Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 calculated using an applicable margin over Federal Reserve Bank of New York's secured overnight fund rate (SOFR), as defined in the Amended Agreement. The interest rate under the Amended Agreement as of April 28, 2204, was 6.81%. As of April 28, 2024, there were no outstanding borrowings under the Amended Agreement.
Effective on March 20, 2024, we entered into an unsecured credit agreement with a financial institution in China denominated in RMB that requires interest to be charged at a rate based on the Loan Prime Rate ("LPR") in China minus 50 basis points (2.95% as of April 28, 2024). There were no borrowings outstanding under this agreement as of April 28, 2024.
Our previously existing revolving credit agreement with another financial institution in China bears interest at a rate determined by the Chinese government at the time of borrowing, and is not directly determined by a published interest rate benchmark. There were no borrowings outstanding under this agreement as of April 28, 2024.
Foreign Currency
We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in Canada, China and Vietnam. 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, China, and Vietnam. 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 28, 2024, would not have materially affected our results of operations or financial position.
43
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 28, 2024 and April 30, 2023, the related consolidated statements of net loss, comprehensive loss, shareholders’ equity, and cash flows for each of the three years in the period ended April 28, 2024, 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 28, 2024 and April 30, 2023, and the results of its operations and its cash flows for each of the three years in the period ended April 28, 2024, in conformity with accounting principles generally accepted in the United States of America.
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 Public Company Accounting Oversight Board (United States) (“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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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 12, 2024
44
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data and preferred and common stock shares)
April 28, 2024, and April 30, 2023
2024
2023
ASSETS
current assets:
cash and cash equivalents
$
10,012
$
20,964
short-term investments - rabbi trust
903
1,404
accounts receivable, net
21,138
24,778
inventories
44,843
45,080
short-term note receivable
264
219
current income taxes receivable
350
—
other current assets
3,371
3,071
total current assets
80,881
95,516
property, plant and equipment, net
33,182
36,111
right of use assets
6,203
8,191
long-term investments - rabbi trust
7,102
7,067
intangible assets
1,876
2,252
long-term note receivable
1,462
1,726
deferred income taxes
518
480
other assets
830
840
total assets
$
132,054
$
152,183
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
accounts payable - trade
$
25,607
$
29,442
accounts payable - capital expenditures
343
56
operating lease liability - current
2,061
2,640
deferred compensation - current
903
1,404
deferred revenue
1,495
1,192
accrued expenses
6,726
8,533
income taxes payable - current
972
753
total current liabilities
38,107
44,020
operating lease liability - long-term
2,422
3,612
income taxes payable - long-term
2,088
2,675
deferred income taxes
6,379
5,954
deferred compensation - long-term
6,929
6,842
total liabilities
55,925
63,103
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 12,469,903 at April 28, 2024
and 12,327,414 at April 30, 2023
624
616
capital contributed in excess of par value
45,011
44,250
accumulated earnings
30,376
44,195
accumulated other comprehensive income
118
19
total equity
76,129
89,080
total liabilities and equity
$
132,054
$
152,183
The accompanying notes are an integral part of these consolidated financial statements.
45
CONSOLIDATED STATEM ENTS OF NET LOSS
For the years ended April 28, 2024,April 30, 2023, and May 1, 2022
(dollars in thousands, except per share data)
2024
2023
2022
net sales
$
225,333
$
234,934
$
294,839
cost of sales
( 197,394
)
( 224,038
)
( 258,746
)
gross profit
27,939
10,896
36,093
selling, general and administrative expenses
( 38,611
)
( 37,978
)
( 35,415
)
restructuring expense
( 636
)
( 1,396
)
—
(loss) income from operations
( 11,308
)
( 28,478
)
678
interest expense
( 11
)
—
( 17
)
interest income
1,174
531
373
other expense
( 625
)
( 443
)
( 1,359
)
loss before income taxes
( 10,770
)
( 28,390
)
( 325
)
income tax expense
( 3,049
)
( 3,130
)
( 2,886
)
net loss
$
( 13,819
)
$
( 31,520
)
$
( 3,211
)
net loss per share-basic
$
( 1.11
)
$
( 2.57
)
$
( 0.26
)
net loss per share-diluted
$
( 1.11
)
$
( 2.57
)
$
( 0.26
)
The accompanying notes are an integral part of these consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the years ended April 28, 2024, April 30, 2023, and May 1, 2022
2024
2023
2022
net loss
$
( 13,819
)
$
( 31,520
)
$
( 3,211
)
other comprehensive income (loss)
unrealized holding gain (loss) on investments
99
( 13
)
( 144
)
reclassification adjustment for realized loss included in
net loss
—
—
30
total unrealized gain (loss) on investments
99
( 13
)
( 114
)
comprehensive loss
( 13,720
)
( 31,533
)
( 3,325
)
The accompanying notes are an integral part of the consolidated financial statements.
