Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes and other exhibits included elsewhere in this report.
General
Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. The nine months ended January 28, 2024, and January 29, 2023, both represent 39-week periods.
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, Quebec, Canada, and Ouanaminthe, Haiti.
Upholstery Fabrics
The upholstery fabrics segment develops, sources, manufactures, and sells fabrics primarily to residential and commercial furniture manufacturers. Currently, we have upholstery fabric operations located in Shanghai, China, and Burlington, NC. During the third quarter of fiscal 2022, we commenced operation of a new leased facility located in Ouanaminthe, Haiti, dedicated to the production of cut and sewn upholstery kits. However, due to a decline in demand, we (i) terminated the agreement to lease this new facility during the third quarter of fiscal 2023, (ii) relocated a scaled-down upholstery cut and sew operation into our existing mattress cover facility located in Ouanaminthe, Haiti, during the fourth quarter of fiscal 2023, and (iii) thereafter discontinued the production of cut and sewn upholstery kits in Haiti during the latter part of the first quarter of fiscal 2024. (See Note 9 to the consolidated financial statements for further details.)
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 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.
Executive Summary
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. Cost of sales for each business segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished good purchases, direct and indirect labor, overhead, and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and their support staff, all costs associated with being a public company, amortization of intangible assets, and other miscellaneous expenses.
Results of Operations
Three Months Ended
(dollars in thousands)
January 28,
2024
January 29,
2023
Change
Net sales
$
60,418
$
52,523
15.0%
Gross profit
7,703
2,093
268.0%
Gross margin
12.7
%
4.0
%
876bp
Selling, general, and administrative expenses
9,493
9,165
3.6%
Restructuring (credit) expense
(50
)
711
(107.0)%
Loss from operations
(1,740
)
(7,783
)
(77.6)%
Operating margin
(2.9
)%
(14.8
)%
1194bp
Loss before income taxes
(2,161
)
(8,682
)
(75.1)%
Income tax expense
1,027
286
259.1%
Net loss
(3,188
)
(8,968
)
(64.5)%
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Nine Months Ended
(dollars in thousands)
January 28,
2024
January 29,
2023
Change
Net sales
$
175,804
$
173,508
1.3%
Gross profit
22,737
4,008
467.3%
Gross margin
12.9
%
2.3
%
1062bp
Selling, general, and administrative expenses
29,366
27,133
8.2%
Restructuring expense
432
1,326
(67.4)%
Loss from operations
(7,061
)
(24,451
)
(71.1)%
Operating margin
(4.0
)%
(14.1
)%
1008bp
Loss before income taxes
(6,710
)
(24,507
)
(72.6)%
Income tax expense
2,244
2,332
(3.8)%
Net loss
(8,954
)
(26,839
)
(66.6)%
Net Sales
Overall, our net sales for the third quarter of fiscal 2024 increased by 15% compared with the same period a year ago, with mattress fabrics sales increasing 21.6% and upholstery fabrics sales increasing 9.2%. Our net sales for the first nine months of fiscal 2024 increased by 1.3% compared with the same period a year ago, with mattress fabrics sales increasing 12.9% and upholstery fabrics sales decreasing 8.6%.
The increase in net sales in our mattress fabrics segment for both the third quarter and the first nine months of fiscal 2024 was primarily driven by new fabric and sewn cover placements that are priced in line with current costs, and, to a lesser extent, SKU rationalization and the re-pricing of some underperforming SKUs to reflect current costs, resulting in higher average selling prices overall.
The increase in net sales for our upholstery fabrics segment for the third quarter of fiscal 2024 was driven by the timing of the Chinese New Year holiday (which falls primarily in the fourth quarter of fiscal 2024, as compared to the third quarter of fiscal 2023), as well as improved residential home furnishing sales during the period.
The decrease in net sales for our upholstery fabrics segment for the first nine months of fiscal 2024 reflects reduced demand for our residential upholstery fabrics products during the first half of the year, driven by a slowdown in new retail business in the residential home furnishings industry during this period.
See the Segment Analysis section below for further details.
Loss Before Income Taxes
Overall, our loss before income taxes for the third quarter of fiscal 2024 was $(2.2) million, compared with loss before income taxes of $(8.7) million for the prior-year period, while our loss before income taxes for the first nine months of fiscal 2024 was $(6.7) million, compared with loss before income taxes of $(24.5) for the prior-year period.
Operating performance for the third quarter of fiscal 2024, as compared to the prior-year period, was positively affected by higher sales volume and a more profitable mix of sales for both the mattress fabrics and upholstery fabrics segment; a more favorable foreign exchange rate associated with our upholstery fabrics operation in China; and fixed cost savings in the upholstery fabrics segment. These factors were partially offset by higher SG&A expense during the period, as well as production inefficiencies relating to the start up of certain new product launches in the mattress fabrics segment. Notably, operating performance for the third quarter of fiscal 2023 was negatively affected by restructuring and related charges associated with our upholstery fabrics segment.
Operating performance for the first nine months of fiscal 2024 was positively affected by the same factors that affected the third quarter, as well as better inventory management. These factors were partially offset by higher SG&A expense over the nine-month period; lower residential upholstery fabrics sales during the first six months of fiscal 2024; and production inefficiencies that negatively affected our mattress fabrics segment during the third quarter of fiscal 2024. Notably, operating performance for the first nine months of fiscal 2023 was negatively affected by inventory impairment charges and inventory closeout sales for our mattress fabrics segment; higher than normal markdowns of inventory for our upholstery fabrics segment; and restructuring and related charges associated with our upholstery fabrics segment.
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See the Segment Analysis section below for further details.
Income Taxes
We recorded income tax expense of $2.2 million, or (33.4%) of loss before income taxes, for the nine-month period ending January 28, 2024, compared with income tax expense of $2.3 million, or (9.5%) of loss before income taxes, for the nine-month period ending January 29, 2023.
