CULP INC 10-K

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rates We are exposed to market risk from changes in interest rates on our revolving credit agreements. Effective January 19, 2023, we entered into a second amended and restated U.S. revolving credit agreement (the "Amended Agreement") to establish an asset-based revolving credit facility that required interest to be charged at a rate (applicable interest rate of 6.3% as of April 30, 2023) calculated using an applicable margin over Federal Reserve Bank of New York's secured overnight fund rate (SOFR), as defined in the Amended Agreement. As of April 30, 2023, there were no outstanding borrowings under the Amended Agreement. Our revolving credit line associated with our operations located in China bears interest at a rate determined by the Chinese government at the time of borrowing. As of April 30, 2023, there were no borrowings outstanding under our revolving credit agreement associated with our operations located in China. Foreign Currency 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 April 30, 2023, would not have materially affected our results of operations or financial position. 45 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGIST ERED 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 April 30, 2023 and May 1, 2022, the related consolidated statements of net (loss) income, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2023, 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 April 30, 2023 and May 1, 2022, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2023, 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 April 30, 2023, 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 14, 2023, 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 matters 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 14, 2023 46 CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data and preferred and common stock shares) April 30, 2023, and May 1, 2022 2023 2022 ASSETS current assets: cash and cash equivalents $ 20,964 $ 14,550 short-term investments - rabbi trust 1,404 — accounts receivable, net 24,778 22,226 inventories 45,080 66,557 short-term note receivable 219 — current income taxes receivable — 857 other current assets 3,071 2,986 total current assets 95,516 107,176 property, plant and equipment, net 36,111 41,702 right of use assets 8,191 15,577 long-term investments - rabbi trust 7,067 9,357 intangible assets 2,252 2,628 long-term note receivable 1,726 — deferred income taxes 480 528 other assets 840 595 total assets $ 152,183 $ 177,563 LIABILITIES AND SHAREHOLDERS' EQUITY current liabilities: accounts payable - trade $ 29,442 $ 20,099 accounts payable - capital expenditures 56 473 operating lease liability - current 2,640 3,219 deferred compensation 1,404 — deferred revenue 1,192 520 accrued expenses 8,533 7,832 income taxes payable - current 753 413 total current liabilities 44,020 32,556 operating lease liability - long-term 3,612 7,062 income taxes payable - long-term 2,675 3,097 deferred income taxes 5,954 6,004 deferred compensation 6,842 9,343 total liabilities 63,103 58,062 commitments and contingencies (notes 10 and 12) 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 12,327,414 at April 30, 2023 and 12,228,629 at May 1, 2022 616 611 capital contributed in excess of par value 44,250 43,143 accumulated earnings 44,195 75,715 accumulated other comprehensive income 19 32 total equity 89,080 119,501 total liabilities and equity $ 152,183 $ 177,563 The accompanying notes are an integral part of these consolidated financial statements. 47 CONSOLIDATED STATEM ENTS OF NET (LOSS) INCOME For the years ended April 30, 2023, May 1, 2022, and May 2, 2021 (dollars in thousands, except per share data) 2023 2022 2021 net sales $ 234,934 $ 294,839 $ 299,720 cost of sales ( 224,038 ) ( 258,746 ) ( 249,888 ) gross profit 10,896 36,093 49,832 selling, general and administrative expenses ( 37,978 ) ( 35,415 ) ( 37,756 ) restructuring expense ( 1,396 ) — — (loss) income from operations ( 28,478 ) 678 12,076 interest expense — ( 17 ) ( 51 ) interest income 531 373 244 gain on bargain purchase — — 819 other expense ( 443 ) ( 1,359 ) ( 2,208 ) (loss) income before income taxes ( 28,390 ) ( 325 ) 10,880 income tax expense ( 3,130 ) ( 2,886 ) ( 7,693 ) income from investment in unconsolidated joint venture — — 31 net (loss) income $ ( 31,520 ) $ ( 3,211 ) $ 3,218 net (loss) income per share-basic $ ( 2.57 ) $ ( 0.26 ) $ 0.26 net (loss) income per share-diluted $ ( 2.57 ) $ ( 0.26 ) $ 0.26 The accompanying notes are an integral part of these consolidated financial statements. 48 CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME For the years ended April 30, 2023, May 1, 2022, and May 2, 2021 2023 2022 2021 net (loss) income $ ( 31,520 ) $ ( 3,211 ) $ 3,218 other comprehensive (loss) income unrealized holding (loss) gain on investments ( 13 ) ( 144 ) 162 reclassification adjustment for realized loss (gain) included in net (loss) income — 30 ( 6 ) total unrealized (loss) gain on investments ( 13 ) ( 114 ) 156 comprehensive (loss) income ( 31,533 ) ( 3,325 ) 3,374 The accompanying notes are an integral part of the consolidated financial statements. 49 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (dollars in thousands, except common stock shares) Capital Accumulated Contributed Other For the years ended April 30, 2023, May 1, 2022, Common Stock in Excess Accumulated Comprehensive Total and May 2, 2021 Shares Amount of Par Value Earnings (Loss) Income Equity Balance, May 3, 2020 12,284,946 $ 615 $ 42,582 $ 86,511 $ ( 10 ) $ 129,698 net income — — — 3,218 — 3,218 stock-based compensation — — 1,251 — — 1,251 unrealized gain on investments — — — — 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 ) dividends paid — — — ( 5,292 ) — ( 5,292 ) Balance, May 2 , 2021 12,312,822 616 43,807 84,437 146 129,006 net loss — — — ( 3,211 ) — ( 3,211 ) stock-based compensation — — 1,133 — — 1,133 unrealized loss on investments — — — — ( 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 ) common stock repurchased ( 121,688 ) ( 6 ) ( 1,746 ) — — ( 1,752 ) dividends paid — — — ( 5,511 ) — ( 5,511 ) Balance, May 1, 2022 12,228,629 611 43,143 75,715 32 119,501 net loss — — — ( 31,520 ) — ( 31,520 ) stock-based compensation — — 1,145 — — 1,145 unrealized loss on investments — — — — ( 13 ) ( 13 ) common stock issued in connection with vesting of performance-based restricted stock units 982 — — — — — common stock issued in connection with vesting of time-based restricted stock units 32,799 2 ( 2 ) — — — immediately vested common stock awards 71,732 3 ( 3 ) — — — common stock surrendered in connection with payroll withholding taxes ( 6,728 ) — ( 33 ) — — ( 33 ) Balance, April 30, 2023 12,327,414 $ 616 $ 44,250 $ 44,195 $ 19 $ 89,080 See accompanying notes to consolidated financial statements. 50 CONSOLIDATED STATEM ENTS OF CASH FLOWS For the years ended April 30, 2023, May 1, 2022, and May 2, 2021 (dollars in thousands) 2023 2022 2021 cash flows from operating activities: net (loss) income $ ( 31,520 ) $ ( 3,211 ) $ 3,218 adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: depreciation 6,845 6,994 6,846 non-cash inventory charges 5,819 1,927 882 amortization 438 559 466 stock-based compensation 1,145 1,133 1,251 deferred income taxes ( 2 ) 691 3,760 gain on bargain purchase — — ( 819 ) gain on sale of property, plant, and equipment ( 314 ) — ( 57 ) non-cash restructuring expense 791 — — income from investment in unconsolidated joint venture — — ( 31 ) realized loss (gain) from the sale of investments — 450 ( 6 ) foreign currency exchange (gain) loss ( 537 ) 16 1,520 changes in assets and liabilities, net of effects of acquisition and disposal of businesses: accounts receivable ( 2,642 ) 15,416 ( 12,117 ) inventories 15,370 ( 12,714 ) ( 8,107 ) other current assets ( 297 ) 946 ( 1,442 ) other assets 86 ( 1,386 ) ( 1,452 ) accounts payable-trade 10,274 ( 22,131 ) 17,228 accrued expenses and deferred compensation 853 ( 5,204 ) 9,457 deferred revenue 672 ( 20 ) 38 income taxes 823 ( 907 ) 843 net cash provided by (used in) operating activities 7,804 ( 17,441 ) 21,478 cash flows from investing activities: cash paid for acquisition of assets, net of cash acquired — — ( 892 ) capital expenditures ( 2,108 ) ( 5,695 ) ( 6,664 ) proceeds from the sale of property, plant, and equipment 468 — 12 proceeds from note receivable 15 — — investment in unconsolidated joint venture — — ( 90 ) proceeds from the sale of short-term investments (available for sale) — 9,879 468 proceeds from the sale and maturity of investments (held to maturity) — 13,486 10,165 purchase of short-term investments (available for sale) — ( 4,391 ) ( 5,044 ) purchase of investments (held-to-maturity) — ( 9,751 ) ( 8,173 ) proceeds from the sale of investments (rabbi trust) 2,058 56 157 purchase of long-term investments (rabbi trust) ( 1,185 ) ( 1,088 ) ( 619 ) net cash (used in) provided by investing activities ( 752 ) 2,496 ( 10,680 ) cash flows from financing activities: proceeds from lines of credit — 9,000 — payments associated with lines of credit — ( 9,000 ) ( 30,772 ) payments associated with Paycheck Protection Program loan — - ( 7,606 ) dividends paid — ( 5,511 ) ( 5,292 ) repurchases of common stock — ( 1,752 ) — common stock surrendered for payroll withholding taxes ( 33 ) ( 50 ) ( 25 ) payments for debt issuance costs ( 403 ) ( 110 ) ( 15 ) net cash used in financing activities ( 436 ) ( 7,423 ) ( 43,710 ) effect of exchange rate changes on cash and cash equivalents ( 202 ) ( 91 ) 131 increase (decrease) in cash and cash equivalents 6,414 ( 22,459 ) ( 32,781 ) cash and cash equivalents at beginning of year 14,550 37,009 69,790 cash and cash equivalents at end of year $ 20,964 $ 14,550 $ 37,009 The accompanying notes are an integral part of these consolidated financial statements. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. Mattress Fabrics The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. Currently, we have mattress fabric operations located in Stokesdale, NC and Quebec, Canada. During the last half of fiscal 2023, we rationalized our domestic cut and sewn cover platform, which included the termination of agreements to lease two facilities located in High Point, NC and moving our R&D and prototyping capabilities from these facilities to our facility located in Stokesdale, North Carolina. 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). Upholstery Fabrics 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. However, due to the decline in demand for cut and sewn upholstery kits, we terminated the agreement to lease this new facility during the third quarter of fiscal 2023, and we relocated a scaled down upholstery cut and sewn operation into our existing mattress cover facility also located in Ouanaminthe, Haiti, during the fourth quarter of fiscal 2023. 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 for 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. Basis of Presentation The consolidated financial statements of the company have been prepared in accordance with U.S. generally accepted accounting principles. Certain amounts presented in prior periods have been reclassified to conform to the current period financial statement presentation. Non-cash charges totaling $ 1.9 million and $ 882,000 for markdowns of inventory estimated based on our policy for aged inventory were reclassified from the line item "inventories" to the line item "non-cash inventory charges" in the Consolidated Statement of Cash Flows for the years ended May 1, 2022, and May 2, 2021, respectively. These reclassifications did not have an on effect on previously reported net cash (used in) provided by operating activities and increase (decrease) in cash and cash equivalents. 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 subsidiary located in Shanghai, China, are consolidated as of April 30, a calendar month end, which is required by the Chinese government. No events occurred related to the difference between our fiscal year end on the Sunday closest to April 30 and our Chinese subsidiary's year end of April 30 that materially affected the company’s financial position, results of operations, or cash flows for fiscal years 2023, 2022, and 2021. 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. 52 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 method of accounting, our 50 % proportionate share of earnings from CIH were reflected in the caption “income from investment in unconsolidated joint venture” in the Consolidated Statement of Net Income for the first nine months of fiscal 2021. 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 2023, 2022, and 2021 each included 52-week periods. 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: April 30, May 1, (dollars in thousands) 2023 2022 United States $ 9,769 $ 4,430 China 10,669 9,502 Canada 281 267 Haiti 236 341 Cayman Islands 9 10 $ 20,964 $ 14,550 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. Rabbi Trust Investments 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 rabbi trust investments classified as available-for-sale were recorded at their fair value of $ 8.5 million and $ 9.4 million as of April 30, 2023, and May 1, 2022, respectively. These investments had accumulated unrealized gains totaling $ 19,000 and $ 32,000 as of April 30, 2023, and May 1, 2022, respectively. The fair value of our investments associated with our rabbi trust approximates their cost basis and reside with our U.S. operations. 