during fiscal years 2022, 2021, and 2020 was $ 10,000 , $ 60,000 , and $ 124,000 , respectively.
1 2 .
INCOME TAXES
Income Tax Expense and Effective Income Tax Rate
Total income tax expense was allocated as follows:
(dollars in thousands)
2022
2021
2020
(loss) income from continuing operations
$
2,886
$
7,693
$
3,354
loss from discontinued operation
—
—
( 68
)
$
2,886
$
7,693
$
3,286
Income tax expense attributable to (loss) income from continuing operations consists of:
(dollars in thousands)
2022
2021
2020
current
federal
$
—
( 17
)
—
state
2
3
7
foreign
2,156
4,151
4,248
uncertain income tax positions
37
( 204
)
725
2,195
3,933
4,980
deferred
federal
1,121
( 1,933
)
( 1,875
)
state
47
( 80
)
( 103
)
2017 Tax Cuts and Jobs Act
—
( 3,674
)
—
undistributed earnings – foreign subsidiaries
76
112
( 114
)
U.S. Federal & State carryforwards and credits
( 971
)
451
974
uncertain income tax positions
( 380
)
380
( 380
)
foreign
615
( 22
)
( 247
)
valuation allowance
183
8,526
119
691
3,760
( 1,626
)
$
2,886
7,693
3,354
69
(Loss) income before income taxes from continuing operations related to our foreign and U.S. operations consists of:
(dollars in thousands)
2022
2021
2020
Foreign
China
$
6,998
10,007
8,316
Canada
1,302
4,764
( 1,391
)
Haiti
( 980
)
817
—
Cayman Islands
—
( 5
)
( 6
)
Total Foreign
7,320
15,583
6,919
United States
( 7,645
)
( 4,703
)
( 14,598
)
$
( 325
)
10,880
( 7,679
)
The following schedule summarizes the principal differences between the income tax expense from continuing operations at the federal income tax rate and the effective income tax rate from continuing operations reflected in the consolidated financial statements:
2022
2021
2020
U.S. federal income tax rate
21.0
%
21.0
%
21.0
%
valuation allowance
( 56.3
)
78.4
( 1.6
)
income tax effects of the 2017 Tax Cuts and Jobs Act
—
( 33.8
)
—
global intangible low taxed income tax (GILTI)
( 540.9
)
—
( 19.0
)
foreign tax rate differential
( 206.2
)
10.9
( 5.4
)
income tax effects of Chinese foreign exchange gains and losses
( 20.6
)
( 8.4
)
( 5.0
)
withholding taxes associated with foreign tax jurisdictions
( 172.8
)
7.7
( 16.0
)
uncertain income tax positions
105.4
1.6
( 4.8
)
U.S. state income taxes
21.5
0.3
0.4
stock-based compensation
( 3.3
)
0.3
( 0.3
)
gain on bargain purchase
—
( 1.6
)
—
income tax effects of impairment of nondeductible goodwill
—
—
( 11.3
)
other (2)
( 35.8
)
( 5.7
)
( 1.7
)
Consolidated effective income tax rate (1)
( 888.0
)%
70.7
%
( 43.7
)%
(1)
Our consolidated effective income tax rates for all fiscal years presented were negatively affected by the mix of consolidated (loss) income before income taxes from continuing operations, as significant pre-tax losses have been incurred by our U.S. operations and almost all our taxable income was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. As a result, income tax expense incurred stems from taxable income from our foreign jurisdictions that exceeds our consolidated (loss) income before income taxes from continuing operations. Accordingly, the extent of the fluctuations in our consolidated effective income tax rates is dependent on the extent income tax expense incurred from our foreign operations compares with our consolidated (loss) income before income taxes from continuing operations that has been significantly lowered by our U.S. operations.
(2)
“Other” for all periods presented represents miscellaneous adjustments that pertain to U.S. permanent differences such as meals and entertainment and income tax provision to return adjustments.
70
Deferred Income Taxes - Overall
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities consist of the following:
(dollars in thousands)
2022
2021
deferred tax assets:
accounts receivable
$
227
362
inventories
2,020
2,019
compensation
2,437
3,284
liabilities and other
28
23
intangible assets and goodwill
536
690
property, plant, and equipment (1)
199
202
operating lease liability
1,297
836
foreign income tax credits - U.S.
783
783
loss carryforwards – U.S.
8,373
7,533
valuation allowance - U.S.
( 11,857
)
( 11,674
)
total deferred tax assets
4,043
4,058
deferred tax liabilities:
undistributed earnings on foreign subsidiaries
( 3,586
)
( 3,521
)
unrecognized tax benefits – U.S.
—
( 380
)
property, plant and equipment (2)
( 4,292
)
( 3,968
)
right of use assets
( 1,520
)
( 855
)
other
( 121
)
( 119
)
total deferred tax liabilities
( 9,519
)
( 8,843
)
Net deferred liabilities
$
( 5,476
)
( 4,785
)
(1)
Pertains to the company’s operations located in China.
(2)
Pertains to the company’s operations located in the U.S. and Canada.
As of May 1, 2022, our U.S. federal net operating loss carryforwards totaled $ 23.7 million, with related future income tax benefits of $ 5.0 million. In accordance with the 2017 Tax Cuts and Jobs Act (“TCJA”), U.S. federal net operating loss carryforwards generated in fiscal 2019 and after do not expire. As of May 1, 2022, all our unused U.S. federal net operating loss carryforwards were generated during fiscal 2019 and after, and therefore, do not expire in accordance with the TCJA. As of May 1, 2022, our U.S. state net operating loss carryforwards totaled $ 28.0 million, with related future income tax benefits of $ 1.0 million. Our U.S. state net operating loss carryforwards totaling $ 28.0 million have expiration dates ranging from fiscal years 2023 through 2043 . Our U.S. foreign income tax credits of $ 783,000 have expiration dates ranging from fiscal years 2026 through 2028 , which represent 10 years from when the associated earnings and profits from our foreign subsidiaries were repatriated to the U.S.
