UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 3, 2019

Commission File No. 1-12597

 

 

CULP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

NORTH CAROLINA		56-1001967
(State or other jurisdiction of incorporation or other organization)		(I.R.S. Employer Identification No.)
1823 Eastchester Drive High Point, North Carolina		27265-1402
(Address of principal executive offices)		(zip code)

(336) 889-5161

(Registrant’s telephone number, including area code)

 

 

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

 

Title of Each Class		Trading Symbol(s)		Name of Each Exchange On Which Registered
Common Stock, par value $0.05/Share		CULP		New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    ☒  YES    NO  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period after the registrant was required to submit such files).    ☒  YES    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller Reporting Company		☐
				Emerging Growth Company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  YES    NO  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common shares outstanding at December 12, 2019: 12,411,957

Par Value: $0.05 per share

 

 

 

 

INDEX TO FORM 10-Q

For the period ended November 3, 2019

 

		Page
Part I - Financial Statements
Item 1. Financial Statements: (Unaudited)
Consolidated Statements of Net Income — Three and Six Months Ended November 3, 2019 and October 28, 2018			I-1
Consolidated Statements of Comprehensive Income – Three and Six Months Ended November 3, 2019 and October 28, 2018			I-2
Consolidated Balance Sheets — November 3, 2019, October  28, 2018, and April 28, 2019			I-3
Consolidated Statements of Cash Flows — Six Months Ended November  3, 2019 and October 28, 2018			I-4
Consolidated Statements of Shareholders’ Equity – Six Months Ended November 3, 2019			I-5
Consolidated Statements of Shareholders’ Equity – Six Months Ended October 28, 2018			I-6
Notes to Consolidated Financial Statements			I-7
Cautionary Statement Concerning Forward-Looking Information			I-35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			I-36
Item 3. Quantitative and Qualitative Disclosures About Market Risk			I-59
Item 4. Controls and Procedures			I-59
Part II - Other Information
Item 1. Legal Proceedings			II-1
Item 1A. Risk Factors			II-1
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			II-1
Item 6. Exhibits			II-2
Signatures			II-4

Item 1:

Financial Statements

CULP, INC.

CONSOLIDATED STATEMENTS OF NET INCOME

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 3, 2019 AND OCTOBER 28, 2018

UNAUDITED

(Amounts in Thousands, Except for Per Share Data)

 

		THREE MONTHS ENDED
		November 3,				October 28,
		2019				2018
Net sales		$	72,619				77,006
Cost of sales			58,516				63,680
Gross profit			14,103				13,326
Selling, general and administrative expenses			10,120				10,103
Restructuring credit			—				(1,061	)
Income from operations			3,983				4,284
Interest expense			30				18
Interest income			(240	)			(151	)
Other expense			87				142
Income before income taxes			4,106				4,275
Income taxes			1,898				1,276
Loss from investment in unconsolidated joint venture			16				55
Net income		$	2,192				2,944
Net loss (income) attributable to non-controlling interest			108				(11	)
Net income attributable to Culp, Inc. common shareholders		$	2,300				2,933
Net income attributable to Culp Inc. common shareholders per share - basic		$	0.19				0.23
Net income attributable to Culp Inc. common shareholders per share - diluted		$	0.19				0.23
Average shares outstanding, basic			12,408				12,515
Average shares outstanding, diluted			12,408				12,551
		SIX MONTHS ENDED
		November 3,				October 28,
		2019				2018
Net sales		$	147,466				148,479
Cost of sales			119,998				124,594
Gross profit			27,468				23,885
Selling, general and administrative expenses			20,831				18,136
Restructuring credit			(35	)			(610	)
Income from operations			6,672				6,359
Interest expense			39				38
Interest income			(490	)			(301	)
Other expense			174				399
Income before income taxes			6,949				6,223
Income taxes			3,580				2,182
Loss from investment in unconsolidated joint venture			3				132
Net income		$	3,366				3,909
Net loss (income) attributable to non-controlling interest			272				(19	)
Net income attributable to Culp, Inc. common shareholders		$	3,638				3,890
Net income attributable to Culp Inc. common shareholders per share - basic		$	0.29				0.31
Net income attributable to Culp Inc. common shareholders per share - diluted		$	0.29				0.31
Average shares outstanding, basic			12,403				12,512
Average shares outstanding, diluted			12,413				12,612

See accompanying notes to consolidated financial statements.