Our consolidated effective income tax rates during the first nine months of fiscal 2024 and the first nine months of fiscal 2023 were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems from our China operations during fiscal 2024 and from our China and Canada operations during fiscal 2023, which have higher income tax rates than the U.S. In addition, during both the first nine months of fiscal 2024 and fiscal 2023, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S. net deferred income tax assets. The income tax charge associated with the full valuation allowance applied against our U.S. net deferred income tax assets was lower during the first nine months of fiscal 2024 compared with the first nine months of fiscal 2023, as our $(11.3) million U.S. pre-tax loss incurred during the first nine months of fiscal 2024 was significantly lower than the $(28.8) million U.S. pre-tax loss incurred during the first nine months of fiscal 2023.
During the first nine months of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $(6.7) million, compared with $(24.5) million during the first nine months of fiscal 2023. 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 during the first nine months of fiscal 2024, as compared with the first nine months of fiscal 2023.
Refer to Note 14 of the consolidated financial statements for further details regarding our provision for income taxes.
Liquidity
As of January 28, 2024, our cash and cash equivalents (collectively, “cash”) totaled $12.6 million, a decrease of $8.4 million compared with cash of $21.0 million as of April 30, 2023. This decrease was mostly due to net cash used in operating activities totaling $(6.0) million and capital expenditures mostly related to our mattress fabrics segment totaling $(3.2) million, partially offset by proceeds from the sale of rabbi trust investments totaling $1.2 million to fund withdrawals from our deferred compensation plan for certain retired employees (see offsetting decrease to the decrease in deferred compensation liability in item (iii) of the below paragraph).
Our net cash used in operating activities was $(6.0) million during the first nine months of fiscal 2024, a decrease of $10.6 million compared with net cash provided by operating activities of $4.6 million during the first nine months of fiscal 2023. This trend primarily reflects (i) a significant decrease in inventory during the first nine months of fiscal 2023 due to improved alignment of inventory purchases with customer demand trends, promotional programs to reduce aged raw materials and finished goods inventory, and a significant decline in net sales (27.1%) during the period, which did not recur during the first nine months of fiscal 2024; (ii) annual incentive payments made during the first quarter of fiscal 2024, which did not occur during the first quarter of fiscal 2023; (iii) payments to certain retired employees totaling $1.2 million for withdrawals from our deferred compensation plan during the first nine months of fiscal 2024; partially offset by (iv) an increase in cash earnings during the first nine months of fiscal 2024 compared with the first nine months of fiscal 2023.
As of January 28, 2024, there were no outstanding borrowings under our lines of credit.
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Segment Analysis
Mattress Fabrics Segment
Three Months Ended
(dollars in thousands)
January 28,
2024
January 29,
2023
Change
Net sales
$
30,021
$
24,697
21.6%
Gross profit (loss)
1,520
(1,237
)
(222.9)%
Gross profit margin
5.1
%
(5.0
)%
1007bp
Selling, general, and administrative expenses
3,102
2,992
3.7%
Loss income from operations
(1,582
)
(4,229
)
(62.6)%
Operating margin
(5.3
)%
(17.1
)%
1185bp
Nine Months Ended
(dollars in thousands)
January 28,
2024
January 29,
2023
Change
Net sales
$
90,619
$
80,299
12.9%
Gross profit (loss)
5,997
(7,330
)
(181.8)%
Gross margin
6.6
%
(9.1
)%
1575bp
Selling, general, and administrative expenses
9,913
8,821
12.4%
Loss from operations
(3,916
)
(16,151
)
(75.8)%
Operating margin
(4.3
)%
(20.1
)%
1579bp
Net Sales
Mattress fabrics sales increased 21.6% in the third quarter of fiscal 2024 compared to the prior-year period. Mattress fabrics sales increased 12.9% in the first nine months of fiscal 2024 compared to the first nine months of fiscal 2023.
The increase in net sales in our mattress fabrics segment for both the third quarter and the first nine months of fiscal 2024 was primarily driven by new fabric and sewn cover placements that are priced in line with current raw material and operational costs, and, to a lesser extent, SKU rationalization and the re-pricing of some underperforming SKUs to reflect current costs, resulting in higher average selling prices as compared to historical average selling prices.
During the third quarter, we maintained our focus on executing our product-driven strategy with an ongoing emphasis on innovation, design creativity, and customer relationships. The strength and flexibility of our global manufacturing and sourcing operations in the U.S., Canada, Haiti, Asia, and Turkey continued to support the evolving needs of our mattress fabrics and cover customers during the period. We also continued to implement improvement initiatives to support future profitable sales growth and enhance operating efficiencies.
Looking ahead, we are diligently focused on winning new placements to drive revenue and increase margins. We are optimistic about the mid-to-long term growth potential for our business and believe our market position is strong. However, the industry demand backdrop has deteriorated further than expected during the first few weeks of the fourth quarter. We expect current macro-economic conditions will continue to affect consumer spending trends for some time, resulting in ongoing industry softness that could affect near-term sales results. In the face of these macro headwinds, we are working to manage the aspects of our business we can control. We believe we will mitigate demand pressures to some extent by the continued rollout of new programs priced in line with current costs, along with opportunities to make additional gains with customers. However, greater macro-industry and end-consumer support will be needed to drive recovery in the mattress industry and support our future sales growth. Additionally, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East, as well as possible economic and health effects from additional surges in the coronavirus, remain unknown and depend on factors beyond our knowledge or control. These situations could cause disruption to global markets that could adversely affect our operations and financial performance.
Gross Profit, Selling, General & Administrative Expenses, and Loss from Operations
The decrease in this segment’s operating loss during the third quarter of fiscal 2024, as compared to the prior-year period, was primarily due to higher sales of products with better pricing and margins, as well as a more favorable product mix. These factors were partially offset by production inefficiencies mostly relating to the start up of certain new product launches, as well as higher SG&A expense.