GILTI
Fiscal 2020
In accordance with the TJCA, GILTI became effective during fiscal 2019. Our policy to account for GILTI is to expense this tax in the period incurred. As a result, we recorded an income tax charge of $ 1.9 million during fiscal 2020.
Fiscal 2021
Effective July 20, 2020, the U.S. Treasury Department finalized and enacted previously proposed regulations regarding the GILTI tax provisions of the TCJA. With the enactment of these final regulations, we became eligible for an exclusion from GILTI if we meet the provisions for the GILTI High-Tax exception included in these final regulations on a jurisdiction-by-jurisdiction basis. To meet the provisions of the GILTI High-Tax exception, the tested foreign entity’s effective income tax rate related to current year’s earnings must be higher than 90 % of the U.S. federal income tax rate of 21 % (i.e., 18.9 %). In addition, the enactment of the new regulations and the provisions for the GILTI High-Tax exception were retroactive to the original enactment of the GILTI tax provision, which included our fiscal 2019 and 2020 fiscal years.
Since we met the requirements for the GILTI High-Tax exception for our fiscal 2019 and 2020 fiscal years, we recorded a non-cash income tax benefit of $ 3.6 million resulting from the re-establishment of certain U.S. federal net operating loss carryforwards. The
71
$ 3.6 million income tax benefit was recorded as a discrete event in which its full income tax effects were recorded during the first quarter of fiscal 2021.
Fiscal 2022
We did not meet the GILTI High-Tax exception for the 2021 tax year regarding our foreign operations located in China. This was due primarily to significant income tax deductible foreign exchange losses that significantly lowered income tax expense associated with current year’s earnings. As a result, the current effective income tax rate was lower than the required 18.9 % current effective income tax rate to meet the GILTI High-Tax exception. Consequently, we incurred a non-cash income tax charge of $ 1.8 million, which was fully offset by a $ 1.8 million non-cash income tax benefit due to a corresponding reversal of our full valuation allowance associated with our U.S. net deferred income tax assets.
We do not expect to meet the GILTI High-Tax exception for the 2022 tax year regarding our operations located in Canada and Haiti. With regards to Canada, we placed several significant capital projects into service during fiscal 2022, and therefore, are eligible for a significant amount of deductible accelerated depreciation. As a result, our current year’s income tax expense is much lower than prior fiscal years, and therefore, our current effective income tax rate is expected to be lower than the required 18.9 % current effective income tax rate to meet the GILTI High-Tax exception. For our operations located in Haiti, taxable income or losses are not subject to income tax, as we are in an economic zone that permits a 0 % income tax rate for the first fifteen years of operations, for which we have ten years remaining. Since our operations located in Haiti are not subject to income tax, our projected current effective income tax rate of 0 % will be lower than the required 18.9 % current effective income tax rate to meet the GILTI High-Tax exception. Although, our operations located in Canada and Haiti did not meet the GILTI High-Tax exception, we did not incur any GILTI tax for the 2022 tax year, as the losses subject to GILTI tax from our Haitian operations exceeded the income subject to GILTI tax from our Canadian operation.
Deferred Income Taxes – Valuation Allowance
Assessment
We evaluate the realizability of our deferred income taxes to determine if a valuation allowance is required. We 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 of the end of the first quarter of fiscal 2021. 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 was reversed because of the retroactivity of the new GILTI regulations. Consequently, due to the retroactivity of the new regulations, we experienced a recent history of cumulative U.S. taxable losses during the last two fiscal years, and we expected at the time of this assessment that our history of U.S. pre-tax losses would continue into fiscal 2021. As a result of the significant weight of this negative evidence, we believed it was more-likely-than-not that our U.S. deferred income tax assets would 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 of fiscal 2021.
As of May 1, 2022, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was still required. Based on our assessment, we determined we still have a recent history of significant cumulative U.S. taxable losses, in that we experienced U.S. taxable losses during each of the last three fiscal years. In addition, we are currently expecting U.S. taxable losses to continue into fiscal 2023. As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S deferred income tax assets would not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets.
Based on our assessments as of May 1, 2022, and May 2, 2021, valuation allowances against our U.S. net deferred income tax assets pertain to the following:
(dollars in thousands)
May 1,
2022
May 2,
2021
U.S. federal and state net deferred income tax assets
$
9,527
$
9,344
U.S. capital loss carryforward
2,330
2,330
$
11,857
$
11,674
72
A summary of the change in the valuation allowances against our U.S. net deferred income tax assets follows:
(dollars in thousands)
2022
2021
2020
beginning balance
$
11,674
3,148
748
change in judgement of beginning of year U.S. valuation allowance (1)
—
6,964
—
change in valuation allowance associated with current year earnings
1,640
1,004
—
establishment of valuation allowance (2)
—
—
2,281
change in estimate during current year (3)
( 1,457
)
558
119
ending balance
$
11,857
11,674
3,148
(1)
Refer to the above Assessment within the section titled Deferred Income Taxes – Valuation Allowance for further details regarding our assessment and conclusions reached for providing a full valuation allowance against our U.S net deferred income tax assets during the first quarter of fiscal 2021.
(2)
In connection with the sale of a discontinued operation that was treated as a partnership for income tax purposes, we generated a capital loss carryforward totaling $ 10.9 million with a related future income tax benefit of $ 2.3 million. Since capital losses can only be offset by capital gains, we established a full valuation allowance on this capital loss carryforward, as we do not have capital assets that would generate capital gains that would utilize this carryforward.