 

I-1

CULP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 3, 2019 AND OCTOBER 28, 2018

(UNAUDITED)

(AMOUNTS IN THOUSANDS)

 

		THREE MONTHS ENDED
		November 3,				October 28,
		2019				2018
Net income		$	2,192			$	2,944
Other comprehensive income (loss)
Unrealized gain (loss) on investments, net of tax
Unrealized holding gains (losses) on investments			9				(43	)
Reclassification adjustment for realized loss (gain) on investments			—				—
Total unrealized gain (loss) on investments			9				(43	)
Unrealized gain on foreign currency cash flow hedge, net of tax
Unrealized holding gain on foreign currency cash flow hedge			—				17
Reclassification adjustment for realized loss on foreign currency cash flow hedge			—				24
Total unrealized gain on foreign currency cash flow hedge			—				41
Total other comprehensive income (loss)			9				(2	)
Comprehensive income		$	2,201			$	2,942
Comprehensive loss (income) attributable to non-controlling interest			108				(11	)
Comprehensive income attributable to Culp, Inc. common shareholders		$	2,309			$	2,931
		SIX MONTHS ENDED
		November 3,				October 28,
		2019				2018
Net income		$	3,366			$	3,909
Other comprehensive income
Unrealized gain on investments, net of tax
Unrealized holding gains (losses) on investments			15				(3	)
Reclassification adjustment for realized loss on investments			—				94
Total unrealized gain on investments			15				91
Unrealized gain on foreign currency cash flow hedge, net of tax
Unrealized holding loss on foreign currency cash flow hedge			—				(8	)
Reclassification adjustment for realized loss on foreign currency cash flow hedge			—				64
Total unrealized gain on foreign currency cash flow hedge			—				56
Total other comprehensive income			15				147
Comprehensive income		$	3,381			$	4,056
Comprehensive (loss) income attributable to non-controlling interest			272				(19	)
Comprehensive income attributable to Culp, Inc. common shareholders		$	3,653			$	4,037

See accompanying notes to consolidated financial statements.

 

I-2

CULP, INC.

CONSOLIDATED BALANCE SHEETS

NOVEMBER 3, 2019, OCTOBER 28, 2018, AND APRIL 28, 2019

UNAUDITED

(Amounts in Thousands)

 

		November 3, 2019				October 28, 2018				* April 28, 2019
Current assets:
Cash and cash equivalents		$	47,183				14,768				40,008
Short-term investments - Held-To-Maturity			—				26,719				5,001
Accounts receivable, net			24,522				24,362				23,751
Inventories			55,228				50,601				50,860
Current income taxes receivable			776				—				776
Assets held for sale			150				237				—
Other current assets			2,710				2,461				2,849
Total current assets			130,569				119,148				123,245
Property, plant and equipment, net			46,973				51,325				48,389
Goodwill			27,222				27,222				27,222
Intangible assets			10,260				10,636				10,448
Long-term investments - Rabbi Trust			7,575				7,851				7,081
Right of use asset			5,879				—				—
Noncurrent income taxes receivable			733				—				733
Deferred income taxes			511				3,614				457
Investment in unconsolidated joint venture			1,504				1,470				1,508
Other assets			496				945				643
Total assets		$	231,722				222,211				219,726
Current liabilities:
Accounts payable-trade		$	27,395				24,007				24,377
Accounts payable - capital expenditures			402				114				78
Operating lease liability - current			2,282				—				—
Deferred revenue			375				649				399
Accrued expenses			8,915				8,670				9,192
Accrued restructuring costs			35				260				124
Deferred compensation			—				714				—
Income taxes payable - current			1,539				2,044				1,022
Total current liabilities			40,943				36,458				35,192
Accrued expenses - long-term			333				—				333
Subordinated loan payable			925				—				675
Operating lease liability - noncurrent			3,439				—				—
Contingent consideration - earn-out obligation			6,006				5,706				5,856
Income taxes payable - long-term			3,442				3,233				3,249
Deferred income taxes			3,283				2,225				3,176
Deferred compensation			7,429				7,120				6,998
Total liabilities			65,800				54,742				55,479
Commitments and Contingencies (Notes 12, 19 and 20)
Shareholders’ equity
Preferred stock, $0.05 par value, authorized 10,000,000			—				—				—
Common stock, $0.05 par value, authorized 40,000,000 shares, issued and outstanding 12,411,957 at November 3, 2019; 12,491,956 at October 28, 2018; and 12,391,160 at April 28, 2019			621				625				620
Capital contributed in excess of par value			44,109				45,959				43,694
Accumulated earnings			116,735				116,272				115,579
Accumulated other comprehensive income			55				62				40
Total shareholders’ equity attributable to Culp Inc.			161,520				162,918				159,933
Non-controlling interest			4,402				4,551				4,314
Total equity			165,922				167,469				164,247
Total liabilities and shareholders’ equity		$	231,722				222,211				219,726