The decrease in operating loss during the first nine months of fiscal 2024, as compared to the prior-year period (which was negatively affected by certain inventory impairment charges and losses from inventory close out sales), was primarily due to the same factors that positively affected the third quarter, along with better inventory management. These factors were partially offset
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by higher SG&A expense during the period, as well as the production inefficiencies relating to the start up of certain new product launches that negatively affected the third quarter.
Higher SG&A expense during both the third quarter and the first nine months of fiscal 2024, as compared to the prior-year periods, was due mostly to an increase in provision for bad debts (reflecting current unfavorable macro-economic conditions relating to bedding products), an increase in sampling expense driven by new product roll outs; and an increase in personnel; partially offset by lower compensation expense.
We expect the ongoing (and further deteriorating) industry softness affecting sales volumes will continue to affect profitability for this segment, although we believe these headwinds will be mitigated to some extent by our ongoing efforts to improve operational efficiencies and control internal costs, as well as our continued roll out of new products priced in line with current costs. Additionally, the internal inefficiencies relating to the start up and production of certain new products that negatively affected this segment's operating performance during the third quarter of fiscal 2024 are also expected to affect operating performance during the fourth quarter.
Looking ahead, with the uncertainty of consumer demand in the near term, we are evaluating strategic actions to adjust and right-size our global platform to align with current demand levels, while still supporting our valued customers. We will also consider additional reasonable pricing actions as competitive conditions permit to further mitigate and manage inflation.
Segment assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, and right of use assets.
(dollars in thousands)
January 28, 2024
January 29, 2023
April 30, 2023
Accounts receivable
$
11,463
$
8,314
$
12,396
Inventory
27,925
28,757
25,674
Property, plant & equipment
32,263
34,661
33,749
Right of use assets
1,798
2,476
2,308
$
73,449
$
74,208
$
74,127
Refer to Note 13 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As of January 28, 2024, accounts receivable increased by $3.1 million, or 37.9%, compared with January 29, 2023. This increase reflects the increase in net sales during the third quarter of fiscal 2024 compared with fiscal 2023, as described in the Net Sales section above. In addition, we experienced slower cash collections as customers did not take advantage of cash discounts as much during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, and more customers elected to source our products from China, (where we have longer payment terms) as opposed to the U.S. This led to an increase in days' sales outstanding to 35 days for the third quarter of fiscal 2024, as compared with 31 days for the third quarter of fiscal 2023.
As of January 28, 2024, accounts receivable decreased by $933,000, or 7.5%, compared with April 30, 2023. This decrease primarily reflects faster cash collections, as we had a mix of higher sales to customers with longer credit terms during the fourth quarter of fiscal 2023, as compared with the third quarter of fiscal 2024. As a result, days’ sales outstanding decreased to 35 days during the third quarter of fiscal 2024, a decrease from 37 days during the fourth quarter of fiscal 2023.
Inventory
As of January 28, 2024, inventory decreased by $832,000, or 2.9%, compared with January 29, 2023. Although net sales increased by 21.6% during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, inventory modestly decreased during the third quarter of fiscal 2024, as compared with the prior-year period, due to improved raw materials inventory management in relation to current customer demand trends and promotional programs to reduce aged raw materials and finished goods.
As of January 28, 2024, inventory increased by $2.3 million, or 8.8%, compared with April 30, 2023. This trend primarily reflects lower than anticipated demands trends during the third quarter of fiscal 2024, compared with the fourth quarter of fiscal 2024. Net sales for the third quarter of fiscal 2024 were $30.0 million, a decrease of 2.2%, compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.
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Inventory turns were 4.0 for the third quarter of fiscal 2024, compared with 3.5 for the third quarter of fiscal 2023 and 4.4 for the fourth quarter of fiscal 2023.
Property, Plant, & Equipment
As of January 28, 2024, property, plant, and equipment has steadily decreased compared to January 29, 2023, and April 30, 2023, due to reduced capital spending stemming from the current and expected unfavorable macro-economic conditions and our strategic focus on limited capital projects that will increase efficiencies and improve the quality of our products.
The $32.3 million as of January 28, 2024, represents property, plant, and equipment of $21.9 million, $9.8 million, and $600,000 located in the U.S., Canada, and Haiti, respectively. The $34.7 million as of January 29, 2023, represents property, plant, and equipment of $23.1 million, $10.9 million, and $651,000 located in the U.S., Canada, and Haiti, respectively. 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.
Right of Use Assets
As of January 28, 2024, right of use assets have decreased due to rent expense incurred over the terms of existing lease agreements.
The $1.8 million as of January 28, 2024, represents right of use assets of $1.2 million and $604,000 located in Haiti and Canada, respectively. The $2.5 million as of January 29, 2023, represents right of use assets of $1.6 million and $833,000 located in Haiti and Canada, respectively. 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.
Upholstery Fabrics Segment
Three Months Ended
(dollars in thousands)
January 28,
2024
January 29,
2023
% Change
Non-U.S. Produced
$28,425
94%
$25,514
92%
11.4%
U.S. Produced
1,972
6%
2,312
8%
(14.7)%
Total
$30,397
100%
$27,826
100%
9.2%
Nine Months Ended
(dollars in thousands)
January 28,
2024
January 29,
2023
% Change
Non-U.S. Produced
$77,187
91%
$86,633
93%
(10.9)%
U.S. Produced
7,998
9%
6,576
7%
21.6%
Total
$85,185
100%
$93,209
100%
(8.6)%
Net Sales
Upholstery fabrics sales increased 9.2% in the third quarter of fiscal 2024 compared to the prior-year period. Upholstery fabrics sales decreased 8.6% in the first nine months of fiscal 2024 compared to the first nine months of fiscal 2023.