( 3 )
Amount represents changes in our U.S. net deferred income tax asset balances during the current year that pertain to (i) income tax provision to return adjustments, (ii) changes in estimates of our U.S. effective income tax rate that pertain to U.S. state income tax rates and apportionment percentages, (iii) recognition of uncertain income tax position due to expiration of statute of limitations, and (iv) other immaterial items.
Deferred Income Taxes – Undistributed Earnings from Foreign Subsidiaries
We assess (i) whether the undistributed earnings from our foreign subsidiaries will be reinvested indefinitely or eventually distributed to our U.S. parent company, and (ii) if we are required to record a deferred income tax liability for undistributed earnings from foreign subsidiaries that will not be reinvested indefinitely. As of May 1, 2022, we assessed the liquidity requirements of our U.S. parent company and determined that our undistributed earnings and profits from our foreign subsidiaries would not be reinvested indefinitely and would be eventually distributed to our U.S. parent company. The conclusion reached from this assessment has been consistent with prior years.
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 for unremitted withholding taxes associated with earnings and profits generated by our foreign subsidiaries that will ultimately be repatriated to the U.S. parent company. As a result, we recorded a deferred income tax liability of $ 3.6 million and $ 3.5 million as of May 1, 2022, and May 2, 2021, respectively.
Uncertainty in Income Taxes
An unrecognized income tax benefit for an uncertain income tax position can be recognized in the first interim period if the more-likely-than-not recognition threshold is met by the end of the reporting period, or is effectively settled through examination, or negotiation, or litigation, or if 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 benefit will be recorded at that time.
The following table sets forth the change in the company’s unrecognized income tax benefit:
(dollars in thousands)
2022
2021
2020
beginning balance
$
1,444
1,269
903
increases from prior period tax positions
114
249
106
decreases from prior period tax positions
( 77
)
( 74
)
( 85
)
lapse of applicable statute of limitations
( 380
)
—
—
increases from current period tax positions
—
—
434
decreases from current period tax positions
—
—
( 89
)
ending balance
$
1,101
1,444
1,269
73
As of May 1, 2022, we had $ 1.1 million of total gross unrecognized tax benefits, of which the entire $ 1.1 million would favorably affect the income tax rate in future periods. As of May 2, 2021, we had $ 1.4 million of total gross unrecognized tax benefits, of which $ 1.1 million would favorably affect the income tax rate in future periods.
As of May 1, 2022, we had $ 1.1 million of total gross unrecognized tax benefits, of which the entire $ 1.1 million was classified as income taxes payable-long-term in the accompanying Consolidated Balance Sheets. As of May 2, 2021, we had $ 1.4 million of total gross unrecognized tax benefits, of which $ 1.1 million and $ 380,000 were classified as income taxes payable-long-term and noncurrent deferred income taxes, respectively, in the accompanying Consolidated Balance Sheets.
We elected to classify interest and penalties as part of income tax expense. As of May 1, 2022, and May 2, 2021, the gross amount of interest and penalties due to unrecognized tax benefits was $ 125,000 and $ 165,000 , respectively.
Our gross unrecognized income tax benefit of $ 1.1 million as of May 1, 2022, 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. United States federal and state income tax returns filed by us remain subject to examination for income tax years 2019 and subsequent. Canadian federal income tax returns filed by us remain subject to examination for income tax years 2018 and subsequent. Canadian provincial (Quebec) income tax returns filed by us remain subject to examination for income tax years 2018 and subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year 2017 and subsequent.
Income Taxes Paid
The following table sets forth income taxes paid (refunded) by jurisdiction:
(dollars in thousands)
2022
2021
2020
United States Federal - Alternative Minimum Tax
(AMT) credit refunds (1)
$
—
$
( 1,510
)
$
—
United States Federal - Transition Tax
266
226
—
China - Income Taxes
2,036
2,076
2,559
China - Withholding Taxes Associated with Earnings
and Profits Distribution to U.S. Parent
487
798
838
Canada - Income Taxes
311
1,408
1,598
$
3,100
$
2,998
$
4,995
(1)
In accordance with the provisions of the TCJA, we elected to treat our prior AMT credit carryforward balance of $1.5 million as refundable. We received refunds totaling $ 1.5 million in two separate installments totaling $ 746,000 and $ 764,000 during the first and second quarters of fiscal 2021, respectively.
1 3 .
COMMITMENTS AND CONTINGENCIES
Leases
Balance Sheet
The right of use assets and lease liabilities associated with our operating leases as of May 1, 2022, and May 2, 2021, are as follows:
(dollars in thousands)
May 1,
2022
May 2,
2021
Right of use assets
$
15,577
$
11,730
Operating lease liability - current
3,219
2,736
Operating lease liability – noncurrent
7,062
6,821
Supplemental Cash Flow Information
(dollars in thousands)
2022
2021
2020
Operating lease liability payments
$
2,954
$
2,634
$
2,524
Right of use assets exchanged for lease liabilities
3,762
8,014
344
74
Operating lease costs associated with continuing operations were $ 3.9 million, $ 2.9 million, and $ 2.6 million during fiscal 2022, 2021, and 2020, respectively. During fiscal 2020, operating lease costs totaling $ 204,000 were associated with our former home accessories segment and were presented within loss from discontinued operations in the fiscal 2020 Consolidated Statement of Net Loss. Short-term lease costs were $ 68,000 , $ 55,000 , and $ 148,000 during fiscal 2022, 2021, and 2020, respectively. Variable lease expense was immaterial for fiscal 2022, 2021, and 2020.