 

*	Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

 

I-3

CULP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED NOVEMBER 3, 2019 AND OCTOBER 28, 2018

UNAUDITED

(Amounts in Thousands)

 

		SIX MONTHS ENDED
		November 3,				October 28,
		2019				2018
Cash flows from operating activities:
Net income		$	3,366				3,909
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			3,893				4,056
Amortization			353				391
Stock-based compensation			467				(106	)
Deferred income taxes			53				(2,081	)
Realized loss on sale of short-term investments (Available for Sale)			—				94
Gain on sale of equipment			(93	)			(1,079	)
Loss from investment in unconsolidated joint venture			3				132
Foreign currency exchange gain			(106	)			(102	)
Changes in assets and liabilities:
Accounts receivable			(835	)			1,639
Inventories			(4,797	)			3,767
Other current assets			(31	)			379
Other assets			133				(10	)
Accounts payable - trade			3,564				(3,264	)
Deferred revenue			(24	)			(160	)
Accrued expenses and deferred compensation			1,620				(1,472	)
Accrued restructuring costs			(89	)			260
Income taxes			770				247
Net cash provided by operating activities			8,247				6,600
Cash flows from investing activities:
Net cash paid for acquisition of businesses			—				(12,096	)
Capital expenditures			(2,410	)			(2,096	)
Proceeds from the sale of equipment			363				1,280
Investment in unconsolidated joint venture			—				(100	)
Proceeds from the sale of short-term investments (Held to Maturity)			5,000				4,000
Proceeds from the sale of short-term investments (Available for Sale)			—				2,458
Purchase of short-term investments (Available for Sale)			—				(10	)
Purchase of long-term investments (Rabbi Trust)			(479	)			(526	)
Net cash used provided by (used in) investing activities			2,474				(7,090	)
Cash flows from financing activities:
Proceeds from line of credit			—				12,000
Payments on line of credit			—				(12,000	)
Payments on vendor-financed capital expenditures			—				(1,412	)
Proceeds from subordinated loan payable			250				—
Cash paid for acquisition of business			(1,532	)			—
Dividends paid			(2,482	)			(2,253	)
Common stock surrendered for withholding taxes payable			(51	)			(1,292	)
Capital contribution from non-controlling interest			360				—
Common stock repurchased			—				(844	)
Net cash used in financing activities			(3,455	)			(5,801	)
Effect of exchange rate changes on cash and cash equivalents			(91	)			(169	)
Increase (decrease) in cash and cash equivalents			7,175				(6,460	)
Cash and cash equivalents at beginning of period			40,008				21,228
Cash and cash equivalents at end of period		$	47,183				14,768

See accompanying notes to consolidated financial statements.