The increase in upholstery fabrics net sales during the third quarter was driven by the timing of the Chinese New Year holiday (which falls primarily in the fourth quarter of fiscal 2024, as opposed to the third quarter of fiscal 2023), as well as some improvement in residential home furnishing sales during the period. This increase was partially offset by moderately lower sales in our hospitality/contract fabric business primarily due to the impact of winter weather events in January; short-term supply chain issues that affected production in our Read business; and increased construction costs affecting demand for new and ongoing hospitality/contract projects.
The decrease in upholstery fabrics net sales during the first nine months of fiscal 2024 reflects softness in the residential home furnishings industry, where demand was pressured during the first half of the year by a challenging macro-economic environment.
Although we saw a year over year increase in residential fabric sales during the third quarter, the industry demand backdrop for residential home furnishings has deteriorated further than expected during the first few weeks of the fourth quarter, and we expect this ongoing softness may affect demand for our residential business for some time. Despite this challenge, we believe our business is well positioned for the long term with our product-driven strategy and innovative product offerings, including our popular portfolio of LiveSmart® performance products, supported by our flexible Asian platform and our long-term supplier relationships. We also believe overall demand remains solid for our hospitality/contract business.
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Notably, the potential ongoing geopolitical disruptions related to wars in Ukraine and the Middle East, as well as the economic and health effects from possible additional surges in the coronavirus, remain unknown and depend on factors beyond our control. At this time, we cannot reasonably estimate the impact on our upholstery fabrics segment, but we note that if conditions worsen in any of these situations, including additional COVID-related shutdowns of our China operations, the impact on our operations, and/or on our suppliers, customers, consumers, and the global economy, could adversely affect our financial performance.
Gross Profit, Selling, General & Administrative Expenses, and Income (Loss) from Operations
Three Months Ended
(dollars in thousands)
January 28,
2024
January 29,
2023
Change
Gross profit
6,122
3,330
83.8%
Gross margin
20.1
%
12.0
%
817bp
Selling, general, and administrative expenses
4,030
3,750
7.5%
Restructuring (credit) expense
(50
)
711
(107.0)%
Income (loss) from operations
2,092
(420
)
(598.1)%
Operating margin
6.9
%
(1.5
)%
839bp
Nine Months Ended
(dollars in thousands)
January 28,
2024
January 29,
2023
Change
Gross profit
16,780
11,436
46.7%
Gross margin
19.7
%
12.3
%
740bp
Selling, general, and administrative expenses
11,969
11,053
8.3%
Restructuring expense
432
1,326
(67.4)%
Income from operations
4,811
383
1156.1%
Operating margin
5.6
%
0.4
%
525bp
The increase in upholstery fabrics profitability for the third quarter of fiscal 2024, as compared to the prior year period (which was negatively affected by restructuring and related charges), primarily reflects higher sales volume; a more profitable mix of sales; a more favorable foreign exchange rate in China; and lower fixed costs resulting from the previous restructuring of the upholstery fabrics segment's cut and sew platforms. These factors were partially offset by lower hospitality/contract sales and higher SG&A expense during the period.
The increase in upholstery fabrics profitability for the first nine months of fiscal 2024, as compared to the prior-year period (which was negatively affected by higher than normal inventory markdowns and restructuring and related charges), primarily reflects a more profitable mix of sales; better inventory management; a more favorable foreign exchange rate in China; lower fixed costs resulting from the previous restructuring of the upholstery fabrics cut and sew platform; and lower freight costs. These factors were partially offset by lower residential fabric sales and higher SG&A expense during the period.
The increase in SG&A expense during both the third quarter and the first nine months of fiscal 2024, as compared to the prior-year periods, was mostly due to wage inflation, higher professional and consulting fees, higher travel and tradeshow costs as business travel and industry tradeshows have resumed, and an increase in sampling expense driven by new product roll outs.
Looking ahead, the residential home furnishings industry remains under pressure, and we expect further deterioration during the fourth quarter of fiscal 2024 due to shifting consumer demand trends and inflation affecting overall consumer spending. As a result, we expect lower sales volumes in our residential business will continue to affect our profitability. However, we still expect to benefit in fiscal 2024 from (i) our strategic decision to discontinue production of cut and sewn upholstery kits in Haiti; (ii) improved inventory management; (iii) a solid hospitality/contract fabric business; and (iv) improvement in our Read business. We will also continue our ongoing cost reduction efforts and will consider further adjustments to right-size and restructure our operations as necessary to align with current demand levels, while maintaining our ability to service our customers.
Restructuring Activities
Ouanaminthe, Haiti
During the third quarter of fiscal 2023, Culp Upholstery Fabrics Haiti, Ltd. ("CUF Haiti") entered into an agreement to terminate a lease associated with a facility located in Ouanaminthe, Haiti, and, in turn, moved its production of upholstery cut and sew kits to an existing facility leased by Culp Home Fashions Haiti, Ltd. (“CHF Haiti”) during the fourth quarter of fiscal 2023. Both CUF
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Haiti and CHF Haiti are indirect wholly-owned subsidiaries of the company. During the first quarter of fiscal 2024, demand for upholstery cut and sewn kits declined more than previously anticipated, resulting in the strategic action to discontinue the production of upholstery cut and sew kits in Haiti.
Shanghai, 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 taken in order to adjust our operating costs to better align with the declining customer demand for cut and sewn products.
The following summarizes our restructuring expense and restructuring related charges from both our restructuring activities noted above for the nine months ending January 28, 2024, and January 29, 2023:
Nine Months Ended
Nine Months Ended
January 28, 2024
January 29, 2023
Lease termination costs
$
—
$
481
Employee termination benefits
103
468
Impairment loss - leasehold improvements and equipment
329
357
Loss on disposal and markdowns of inventory
40
98
Other associated costs
—
20
Restructuring expense and restructuring related charges (1) (2)
$
472
$
1,424
(1) Of the total $472,000, $432,000 and $40,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ending January 28, 2024.
(2) Of the total $1.4 million, $1.3 million and $98,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the nine-month period ending January 29, 2023.
See Note 9 of the consolidated financial statement for further details regarding our restructuring activities.