53 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 patterns 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 greater than or less than the book value of assets sold are credited or charged to (loss) 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. Interest Costs No interest costs were incurred during fiscal 2023. Total interest costs incurred were $ 17,000 and $ 51,000 during fiscal 2022 and 2021, 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 2023, 2022, or 2021. 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. 54 A summary of our foreign currency exchange gains (losses) by geographic area follows: (dollars in thousands) 2023 2022 2021 China $ 588 $ ( 104 ) $ ( 1,389 ) Canada ( 88 ) ( 28 ) ( 22 ) $ 500 $ ( 132 ) $ ( 1,411 ) Indefinite-Lived Intangible Assets In accordance with ASC Topic 350, Intangibles – Goodwill and Other, our business was classified into three reporting units during fiscal 2023: mattress fabrics, upholstery fabrics, and Read. ASC Topic 350 requires us to assess indefinite-lived intangible assets such as our tradename 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) an 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 our tradename is less than its carrying amount. If we conclude that it is more likely than not that the fair value of our tradename is less than its carrying amount, we would conduct a quantitative impairment test. The quantitative impairment test would involve comparing the fair value of our tradename with its carrying value. We would estimate the fair value of our tradename using an income, discounted cash flows, or market approach, as appropriate, that would require management assumptions (i.e., unobservable inputs). If the carrying amount of our tradename exceeds the tradename's fair value, an impairment loss is recognized in an amount equal to that excess. No asset impairment charges were recorded during fiscal 2023, 2022, or 2021, as it relates to indefinite-lived intangible assets. See Note 7 of the consolidated financial statements for further details of our assessments of impairment, conclusions reached, and the performance of our quantitative test relating to our indefinite-live intangible asset (i.e. tradename). 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 on 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, 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 55 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 customer 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 for 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 for 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. 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 April 30, 2023, 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 associated with allowances for sales returns, early payment discounts, and volume rebates that we offer to customers. The amount of variable consideration 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 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. 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 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 56 warehousing costs incurred to store, move, and prepare products for shipment in the company’s various distribution facilities. Handling costs were $ 4.2 million, $ 4.3 million, and $ 3.9 million during fiscal 2023, 2022, and 2021, 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 right of use asset and lease liability on the commencement date of a lease arrangement based on the present value of lease payments over the lease term. 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 use at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. Stock-Based Compensation Our equity incentive plans are described more fully in Note 13 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. Compensation expense for time-vested restricted stock unit awards is amortized on a straight-line basis over the respective vesting period. Compensation expense for performance-based restricted stock unit awards 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 related to a rabbi trust that sets aside funds for participants in our deferred compensation plan and are classified as available-for-sale. The fair value measurements of our financial instruments are described more fully in Note 14 of the consolidated financial statements. The carrying amount of cash and cash equivalents, accounts receivable, other current assets, accounts payable, and accrued expenses approximate their fair value because of the short maturity of these financial instruments. Recently Adopted Accounting Pronouncements There were not any recently adopted accounting pronouncements affecting our consolidated financial statements during fiscal 2023. Recently Issued Accounting Pronouncements Currently, there are no new accounting pronouncements that are expected to have a material effect on our consolidated financial statements. 57 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. 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 represented 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 ) Fair value of identifiable assets acquired and liabilities assumed 3,497 Gain on bargain purchase ( 819 ) $ 2,678 Equipment and leasehold improvements are being 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 in connection 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 our 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 described below. 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 was reported in the line-item “gain on bargain purchase” in the fiscal 2021 Consolidated Statement of Net Income. 58 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 supply and rebate agreements were effective as of the acquisition date and based on future sales orders consistent with current market conditions. The transactions associated with the supply and rebate agreements were accounted for in accordance with ASC Topic 606 Revenue from Contract with Customers. During fiscal 2023, 2022 and the period from February 1, 2021, through May 2, 2021, shipments pursuant to the supply agreement were $ 198,000 , $ 1.6 million and $ 379,000 , respectively. During fiscal 2023, there was no charge pursuant to the rebate agreement as the terms of the rebate agreement were not met. 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 for the respective periods. 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 year ending May 2, 2021, has been prepared as if this acquisition had occurred on April 29, 2019. (dollars in thousands, except per share data) May 2, 2021 Net Sales $ 300,995 Income from operations $ 12,138 Net income $ 2,430 Net income per share - basic $ 0.20 Net income per share - diluted $ 0.20 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 of CIH as a separate line titled “income from investment in consolidated joint venture” in the accompanying Consolidated Statements of Net (Loss) Income. Our 50% proportionate share of the net income of the unconsolidated joint venture was $ 31,000 during fiscal 2021. 59 3. ACCOUNTS RECEIVABLE A summary of accounts receivable follows: April 30, May 1, (dollars in thousands) 2023 2022 customers $ 25,244 $ 22,613 allowance for doubtful accounts ( 342 ) ( 292 ) allowance for cash discounts ( 96 ) ( 74 ) reserve for returns and allowances and discounts ( 28 ) ( 21 ) $ 24,778 $ 22,226 A summary of the activity in the allowance for doubtful accounts follows: (dollars in thousands) 2023 2022 2021 beginning balance $ ( 292 ) $ ( 591 ) $ ( 472 ) provision for bad debts ( 121 ) 74 ( 119 ) write-offs, net of recoveries 71 225 — ending balance $ ( 342 ) $ ( 292 ) $ ( 591 ) As of April 30, 2023, and May 1, 2022, 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 $ 342,000 and $ 292,000 as of April 30, 2023, and May 1, 2022, respectively. A summary of the activity in the allowance for returns and allowances and discounts follows: (dollars in thousands) 2023 2022 2021 beginning balance $ ( 95 ) $ ( 138 ) $ ( 84 ) provision for returns and allowances and discounts ( 1,212 ) ( 1,386 ) ( 1,665 ) credits issued and discounts taken 1,183 1,429 1,611 ending balance $ ( 124 ) $ ( 95 ) $ ( 138 ) Bankruptcy Proceedings On June 25, 2022, a significant 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. Our customer and its affiliates entered into an asset purchase agreement for the sale of substantially all of their assets, and the new owner is now conducting normal operations. We did not record a credit loss associated with outstanding accounts receivable dated on or prior to May 1, 2022, for this customer and its affiliates, as we received payment in full regarding these invoices. We did not record a credit loss associated with outstanding accounts receivable dated after May 1, 2022, relating to products sold prior to the bankruptcy filing, as we received payment in full regarding these invoices. On January 23, 2023, a significant customer and its affiliates associated with our mattress fabrics segment filed pre-planned voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Our customer and its affiliates are operating as a debtors-in-possession and subject to and within the provisions of the petitions as approved by the U.S. Bankruptcy Court. We did not record a credit loss associated with outstanding accounts receivable for this customer and its affiliates, in connection with products sold prior to the bankruptcy filing, as we received payment in full regarding these invoices during the fourth quarter of fiscal 2023. As of April 30, 2023, based on information available at this time, we do not believe there is a risk of material credit loss associated with outstanding accounts receivable with this customer, as we are selling products based on credit terms, and we are being paid in the normal course of business. 60 4. REVENUE FROM CONTRACTS WITH CUSTOMERS Nature of Performance Obligations Our 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 for 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 for Read’s products associated with window treatments. Significant Judgments See Note 1 of the consolidated financial statements for disclosure of our accounting policies regarding our significant judgments associated with revenue recognition, determining our transaction prices, and revenue measurement. Contract Assets & Liabilities Certain contracts relating to 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 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. During the fourth quarter of fiscal 2023, we entered into a contract with an upholstery fabrics customer that required the customer to pay us an upfront license fee payment totaling $ 250,000 to use a certain trademark for a period of three years commencing in fiscal 2024 and extending through fiscal 2026. There were no contract assets recognized as of April 30, 2023, or May 1, 2022. A summary of the activity of deferred revenue follows: (dollars in thousands) Fiscal 2023 Fiscal 2022 Fiscal 2021 Beginning Balance $ 520 $ 540 $ 502 Revenue recognized on contract liabilities ( 4,885 ) ( 3,434 ) ( 2,459 ) Payments received for services not yet rendered 5,557 3,414 2,497 Ending Balance $ 1,192 $ 520 $ 540 As of April 30, 2023, total deferred revenue of $ 1.2 million pertained to (i) upfront customer deposits associated with customized fabrication and installation services related to Read totaling $ 942,000 and (ii) an upfront license fee paid to us for the licensing of a certain trademark to be used by an upholstery fabrics customer totaling $ 250,000 . As of May 1, 2022, the entire deferred revenue amount of $ 520,000 represented upfront customer deposits associated with customized fabrication and installation services related to Read. Disaggregation of Revenue The following table presents our disaggregated revenue related to operations by segment, timing of revenue recognition, and product sales versus services rendered for fiscal 2023: (dollars in thousands) Mattress Fabrics Upholstery Fabrics Total Products transferred at a point in time $ 110,995 $ 114,996 $ 225,991 Services transferred over time — 8,943 8,943 Total Net Sales $ 110,995 $ 123,939 $ 234,934 61 The following table presents our disaggregated revenue related to 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 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 5. INVENTORIES A summary of inventories follows: (dollars in thousands) April 30, 2023 May 1, 2022 raw materials $ 7,908 $ 13,477 work-in-process 2,602 4,237 finished goods 34,570 48,843 $ 45,080 $ 66,557 Substantial and Unusual Losses Resulting from Subsequent Measurement of Inventory We incurred non-cash inventory charges totaling $ 5.8 million during fiscal 2023, which represents a $ 2.9 million impairment charge associated with our mattress fabrics segment; a total of $ 2.8 million related to markdowns of inventory in both segments that were estimated based on our policy for aged inventory; and $ 98,000 for the loss on disposal and markdowns of inventory related to the exit of our cut and sewn upholstery fabrics operation located in Shanghai, China (see Note 9 of the consolidated financial statements for further details). We incurred non-cash inventory charges of $ 1.9 million and $ 882,000 during fiscal 2022 and 2021, respectively, which represent markdowns of inventory in both segments that were based on our policy of aged inventory. Mattress Fabrics Segment - Net Realizable Value During the second quarter of fiscal 2023, our mattress fabrics segment experienced a 35.8 % decline in net sales compared with the second quarter of fiscal 2022. This decline in net sales led to a significant decrease in gross margin to ( 8.7 %), excluding non-cash inventory charges of $ 3.8 million during the second quarter of fiscal 2023, as compared with a gross margin of 15 % during the second quarter of fiscal 2022. The significant decline in net sales and profitability during the second quarter of fiscal 2023 stemmed from a greater than anticipated decline in consumer discretionary spending on mattress products, which we believed was due to the following factors: (i) inflationary effects of commodities such as gas, food, and other necessities; (ii) a significant increase in interest rates; (iii) the pulling forward of demand for home goods products during the early years of the COVID-19 pandemic, which demand subsequently shifted to travel, leisure, and other services; and (iv) excess inventory held by customers due to a decline in consumer demand. Based on this evidence, as of October 30, 2022 (the end of our second quarter of fiscal 2023), management conducted a thorough review of our mattress fabrics inventory, and as a result, recorded a charge of $ 2.9 million within cost of sales to write down inventory to its net realizable value. This $ 2.9 million charge was based on management's estimates of product sales prices, customer demand trends, and its plans to transition to new products. 