As of May 1, 2022, the weighted average remaining lease term and discount rate for our operating leases follows:
Weighted average lease term
3.29 years
Weighted average discount rate
1.77
%
As of May 2, 2021, the weighted average remaining lease term and discount rate for our operating leases follows:
Weighted average lease term
4.36 years
Weighted average discount rate
2.41
%
Other Information
Maturity of our operating lease liabilities for the next five fiscal years and thereafter follows:
(dollars in thousands)
Amount
2023
$
3,367
2024
2,986
2025
1,945
2026
493
2027
457
Thereafter
1,409
10,657
Less: interest
( 376
)
Present value of lease liabilities
$
10,281
Related Party Lease – Mattress Fabrics Segment
We have an agreement to lease a facility totaling 65,886 square feet from a partnership owned by an immediate family member of an officer of the company. The current non-cancelable lease term for this facility ends September 30, 2023. Rents paid to the entity owned by an immediate family member of an officer totaled $ 148,000 , $ 151,000 , and $ 157,000 in fiscal 2022, 2021, and 2020, respectively.
Litigation
The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. Management has determined that these actions, when ultimately concluded and settled, will not have a material adverse effect upon the financial position, results of operations, or cash flows of the company.
Accounts Payable – Capital Expenditures
As of May 1, 2022, and May 2, 2021, we had total amounts due regarding capital expenditures totaling $ 473,000 and $ 348,000 , respectively, which pertained to outstanding vendor invoices, none of which were financed.
Purchase Commitments - Capital Expenditures
As of May 1, 2022, we had open purchase commitments to acquire equipment for our U.S. and Canadian mattress fabrics operations totaling $ 580,000 .
1 4 .
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-based units, and other equity and cash related
75
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 May 1, 2022, there were 577,349 shares available for future equity-based grants under the company’s 2015 Plan.
Time-Based Restricted Stock Awards
The following table summarizes the time-based restricted stock unit activity during fiscal years 2022, 2021, and 2020:
2022
2021
2020
Shares
Shares
Shares
outstanding at beginning of year
174,295
44,399
10,000
granted
37,991
129,896
34,399
forfeited
( 2,002
)
—
—
outstanding at end of year
210,284
174,295
44,399
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 during fiscal years 2022, 2021, and 2020:
(1)
Restricted
Price
Vesting
Date of Grant
Stock Awarded
Per Share
Period
July 22, 2021
37,991
$
14.75
3 years
August 6, 2020
129,896
$
11.01
3 years
July 18, 2019
34,399
$
18.49
3 years
(1)
Price per share represents closing price of our common stock on the date the respective award was granted.
Overall
We recorded compensation expense of $ 893,000 , $ 614,000 , and $ 220,000 within selling, general, and administrative expense for time-based restricted stock units in fiscal 2022, 2021, and 2020, respectively.
As of May 1, 2022, the remaining unrecognized compensation cost related to our time-based restricted stock units was $ 1.1 million, which is expected to be recognized over a weighted average vesting period of 1.6 years. As of May 1, 2022, our time-based restricted stock unit awards that were expected to vest had a fair value totaling $ 1.4 million.
Performance-Based Restricted Stock Units
Senior Executives
We grant performance-based restricted stock units to 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 award 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 award agreements.
Our performance-based restricted stock units granted to senior executives were 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.
76
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 stock units granted to senior executives on July 22, 2021, and July 18, 2019:
July 22,
July 18,
2021
2019
Closing price of our common stock
$
14.75
$
18.49
Expected volatility of our common stock
54.2
%
30.0
%
Expected volatility of peer companies (1)
45.7% - 101.5%
29.9% - 82.3%
Risk-free interest rate
0.33
%
1.73
%
Dividend yield
3.00
%
2.10
%
Correlation coefficient of peer companies (1)
0.03 - 0.35
0.00 - 0.43
(1)
The expected volatility and correlation coefficient of our peer companies for the July 22, 2021, and July 18, 2019, grant dates 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.
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 award 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 (the closing price of our common stock) on the date when the performance criteria were met.
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 were unvested as of May 1, 2022:
(4)
(3)
Restricted Stock
Restricted Stock
Units Expected
Price Per
Vesting
Date of Grant
Units Awarded
to Vest
Share
Period
July 22, 2021 (1)
122,476
—
$
15.93
(5)
3 years
July 22, 2021 (2)
20,500
—
$
14.75
(7)
3 years
July 18, 2019 (1)
93,653
727
$
19.04
(6)
3 years
July 18, 2019 (2)
29,227
435
$
18.49
(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 award agreements.
(4)
Compensation cost is based on an assessment each reporting period to determine the probability of whether or not certain performance targets will be met and how many shares are expected to be earned as of the end of the vesting period. These amounts represent the number of shares that are expected to vest as of May 1, 2022.
(5)
Price per share represents the fair market value per share ($ 1.08 per $1, or an increase of $ 1.18 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 ($ 14.75 ) for the performance-based component of the performance-based restricted stock units granted to senior executives on July 22, 2021.
( 6 )
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
77
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 .
( 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 fiscal 2022, 2021, and 2020:
(3)
(4)
Common
Weighted
Weighted
Stock Shares
Average
Average Price
Fiscal Year
Vested
Fair Value
Per Share
Fiscal 2022 (1)
5,051
$
87
$
17.14
Fiscal 2022 (1)
5,812
$
100
$
17.14
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)
Senior executives and key employees.
(2)
Non-employee .
(3)
Dollar amounts are in thousands.
(4)
The weighted average price per share is derived from the closing prices of our common stock on the dates the respective performance-based restricted stock units vested.