Segment Assets
Segment assets consist of accounts receivable, inventory, property, plant, and equipment, right of use assets, and assets held for sale:
(dollars in thousands)
January 28, 2024
January 29, 2023
April 30, 2023
Accounts receivable
$
12,223
$
12,927
$
12,382
Inventory
18,952
18,870
19,406
Property, plant & equipment
1,155
1,794
1,671
Right of use assets
2,345
2,995
2,618
Assets held for sale
—
1,950
—
$
34,675
$
38,536
$
36,077
Refer to Note 13 of the consolidated financial statements for disclosures regarding determination of our segment assets.
Accounts Receivable
As of January 28, 2024, accounts receivable decreased by $704,000, or 5.4%, compared with January 29, 2023. Although net sales increased by 9.2% during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, accounts receivable decreased. This trend reflects a timing difference of cash receipts from certain significant customers during the last week of the third quarter of fiscal 2024, which cash receipts did not occur during the third quarter of fiscal 2023. It also reflects the expiration of extended credit terms with certain customers. As a result, days’ sales outstanding for this segment decreased to 31 days for the third quarter of fiscal 2024, as compared with 38 days for the third quarter of fiscal 2023.
As of January 28, 2024, accounts receivable decreased by 1.3%, compared with April 30, 2023. This trend reflects a static net sales of $30.4 million for the third quarter of fiscal 2024, that was comparable with net sales of $30.7 million during the fourth quarter of fiscal 2023. Days' sales outstanding was 31 days for the third quarter of fiscal 2024, as compared with 33 days for the fourth quarter of fiscal 2023.
Inventory
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As of January 28, 2024, inventory increased by 0.4%, compared with January 29, 2023. Although net sales increased by 9.2% during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, inventory remained flat as inventory levels were well managed in relation to current customer demand trends.
As of January 28, 2024, inventory decreased by $454,000, or 2.3%, compared with April 30, 2023. The trend reflects a modest decrease in net sales of 1.1% during the third quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales for the third quarter of fiscal 2024 were $30.4 million, compared with net sales of $30.7 million during the fourth quarter of fiscal 2023.
Inventory turns were 5.1 for the third quarter of fiscal 2024, compared with 4.1 for the third quarter of fiscal 2023 and 4.8 for the fourth quarter of fiscal 2023.
Property, Plant, & Equipment
As of January 28, 2024, property, plant, and equipment steadily decreased compared to January 29, 2023, and April 30, 2023, due to (i) impairment charges of $329,000 related to our strategic action to discontinue the production of upholstery cut and sew kits in Ouanaminthe, Haiti, and (ii) a reduction in capital spending as a result of current and expected unfavorable macro-economic conditions.
The $1.2 million as of January 28, 2024, represents property, plant, and equipment of $1.1 million and $134,000 located in the U.S. and China, respectively. The $1.8 million as of January 29, 2023, represents property, plant, and equipment of $1.0 million, $630,000, and $121,000 located in the U.S., Haiti, and China, respectively. 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.
Right of Use Assets
As of January 28, 2024, right of use assets has steadily decreased compared with January 29, 2023, and April 30, 2023. This is due to rent expense incurred over the terms of existing lease agreements, partially offset by the renewal of our agreement to lease our facility associated with Read and certain facilities associated with our operations located in China.
The $2.3 million as of January 28, 2024, represents right of use assets of $944,000 and $1.4 million located in China and the U.S., respectively. The $3.0 million as of January 29, 2023, represents right of use assets of $1.7 million and $1.3 million located in China and the U.S., respectively. 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.
Assets Held for Sale
The $2.0 million as of January 29, 2023, represents a right of use asset associated with an agreement to lease a facility located in Ouanaminthe, Haiti, which such lease was terminated in connection with a restructuring activity. See Note 9 of the consolidated financial statement for further details regarding our restructuring activity associated with our upholstery cut and sew operation located in Ouanaminthe, Haiti. This right of use asset was sold to a third party during the fourth quarter of fiscal 2023, which resulted in a note receivable. See Note 7 to the consolidated financial statements for further details regarding this note receivable.
Other Income Statement Categories
Three Months Ended
(dollars in thousands)
January 28, 2024
January 29, 2023
% Change
SG&A expenses
$
9,493
$
9,165
3.6
%
Interest income
284
196
44.9
%
Other expense
705
1,095
(35.6
)%
Nine Months Ended
(dollars in thousands)
January 28, 2024
January 29, 2023
% Change
SG&A expenses
$
29,366
$
27,133
8.2
%
Interest income
911
292
212.0
%
Other expense
560
348
60.9
%
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Selling, General, and Administrative Expenses
The increase in selling, general, and administrative expenses during the third quarter and first nine months of fiscal 2024, compared with the third quarter and first nine months of fiscal 2023, is due to a variety of factors, including (i) wage inflation; (ii) higher professional and consulting fees; (iii) an increase in provision for bad debts reflecting current unfavorable macro-economic conditions relating to furniture and bedding products; and (iv) an increase in sampling expense driven by new product roll outs in both business segments.
Interest Income
The increase in interest income is due primarily to higher market interest rates during the third quarter and first nine months of fiscal 2024, as compared with the third quarter and first nine months of fiscal 2023.
Other Expense
Management is required to assess certain economic factors to determine the currency of the primary economic environment in which our foreign subsidiaries operate. Based on our assessments, the U.S. dollar was determined to be the functional currency of our operations located in China and Canada.
The decrease in other expense during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, is due mostly to more favorable foreign currency exchange rates applied against our balance sheet accounts denominated in Chinese Renminbi to determine the corresponding U.S. dollar financial reporting amounts during third quarter, as compared with the third quarter of fiscal 2023. During the third quarter of fiscal 2024, we reported a foreign currency exchange loss associated with our operations located in China of $290,000, compared with $757,000 during the third quarter of fiscal 2023. The decrease in other expense due to more favorable foreign exchange rates noted above, was partially offset by an increase in unrealized gains associated with our rabbi trust that funds our deferred compensation liability.