 

I-4

CULP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX-MONTH PERIOD ENDED NOVEMBER 3, 2019

UNAUDITED

(Dollars in thousands, except share data)

 

		Shareholders’ equity attributable to Culp Inc.
										Capital								Accumulated
										Contributed								Other
		Common Stock								in Excess				Accumulated				Comprehensive								Non-Controlling				Total
		Shares				Amount				of Par Value				Earnings				Income				Total				Interest				Equity
Balance, April 28, 2019 *			12,391,160				620				43,694				115,579				40				159,933				4,314				164,247
Net income (loss)			—				—				—				1,338				—				1,338				(164	)			1,174
Stock-based compensation			—				—				154				—				—				154				—				154
Unrealized gain on investments			—				—				—				—				6				6				—				6
Common stock issued in connection with vesting of performance based restricted stock units			12,776				1				(1	)			—				—				—				—				—
Fully vested common stock award			3,659				—				—				—				—				—				—				—
Common stock surrendered for withholding taxes payable			(2,581	)			—				(44	)			—				—				(44	)			—				(44	)
Dividends paid			—				—				—				(1,241	)			—				(1,241	)			—				(1,241	)
Capital contribution from non-controlling interest			—				—				—				—				—				—				40				40
Balance, August 4, 2019			12,405,014				621				43,803				115,676				46				160,146				4,190				164,336
Net income (loss)			—				—				—				2,300				—				2,300				(108	)			2,192
Stock-based compensation			—				—				313				—				—				313				—				313
Unrealized gain on investments			—				—				—				—				9				9				—				9
Common stock issued in connection with vesting of performance based restricted stock units			2,862				—				—				—				—				—				—				—
Fully vested common stock award			4,520				—				—				—				—				—				—				—
Common stock surrendered for withholding taxes payable			(439	)			—				(7	)			—				—				(7	)			—				(7	)
Dividends paid			—				—				—				(1,241	)			—				(1,241	)			—				(1,241	)
Capital contributions from non-controlling interest			—				—				—				—				—				—				320				320
Balance, November 3, 2019			12,411,957				621				44,109				116,735				55				161,520				4,402				165,922

 

*	Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

 

I-5

CULP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

SIX-MONTH PERIOD ENDED OCTOBER 28, 2018

UNAUDITED

(Dollars in thousands, except share data)

 

		Shareholders’ equity attributable to Culp Inc.
										Capital								Accumulated
										Contributed								Other
		Common Stock								in Excess				Accumulated				Comprehensive								Non-Controlling				Total
		Shares				Amount				of Par Value				Earnings				(Loss) Income				Total				Interest				Equity
Balance, April 29, 2018 *			12,450,276			$	623				48,203				114,635				(85	)		$	163,376			$	—			$	163,376
Net income			—				—				—				957				—				957				8				965
Acquisition of subsidiary with non-controlling interest			—				—				—				—				—				—				4,532				4,532
Stock-based compensation			—				—				(501	)			—				—				(501	)			—				(501	)
Unrealized gain on foreign currency cash flow hedge			—				—				—				—				15				15				—				15
Unrealized gain on investments			—				—				—				—				134				134				—				134
Common stock issued in connection with vesting of performance based restricted stock units			115,917				6				(6	)			—				—				—				—				—
Common stock issued in connection with vesting of time-based restricted stock units			1,200				—				—				—				—				—				—				—
Common stock surrendered for withholding taxes payable			(42,157	)			(2	)			(1,290	)			—				—				(1,292	)			—				(1,292	)
Common stock repurchased			(2,990	)			—				(72	)			—				—				(72	)			—				(72	)
Dividends paid			—				—				—				(1,127	)			—				(1,127	)			—				(1,127	)
Balance, July 29, 2018			12,522,246				627				46,334				114,465				64				161,490				4,540				166,030
Net income			—				—				—				2,933				—				2,933				11				2,944
Stock-based compensation			—				—				395				—				—				395				—				395
Unrealized gain on foreign currency cash flow hedge			—				—				—				—				41				41				—				41
Unrealized loss on investments			—				—				—				—				(43	)			(43	)			—				(43	)
Fully vested common stock award			3,600				—				—				—				—				—				—				—
Common stock repurchased			(33,890	)			(2	)			(770	)			—				—				(772	)			—				(772	)
Dividends paid			—				—				—				(1,126	)			—				(1,126	)			—				(1,126	)
Balance, October 28, 2018			12,491,956			$	625				45,959				116,272				62			$	162,918			$	4,551			$	167,469

 

*	Derived from audited financial statements.