We recorded a (credit) charge to compensation expense totaling $( 81,000 ), $ 357,000 , and $ 114,000 within selling, general, and administrative expense associated with our performance-based restricted stock units for fiscal years 2022, 2021, and 2020, respectively.
As of May 1, 2022, the remaining unrecognized compensation cost related to the performance-based restricted stock units was $ 2,000 , which is expected to be recognized over a weighted average vesting period of 0.2 years. As of May 1, 2022, our performance-based restricted stock units that are expected to vest had a fair value totaling $ 1,000 .
Common Stock Awards
The following table summarizes information related to our grants of common stock to our outside directors during fiscal 2022, 2021, and 2020:
Common
(1)
Stock
Price Per
Vesting
Date of Grant
Awarded
Share
Period
April 1, 2022 - Fiscal 2022
10,562
$
7.93
Immediate
January 3, 2022 - Fiscal 2022
8,357
$
10.02
Immediate
October 1, 2021 - Fiscal 2022
6,426
$
13.03
Immediate
July 1, 2021 - Fiscal 2022
4,312
$
16.24
Immediate
April 1, 2021 - Fiscal 2021
4,467
$
15.67
Immediate
January 4, 2021 - Fiscal 2021
4,563
$
15.34
Immediate
October 1, 2020 - Fiscal 2021
5,193
$
13.48
Immediate
July 1, 2020 - Fiscal 2021
7,000
$
10.00
Immediate
April 1, 2020 - Fiscal 2020
10,511
$
6.66
Immediate
January 2, 2020 - Fiscal 2020
4,972
$
14.08
Immediate
October 1, 2019 - Fiscal 2020
4,519
$
15.49
Immediate
July 1, 2019 - Fiscal 2020
3,659
$
19.21
Immediate
(1)
Price per share represents closing price of our common stock on the date of grant.
78
We recorded $ 321,000 , $ 280,000 , and $ 280,000 of compensation expense within selling, general, and administrative expense for these common stock awards for fiscal 2022, 2021, and 2020, respectively.
1 5 .
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, and
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 a range of 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.
Recurring Basis – Continuing Operations
The following tables present information about assets and liabilities measured at fair value on a recurring basis related to our continuing operations:
Fair value measurements as of May 1, 2022, using:
Quoted
prices in
active markets
for identical
assets
Significant
other
observable
inputs
Significant
unobservable
inputs
(amounts in thousands)
Level 1
Level 2
Level 3
Total
Assets:
U.S. Government Money Market Fund
$
8,683
N/A
N/A
$
8,683
Growth Allocation Mutual Funds
435
N/A
N/A
435
Moderate Allocation Mutual Fund
81
N/A
N/A
81
Other
158
N/A
N/A
158
Fair value measurements as of May 2, 2021, using:
Quoted
prices in
active markets
for identical
assets
Significant
other
observable
inputs
Significant
unobservable
inputs
(amounts in thousands)
Level 1
Level 2
Level 3
Total
Assets:
Premier Money Market Fund
$
7,879
N/A
N/A
$
7,879
Short Term Bond Mutual Funds
4,101
N/A
N/A
4,101
Short Duration Inflation Protected Mutual Fund
722
N/A
N/A
722
Mortgage Securities Mutual Fund
719
N/A
N/A
719
Growth Allocation Mutual Funds
339
N/A
N/A
339
Moderate Allocation Mutual Fund
86
N/A
N/A
86
Other
111
N/A
N/A
111
79
Nonrecurring Basis – Continuing Operations
Fourth Quarter of Fiscal 2021
We had assets and liabilities that were required to be measured at fair value on a nonrecurring basis that pertained to assets acquired and certain liabilities that were assumed in connection with the CIH business combination effective February 1, 2021. See Note 2 of the consolidated financial statements for further details regarding this business combination.
Fair value measurements on February 1, 2021, using:
Quoted Prices
in active
markets for
identical assets
Significant
other
observable
inputs
Significant
unobservable
inputs
(amounts in thousands)
Level 1
Level 2
Level 3
Total
Assets:
Right of use assets
N/A
$
2,544
N/A
$
2,544
Equipment and leasehold improvements
N/A
N/A
846
846
Inventory
N/A
N/A
31
31
The fair value of the right of use assets was based on our analysis of a recent appraisal of the annual lease rates per square foot for industrial buildings that are similar in nature and within the same locale. We believe the annual lease rates per square foot presented in our recent appraisal represent significant observable inputs and therefore these right of use assets were classified as level 2.
Additionally, in connection with the CIH business combination effective February 1, 2021, we acquired cash, accounts receivable, and certain other current assets, and we assumed accounts payable. Based on the nature of these items and their short-term maturity, the carrying amount of these items approximated their fair values. See Note 2 of the consolidated financial statements for the final allocation of the acquisition cost to assets acquired and liabilities assumed based on their fair values.
Annual Impairment Assessment – May 3, 2020
The following table presents information about assets measured at fair value on a nonrecurring basis related to our continuing operations as of May 3, 2020:
Fair value measurements as of May 3, 2020, using:
Quoted Prices
in active
markets for
identical assets
Significant
other
observable
inputs
Significant
unobservable
inputs
(amounts in thousands)
Level 1
Level 2
Level 3
Total
Assets:
Goodwill
N/A
N/A
$
—
$
—
Tradename
N/A
N/A
540
540
We recorded an asset impairment charge of $ 13.6 million in asset impairments in the fiscal 2020 Consolidated Statement of Net Loss for the entire carrying value of goodwill associated with our continuing operations. As a result, we did no t have goodwill recorded in our Consolidated Balance Sheets as of May 1, 2022, and May 2, 2021, respectively. Goodwill was recorded at fair market value using a discounted cash flow method that used significant unobservable inputs and was classified as level 3. See Note 9 of the consolidated financial statements for further details regarding our assessment of impairment, conclusions reached, and the performance of our quantitative impairment tests.