The increase in other expense during the first nine months of fiscal 2024, as compared with the first nine months of fiscal 2023, is mostly due to the increase in fees associated with our ABL Credit Agreement effective on January 19, 2023. See Note 10 located in the consolidated financial statements for further details. In addition, the increase in other expense is due an increase in unrealized gains associated with our rabbi trust that increased our deferred compensation liability.
A foreign currency exchange gain of $389,000 was reported during the first nine months of fiscal 2024 that (i) related to our operations located in China, (ii) was mostly non-cash, and (iii) was offset by a $477,000 income tax charge. This income tax charge of $477,000 was associated with taxable foreign currency exchange gains based on less favorable foreign currency exchange rates applied against balance sheet accounts denominated in U.S. dollars to determine the corresponding Chinese Renminbi local currency amounts. The foreign currency exchange rate gains incurred on our U.S. dollar denominated balance sheet accounts associated with our operations located in China are considered taxable income, as we incur income tax expense and pay income taxes in China's local currency. The $477,000 income tax charge represents an increase in our income tax payments and withholding tax payments associated with future earnings and profits that will ultimately be repatriated from our operations located in China to the company's U.S. parent.
Income Taxes
Effective Income Tax Rate & Income Tax Expense
We recorded income tax expense of $2.2 million, or (33.4%) of loss before income taxes, for the nine-month period ending January 28, 2024, compared with income tax expense of $2.3 million, or (9.5%) of loss before income taxes, for the nine-month period ending January 29, 2023
Our effective income tax rates for the nine-month periods ended January 28, 2024, and January 29, 2023, were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. When calculating the annual estimated effective income tax rates for the nine-month periods ended January 28, 2024, and January 29, 2023, we were subject to loss limitation rules. These loss limitation rules require any taxable loss associated with our U.S. or foreign operations to be excluded from the annual estimated effective income tax rate calculation if it was determined that no income tax benefit could be recognized during the current fiscal year. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in
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China, Canada, and Haiti as compared to annual projections, as well as changes in foreign currency exchange rates in relation to the U.S. dollar.
The following schedule summarizes the principal differences between income tax expense at the U.S. federal income tax rate and the effective income tax rate reflected in the consolidated financial statements for the nine-month periods ending January 28, 2024, and January 29, 2023:
January 28,
January 29,
2024
2023
U.S. federal income tax rate
21.0
%
21.0
%
U.S. valuation allowance
(42.0
)
(29.3
)
Withholding taxes associated with foreign jurisdictions
(8.1
)
(2.0
)
Capital expenditure deduction - Quebec, Canada
—
(1.6
)
Foreign income tax rate differential
(5.2
)
1.4
Stock-based compensation
(2.9
)
(0.4
)
Tax effects of local currency foreign exchange gains
3.8
1.3
Other
—
0.1
(33.4)%
(9.5)%
Our consolidated effective income tax rates during the first nine months of fiscal 2024 and fiscal 2023 were both adversely affected by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems from our operations located in China during fiscal 2024 and from our operations located in both China and Canada during fiscal 2023, each of which has higher income tax rates than the U.S. In addition, during the first nine months of fiscal 2024 and the first nine months of fiscal 2023, we incurred pre-tax losses associated with our U.S. operations, for which an income tax benefit was not recorded due to the full valuation allowance applied against our U.S. net deferred income tax assets (as described below). The income tax charge associated with the full valuation allowance applied against our U.S. net deferred income tax assets was lower during the first nine months of fiscal 2024 compared with the first nine months of fiscal 2023, as our $(11.3) million U.S. pre-tax loss incurred during the first nine months of fiscal 2024 was significantly lower than the $(28.8) million U.S. pre-tax loss incurred during the first nine months of fiscal 2023.
During the first nine months of fiscal 2024, we incurred a lower consolidated pre-tax loss totaling $(6.7) million, compared with $(24.5) million during the first nine months of fiscal 2023. 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 during the first nine months of fiscal 2024, as compared with the first nine months of fiscal 2023.
U.S. Valuation Allowance
We evaluate the realizability of our U.S. net deferred income tax assets 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 of January 28, 2024, we evaluated the realizability of our U.S. net deferred income tax assets to determine if a full valuation allowance was 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 from 2021 through 2023, and we are currently expecting significant U.S. pre-tax losses to continue during 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. 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.
Based on our assessments as of January 28, 2024, January 29, 2023, and April 30, 2023, valuation allowances against our net deferred income tax assets pertain to the following:
(dollars in thousands)
January 28, 2024
January 29, 2023
April 30, 2023
U.S. federal and state net deferred income tax assets
$
19,162
$
15,741
$
16,345
U.S. capital loss carryforward
2,330
2,330
2,330
$
21,492
$
18,071
$
18,675
Undistributed Earnings
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Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our recorded deferred income tax liability balances associated with undistributed earnings from our foreign subsidiaries as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively.
Uncertain Income Tax Positions
Refer to Note 14 of the consolidated financial statements for disclosures regarding our assessments of our uncertain income tax positions as of January 28, 2024, January 29, 2023, and April 30, 2023, respectively.
Income Taxes Paid
The following table sets forth income taxes paid by jurisdiction for the nine months ended January 28, 2024, and January 29, 2023, respectively:
Nine Months
Nine Months
Ended
Ended
January 28,
January 29,
(dollars in thousands)
2024
2023
United States Transition Tax Payment
$
499
$
265
China Income Taxes, Net of Refunds
1,803
1,680
Canada - Income Taxes, Net of Refunds
468
(9
)
$
2,770
$
1,936
Future Liquidity
We are currently projecting annual cash income tax payments of approximately $3.2 million for fiscal 2024, compared with $2.3 million for fiscal 2023. Our estimated income tax payments for fiscal 2024 are management’s current projections only and can be affected by actual earnings from our foreign subsidiaries located in China and Canada versus annual projections; changes in the foreign exchange rates associated with our China operations in relation to the U.S. dollar; the timing of when we will repatriate earnings and profits from China and Canada; and the timing of when significant capital projects will be placed into service, which determines the deductibility of accelerated depreciation.