See accompanying notes to consolidated financial statements.

 

I-6

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Culp, Inc. and its majority-owned subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position. All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 12, 2019, for the fiscal year ended April 28, 2019.

The company’s six-months ended November 3, 2019, and October 28, 2018, represent 27-week and 26-week periods, respectively.

2. Significant Accounting Policies

As of November 3, 2019, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended April 28, 2019, except as discussed below.

Recently Adopted Accounting Pronouncements

Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on the balance sheet and disclose certain key information about their leasing arrangements. The new standard establishes a right of use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability for certain lease contracts. Topic 842 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As a result, we adopted Topic 842 on April 29, 2019, electing to use the modified retrospective transition method, which requires us to recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, financial information and disclosures will not be provided for periods prior to April 29, 2019.

Topic 842 allows the election of several practical expedients as part of adopting this new standard. We elected the “package of practical expedients” which permits us not to reassess, under Topic 842, our previous conclusions regarding lease identification and classification. We did not elect the use of hindsight with respect to determining the lease term. Also, Topic 842 provides practical expedients after adopting the new standard. We elected the short-term lease exemption, and therefore, we will not recognize ROU assets or lease liabilities for leases shorter than twelve months. We did not elect the practical expedient to combine lease and non-lease components for any class of assets and will account for lease components separately from non-lease components.

The adoption of Topic 842 had a material effect on our Consolidated Balance Sheets and increased the required disclosures in our notes to the consolidated financial statements (see note 19 for further details). The most significant effect related to the recognition of ROU assets totaling $7.2 million that were mostly offset by the recognition of lease liabilities totaling $7.1 million in our Consolidated Balance Sheets. The adoption of Topic 842 did not have a material impact on our Consolidated Statements of Net Income or our Consolidated Statement of Cash Flows.

 

I-7

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Recently Issued Accounting Pronouncements

The company has considered all recent accounting pronouncements and currently believes there are no recent accounting pronouncements that may have a material impact on our Consolidated Financial Statements.

3. Business Combinations

eLuxury, LLC (eLuxury)

Overview

Effective June 22, 2018, we entered into an Equity Purchase Agreement (Equity Agreement), pursuant to which we acquired an initial 80% ownership interest in 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, as well as Amazon and other leading online retailers for specialty home goods.

This acquisition brings together eLuxury’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise with our global production, sourcing, and distribution capabilities.

The estimated consideration given for the initial 80% ownership interest in eLuxury totaled $18.1 million, of which $12.5 million represented the estimated purchase price and $5.6 million represented the fair value for contingent consideration associated with an earn-out obligation (see below for further details). Of the $12.5 million estimated purchase price, $11.6 million was paid at closing on June 22, 2018, $185,000 was paid in August 2018, and $749,000 was paid in September 2019.

Assets Acquired and Liabilities Assumed

The following table presents the final allocation of the acquisition cost to the assets acquired and liabilities assumed based on their fair values.

 

(dollars in thousands)		Fair Value
Goodwill		$	13,653
Tradename			6,549
Equipment			2,179
Inventory			1,804
Accounts receivable and other current assets			108
Accounts payable			(1,336	)
Accrued expenses			(295	)
Non-controlling interest in eLuxury			(4,532	)
		$	18,130

We recorded the tradename at fair market value based on the relief from royalty method. This tradename was determined to have an indefinite useful life and, therefore, is not being amortized. Equipment will be depreciated on a straight-line basis over useful lives ranging from five to ten years.

 

I-8

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The goodwill related to this acquisition is attributable to eLuxury’s reputation with the products it offers and management’s experience in e-commerce, online brand building, and direct-to-consumer shopping and fulfillment expertise. Goodwill is deductible for income tax purposes over the statutory period of fifteen years.