We recorded an asset impairment charge of $ 143,000 in asset impairments in the fiscal 2020 Consolidated Statement of Net Loss. Tradename was recorded at fair market value using the relief from royalty method that used significant unobservable inputs and was classified as level 3. See Note 8 of the consolidated financial statements for further details regarding our assessment of impairment, conclusions reached, and the performance of our quantitative impairment test.
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Nonrecurring Basis – Discontinued Operation
During fiscal 2020, the entire carrying value of our goodwill and tradename associated with our discontinued operation was impaired. Consequently, we recorded asset impairment charges totaling $ 20.2 million that were presented in loss before income taxes from discontinued operation of the fiscal 2020 Consolidated Statement of Net Loss. Of the total asset impairment charges totaling $ 20.2 million, $ 13.6 million and $ 6.6 million pertained to goodwill and tradename, respectively.
At the end of the third quarter of fiscal 2020, we assessed the fair value of our contingent consideration related to the acquisition of our ownership interest in eLuxury. Based on this assessment, we recorded a reversal of $ 6.1 million for the full amount of this contingent consideration.
See below for fair value techniques used to determine the fair value of goodwill, tradename, and contingent consideration and the level of the fair value hierarchy at which these assets and liabilities were classified based on the lowest level of inputs used.
Goodwill
Goodwill was assessed for impairment at the end of our third quarter and during our fourth quarter of fiscal 2020. At the end of the third quarter of fiscal 2020, goodwill was recorded at fair market value using a discounted cash flow method that used significant unobservable inputs and was classified as level 3.
During the fourth quarter of fiscal 2020, goodwill was recorded at fair market value based on the expected selling price of our entire ownership interest in eLuxury in comparison to its carrying amount, including goodwill. 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 interest in eLuxury. We believe the selling price represents a significant observable input and was classified as level 2.
See Note 9 of the consolidated financial statements for further details regarding our assessment of impairment, conclusions reached, and the performance of our quantitative impairment tests.
Tradename
Tradename was assessed for impairment at the end of our third quarter and during our fourth quarter of fiscal 2020. At the end of the third quarter of fiscal 2020, tradename was recorded at fair market value using the relief from royalty method that used significant unobservable inputs and was classified as level 3.
During the fourth quarter of fiscal 2020, tradename was recorded at fair market value 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 interest in eLuxury. We believe the selling price represents a significant observable input and was classified as level 2.
See Note 8 of the consolidated financial statements for further details regarding our assessment of impairment, conclusions reached, and the performance of our quantitative impairment test.
Contingent Consideration
At the end of the third quarter of fiscal 2020, the fair value of our contingent consideration was determined using forecasted financial information to calculate EBITDA as it related to the Equity Agreement associated with the acquisition of our ownership interest in eLuxury. Since forecasted financial information utilizes significant unobservable inputs, the fair value of our contingent consideration was classified as level 3.
See Note 3 of the consolidated financial statements for further details regarding the terms of this contingent consideration arrangement.
1 6 .
NET (LOSS) INCOME FROM CONTINUING OPERATIONS PER SHARE
Basic net (loss) income from continuing operations per share is computed using the weighted-average number of shares outstanding during the period. Diluted net (loss) income 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
81
method. Weighted average shares used in the computation of basic and diluted net (loss) income from continuing operations per share are as follows:
(in thousands)
2022
2021
2020
weighted-average common shares outstanding, basic
12,242
12,300
12,378
dilutive effect of stock-based compensation
—
22
—
weighted-average common shares outstanding, diluted
12,242
12,322
12,378
During fiscal 2022, 18,281 shares of unvested common stock were not included in the computation of diluted net loss from continuing operations per share, as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards. In addition, during fiscal 2022, 85,796 shares of unvested common stock were not included in the computation of diluted net loss from continuing operations per share as we incurred a net loss during the reporting period.
During fiscal 2021, 2,175 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 due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards.
During fiscal 2020, 19,388 shares of unvested common stock were not included in the computation of diluted net loss from continuing operations per share, as their effect would be antidilutive due to the decrease in the price per share of our common stock during the reporting period compared with the price per share of our common stock as of the respective grant dates of the related stock-based compensation awards. In addition, during fiscal 2020, 26,343 shares of unvested common stock were not included in the computation of diluted net loss from continuing operations per share as we incurred a net loss during the reporting period.
17 .
BENEFIT PLANS
Defined Contribution Plans
We have defined contribution plans that cover substantially all employees and allow participants to contribute on a pre-tax basis, along with, matching contributions by the company for its U.S. and Canadian operations. Our contributions to these plans were $ 1.3 million, $ 1.2 million, and $ 1.2 million during fiscal years 2022, 2021, and 2020, respectively.
Deferred Compensation Plan
We have a nonqualified deferred compensation plan (the “Plan”) covering senior executives and certain key members of management. The Plan provides for participant deferrals on a pre-tax basis that are subject to annual deferral limits by the IRS and non-elective contributions made by the company. Participant deferrals and non-elective contributions made by the company are immediately vested.
Our contributions to the Plan were $ 212,000 , $ 143,000 , and $ 185,000 in fiscal years 2022, 2021, and 2020, respectively. Our nonqualified deferred compensation plan liability was $ 9.3 million and $ 8.4 million as of May 1, 2022, and May 2, 2021, respectively.