62 As of January 29, 2023 (the end of our third quarter of fiscal 2023), and April 30, 2023 (the end of fiscal 2023), we reviewed our mattress fabrics inventory to determine if additional write-downs of inventory that were not recorded based on our policy for aged inventory were necessary. Based on this assessment, no additional write-downs of inventory to their net realizable value were recorded during the third and fourth quarters of fiscal 2023. Based on current unfavorable macroeconomic conditions, it is possible that estimates used by management to determine the write down of inventory to its net realizable value could be materially different from its actual value or our ultimate results. These differences could result in higher than expected inventory provisions, which could adversely affect the company's results of operations and financial condition in the near term. 6. PROPERTY, PLANT, AND EQUIPMENT A summary of property, plant, and equipment follows: (dollars in thousands) depreciable lives (in years) April 30, 2023 May 1, 2022 land and improvements 0 - 10 $ 947 $ 947 buildings and improvements 7 - 40 30,411 31,628 leasehold improvements ** 2,368 3,474 machinery and equipment 3 - 15 68,070 67,827 data processing equipment and software 3 - 7 8,241 8,706 office furniture and equipment 3 - 10 1,443 1,643 capital projects in progress 455 613 111,935 114,838 accumulated depreciation ( 75,824 ) ( 73,136 ) $ 36,111 $ 41,702 ** Shorter of life of lease or useful life. 7. INTANGIBLE ASSETS A summary of intangible assets follows: (dollars in thousands) April 30, 2023 May 1, 2022 Tradename $ 540 $ 540 Customer relationships, net 1,335 1,636 Non-compete agreement, net 377 452 $ 2,252 $ 2,628 Tradename Our tradename pertains to Read, a separate reporting unit within our upholstery fabrics segment. This tradename was determined to have an indefinite useful life at the time of its acquisition, and therefore is not being amortized. However, we are required to assess this tradename annually or between annual tests if we believe indicators of impairment exist. Accordingly, we performed an annual assessment of Read's tradename as of April 30, 2023. First, we performed a qualitative assessment to determine if any impairment indicators existed. Based on this assessment we concluded that indicators of impairment did exist, such as unfavorable financial performance in that we have incurred net operating losses during the last two fiscal years, which stem from (i) tight labor supply and wage inflation; (ii) processing and pricing inefficiencies associated with customization and installation services; (iii) an unfavorable mix of small scale and larger scale projects; and (iv) changes in management and key personnel. Consequently, we conducted a quantitative impairment test to determine the fair value of Read's tradename by calculating Read's future discounted cash flows based on management's assumptions that involve unobservable inputs such as (i) discount rate, (ii) future growth rates, (iii) changes in working capital, and (iv) effect of strategic actions to be performed by management to address recent operating inefficiencies. Based on the 63 results of our quantitative impairment test, the fair value of Read's tradename exceeded its carrying amount, and therfore, no impairment was noted as of April 30, 2023. Customer Relationships A summary of the change in the carrying amount of our customer relationships follows: (dollars in thousands) 2023 2022 2021 beginning balance $ 1,636 $ 1,937 $ 2,238 amortization expense ( 301 ) ( 301 ) ( 301 ) ending balance 1,335 1,636 1,937 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 April 30, 2023, and May 1, 2022. Accumulated amortization for these customer relationships was $ 1.8 million and $ 1.5 million as of April 30, 2023, and May 1, 2022, respectively. The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2024 - $ 301,000 ; FY 2025 - $ 301,000 ; FY 2026 - $ 301,000 ; FY 2027 - $ 278,000 ; FY 2028 - $ 52,000 ; and thereafter - $ 102,000 . The weighted average amortization period for our customer relationships is 4.8 years as of April 30, 2023. Non-Compete Agreement A summary of the change in the carrying amount of our non-compete agreement follows: (dollars in thousands) 2023 2022 2021 beginning balance $ 452 $ 527 $ 602 amortization expense ( 75 ) ( 75 ) ( 75 ) ending balance $ 377 $ 452 527 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 April 30, 2023, and May 1, 2022. Accumulated amortization for this non-compete agreement was $ 1.6 million as of April 30, 2023, and May 1, 2022. The remaining amortization expense for the next five years and thereafter follows: FY 2024 - $ 76,000 ; FY 2025 - $ 76,000 ; FY 2026 - $ 76,000 ; FY 2027 - $ 76,000 ; and FY 2028 - $ 73,000 . The weighted average amortization period for the non-compete agreement is 5.0 years as of April 30, 2023. Impairment - Mattress Fabrics Segment As of October 30, 2022 (the end of our second quarter of fiscal 2023), management reviewed the long-lived assets associated with our mattress fabrics segment, which consisted of property, plant, and equipment, right of use assets, and finite-lived intangible assets (collectively known as the "Mattress Asset Group"), for impairment, as events and changes in circumstances occurred that indicated the carrying amount of the Mattress Asset Group may not be recoverable. During the second quarter of fiscal 2023, our mattress fabrics segment experienced a 35.8 % decline in net sales compared with the second quarter of fiscal 2022. This decline in net sales led to a significant decrease in gross margin to ( 23.1 %) during the second quarter of 2023, compared with gross margin of 15.0 % during second quarter of fiscal 2022. The significant decline in net sales and profitability during the second quarter of fiscal 2023 stemmed from a greater than anticipated decline in consumer discretionary spending on mattress products, which we believed was due to the following factors: (i) inflationary effects of commodities such as gas, food, and other necessities; (ii) a significant increase in interest rates; (iii) the pulling forward of demand for home goods products during the early years of the COVID-19 pandemic, which demand subsequently shifted to travel, leisure, and other services; and (iv) excess inventory held by customers due to a decline in consumer demand. Based on the above evidence, we were required to determine the recoverability of the Mattress Asset Group, which was classified as held and used, by comparing the carrying amount of the Mattress Asset Group to the sum of the future undiscounted cash flows expected 64 to result from its use and eventual disposition. If the carrying amount of an asset group exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the excess of the carrying amount over the sum of the future undiscounted cash flows of the asset group. As of October 30, 2022, the carrying amount of the Mattress Asset Group totaled $ 38.8 million, which related to property, plant, and equipment of $ 35.9 million, right of use assets of $ 2.1 million, a non-compete agreement of $ 414,000 , and customer relationships of $ 383,000 . The total carrying amount of the Mattress Asset Group did not exceed the sum of its future undiscounted cash flows from its use and eventual disposition. As a result, we determined no impairment associated with the Mattress Asset Group existed as of October 30, 2022. Since the end of the second quarter on October 30, 2022, and through the end of fiscal 2023, our mattress fabrics segment remained unprofitable, as it incurred operating losses totaling $( 4.2 ) million and $( 2.5 ) million during the third quarter and fourth quarter of fiscal 2023, respectively. As of April 30, 2023, the carrying amount of the Mattress Asset Group totaled $ 36.8 million, which represents property, plant, and equipment of $ 33.7 million, right use assets of $ 2.3 million, a non-compete agreement of $ 377,000 , and customer relationships of $ 358,000 . The total carrying amount of the Mattress Asset Group did not exceed the sum of its future undiscounted cash flows from its use and eventual disposition. As result, we maintain our position that no impairment associated with the Mattress Asset Group existed as of April 30, 2023. Impairment - Read As of April 30, 2023, management reviewed the long-lived assets associated with Read, a separate reporting unit within our upholstery fabrics segment. Read's long-lived assets consist of property, plant, and equipment, a right of use asset, and finite-lived intangible assets (collectively known as "Read's Asset Group"). Read's Asset Group was reviewed for impairment because events and changes in circumstances occurred that indicated the carrying amount of the Read's Asset Group may not be recoverable. As a result, we performed a qualitative assessment to determine if any impairment indicators existed. Based on this assessment we concluded that indicators of impairment did exist, such as unfavorable financial performance in that we have incurred net operating losses during the last two fiscal years, which stem from (i) tight labor supply and wage inflation, (ii) processing and pricing inefficiencies associated with customization and installation services, (iii) an unfavorable mix of small scale and larger scale projects; and (iv) changes in management and key personnel. Based on the above evidence, we were required to determine the recoverability of Read's Asset Group, which was classified as held and used, by comparing the carrying amount of Read's Asset Group to the sum of the future undiscounted cash flows expected to result from its use and eventual disposition. If the carrying amount of an asset group exceeds its estimated future undiscounted cash flows, an impairment charge is recognized for the excess of the carrying amount over the sum of the future undiscounted cash flows of the asset group. As of April 30, 2023, the carrying amount of Read's Asset Group totaled $ 1.5 million, which represents customer relationships of $ 978,000 , property, plant, and equipment of $ 329,000 , and a right of use asset of $ 215,000 . The total carrying amount of Read's Asset Group did not exceed the sum of its future undiscounted cash flows from its use and eventual disposition. As a result, we determined no impairment associated with Read's Asset Group existed as of April 30, 2023. 