As mentioned above, the Equity Agreement contains a contingent consideration arrangement that requires us to pay the seller, who is 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.

Non-Controlling Interest

The Equity Agreement contains substantive profit-sharing arrangement provisions which explicitly state the ownership interests at the effective date of this business combination and the allocation of net income or loss between Culp, Inc., as the controlling interest holder, and the noncontrolling interest holder. The Equity Agreement states that at the effective date of this acquisition (June 22, 2018), we acquired an 80% ownership interest in eLuxury, with the seller retaining a 20% noncontrolling interest. Additionally, the Equity Agreement states that eLuxury’s net income or loss and future capital contributions will be allocated at a percentage of 70% and 30% to Culp, Inc. and the noncontrolling interest holder, respectively.

Based on the terms of the Equity Agreement, we believe the related risks associated with the ownership interests are aligned and therefore, the total consideration of $18.1 million for the 80% controlling interest provides information for the equity value of eLuxury as a whole, and is useful in estimating the fair value of the 20% noncontrolling interest. In order to determine the carrying value of the noncontrolling interest in eLuxury, we applied the Hypothetical-Liquidation-At-Book-Value method (HLBV). HLBV is an approach that is used in practice to determine the carrying value of a noncontrolling interest if it is consistent with an existing profit-sharing arrangement such as the Equity Agreement. Therefore, the carrying amount of the noncontrolling interest of $4.4 million at November 3, 2019, mostly represents its $4.5 million fair value determined at the acquisition date, minus its allocation of net losses that were mostly offset by capital contributions that were made subsequent from the acquisition date through the end of our second quarter of fiscal 2020.

Other

Acquisitions costs totaling $270,000 were included in selling, general, and administrative expenses in our Consolidated Statement of Net Income for the six-month period ending October 28, 2018.

 

I-9

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Pro Forma Financial Information

The following unaudited pro forma consolidated results of operations for the three-month and six-month periods ending November 3, 2019, and October 28, 2018, have been prepared as if the acquisition of eLuxury had occurred on May 1, 2017.

 

		Three Months Ended
(dollars in thousands, except per share data)		November 3, 2019				October 28, 2018
Net Sales		$	72,619			$	77,006
Income from operations			3,983				4,284
Net income			2,192				2,944
Net loss (income) - noncontrolling interest			108				(11	)
Net income – Culp Inc. common shareholders			2,300				2,933
Net income per share (basic) – Culp Inc. common shareholders			0.19				0.23
Net income per share (diluted) – Culp Inc. common shareholders			0.19				0.23
		Six Months Ended
(dollars in thousands, except per share data)		November 3, 2019				October 28, 2018
Net Sales		$	147,466			$	151,604
Income from operations			6,672				6,357
Net income			3,366				3,883
Net loss (income) - noncontrolling interest			272				(11	)
Net income – Culp Inc. common shareholders			3,638				3,872
Net income per share (basic) – Culp Inc. common shareholders			0.29				0.31
Net income per share (diluted) – Culp Inc. common shareholders			0.29				0.31

The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would actually have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

4. Allowance for Doubtful Accounts

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

 

		Six months ended
(dollars in thousands)		November 3, 2019				October 28, 2018
Beginning balance		$	393			$	357
Provision for bad debts			(27	)			28
Net write-offs, net of recoveries			—				3
Ending balance		$	366			$	388

 

I-10

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5. Revenue from Contracts with Customers

Nature of Performance Obligations

Our operations are classified into three business segments: mattress fabrics, upholstery fabrics, and home accessories. 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. Effective April 1, 2018, we acquired Read Window Products LLC (Read), a turn-key provider of window treatments that offers sourcing of upholstery fabrics and other products, measuring, and installation services of their own products for the hospitality and commercial industries. In addition, Read supplies soft goods such as decorative top sheets, coverlets, duvet covers, bed skirts, bolsters, and pillows. The home accessories segment is our finished products business that manufactures, sources, and sells bedding accessories and home goods directly to consumers and businesses through global e-commerce and business-to-business sales channels.