We have a rabbi trust (the “Trust”) to set aside funds for the participants of the Plan and that allows the participants to direct their contributions to various investment options in the Plan. The investment options of the Plan consist of a money market fund and various mutual funds. The funds set aside in the Trust are subject to the claims of our general creditors in the event of the company’s insolvency, as defined in the Plan.
The investment assets of the Trust are recorded at their fair value of $ 9.4 million and $ 8.4 million as of May 1, 2022, and May 2, 2021, respectively. The investment assets of the Trust are classified as available for sale and accordingly, changes in their fair values are recorded in other comprehensive (loss) income.
1 8 .
SEGMENT INFORMATION
Overall
Continuing Operations
Our continuing operations are classified into two business segments: mattress fabrics and upholstery fabrics.
82
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. In addition, this segment includes Read, which 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.
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. Additionally, 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 for fiscal year 2020.
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. A reconciliation is provided in Note 3 that contains detailed income statement information and is reconciled to net loss from discontinued operation presented in the Consolidated Statement of Net Loss for fiscal year 2020.
Net Sales Geographic Concentration
Net sales denominated in U.S. dollars accounted for 90 %, 91 %, and 93 % of total consolidated net sales in fiscal 2022, 2021, and 2020, respectively. International sales accounted for 31 %, 27 %, and 26 % of net sales during fiscal 2022, 2021, and 2020, respectively, and are summarized by geographic area as follows:
(dollars in thousands)
2022
2021
2020
north america (excluding USA) (1)
$
39,256
$
32,925
$
27,637
far east and asia (2)
43,015
43,764
36,470
all other areas
8,114
5,558
2,986
$
90,385
$
82,247
$
67,093
(1)
Of this amount, $ 33.5 million, $ 27.2 million, and $ 21.7 million are attributable to shipments to Mexico in fiscal 2022, 2021, and 2020, respectively.
(2)
Of this amount $ 26.9 million, $ 28.1 million, and $ 21.4 million are attributable to shipments to China in fiscal 2022, 2021, and 2020, respectively.
Sales attributed to individual countries are based upon the location that the company ships its products to for delivery to customers.
Customer Concentration
One customer within the upholstery fabrics segment represented 13 %, 13 %, and 12 % of consolidated net sales during fiscal 2022, 2021, and 2020, respectively. No customers within the upholstery fabrics segment accounted for greater than 10 % of the consolidated net accounts receivable balance as of May 1, 2022, or May 2, 2021.
No customers within the mattress fabrics segment represented greater than 10 % of consolidated net sales during fiscal 2022, 2021, or fiscal 2020. No customers within the mattress fabrics segment accounted for greater than 10 % of the consolidated net accounts receivable balance as of May 1, 2022. One customer within the mattress fabrics segment accounted for 12 % of the consolidated net accounts receivable balance as of May 2, 2021.
Employee Workforce Concentration
The hourly employees associated with our manufacturing facility located in Canada (approximately 10 % of our workforce) are represented by a local, unaffiliated union. The collective bargaining agreement for these employees expires on February 1, 2023. We are not aware of any efforts to organize any more of our employees, and we believe our relations with our employees are good.
83
Financial Information
We evaluate the operating performance of our business segments based upon income (loss) from continuing operations before certain unallocated corporate expenses, asset impairment charges, restructuring credit, and other items that are not expected to occur on a regular basis. Cost of sales in each of our current business segments include 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 senior executives and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses. Segment assets include assets used in operations of each segment and primarily consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets.
Statements of operations for our current operating segments are as follows:
(dollars in thousands)
2022
2021
2020
net sales by segment:
upholstery fabrics
$
142,680
$
142,049
$
124,754
mattress fabrics
152,159
157,671
131,412
total net sales
$
294,839
$
299,720
$
256,166
gross profit from continuing operations by segment:
upholstery fabrics
$
19,635
$
25,968
$
24,220
mattress fabrics
16,458
23,864
16,278
total gross profit from continuing operations
$
36,093
$
49,832
$
40,498
selling, general, and administrative expenses by segment:
upholstery fabrics
$
14,009
$
14,092
$
14,353
mattress fabrics
12,246
12,066
11,354
unallocated corporate
9,160
11,598
8,717
total selling, general, and administrative expenses
$
35,415
$
37,756
$
34,424
income (loss) from continuing operations:
upholstery fabrics
$
5,626
$
11,876
$
9,867
mattress fabrics
4,212
11,798
4,924
unallocated corporate expenses
( 9,160
)
( 11,598
)
( 8,717
)
total segment income from continuing operations
678
12,076
6,074
asset impairments (1)
—
—
( 13,712
)
restructuring credit
—
—
70
total income (loss) from continuing operations
678
12,076
( 7,568
)
interest expense
( 17
)
( 51
)
( 106
)
interest income
373
244
897
gain on bargain purchase (2)
—
819
—
other expense
( 1,359
)
( 2,208
)
( 902
)
(loss) income before income taxes from continuing operations
$
( 325
)
$
10,880
$
( 7,679
)
( 1 )
During fiscal 2020, we incurred asset impairment charges totaling $ 13.7 million, of which $ 13.6 million and $ 143,000 pertained to goodwill and a tradename associated with Read, respectively. Of this $ 13.7 million, $ 11.5 million and $ 2.2 million pertained to the mattress fabrics segment and upholstery fabrics segment, respectively.
( 2 )
Effective February 1, 2021, we acquired the remaining fifty percent ownership interest in our former unconsolidated joint venture located in Haiti. Pursuant to this transaction, we are now the sole owner with full control over this operation. The gain on bargain purchase represents the net assets acquired from this transaction that exceeded the fair value of our previously held 50 % ownership interest of $ 1.7 million and the $ 954,000 total purchase price for the remaining 50% ownership interest.