8. ACCRUED EXPENSES (dollars in thousands) April 30, 2023 May 1, 2022 compensation and related benefits $ 5,800 $ 4,248 other 2,733 3,584 $ 8,533 $ 7,832 9. UPHOLSTERY FABRICS SEGMENT RESTRUCTURING ACTIVITIES Second Quarter of Fiscal 2023 - China During the second quarter of fiscal 2023, we closed our cut and sew upholstery fabrics operation located in Shanghai, China, which included the termination of an agreement to lease a building. This strategic action, along with the further use of our Asian supply chain, was our response to declining consumer demand for cut and sew products, by adjusting our operating costs to better align with the lower demand. As a result of this strategic action, we recorded restructuring expense and restructuring related charges during fiscal 2023 totaling $ 713,000 , which represent represent (i) employee termination benefits of $ 468,000 , (ii) loss from the disposal and markdowns of inventory of $ 98,000 , (iii) an impairment loss associated with equipment of $ 80,000 , (iv) lease termination costs of $ 47,000 , (v) and 65 other associated costs of $ 20,000 . Of the total $ 713,000 , $ 615,000 and $ 98,000 , were recorded to restructuring expense and cost of sales, respectively, in the fiscal 2023 Consolidated Statement of Net Loss. Third and Fourth Quarters of Fiscal 2023 - Haiti Effective January 24, 2023, Culp Upholstery Fabrics Haiti, Ltd. ("CUF Haiti") entered into an agreement to terminate a lease associated with a facility located in Ouanaminthe, Haiti ("Haiti"), that was used solely for the production of cut and sewn kits associated with our upholstery fabrics segment. As a result, CUF Haiti's production of cut and sewn upholstery kits has been moved to an existing facility leased by Culp Home Fashions Haiti, Ltd. ("CHF Haiti"). Both CUF Haiti and CHF Haiti are indirect wholly-owned subsidiaries of Culp, Inc. CHF Haiti's facility, which is also located in Ouanaminthe, Haiti, will not only produce cut and sewn kits associated with our upholstery fabrics segment, but will also continue to produce cut and sewn mattress covers associated with our mattress fabrics segment. We believe this restructuring action will reduce the costs of our operations located in Haiti to better align with the declining consumer demand for cut and sewn products by consolidating existing facilities and reducing headcount. As mentioned above, CUF Haiti entered into an agreement to terminate the lease (the "Termination Agreement") of a facility ("right of use asset"). Pursuant to the terms of the original lease agreement (the "Original Lease"), CUF Haiti was required to pay in advance $ 2.8 million for the full amount of rent due prior to the commencement of the Original Lease, and the initial lease term was set to expire on December 31, 2029 . Pursuant to the terms of the Termination Agreement, the Original Lease was formally terminated when CUF Haiti vacated and returned possession of their right of use asset associated with the Original Lease to the lessor. After CUF Haiti vacated and returned possession of their right of use asset to the lessor, a third party (the "Lessee") took possession of CUF Haiti's right of use asset, and the Lessee agreed to pay CUF Haiti $ 2.4 million over a period commencing on April 1, 2023 and ending on December 31, 2029, based on monthly installments as stated in the Termination Agreement. In connection with the Termination Agreement, an affiliate of the Lessee has guaranteed payment in full of all amounts due and payable to CUF Haiti by the Lessee, and CUF Haiti has been fully and unconditionally released and discharged from all of its remaining obligations under the Original Lease. In connection with the Termination Agreement, CUF Haiti's right of use asset was classified as held for sale and was presented separately as assets held for sale on the Consolidated Balance Sheet as of January 29, 2023 (i.e., the end of the third quarter of fiscal 2023). As a result, CUF Haiti's right of use asset was recorded at its fair value of $ 2.0 million, which was lower than its carrying value as of January 29, 2023 (see Note 14 to the consolidated financial statements for further details regarding fair value measurement). Consequently, since the fair value of CUF Haiti's right of use asset was lower than its carrying amount, we recorded a restructuring charge of $ 434,000 during the third quarter of fiscal 2023 to reduce the carrying amount of CUF Haiti's right of use asset to its reported fair value. During the fourth quarter of fiscal 2023, CUF Haiti recognized the sale of its right of use asset, as it vacated and returned possession of their right of use asset to the Lessor, and the Lessee has taken possession of CUF Haiti's right of use asset. As a result, CUF Haiti's right of use asset classified as held for sale was derecognized and a short-term and long-term note receivable was recognized based on the payments and timing of such payments due from the Lessee as stated in the Termination Agreement. As of April 30, 2023, CUF Haiti's note receivable totaled $ 1.9 million, of which $ 219,000 and $ 1.7 million were classified as short-term and long-term, respectively. As a result of this strategic action, we recorded restructuring expense during fiscal 2023 totaling $ 781,000 . which represents (i) lease termination costs of $ 434,000 , (ii) an impairment loss related to leasehold improvements of $ 277,000 , (iii) employee termination benefits of $ 39,000 , and (iv) other associated costs of $ 31,000 . Overall The following summarizes our restructuring expense and related charges from both our restructuring activities noted above for fiscal 2023: (dollars in thousands) 2023 Employee termination benefits $ 507 Lease termination costs 481 Impairment loss - leasehold improvements and equipment 357 Loss on disposal and markdowns of inventory 98 Other associated costs 51 Restructuring expense and restructuring related charges (1) $ 1,494 66 (1) Of the total $ 1.5 million, $ 1.4 million and $ 98,000 were recorded to restructuring expense and cost of sales, respectively, in the fiscal 2023 Consolidated Statement of Net Loss. The following summarizes the activity in accrued restructuring for fiscal 2023: Employee Lease Other Termination Termination Associated (dollars in thousands) Benefits Costs Costs Total Beginning of year balance $ — $ — $ — $ — Accrual established in fiscal 2023 507 47 — 554 Expenses incurred — — 51 51 Payments ( 507 ) ( 47 ) ( 51 ) ( 605 ) End of year balance $ — $ — $ — $ — 10. LINES OF CREDIT Revolving Credit Agreement – United States Existing Credit Agreement As of May 1, 2022, we had a Credit Agreement (the “Existing Credit Agreement”) with Wells Fargo Bank, N.A. (“Wells Fargo”) that 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. Amended Agreement Effective June 24, 2022, we entered into an Amended and Restated Credit Agreement (the “Amended Agreement”) with Wells Fargo. The Amended Agreement amended, restated, superseded, and served as a replacement for the Existing Credit Agreement. The Amended Agreement provided a revolving credit facility of up to $ 40 million, was secured by a lien on the company’s assets, and was set to expire in June 2025 . The company’s available borrowings under the Amended Agreement were 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 contained 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 incurred 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 was set initially at 1.35 % and varied 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 contained customary affirmative and negative covenants and required 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 did not apply during the first three quarters of the company’s fiscal 2023, but during that period, the company was required to 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. First Amendment On August 19, 2022, we entered into a First Amendment to the Amended Agreement ("the First Amendment") with Wells Fargo. The terms of the First Amendment amended the time period in which the financial covenant for the minimum ratio of consolidated EBITDA to consolidated net interest expense applied, such that this EBITDA to interest expense covenant did not apply during any of the four quarters of the Company's fiscal 2023. During that time period, we were still required to maintain minimum "access to liquidity" of $ 15 million as mentioned in the above Amended Agreement section. Second Amended and Restated Agreement On January 19, 2023, Culp Inc., as borrower (the "company"), and Read as guarantor (the "Guarantor"), entered into a Second Amended and Restated Credit Agreement (the "ABL Credit Agreement"), by and among the company, the Guarantor, and Wells Fargo, as lender (the "Lender"), to establish an asset-based revolving credit facility (the "ABL Facility"), the proceeds of which may be used to pay fees 67 and expenses related to the ABL Facility and to provide funding for ongoing working capital and general corporate purposes. The ABL Credit Agreement amends, restates, and supersedes, and serves as a replacement for, the Amended Agreement. The ABL Facility may be used for revolving credit loans and letters of credit from time to time up to a maximum principal amount of $ 35.0 million, subject to the limitations described below. Like the Amended Agreement, the ABL Facility contains a sub-facility that allows the company to issue letters of credit in an aggregate amount not to exceed $ 1 million. The amount available under the ABL Facility is limited by a borrowing base consisting of certain eligible accounts receivable and inventory, reduced by specified reserves as follows: • 85 % of eligible accounts receivable, plus • the least of: the sum of: • lesser of (i) 65 % of eligible inventory valued at cost based on a first-in first-out basis (net of intercompany profits) and (ii) 85 % of the net-orderly-liquidation value percentage of eligible inventory, plus • the least of (i) 65 % of eligible in-transit inventory valued at cost based on a first-in first-out basis (net of intercompany profits), (ii) 85 % of the net-orderly-liquidation value percentage of eligible in-transit inventory, and (iii) $ 5.0 million, plus • the lesser of (i) 65 % of eligible raw material inventory valued at cost based on a first-in first-out basis (net of intercompany profits) and (ii) 85 % of the net-orderly-liquidation value percentage of eligible raw material inventory In each case, the net-orderly-liquidation value is calculated based on the lower of (i) a first-in first-out basis and (ii) market value, and is (A) net of intercompany profits, (B) net of write-ups and write-downs in value with respect to currency exchange rates and (C) consistent with most recent appraisals received and acceptable to Lender. • $ 22.5 million; and • An amount equal to 200 % of eligible accounts receivable. minus • applicable reserves. The ABL Facility permits both base rate borrowings and borrowings based upon daily simple SOFR (the secured overnight financing rate administered by the Federal Reserve Bank of New York (or its successor)). Borrowings under the ABL Facility bear interest at an annual rate equal to daily simple SOFR plus 150 basis points (if the average monthly excess availability under the ABL Facility is greater than 50%) or 175 basis points (if the average monthly excess availability under the ABL Facility is less than or equal to 50%) or 50 basis points above base rate (if the average monthly excess availability under the ABL Facility is greater than 50%) or 75 basis points above base rate (if the average monthly excess availability under the ABL Facility is less than or equal to 50%), as applicable, with a fee on unutilized commitments at an annual rate of 37.5 basis points and an annual servicing fee of $ 12,000 . The ABL Facility matures on January 19, 2026 . The ABL Facility may be prepaid from time to time, in whole or in part, without prepayment or premium. In addition, customary mandatory prepayments of the loans under the ABL Facility are required upon the occurrence of certain events including, without limitation, outstanding borrowing exposures exceeding the borrowing base and certain dispositions of assets outside of the ordinary course of business. Accrued interest is payable monthly in arrears. The company's obligations under the ABL Facility (and certain related obligations) are (a) guaranteed by the Guarantor and each of the company's future domestic subsidiaries is required to guarantee the ABL Facility on a senior secured basis (such guarantors and the company, the "Loan Parties") and (b) secured by all assets of the Loan Parties, subject to certain exceptions. The liens and other security interests granted by the Loan Parties on the collateral for the benefit of the Lender under the ABL Facility are, subject to certain permitted liens, first priority. Cash Dominion. Under the terms of the ABL Facility, if (i) an event of default has occurred or (ii) excess borrowing availability under the ABL Facility (based on the lesser of $ 35.0 million and the borrowing base) (the "Excess Availability") falls below $ 7.0 million at 68 such time, the Loan Parties will become subject to cash dominion, which will require prepayment of loans under the ABL Facility with the cash deposited in certain deposit accounts of the Loan Parties, including a concentration account, and will restrict the Loan Parties' ability to transfer cash from their concentration account. Such cash dominion period (a "Dominion Period') shall end when Excess Availability shall be equal to or greater than $ 7.0 million for a period of 60 consecutive days and no event of default is continuing. Financial Covenants. The ABL Facility contains a springing covenant requiring that the company's fixed charge coverage ratio be no less than 1.10 to 1.00 during any period that (i) an event of default has occurred or (ii) Excess Availability under the ABL Facility falls below $ 5.25 million at such time. Such compliance period shall end when Excess Availability shall be equal to or greater than $ 5.25 million for a period of 60 consecutive days and no event of default is continuing. Affirmative and Restrictive Covenants. The ABL