Additionally, we currently expect to pay minimal income taxes in the U.S. on a cash basis during fiscal 2024 due to the immediate expensing of U.S. capital expenditures and our existing U.S. federal net operating loss carryforwards that totaled $49.4 million as of April 30, 2023, which are projected to increase as a result of the significant U.S. loss carryforward we expect to generate during fiscal 2024.
As of January 28, 2024, we will be required to pay annual U.S. federal transition tax payments, in accordance with the 2017 Tax Cuts and Jobs Act, as follows: FY 2025 - $665,000; and FY 2026 - $830,000.
Liquidity and Capital Resources
Liquidity
Overall
Currently, our sources of liquidity include cash and cash equivalents (collectively, "cash"), cash flow from operations, and amounts available under our revolving credit lines. As of January 28, 2024, we believe our cash of $12.6 million and the current availability under our revolving credit lines totaling $26.2 million (Refer to Note 10 of the consolidated financial statements for further details) will be sufficient to fund our foreseeable business needs, commitments, and contractual obligations.
As of January 28, 2024, our cash totaled $12.6 million, a decrease of $8.4 million compared with cash of $21.0 million as of April 30, 2023. This decrease was mostly due to net cash used in operating activities totaling $(6.0) million and capital expenditures mostly related to our mattress fabrics segment totaling $(3.2) million, partially offset by proceeds from the sale of our rabbi trust investments totaling $1.2 million to fund withdrawals from our deferred compensation plan for certain retired employees (see offsetting decrease to the decrease in deferred compensation liability in item (iii) of the below paragraph).
Our net cash used in operating activities was $(6.0) million during the first nine months of fiscal 2024, a decrease of $10.6 million compared with net cash provided by operating activities of $4.6 million during the first nine months of fiscal 2023. This trend
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primarily reflects (i) a significant decrease in inventory during the first nine months of fiscal 2023 due to improved alignment of inventory purchases with customer demand trends, promotional programs to reduce aged raw materials and finished goods inventory, and a significant decline net sales of (27.1%) during the period, which did not recur during the first nine months of fiscal 2024; (ii) annual incentive payments made during the first quarter of fiscal 2024, which did not occur during the first quarter of fiscal 2023; and (iii) payments to certain retired employees totaling $1.2 million for withdrawals from our deferred compensation plan during the first nine months of fiscal 2024; partially offset by (iv) an increase in cash earnings during the first nine months of fiscal 2024 compared with the first nine months of fiscal 2023.
As of January 28, 2024, there were no outstanding borrowings under our lines of credit.
The income taxes we pay also affect our liquidity. See the above section titled “Income Taxes Paid” of this Item 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION for further detail.
Our cash balance may be adversely affected by factors beyond our control, such as (i) recent customer demand trends, (ii) supply chain disruptions, (iii) rising interest rates and inflation, (iv) world events (including wars in Ukraine and the Middle East), and (v) the continuing uncertainty associated with COVID-19. These factors could cause delays in receipt of payment on accounts receivable and could increase cash disbursements due to rising prices.
By Geographic Area
A summary of our cash by geographic area follows:
(dollars in thousands)
January 28, 2024
January 29, 2023
April 30, 2023
United States
$
2,816
$
9,658
$
9,769
China
9,138
6,114
10,669
Canada
259
700
281
Haiti
363
244
236
Cayman Islands
9
9
9
$
12,585
$
16,725
$
20,964
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.
We did not repurchase any shares of common stock during either of the nine-month periods ending January 28, 2024, or January 29, 2023, respectively. As a result, as of January 28, 2024, $3.2 million is available for additional repurchases of our common stock. Despite the current share repurchase authorization, the company does not expect to repurchase any shares through at least the fourth quarter of fiscal 2024.
Dividends
In June 2022, our board of directors suspended the company’s quarterly cash dividend. Considering the current and expected macroeconomic conditions, we believe that preserving capital and managing our liquidity is in the company’s best interest to support future growth and the long-term interests of our shareholders. Accordingly, we do not expect to pay any dividends through at least the fourth quarter of fiscal 2024.
Working Capital
Operating Working Capital
Operating working capital (the total of accounts receivable and inventories, less accounts payable-trade, less accounts payable-capital expenditures, and less deferred revenue) was $39.0 million as of January 28, 2024, compared with $44.9 million as of January 29, 2023, and $39.2 million as of April 30, 2023. Operating working capital turnover was 5.9 during the third quarter of fiscal 2024, compared with 4.1 during the third quarter of fiscal 2023, and 4.6 during the fourth quarter of fiscal 2023.
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Accounts Receivable
Accounts receivable was $23.7 million as of January 28, 2024, an increase of $2.5 million, or 11.5%, compared with $21.2 million as of January 29, 2023. This increase mostly reflects a 15.0% increase in net sales during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023. Days’ sales outstanding were 33 days during the third quarter of fiscal 2024, compared with 34 days during the third quarter of fiscal 2023.
Accounts receivable was $23.7 million as of January 28, 2024, a decrease of $1.1 million, or 4.4%, compared with $24.8 million as of April 30, 2023. This decrease primarily reflects a decrease in net sales during the third quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales were $60.4 million during the third quarter of fiscal 2024, a decrease of $1.0 million, or 1.6%, compared with net sales of $61.4 million during the fourth quarter of fiscal 2023. In addition, this decrease reflects faster cash collections associated with our mattress fabrics segment, as we had a mix of higher sales to customers with longer credit terms during the fourth quarter of fiscal 2023, as compared with the third quarter of fiscal 2024. As a result, days’ sales outstanding decreased to 33 days during the third quarter of fiscal 2024, a decrease from 35 days during the fourth quarter of fiscal 2023.