84
Balance sheet information for our current operating segments follow:
(dollars in thousands)
May 1,
2022
May 2,
2021
segment assets
mattress fabrics
accounts receivable
$
9,865
$
20,427
inventory
39,028
30,047
property, plant, and equipment
38,731
(1)
41,694
(2)
right of use assets
3,469
(3)
4,278
(4)
total mattress fabrics assets
91,093
96,446
upholstery fabrics
accounts receivable
12,361
17,299
inventory
27,529
25,870
property, plant, and equipment
2,030
(5)
1,495
(6)
right of use assets
8,124
(7)
5,945
(8)
total upholstery fabrics assets
50,044
50,609
total segment assets
141,137
147,055
non-segment assets
cash and cash equivalents
14,550
37,009
short-term investments – available for sale
—
5,542
short-term investments – held-to-maturity
—
3,161
current income taxes receivable
857
—
deferred income taxes
528
545
other current assets
2,986
3,852
property, plant, and equipment (9)
941
814
right of use assets (10)
3,984
1,507
intangible assets
2,628
3,004
long-term investments - held-to-maturity
—
1,141
long-term investments - rabbi trust
9,357
8,415
other assets
595
2,035
total assets
$
177,563
$
214,080
(dollars in thousands)
2022
2021
2020
capital expenditures (11):
mattress fabrics
$
3,383
$
6,226
$
3,475
upholstery fabrics
1,032
347
348
discontinued operation
—
—
135
unallocated corporate
1,406
332
675
total capital expenditures
$
5,821
$
6,905
$
4,633
depreciation expense
mattress fabrics
$
6,200
$
6,014
$
6,712
upholstery fabrics
794
832
765
discontinued operation
—
—
350
total depreciation expense
$
6,994
$
6,846
$
7,827
(1)
The $ 38.7 million as of May 1, 2022, represents property, plant, and equipment of $ 25.6 million, $ 12.4 million, and $ 757,000 located in the U.S., Canada, and Haiti, respectively.
(2)
The $ 41.7 million as of May 2, 2021, represents property, plant, and equipment of $ 28.8 million, $ 12.0 million, and $ 855,000 located in the U.S., Canada, and Haiti, respectively.
(3)
The $ 3.5 million as of May 1, 2022, represents right of use assets of $ 2.0 million, $ 1.2 million, and $ 291,000 located in Haiti, the U.S., and Canada, respectively.
85
(4)
The $ 4.3 million as of May 2, 2021, represents right of use assets of $ 2.4 million, $ 1.4 million, and $ 400,000 located in Haiti, the U.S., and Canada, respectively.
(5)
The $ 2.0 million as of May 1, 2022, represents property, plant, and equipment of $ 1.0 million, $ 756,000 , and $ 255,000 located in the U.S., Haiti, and China, respectively.
(6)
The $ 1.5 million as of May 2, 2021, represents property, plant, and equipment of $ 1.1 million and $ 420,000 located in the U.S. and China, respectively.
(7)
The $ 8.1 million as of May 1, 2022, represents right of use assets of $ 3.7 million, $ 2.6 million, and $ 1.8 million located in China, Haiti, and the U.S., respectively.
(8)
The $ 5.9 million as of May 2, 2021, represents right of use assets of $ 5.0 million and $ 952,000 located in China and the U.S., respectively.
(9)
The $ 941,000 as of May 1, 2022, and $ 814,000 as of May 2, 2021, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by both the mattress fabrics and upholstery fabrics segments located in the U.S.
(10)
The $ 4.0 million as of May 1, 2022, and $ 1.5 million as of May 2, 2021, represents right of use assets located in the U.S. associated with unallocated corporate departments and corporate departments shared by both the mattress fabrics and upholstery fabrics segments located in the U.S.
(11)
Capital expenditure amounts are stated on an accrual basis. See the Consolidated Statement of Cash Flows for capital expenditure amounts on a cash basis.
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 reached 50 % of the company’s registered capital. As of May 1, 2022, the statutory surplus reserve fund represents the 50 % registered capital requirement, and therefore, our subsidiary located in China is no longer 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 May 1, 2022, the company’s statutory surplus reserve was $ 4.4 million. The statutory surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any. The statutory 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.
The company’s subsidiary located in China can transfer funds to the parent company, except for the statutory surplus reserve of $ 4.4 million, to assist with debt repayment, capital expenditures, and other expenses of the company’s business.
2 0 .
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 in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number and timing of share purchases are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities.
During fiscal 2022, we repurchased 121,688 shares of our common stock at a cost of $ 1.8 million. As a result, as of May 1, 2022, $ 3.2 million is available for additional repurchases of our common stock.
During fiscal 2021, we did no t repurchase any shares of our common stock.
During fiscal 2020, we repurchased 142,496 shares of our common stock at a cost of $ 1.7 million pursuant to the authorization approved by our board of directors on September 5, 2019.
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2 1 .
DIVIDEND PROGRAM
On June 29, 2022, our board of directors announced the decision to suspend the company’s quarterly cash dividend. Considering the current and expected macroeconomic conditions, we believe that preserving capital and managing our liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders.
During fiscal 2022, dividend payments totaled $ 5.5 million, which represented quarterly dividend payments ranging from $ 0.11 per share to $ 0.115 per share.
During fiscal 2021, dividend payments totaled $ 5.3 million, which represented quarterly dividend payments ranging from $ 0.105 per share to $ 0.11 per share.
During fiscal 2020, dividend payments totaled $ 5.1 million, which represented quarterly dividend payments ranging from $ 0.10 per share to $ 0.105 per share.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended May 1, 2022, there were no disagreements on any matters of accounting principles or practices or financial statement disclosures.