Credit Agreement governing the ABL Facility contains customary representations and warranties, affirmative and negative covenants (subject, in each case, to exceptions and qualifications) and events of defaults, including covenants that limit the company's ability to, among other things: • incur additional indebtedness; • make investments; • pay dividends and make other restricted payments; • sell certain assets; • create liens; • consolidate, merge, sell or otherwise dispose of all or substantially all of the company's assets; and • enter into transactions with affiliates Overall Effective January 19, 2023, interest was charged under the ABL Agreement at a rate (applicable interest rate of 6.3 % as of April 30, 2023) calculated using the Applicable Margin over SOFR based on the company's excess availability under the ABL Facility, as defined 69 in the ABL Agreement. Under the Existing Credit Agreement, interest was charged at a rate (applicable interest rate of 2.40 % as of May 1, 2022) as a variable spread over LIBOR based on a ratio of debt to EBITDA , as defined in the Existing Credit Agreement. There were $ 275,000 of outstanding letters of credit provided by the ABL Agreement and the Existing Agreement, as applicable, as of April 30, 2023 and May 1, 2022. As of April 30, 2023, we had $ 725,000 remaining for the issuance of additional letters of credit under the ABL Agreement. There were no borrowings outstanding under either the ABL Agreement or the Existing Credit Agreement, as applicable, as of April 30, 2023 and May 1, 2022, respectively. As of April 30, 2023, our available borrowings calculated under the provisions of the ABL Agreement totaled $ 26.8 million. Revolving Credit Agreements - China Operations 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 ($ 5.8 million USD as of April 30, 2023). Interest charged under this agreement is based on an interest rate determined by the Chinese government at the time of borrowing. This agreement is set to expire on November 24, 2023 . There were no borrowings outstanding under this agreement as of April 30, 2023 and May 1, 2022, respectively. Denominated in United States Dollar ("USD") We had an unsecured credit agreement denominated in USD with another bank located in China that provided for a line of credit of up to $ 2 million USD, which expired on August 30, 2022 . Currently, the company does not plan to renew or replace this agreement. Overall Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of April 30, 2023, we were in compliance with our financial covenants. Interest paid during fiscal years 2023, 2022, and 2021 was $ 8,000 , $ 10,000 , and $ 60,000 , respectively. 11. INCOME TAXES Income Tax Expense and Effective Income Tax Rate The entire amount of income tax expense of $ 3.1 million, $ 2.9 million, and $ 7.7 million during fiscal 2023, 2022, and 2021, respectively, was allocated to (loss) income from continuing operations. Income tax expense consists of: 70 (dollars in thousands) 2023 2022 2021 current federal $ — — ( 17 ) state 1 2 3 foreign 3,053 2,156 4,151 uncertain income tax positions 78 37 ( 204 ) 3,132 2,195 3,933 deferred federal ( 1,591 ) 1,121 ( 1,933 ) state ( 66 ) 47 ( 80 ) 2017 Tax Cuts and Jobs Act — — ( 3,674 ) undistributed earnings – foreign subsidiaries 628 76 112 U.S. federal & state carryforwards and credits ( 5,162 ) ( 971 ) 451 uncertain income tax positions — ( 380 ) 380 foreign ( 629 ) 615 ( 22 ) valuation allowance 6,818 183 8,526 ( 2 ) 691 3,760 $ 3,130 2,886 7,693 (Loss) income before income taxes related to our foreign and U.S. operations consists of: (dollars in thousands) 2023 2022 2021 Foreign China $ 7,062 6,998 10,007 Canada 1,516 1,302 4,764 Haiti ( 3,483 ) ( 980 ) 817 Cayman Islands — — ( 5 ) Total Foreign 5,095 7,320 15,583 United States ( 33,485 ) ( 7,645 ) ( 4,703 ) $ ( 28,390 ) ( 325 ) 10,880 The following schedule summarizes the principal differences between the income tax expense at the federal income tax rate and the effective income tax rate reflected in the consolidated financial statements: 2023 2022 2021 U.S. federal income tax rate 21.0 % 21.0 % 21.0 % valuation allowance ( 24.0 ) ( 56.3 ) 78.4 income tax effects of the 2017 Tax Cuts and Jobs Act — — ( 33.8 ) global intangible low taxed income tax (GILTI) — ( 540.9 ) — foreign tax rate differential ( 4.0 ) ( 206.2 ) 10.9 income tax effects of Chinese foreign exchange gains and losses ( 0.9 ) ( 20.6 ) ( 8.4 ) withholding taxes associated with foreign tax jurisdictions ( 2.4 ) ( 172.8 ) 7.7 uncertain income tax positions ( 0.3 ) 105.4 1.6 U.S. state income taxes 0.6 21.5 0.3 stock-based compensation ( 0.3 ) ( 3.3 ) 0.3 gain on bargain purchase — — ( 1.6 ) other (3) ( 0.7 ) ( 35.8 ) ( 5.7 ) consolidated effective income tax rate (1) (2) ( 11.0 )% ( 888.0 )% 70.7 % (1) Our consolidated effective income tax rate during fiscal 2023 was much more negatively affected by the mix of earnings and losses between our U.S. operations and foreign subsidiaries, as compared with fiscal 2022 and 2021. During fiscal 2023, we incurred a significantly higher pre-tax loss from our U.S. operations totaling $( 33.5 ) million, compared with $( 7.6 ) million and $( 4.7 ) million for fiscal 2022 and 2021, respectively. As a result, a significantly higher income tax benefit was not recognized due to a full valuation allowance being applied against our U.S. net deferred income tax assets during fiscal 2023, as compared with 71 fiscal 2022 and 2021. In addition, almost all of our taxable income for each of fiscal 2023, 2022, and 2021 was earned by our foreign operations located in China and Canada, which have higher income tax rates than the U.S. (2) During fiscal 2023, we incurred a significantly higher consolidated pre-tax loss totaling $( 28.4 ) million, compared with a much lower consolidated pre-tax loss totaling $( 325,000 ) during fiscal 2022 and pre-tax income totaling $ 10.9 million during fiscal 2021. As a result, the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements were more pronounced for fiscal 2022 and 2021, compared with fiscal 2023. (3) “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. 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) 2023 2022 deferred tax assets: accounts receivable $ 297 227 inventories 3,277 2,020 compensation 2,676 2,437 liabilities and other 5 28 intangible assets and goodwill 395 536 property, plant, and equipment (1) 179 199 operating lease liability 781 1,297 foreign income tax credits - U.S. 783 783 loss carryforwards – U.S. 13,564 8,373 valuation allowance - U.S. ( 18,675 ) ( 11,857 ) total deferred tax assets 3,282 4,043 deferred tax liabilities: undistributed earnings on foreign subsidiaries ( 4,213 ) ( 3,586 ) property, plant and equipment (2) ( 3,450 ) ( 4,292 ) right of use assets ( 964 ) ( 1,520 ) other ( 129 ) ( 121 ) total deferred tax liabilities ( 8,756 ) ( 9,519 ) Net deferred liabilities $ ( 5,474 ) ( 5,476 ) (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 April 30, 2023, our U.S. federal net operating loss carryforwards totaled $ 48.2 million, with related future income tax benefits of $ 10.1 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 April 30, 2023, 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 April 30, 2023, our U.S. state net operating loss carryforwards totaled $ 27.2 million, with related future income tax benefits of $ 1.0 million. Our U.S. state net operating loss carryforwards totaling $ 27.2 million have expiration dates ranging from fiscal years 2024 through 2044 . 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 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 72 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 2019 and 2020 fiscal years. Since we met the requirements for the GILTI High-Tax exception for our 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 $ 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 the 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 charge 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 did not 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, were eligible for a significant amount of deductible accelerated depreciation. As a result, our current year's income tax expense was much lower than prior fiscal years, and therefore, our current effective income tax rate was 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 located in an economic zone that permits a 0 % income tax rate for the first fifteen years of operations, for which we have nine years remaining. Since our operations located in Haiti are not subject to income tax, our current effective tax rate was 0 %, which is 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 incurred a nominal amount of GILTI tax for the 2022 tax year, as the losses subject to GILTI tax from our Haitian operations mostly offset the income subject to GILTI tax from our Canadian operation. Fiscal 2023 We do not expect to pay GILTI tax for the 2023 tax year, as we expect to meet the GILTI High-Tax exception regarding our operations located in China and Canada, and we incurred taxable losses associated with our operations located in Haiti. 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 assets 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. pre-tax 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 April 30, 2023, 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. pre-tax losses, in that we experienced U.S. pre-tax losses during each of the last three fiscal years. In addition, we are currently expecting U.S. pre-tax losses to continue into fiscal 2024. As a result of the significant weight of this negative evidence, we believe it is more-likely-than-not that our U.S net deferred income tax assets will not be fully realizable, and therefore we provided for a full valuation allowance against our U.S. net deferred income tax assets. 73 Based on our assessments as of April 30, 2023, and May 1, 2022, valuation allowances against our U.S. net deferred income tax assets pertain to the following: (dollars in thousands) April 30, 2023 May 1, 2022 U.S. federal and state net deferred income tax assets $ 16,345 $ 9,527 U.S. capital loss carryforward 2,330 2,330 $ 18,675 $ 11,857 A summary of the change in the valuation allowances against our U.S. net deferred income tax assets follows: (dollars in thousands) 2023 2022 2021 beginning balance $ 11,857 11,674 3,148 change in judgement of beginning of year U.S. valuation allowance (1) — — 6,964 change in valuation allowance associated with current year earnings 7,252 1,640 1,004 change in estimate during current year (2) ( 434 ) ( 1,457 ) 558 ending balance $ 18,675 11,857 11,674 (1) Refer to the above "Assessment" subsection 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) Amounts represent 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 an uncertain income tax position due to the expiration of statute of limitations, (iv) expiration of certain U.S. state loss carryforwards, and (v) other immaterial items. 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 and whether we are required to record a deferred income tax liability for those undistributed earnings from our foreign subsidiaries that will not be reinvested indefinitely. As of April 30, 2023, 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 only 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 $ 4.2 million and $ 3.6 million as of April 30, 2023, and May 1, 2022, 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, 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) 2023 2022 2021 beginning balance $ 1,101 1,444 1,269 increases from prior period tax positions 175 114 249 decreases from prior period tax positions ( 97 ) ( 77 ) ( 74 ) lapse of applicable statute of limitations — ( 380 ) — ending balance $ 1,179 1,101 1,444 As of April 30, 2023, we had $ 1.2 million of total gross unrecognized tax benefits, of which the entire amount was classified as income taxes payable - long-term in the accompanying Consolidated Balance Sheets. As of May 1, 2022, we had $ 1.1 million of total gross 74 unrecognized tax benefits, of which the entire amount was classified as income taxes payable - long-term in the accompanying Consolidated Balance Sheets. These unrecognized income tax benefits would favorably affect income tax expense in future periods by $ 1.2 million and $ 1.1 million as of April 30, 2023, and May 1, 2022, respectively. We elected to classify interest and penalties as part of income tax expense. As of April 30, 2023, and May 1, 2022, the gross amount of interest and penalties due to unrecognized tax benefits was $ 239,000 and $ 185,000 , respectively. Our gross unrecognized income tax benefit of $ 1.2 million as of April 30, 2023, 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 2019 and subsequent. Canadian provincial (Quebec) income tax returns filed by us remain subject to examination for income tax years 2019 and subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year 2018 and subsequent. Income Taxes Paid The following table sets forth income taxes paid (refunded) by jurisdiction: (dollars in thousands) 2023 2022 2021 United States federal - Alternative Minimum Tax (AMT) credit refunds (1) $ — $ — $ ( 1,510 ) United States federal - Transition Tax 265 266 226 China - Income Taxes 1,831 2,036 2,076 China - Withholding Taxes Associated with Earnings and Profits Distribution to U.S. Parent — 487 798 Canada - Income Taxes 228 311 1,408 $ 2,324 $ 3,100 $ 2,998 (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. 