Inventory
Inventory was $46.9 million as of January 28, 2024, a decrease of $750,000, or 1.6%, compared with $47.6 million as of January 29, 2023. Although net sales increased by 15.0% during the third quarter of fiscal 2024, as compared with the third quarter of fiscal 2023, inventory modestly decreased during the third quarter of fiscal 2024, as compared with the prior-year period, as inventory levels were well managed in relation to current customer demand trends by both our mattress and upholstery fabrics segments, and our mattress fabrics segment implemented promotional programs to reduce aged raw materials and finished goods.
Inventory was $46.9 million as of January 28, 2024, an increase of $1.8 million, or 4.0%, compared with $45.1 million as of April 30, 2023. This trend primarily reflects lower than anticipated demand trends associated with our mattress fabrics segment during the third quarter of fiscal 2024, compared with the second quarter of fiscal 2024. Net sales related to our mattress fabrics segment for the third quarter of fiscal 2024 were $30.0 million, a decrease of 4.3%, compared with net sales of $31.4 million during the second quarter of fiscal 2024.
Inventory turns were 4.5 for the third quarter of fiscal 2024, as compared with 4.0 for the third quarter of fiscal 2023 and 4.7 for the fourth quarter of fiscal 2023.
Accounts Payable - Trade
Accounts payable - trade was $29.8 million as of January 28, 2024, an increase of $7.3 million, or 32.2%, compared with $22.5 million as of January 29, 2023. This increase is mostly due to the timing of vendor payments associated with the Chinese New Year holiday, where a higher level of vendor payments was made prior to January 29, 2023, as compared with January 28, 2024.
Accounts payable - trade was $29.8 million as of January 28, 2024, a decrease of 1.2% compared with $29.4 million as of April 30, 2023. This trend reflects a decline in net sales during the third quarter of fiscal 2024, as compared with the fourth quarter of fiscal 2023. Net sales were $60.4 million during the third quarter of fiscal 2024, a decrease of $1.0 million, or 1.6%, compared with net sales of $61.4 million during the fourth quarter of fiscal 2023.
Financing Arrangements
Currently, we have revolving credit agreements with banks for our U.S parent company and our operations located in China. As of January 28, 2024, we did not have any outstanding borrowings associated with our revolving credit agreements. Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of January 28, 2024, we were in compliance with these financial covenants.
Refer to Note 10 of the consolidated financial statements for further disclosure regarding our revolving credit agreements.
Capital Expenditures and Depreciation
Overall
Capital expenditures on a cash basis during the first nine months of fiscal 2024 totaled $3.2 million and were mostly related to machinery and equipment associated with our mattress fabrics segment. Capital expenditures on a cash basis during the first nine months of fiscal 2023 totaled $1.6 million and pertained to (i) manufacturing equipment associated with our mattress fabrics
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segment, (ii) machinery and equipment associated with our former upholstery cut and sew operation located in Haiti; and (iii) IT equipment associated with both our business segments.
Depreciation expense was $4.9 million during the first nine months of fiscal 2024, compared with $5.2 million for the same period a year ago. Depreciation expense mostly related to our mattress fabrics segment for both periods. For the remainder of fiscal 2024, our planned capital spending will be centered on our mattress fabrics segment, with a strategic focus on capital projects that will increase efficiencies and improve the quality of our products. Funding for capital expenditures is expected to be from cash provided from operations.
Accounts Payable – Capital Expenditures
As of January 28, 2024, we had amounts due regarding capital expenditures totaling $19,000 that pertained to outstanding vendor invoices, none of which were financed. The total amount outstanding of $19,000 is required to be paid based on normal credit terms.
Purchase Commitments – Capital Expenditures
As of January 28, 2024, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $880,000.
Critical Accounting Policies and Recent Accounting Developments
As of January 28, 2024, there were no changes in our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended April 30, 2023.
Refer to Note 2 of the consolidated financial statements for recently adopted and issued accounting pronouncements, if any, since the filing of our Form 10-K for the year ended April 30, 2023.
Contractual Obligations
There were no significant or new contractual obligations since those reported in our annual report on Form 10-K for the year ended April 30, 2023, except for those disclosed in Note 10 of the consolidated financial statements.
Inflation
Any significant increase in our raw material costs, utility/energy costs, and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating cost increases on to customers.
During fiscal 2023 and continuing through the third quarter of fiscal 2024, raw material costs started to decline due to lower oil prices and slowing global demand; however, higher cost of labor remained challenging during fiscal 2023 and continuing through the third quarter of fiscal 2024.
Inflationary pressures also affected consumer spending during fiscal 2023 and through the third quarter of fiscal 2024, causing a slowdown in business in both the mattress industry and the residential home furnishings industry. This slowdown has caused reduced demand for our mattress fabrics and residential upholstery fabrics products during fiscal 2023 and during the first nine months of fiscal 2024.
We are unable to predict how long these trends will last, or to what extent inflationary pressures may affect the economic and purchasing cycle for home furnishing products (and therefore affect demand for our products) over the short and long term.
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ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK
Interest Rates
We are exposed to market risk from changes in interest rates with regards to our revolving credit agreements.
Effective January 19, 2023, we entered into a second amended and restated U.S. revolving credit agreement (the “Amended Agreement”) that established an asset-based revolving credit facility that required interest to be charged at a rate (applicable interest rate of 6.81% as of January 28, 2024) calculated using an applicable margin over the Federal Reserve Bank of New York’s secured overnight fund rate, as defined in the Amended Agreement. As of January 28, 2024, 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 January 28, 2024, 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 related to 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 United States dollar as their functional currency. A substantial portion of the company’s imports purchased outside the United States are denominated in U.S. dollars. A 10% change in the above exchange rates as of January 28, 2024, would not have materially affected our results of operations or financial position.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.