Our primary performance obligations include the sale of mattress fabrics, upholstery fabrics, and bedding and home accessories products, as well as the performance of customized fabrication and installation services of our own products associated with window treatments.

Contract Assets & Liabilities

Certain contracts, primarily those for customized fabrication and installation services, 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 – 45 days. Such terms are common within the industries in which we operate and are not considered financing arrangements. There were no contract assets recognized as of November 3, 2019, October 28, 2018, and April 28, 2019.

A summary of the activity of deferred revenue for the six-month periods ended November 3, 2019, and October 28, 2018, follows:

 

		Six months ended
(dollars in thousands)		November 3, 2019				October 28, 2018
Beginning balance		$	399			$	809
Revenue recognized on contract liabilities			(1,536	)			(1,534	)
Payments received for services not yet rendered			1,512				1,374
Ending balance		$	375			$	649

 

I-11

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Disaggregation of Revenue

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

 

		Mattress				Upholstery				Home
(dollars in thousands)		Fabrics				Fabrics				Accessories				Total
Products transferred at a point in time		$	35,459			$	30,964			$	3,276			$	69,699
Services transferred over time			—				2,920				—				2,920
Total Net Sales		$	35,459			$	33,884			$	3,276			$	72,619

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

 

		Mattress				Upholstery				Home
(dollars in thousands)		Fabrics				Fabrics				Accessories				Total
Products transferred at a point in time		$	74,145			$	60,792			$	7,577			$	142,514
Services transferred over time			—				4,952				—				4,952
Total Net Sales		$	74,145			$	65,744			$	7,577			$	147,466

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the three-month period ending October 28, 2018:

 

		Mattress				Upholstery				Home
(dollars in thousands)		Fabrics				Fabrics				Accessories				Total
Products transferred at a point in time		$	37,205			$	31,877			$	4,784			$	73,866
Services transferred over time			—				3,140				—				3,140
Total Net Sales		$	37,205			$	35,017			$	4,784			$	77,006

The following table presents our disaggregated revenue by segment, timing of revenue recognition, and product sales versus services rendered for the six-month period ending October 28, 2018:

 

		Mattress				Upholstery				Home
(dollars in thousands)		Fabrics				Fabrics				Accessories				Total
Products transferred at a point in time		$	71,603			$	63,878			$	7,369			$	142,850
Services transferred over time			—				5,629				—				5,629
Total Net Sales		$	71,603			$	69,507			$	7,369			$	148,479

 

I-12

Culp, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6. Inventories

Inventories are carried at the lower of cost or net realizable value. Cost is determined using the FIFO (first-in, first-out) method.

A summary of inventories follows:

 

(dollars in thousands)		November 3, 2019				October 28, 2018				April 28, 2019
Raw materials		$	6,872			$	5,397			$	5,617
Work-in-process			2,973				2,082				2,289
Finished goods			45,383				43,122				42,954
		$	55,228			$	50,601			$	50,860

7. Intangible Assets

A summary of intangible assets follows:

 

(dollars in thousands)		November 3, 2019				October 28, 2018				April 28, 2019
Tradenames		$	7,232			$	7,232			$	7,232
Customer relationships, net			2,388				2,688				2,538
Non-compete agreement, net			640				716				678
		$	10,260			$	10,636			$	10,448

Tradenames

A summary of the carrying amount of our tradenames follows:

 

		Six months ended
(dollars in thousands)		November 3, 2019				October 28, 2018
Beginning balance		$	7,232			$	683
Acquisition of business (note 3)			—				6,549
Ending balance		$	7,232			$	7,232

Our tradenames were determined to have an indefinite useful life and therefore, are not being amortized. However, in accordance with ASC Topic 350 Intangibles – Goodwill and Other, our tradenames will be assessed annually for impairment or more frequently if events or changes in circumstances indicate that it is more-likely-than-not that our tradenames are impaired.

Customer Relationships

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

 

		Six months ended
(dollars in thousands)		November 3, 2019				October 28, 2018
Beginning balance		$	2,538			$	2,839
Amortization expense			(150	)			(151	)
Ending balance		$	2,388			$	2,688

 

I-13