12. COMMITMENTS AND CONTINGENCIES Leases Balance Sheet The right of use assets and lease liabilities associated with our operating leases as of April 30, 2023, and May 1, 2022, are as follows: (dollars in thousands) April 30, 2023 May 1, 2022 Right of use assets $ 8,191 $ 15,577 Operating lease liability - current 2,640 3,219 Operating lease liability – noncurrent 3,612 7,062 Supplemental Cash Flow Information (dollars in thousands) 2023 2022 2021 Operating lease liability payments $ 2,497 $ 2,954 $ 2,634 Right of use assets exchanged for lease liabilities 731 3,762 8,014 Operating lease costs were $ 3.6 million, $ 3.9 million, and $ 2.9 million during fiscal 2023, 2022, and 2021, respectively. Short-term lease costs were $ 44,000 , $ 68,000 , and $ 55,000 during fiscal 2023, 2022, and 2021, respectively. Variable lease expense was immaterial for each of fiscal 2023, 2022, and 2021. 75 As of April 30, 2023, the weighted average remaining lease term and discount rate for our operating leases follows: Weighted average lease term 3.87 years Weighted average discount rate 3.58 % 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 % Other Information Maturity of our operating lease liabilities for the next five fiscal years and thereafter follows: (dollars in thousands) Amount 2024 $ 2,698 2025 1,890 2026 603 2027 343 2028 225 Thereafter 804 6,563 Less: interest ( 311 ) Present value of lease liabilities $ 6,252 Related Party Lease – Mattress Fabrics Segment On March 23, 2023, we terminated an agreement with a partnership owned by an immediate family member of an officer of the company, pursuant to which we leased a 63,522 square foot facility for our domestic mattress cover operation. Prior to the termination of the lease agreement, rent payments totaled $ 123,000 , $ 148,000 , and $ 151,000 in fiscal 2023, 2022, and 2021, respectively. In accordance with the termination of the lease agreement, we were reimbursed $ 67,000 for leasehold improvements we made to the leased property. 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 on our financial position, results of operations, or cash flows. Accounts Payable – Capital Expenditures As of April 30, 2023, and May 1, 2022, we had total amounts due regarding capital expenditures totaling $ 56,000 and $ 473,000 , respectively, which pertained to outstanding vendor invoices, none of which were financed. Purchase Commitments - Capital Expenditures As of April 30, 2023, we had open purchase commitments to acquire equipment for our U.S. and Canadian mattress fabrics operations totaling $ 629,000 . 13. 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 awards as determined by the Compensation Committee of our board of directors. An aggregate of 1,200,000 shares of common stock were 76 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 April 30, 2023, there were 224,266 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 2023, 2022, and 2021: 2023 2022 2021 Shares Shares Shares outstanding at beginning of year 210,284 174,295 44,399 granted 119,687 37,991 129,896 vested (1) ( 32,799 ) — — forfeited ( 11,346 ) ( 2,002 ) — outstanding at end of year 285,826 210,284 174,295 (1) During fiscal 2023, time-based restricted stock units totaling 32,799 vested at a fair value of $ 167,000 , or $ 5.10 per share. 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 2023, 2022, and 2021: (1) Restricted Price Vesting Date of Grant Stock Awarded Per Share Period September 6, 2022 37,671 $ 4.58 1 to 3 years August 10, 2022 82,016 $ 5.06 3 years July 22, 2021 37,991 $ 14.75 3 years August 6, 2020 129,896 $ 11.01 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 $ 808,000 , $ 893,000 , and $ 614,000 within selling, general, and administrative expense for time-based restricted stock units in fiscal 2023, 2022, and 2021, respectively. As of April 30, 2023, the remaining unrecognized compensation cost related to our time-based restricted stock units was $ 759,000 , which is expected to be recognized over a weighted average vesting period of 1.5 years. As of April 30, 2023, our time-based restricted stock unit awards that were expected to vest had a fair value totaling $ 1.6 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. 77 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 August 10, 2022, and July 22, 2021: August 10, July 22, 2022 2021 Closing price of our common stock $ 5.06 $ 14.75 Expected volatility of our common stock 48.2 % 54.2 % Expected volatility of peer companies (1) 41.6 % - 105.1 % 45.7 % - 101.5 % Risk-free interest rate 3.13 % 0.33 % Dividend yield 0.00 % 3.00 % Correlation coefficient of peer companies (1) 0.05 - 0.23 0.03 - 0.35 (1) The expected volatility and correlation coefficient of our peer companies for the August 10, 2022, and July 22, 2021, 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 We grant performance-based restricted stock units to key employees 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. 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 April 30, 2023: (4) (3) Restricted Restricted Stock Stock Units Stock Units Expected to Price Per Vesting Date of Grant Awarded Vest Share Period August 10, 2022 (1) 178,714 — $ 5.77 (5) 3 years July 22, 2021 (1) 122,476 — $ 15.93 (6) 3 years July 22, 2021 (2) 20,500 — $ 14.75 (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 April 30, 2023. (5) Price per share represents the fair market value per share ($ 1.14 per $1, or an increase of $ 0.71 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 ($ 5.06 ) for the performance-based component of the performance-based restricted stock units granted to senior executives on August 10, 2022. (6) 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 78 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 certain senior executives on July 22, 2021. (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 2023, 2022, and 2021: (3) (4) Common Weighted Weighted Stock Shares Average Average Price Fiscal Year Vested Fair Value Per Share Fiscal 2023 (1) 545 $ 3 $ 5.10 Fiscal 2023 (2) 437 $ 2 $ 5.10 Fiscal 2022 (1) 5,051 $ 87 $ 17.14 Fiscal 2022 (2) 5,812 $ 100 $ 17.14 Fiscal 2021 (1) 3,277 $ 33 $ 9.96 Fiscal 2021 (2) 3,710 $ 37 $ 9.96 (1) Performance-based restricted stock units vested for senior executives. (2) Performance-based restricted stock units vested for key employees. (3) Dollar amounts are in thousands. (4) 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 charge (credit) to compensation expense totaling $ 2,000 , $( 81,000 ), and $ 357,000 within selling, general, and administrative expense associated with our performance-based restricted stock units for fiscal years 2023, 2022, and 2021, respectively. Common Stock Awards The following table summarizes information related to our grants of common stock to our outside directors during fiscal 2023, 2022, and 2021: Common (1) Stock Price Per Vesting Date of Grant Awarded Share Period April 3, 2023 - Fiscal 2023 15,832 $ 5.29 Immediate January 3, 2023 - Fiscal 2023 17,819 $ 4.70 Immediate October 3, 2022 - Fiscal 2023 18,326 $ 4.57 Immediate July 1, 2022 - Fiscal 2023 19,753 $ 4.24 Immediate 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 (1) Price per share represents closing price of our common stock on the date of grant. We recorded $ 335,000 , $ 321,000 , and $ 280,000 of compensation expense within selling, general, and administrative expense for these common stock awards for fiscal 2023, 2022, and 2021, respectively. 79 14. 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 The following tables present information about assets and liabilities measured at fair value on a recurring basis: Fair value measurements as of April 30, 2023, 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 $ 7,649 N/A N/A $ 7,649 Growth Allocation Mutual Funds 528 N/A N/A 528 Moderate Allocation Mutual Fund 86 N/A N/A 86 Other 208 N/A N/A 208 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 Nonrecurring Basis Third and Fourth Quarters of Fiscal 2023 We classified a right of use asset associated with a leased facility as held for sale in the Consolidated Balance Sheet as of January 29, 2023 (i.e., the end of the third quarter of fiscal 2023), in connection with the restructuring activity associated with our upholstery fabrics cut and sew operation located in Haiti (which is described more fully in Note 9 of the consolidated financial statements). This right of use asset classified as held for sale was recorded at its fair value of $ 2.0 million, which represented the present value of future discounted cash flows based on the payments and timing of such payments due from the Lessee as stated in the Termination Agreement (which is 80 described more fully in Note 9 of the consolidated financial statements). The interest rate used to determine the present value of the future discounted cash flows was based on significant unobservable inputs based on assumptions determined by management such as (i) the credit characteristics of the Lessee and guarantor of the Termination Agreement; (ii) the length of the payment terms as defined in the Termination Agreement; (iii) the payment terms as defined in the Termination Agreement being denominated in USD, and (iv) the fact that the right of use asset was located in, and the Lessee and guarantor conduct business in Haiti, a foreign country. As a result, since management used significant unobservable inputs and assumptions to determine the fair value of this right of use asset, this right of use asset was classified as level 3 within the fair value hierarchy defined above. During the fourth quarter of fiscal 2023, the right of use asset mentioned above was vacated and possession was returned to the Lessor, and the Lessee took possession of this right of use asset as described more fully in Note 9 of the consolidated financial statements. As a result, the right of use asset classified as held for sale as of January 29, 2023, was derecognized and a short-term and long-term note receivable was recognized based on the payments and timing of such payments due from the Lessee as stated in the Termination Agreement. As of April 30, 2023, this note receivable totaled $ 1.9 million, of which $ 219,000 and $ 1.7 million were classified as short-term and long-term, respectively. 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 values of the right of use assets were 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 amounts 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. 15. NET (LOSS) INCOME PER SHARE Basic net (loss) income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net (loss) income per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method. Weighted average shares used in the computation of basic and diluted net (loss) income per share are as follows: (in thousands) 2023 2022 2021 weighted-average common shares outstanding, basic 12,283 12,242 12,300 dilutive effect of stock-based compensation — — 22 weighted-average common shares outstanding, diluted 12,283 12,242 12,322 Shares of unvested common stock that were not included in the computation of diluted net (loss) income per share consist of the following: 81 (in thousands) 2023 2022 2021 antidilutive effect from decrease in the price per share of our common stock 25 18 2 antidilutive effect from net loss incurred during the fiscal year 88 86 — total unvested shares of common stock not included in computation of diluted net (loss) income per share 113 104 2 16. 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 $ 1.2 million, $ 1.3 million, and $ 1.2 million during fiscal years 2023, 2022, and 2021, 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 $ 215,000 , $ 212,000 , and $ 143,000 in fiscal years 2023, 2022, and 2021, respectively. Our nonqualified deferred compensation plan liability was $ 8.2 million and $ 9.3 million as of April 30, 2023, and May 1, 2022, respectively. We have a rabbi trust (the “Trust”) to set aside funds for the participants of the Plan that allows the participants to direct their contributions to various investment options in the Plan. The investment options in 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 $ 8.5 million and $ 9.4 million as of April 30, 2023, and May 1, 2022, 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. 17. SEGMENT INFORMATION Overall Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. Mattress Fabrics The mattress fabrics segment manufactures, sources, and sells fabrics and mattress covers primarily to bedding manufacturers. Upholstery Fabrics The upholstery fabrics segment develops, manufactures, sources, and sells fabrics primarily to residential and commercial furniture manufacturers. 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 for 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. Net Sales Geographic Concentration Net sales denominated in U.S. dollars accounted for 91 %, 90 %, and 91 % of total consolidated net sales in fiscal 2023, 2022, and 2021, respectively. International sales accounted for 29 %, 31 %, and 27 % of net sales during fiscal 2023, 2022, and 2021, respectively, and are summarized by geographic area as follows: (dollars in thousands) 2023 2022 2021 north america (excluding USA) (1) $ 29,756 $ 39,256 $ 32,925 far east and asia (2) 31,339 43,015 43,764 all other areas 8,032 8,114 5,558 $ 69,127 $ 90,385 $ 82,247 82 (1) Of this amount, $ 24.9 million, $ 33.5 million, and $ 27.2 million are attributable to shipments to Mexico in fiscal 2023, 2022, and 2021, respectively. (2) Of this amount $ 20.0 million, $ 26.9 million, and $ 28.1 million are attributable to shipments to China in fiscal 2023, 2022, and 2021, 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 15 %, 13 %, and 13 % of consolidated net sales during fiscal 2023, 2022, and 2021, respectively. No customers within the upholstery fabrics segment accounted for greater than 10 % of the consolidated net accounts receivable balance as of April 30, 2023, or May 1, 2022. No customers within the mattress fabrics segment represented greater than 10 % of consolidated net sales during fiscal 2023, 2022, or fiscal 2021. No customers within the mattress fabrics segment accounted for greater than 10 % of the consolidated net accounts receivable balance as of April 30, 2023, or May 1, 2022. Employee Workforce Concentration The hourly employees associated with our manufacturing facility located in Canada (approximately 11 % of our workforce) are represented by a local, unaffiliated union. The collective bargaining agreement for these employees expires on February 1, 2026. We are not aware of any efforts to organize any more of our employees, and we believe our relations with our employees are good. Financial Information We evaluate the operating performance of our business segments based upon (loss) income from operations before certain unallocated corporate expenses and other items that are not expected to occur on a regular basis, such as restructuring expense and restructuring related charges. Cost of sales in each of our 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 the operations of each segment and consist of accounts receivable, inventories, property, plant, and equipment, and right of use assets. 83 Statements of operations for our business segments are as follows: (dollars in thousands) 2023 2022 2021 net sales by segment: mattress fabrics $ 110,995 $ 152,159 $ 157,671 upholstery fabrics 123,939 142,680 142,049 net sales $ 234,934 $ 294,839 $ 299,720 gross (loss) profit: mattress fabrics $ ( 6,739 ) $ 16,458 $ 23,864 upholstery fabrics 17,733 19,635 25,968 total segment gross profit 10,994 36,093 49,832 restructuring related charge (2) ( 98 ) — — gross profit $ 10,896 $ 36,093 $ 49,832 selling, general, and administrative expenses by segment: mattress fabrics $ 11,942 $ 12,246 $ 12,066 upholstery fabrics 15,739 14,009 14,092 unallocated corporate 10,297 9,160 11,598 selling, general, and administrative expenses $ 37,978 $ 35,415 $ 37,756 (loss) income from operations by segment: mattress fabrics $ ( 18,681 ) $ 4,212 $ 11,798 upholstery fabrics 1,994 5,626 11,876 unallocated corporate expenses ( 10,297 ) ( 9,160 ) ( 11,598 ) total segment (loss) income from operations ( 26,984 ) 678 12,076 restructuring expense (1) ( 1,396 ) — — restructuring related charge (2) ( 98 ) — — (loss) income from operations $ ( 28,478 ) $ 678 $ 12,076 interest expense — ( 17 ) ( 51 ) interest income 531 373 244 other expense ( 443 ) ( 1,359 ) ( 2,208 ) gain on bargain purchase (3) — — 819 (loss) income before income taxes $ ( 28,390 ) $ ( 325 ) $ 10,880 (1) Restructuring expense totaling $ 1.4 million for fiscal 2023 relates to both our restructuring activities for our cut and sew upholstery fabrics operations (i) located in Shanghai, China, which occurred during the second quarter of fiscal 2023, and (ii) located in Ouanaminthe, Haiti, which occurred during the third and fourth quarters of fiscal 2023. Restructuring expense represents employee termination benefits of $ 507,000 , lease termination costs of $ 481,000 , impairment losses totaling $ 357,000 that relate to leasehold improvements and equipment, and $ 51,000 for other associated costs. (2) Cost of sales for fiscal 2023 includes a restructuring related charge totaling $ 98,000 , which pertained to a loss on disposal and markdowns of inventory related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China. (3) 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 business segments follow: (dollars in thousands) April 30, 2023 May 1, 2022 segment assets mattress fabrics accounts receivable $ 12,396 $ 9,865 inventory 25,674 39,028 property, plant, and equipment 33,749 (1) 38,731 (2) right of use assets 2,308 (3) 3,469 (4) total mattress fabrics assets 74,127 91,093 upholstery fabrics accounts receivable 12,382 12,361 inventory 19,406 27,529 property, plant, and equipment 1,671 (5) 2,030 (6) right of use assets 2,618 (7) 8,124 (8) total upholstery fabrics assets 36,077 50,044 total segment assets 110,204 141,137 non-segment assets cash and cash equivalents 20,964 14,550 short-term investments – rabbi trust 1,404 — short-term note receivable 219 — current income taxes receivable — 857 other current assets 3,071 2,986 long-term note receivable 1,726 — deferred income taxes 480 528 property, plant, and equipment (9) 691 941 right of use assets (10) 3,265 3,984 intangible assets 2,252 2,628 long-term investments - rabbi trust 7,067 9,357 other assets 840 595 total assets $ 152,183 $ 177,563 Capital expenditures and depreciation expense information for our business segments follow: (dollars in thousands) 2023 2022 2021 capital expenditures (11): mattress fabrics $ 1,125 $ 3,383 $ 6,226 upholstery fabrics 467 1,032 347 unallocated corporate 97 1,406 332 total capital expenditures $ 1,689 $ 5,821 $ 6,905 depreciation expense mattress fabrics $ 6,050 $ 6,200 $ 6,014 upholstery fabrics 795 794 832 total depreciation expense $ 6,845 $ 6,994 $ 6,846 (1) The $ 33.7 million as of April 30, 2023, represents property, plant, and equipment of $ 22.7 million, $ 10.4 million, and $ 608,000 located in the U.S., Canada, and Haiti, respectively. (2) 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. (3) The $ 2.3 million as of April 30, 2023, represents right of use assets of $ 1.5 million and $ 776,000 located in Haiti and Canada, respectively. 85 (4) 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. (5) The $ 1.7 million as of April 30, 2023, represents property, plant, and equipment of $ 974,000 , $ 592,000 , and $ 105,000 located in the U.S., Haiti, and China, respectively (6) 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. (7) The $ 2.6 million as of April 30, 2023, represents right of use assets of $ 1.5 million and $ 1.1 million located in China and the U.S., respectively. (8) 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. (9) The $ 691,000 as of April 30, 2023, and $ 941,000 as of May 1, 2022, 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 $ 3.3 million as of April 30, 2023, and $ 4.0 million as of May 1, 2022, represent 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. 18. 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 April 30, 2023, 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 April 30, 2023, the company’s statutory surplus reserve was $ 4.2 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 $ 4.2 million, to assist with debt repayment, capital expenditures, and other expenses of the company’s business. 19. COMMON STOCK REPURCHASE PROGRAM In March 2020, our board of directors approved an authorization for us to acquire up to $ 5.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, through plans established under the Securities Exchange Act Rule 10b5-1, or otherwise. The number of shares purchased and the timing of such purchases are based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities. During fiscal 2023 and 2021, we did no t repurchase any shares of our common stock. During fiscal 2022, we repurchased 121,688 shares of our common stock at a cost of $ 1.8 million. As of April 30, 2023, $ 3.2 million was available for additional repurchases of our common stock. 86 20. DIVIDEND PROGRAM On June 29, 2022, our board of directors announced the decision to suspend the company’s quarterly cash dividend. Accordingly, we did no t make any dividend payments during fiscal 2023. 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. 87 ITEM 9. CHANGES IN AND DISA GREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the three years ended April 30, 2023, there were no disagreements on any matters of accounting principles or practices or financial statement disclosures. ITEM 9A. CONTROL S AND PROCEDURES Evaluation of Disclosure Controls and Procedures We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of April 30, 2023. This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, we have concluded that these disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports filed by us and submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported as and when required. Further, we concluded that our disclosure controls and procedures have been designed to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosure. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes: (1) maintaining records that in reasonable detail accurately and fairly reflect the transactions and disposition of assets; (2) providing reasonable assurance that the transactions are recorded as necessary for preparation of financial statements, and that receipts and expenditures are made in accordance with authorizations of management and directors; and (3) providing reasonable assurance that unauthorized acquisition, use, disposition of assets that could have a material effect on financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of financial statements would be prevented or detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control – Integrated Framework. Based on this assessment, management concluded that our internal control over financial reporting was effective as of April 30, 2023. Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statements as of and for the years ended April 30, 2023, May 1, 2022, and May 2, 2021, and has audited the company’s effectiveness of internal controls over financial reporting as of April 30, 2023, as stated in their reports, which are included in Item 8 and Item 9A hereof. During the quarter ended April 30, 2023, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 88 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Culp, Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of Culp, Inc. (a North Carolina corporation) and subsidiaries (“the Company”) as of April 30, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended April 30, 2023, and our report dated July 14, 2023, expressed an unqualified opinion on those financial statements. Basis for opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Charlotte, North Carolina July 14, 2023 89 ITEM 9B. OTHE R INFORMATION On July 12, 2013, the board of directors of the company designated Kenneth R. Bowling, the company's existing chief financial officer and treasurer, as the company’s principal accounting officer as defined by the Securities and Exchange Commission. This appointment is effective July 21, 2023, following the last day of employment for Thomas B. Gallagher, Jr., who served as the company’s principal accounting officer prior to Mr. Bowling's designation. Mr. Bowling joined the company in 1997 as controller for the Culp Velvets/Prints division. He was promoted to corporate controller in 2001 and was named corporate controller and assistant treasurer in 2002. In 2004, he was promoted to vice president, finance and treasurer. Mr. Bowling became the company’s chief financial officer in 2007 and corporate secretary in 2008, and he was named senior vice president in 2016. In 2019, Mr. Bowling was named executive vice president. On July 12, 2023, the compensation committee of the company's board of directors (the “Committee”) reviewed achievement of the applicable performance measures established under the company’s annual incentive program for the fiscal 2023 year, as previously described in the section titled “Consideration of Shareholder Advisory Vote and Changes for Fiscal 2023” of the Company’s Proxy Statement filed with the Securities and Exchange Commission on August 24, 2022, in order to determine the bonus payments, if any, payable to the company's named executive officers under such program. The committee determined that bonuses would be due to executive officers in each of the executive shared services reporting unit and the upholstery fabrics reporting unit, based on the attainment of free cash flow-based targets, but no bonus had been achieved by the mattress fabrics reporting unit. With respect to the bonus payable to executive officers in the upholstery fabrics reporting unit, the Committee also reviewed other factors it deemed relevant to the bonus determination, including the company's significant consolidated operating loss for fiscal 2023. Specifically, the Committee noted that the annual incentive bonus program for the upholstery fabrics reporting unit was tied to measures of adjusted operating income and adjusted free cash flow, with an allocation between the two performance measures of 20% operating income and 80% free cash flow, but for the executive shared services reporting unit, the fiscal 2023 annual incentive bonus program was tied solely to the measure of adjusted free cash flow, with a negative moderator of 20% applied against any bonus earned as a result of the company's consolidated operating loss for fiscal 2023. Based on the company's significant consolidated operating loss for fiscal 2023, the Committee determined that a negative moderator of 20% should also be applied against any bonus earned by the upholstery fabrics reporting unit. As a result, the Committee determined that the upholstery fabrics reporting unit had achieved a level of adjusted free cash flow for fiscal 2023 that, absent the 20% negative moderator, would have resulted in the payment of a bonus to Mr. Boyd Chumbley, president of the upholstery fabrics division, in the amount of $318,474.24, but with the application of the 20% negative moderator, the amount of Mr. Chumbley's bonus would now be $254,779.92, a reduction of $63,694.32 from what would have otherwise been payable to Mr. Chumbley without the addition of the 20% negative moderator. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not Applicable. 90 PART III ITEM 10. DIRECTORS, EXECUTIVE OF FICERS, AND CORPORATE GOVERNANCE Information with respect to executive officers and directors of the company is included in the company’s definitive Proxy Statement to be filed within 120 days after the end of the company’s fiscal year pursuant to Regulation 14A of the Securities and Exchange Commission, under the captions “Nominees, Directors, and Executive Officers,” “Delinquent Section 16(a) Reports,” “Corporate Governance – Code of Business Conduct and Ethics,” and “Board Committees and Attendance – Audit Committee,” which information is herein incorporated by reference. ITEM 11. EXECUT IVE COMPENSATION Information with respect to executive compensation is included in the company’s definitive Proxy Statement to be filed within 120 days after the end of the company’s fiscal year pursuant to Regulation 14A of the Securities and Exchange Commission, under the captions “Executive Compensation” and “Compensation Committee Interlocks and Insider Participation,” which information is herein incorporated by reference. ITEM 12. SECURITY OWNERS HIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information with respect to the security ownership of certain beneficial owners and management is included in the company’s definitive Proxy Statement to be filed within 120 days after the end of the company’s fiscal year pursuant to Regulation 14A of the Securities and Exchange Commission, under the captions “Executive Compensation Plan Information,” “Beneficial Owners of 5% or More of Our Common Stock,” and “Nominees, Directors, and Executive Officers,” which information is herein incorporated by reference. The following table sets forth information as of the end of fiscal 2023 regarding shares of our common stock that may be issued upon the exercise of equity awards previously granted and currently outstanding equity awards under the company’s equity incentive and stock option plans, as well as the number of shares available for the grant of equity awards that had not been granted as of that date. EQUITY COMPENSATION PLAN INFORMATION Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights (2) Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a)) Plan Category (a) (b) (c) Equity compensation plans approved by security holders 607,516 (1) $ — 224,266 Equity compensation plans not approved by security holders — — — Total 607,516 (1) $ — 224,266 (1) For performance-based restricted stock unit awards, the number of shares shown represents the maximum number of shares that could be issued if certain performance targets are met. None of these performance-based restricted stock unit shares (i.e., 321,690 shares) are currently expected to vest and be issued due to challenging financial performance measures that are unlikely to be met. For time-based restricted stock unit awards, the number of shares shown represents the number of shares to be issued upon completion of the time-based vesting period for such restricted stock units. (2) All of the shares shown in column (a) are issueable under restricted stock units that do not require the payment of consideration by the recipient upon vesting of the award and issuance of the shares, and therefore there is no exercise price information shown in column (b). 91 ITEM 13. CERTAIN RELATIONSHIPS AND RELATE D TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information with respect to certain relationships and related transactions is included in the company’s definitive Proxy Statement to be filed within 120 days after the end of the company’s fiscal year pursuant to Regulation 14A of the Securities and Exchange Commission, under the captions “Corporate Governance – Director Independence” and “Certain Relationships and Related Transactions,” which information is herein incorporated by reference. ITEM 14. PRINCIPAL ACCO UNTANT FEES AND SERVICES Information with respect to accountants fees and services is included in the company’s definitive Proxy Statement to be filed within 120 days after the end of the company’s fiscal year pursuant to Regulation 14A of the Securities and Exchange Commission, under the caption “Fees Paid to Independent Auditors,” which information is herein incorporated by reference. 92 PART IV ITEM 15. EXHIBITS AND FIN ANCIAL STATEMENT SCHEDULES a) DOCUMENTS FILED AS PART OF THIS REPORT: 1. Consolidated Financial Statements The following consolidated financial statements of Culp, Inc. and its subsidiaries are filed as part of this report. Item Page of Annual Report on Form 10-K Report of Independent Registered Public Accounting Firm (PCAOB ID Number 248 ) 46 Consolidated Balance Sheets – April 30, 2023, and May 1, 2022 47 Consolidated Statements of Net (Loss) Income - for the years ended April 30, 2023, May 1, 2022, and May 2, 2021 48 Consolidated Statements of Comprehensive (Loss) Income - for the years ended April 30, 2023, May 1, 2022, and May 2, 2021 49 Consolidated Statements of Shareholders’ Equity – for the years ended April 30, 2023, May 1, 2022, and May 2, 2021 50 Consolidated Statements of Cash Flows – for the years ended April 30, 2023, May 1, 2022, and May 2, 2021 51 Notes to Consolidated Financial Statements 52 2. Financial Statement Schedules All financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. 93 3. Exhi bits The following exhibits are attached at the end of this report or incorporated by reference herein. Management contracts, compensatory plans, and arrangements are marked with an asterisk (*). 3(i) Articles of Incorporation of the company, as amended, were filed as Exhibit 3(i) to the company’s Form 10-Q for the quarter ended July 28, 2002, filed September 11, 2002 (Commission File No. 001-12597), and are incorporated herein by reference. 3(ii) Restated and Amended Bylaws of the company, as amended July 10, 2019, were filed as Exhibit 3(ii) to the company’s Form 10-K for the year ended April 28, 2019, filed July 12, 2019 (Commission File No. 001-12597), and are incorporated herein by reference. 4.1 Description of Capital Stock of the company was filed as Exhibit 4.1 to the company’s Form 10-K for the year ended May 3, 2020, filed July 17, 2020 (Commission File No. 001-12597), and is incorporated herein by reference. 10.1 Second Amended and Restated Credit Agreement dated as of January 19, 2023, by and among Culp, Inc., as Borrower, Read Window Products, LLC, as Guarantor, and Wells Fargo Bank, National Association, as Lender, was filed as exhibit 10.1 to the company’s Form 8-K filed January 23, 2023 (Commission File No. 001-12597), and is incorporated herein by reference. 10.2 First Amendment to Second Amended and Restated Credit Agreement dated as of February 21, 2023, by and among Culp, Inc., as Borrower, Read Window Products, LLC, as Guarantor, and Wells Fargo Bank, National Association, as Lender, was filed as exhibit 10.1 to the company's Form 10-Q filed March 9, 2023 (Commission File No. 001-12597), and is incorporated herein by reference. 10.3 Form of Annual Incentive Award Agreement was filed as Exhibit 10.1 to the company’s Form 10-Q dated December 9, 2022 (Commission File No. 001-12597), and is incorporated herein by reference. (*) 10.4 Form of restricted stock unit agreement for restricted stock units granted to executive officers pursuant to the 2015 Equity Incentive Plan was filed as Exhibit 10.2 to the company’s Form 10-Q dated September 9, 2021 (Commission File No. 001-12597), and is incorporated herein by reference. (*) 10.5 Form of restricted stock unit agreement for restricted stock units granted to executive officers pursuant to the 2015 Equity Incentive Plan was filed as Exhibit 10.2 to the company’s Form 10-Q dated December 11, 2020 (Commission File No. 001-12597), and is incorporated herein by reference. (*) 10.6 Written description of Non-Employee Director Compensation was filed as Exhibit 10.2 to the company’s Form 10-Q dated March 8, 2019 (Commission File No. 001-12597), and incorporated herein by reference. 10.7 2015 Equity Incentive Plan, filed as Annex A to the company’s 2015 Proxy Statement, filed on August 12, 2015 (Commission File No. 001-12597), and incorporated herein by reference. (*) 10.8 Culp, Inc. Deferred Compensation Plan For Certain Key Employees Amendment No. 1, was filed as Exhibit 10.2 to the company’s Form 10-K for the year ended May 3, 2015, dated July 17, 2015, and incorporated herein by reference. (*) 10.9 Form of change in control and noncompetition agreement. This agreement was filed as Exhibit 10.3 to the company’s Form 10-Q for the quarter ended October 28, 2007, filed on December 12, 2007 (Commission File No. 001-12597) and incorporated herein by reference. (*) 10.10 Amended and Restated Deferred Compensation Plan for Certain Key Employees was filed as Exhibit 10.1 to the company’s Form 10-Q for the quarter ended January 26, 2014, filed on March 7, 2014, and is incorporated herein by reference. (*) 21 List of subsidiaries of the company 23 Consent of Independent Registered Public Accounting Firm in connection with the registration statements of Culp, Inc. on Form S-8 (File Nos. 333-207195 and 33‑13310). 24(a) Power of Attorney of John A. Baugh, dated July 14, 2023 24(b) Power of Attorney of Perry E. Davis, dated July 14, 2023 24(c) Power of Attorney of Sharon A. Decker, dated July 14, 2023 24(d) Power of Attorney of Kimberly B. Gatling, dated July 14, 2023 24(e) Power of Attorney of Fred A. Jackson, dated July 14, 2023 24(f) Power of Attorney of Jonathan L. Kelly, dated July 14, 2023 31(a) Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31(b) Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32(a) Certification of Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32(b) Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 94 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). 95 b) Exhi bits: The exhibits to this Form 10-K are filed at the end of this Form 10-K immediately preceded by an index. A list of the exhibits begins on page 99 under the subheading “Exhibit Index.” c) Financial Stat ement Schedules: None ITEM 16. FORM 10-K SUMMARY None 96 EXHIBIT INDEX Exhibit Number Exhibit 21 List of subsidiaries of the company 23 Consent of Independent Registered Public Accounting Firm in connection with the registration statements of Culp, Inc. on Form S-8 (File Nos. 333-207195 and 33-13310). 24(a) Power of Attorney of John A. Baugh, dated July 14, 2023 24(b) Power of Attorney of Perry E. Davis, dated July 14, 2023 24(c) Power of Attorney of Sharon A. Decker, dated July 14, 2023 24(d) Power of Attorney of Kimberly B. Gatling, dated July 14, 2023 24(e) Power of Attorney of Fred A. Jackson, dated July 14, 2023 24(f) Power of Attorney of Jonathan L. Kelly, dated July 14, 2023 31(a) Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31(b) Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32(a) Certification of Principal Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 32(b) Certification of Principal Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101). 97 SIGNA TURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, CULP, INC. has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14 th day of July 2023. CULP, INC. By /s/ Robert G. Culp, IV Robert G. Culp, IV Chief Executive Officer (principal executive officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 14 th day of July 2023. /s/ Franklin N. Saxon /s/ Kimberly B. Gatling * Franklin N. Saxon Kimberly B. Gatling (Chairman of the Board of Directors) (Director) /s/ Fred A. Jackson* /s/ Jonathan L. Kelly* Fred A. Jackson Jonathan L. Kelly (Lead Independent Director) (Director) /s/ John A. Baugh * /s/ Kenneth R. Bowling John A. Baugh Kenneth R. Bowling (Director) Chief Financial Officer (principal financial officer) /s/ Perry E. Davis* /s/ Thomas B. Gallagher, Jr. Perry E. Davis Thomas B. Gallagher, Jr. (Director) Vice President of Finance (principal accounting officer) /s/ Sharon A. Decker* Sharon A. Decker (Director) * By Kenneth R. Bowling, Attorney-in-Fact, pursuant to Powers of Attorney filed with the Securities and Exchange Commission. 98