47
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(dollars in thousands, except common stock shares)
Capital
Accumulated
Contributed
Other
For the years ended April 28, 2024, April 30, 2023,
Common Stock
in Excess
Accumulated
Comprehensive
Total
and May 1, 2022
Shares
Amount
of Par Value
Earnings
Income
Equity
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
net loss
—
—
—
( 13,819
)
—
( 13,819
)
stock-based compensation
—
—
915
—
—
915
unrealized gain on investments
—
—
—
—
99
99
common stock issued in connection with
vesting of time-based restricted
stock units
151,653
8
( 8
)
—
—
—
immediately vested common stock awards
16,616
1
( 1
)
—
—
—
common stock surrendered in connection
with payroll withholding taxes
( 25,780
)
( 1
)
( 145
)
—
—
( 146
)
Balance, April 28, 2024
12,469,903
$
624
$
45,011
$
30,376
$
118
$
76,129
See accompanying notes to consolidated financial statements.
48
CONSOLIDATED STATEM ENTS OF CASH FLOWS
For the years ended April 28, 2024, April 30, 2023, and May 1, 2022
(dollars in thousands)
2024
2023
2022
cash flows from operating activities:
net loss
$
( 13,819
)
$
( 31,520
)
$
( 3,211
)
adjustments to reconcile net loss income to net cash (used in) provided by
operating activities:
depreciation
6,521
6,845
6,994
non-cash inventory (credit) charges
( 1,628
)
5,819
1,927
amortization
390
438
559
stock-based compensation
915
1,145
1,133
deferred income taxes
387
( 2
)
691
gain on sale of property, plant, and equipment
( 299
)
( 314
)
—
non-cash restructuring expense
330
791
—
realized loss from the sale of investments
—
—
450
foreign currency exchange (gain) loss
( 593
)
( 537
)
16
changes in assets and liabilities:
accounts receivable
3,559
( 2,642
)
15,416
inventories
1,593
15,370
( 12,714
)
other current assets
( 329
)
( 297
)
946
other assets
( 115
)
86
( 1,386
)
accounts payable-trade
( 2,926
)
10,274
( 22,131
)
accrued expenses and deferred compensation
( 1,870
)
853
( 5,204
)
deferred revenue
303
672
( 20
)
income taxes
( 643
)
823
( 907
)
net cash (used in) provided by operating activities
( 8,224
)
7,804
( 17,441
)
cash flows from investing activities:
capital expenditures
( 3,711
)
( 2,108
)
( 5,695
)
proceeds from the sale of property, plant, and equipment
385
468
—
proceeds from note receivable
330
15
—
proceeds from the sale of short-term investments (available for sale)
—
—
9,879
proceeds from the sale and maturity of investments (held to maturity)
—
—
13,486
purchase of short-term investments (available for sale)
—
—
( 4,391
)
purchase of investments (held-to-maturity)
—
—
( 9,751
)
proceeds from the sale of investments (rabbi trust)
1,449
2,058
56
purchase of investments (rabbi trust)
( 884
)
( 1,185
)
( 1,088
)
net cash (used in) provided by investing activities
( 2,431
)
( 752
)
2,496
cash flows from financing activities:
proceeds from lines of credit
4,166
—
9,000
payments associated with lines of credit
( 4,146
)
—
( 9,000
)
dividends paid
—
—
( 5,511
)
repurchases of common stock
—
—
( 1,752
)
common stock surrendered for payroll withholding taxes
( 146
)
( 33
)
( 50
)
payments for debt issuance costs
—
( 403
)
( 110
)
net cash used in financing activities
( 126
)
( 436
)
( 7,423
)
effect of exchange rate changes on cash and cash equivalents
( 171
)
( 202
)
( 91
)
(decrease) increase in cash and cash equivalents
( 10,952
)
6,414
( 22,459
)
cash and cash equivalents at beginning of year
20,964
14,550
37,009
cash and cash equivalents at end of year
$
10,012
$
20,964
$
14,550
The accompanying notes are an integral part of these consolidated financial statements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
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 manufacturing operations located in Stokesdale, North Carolina, and Quebec, Canada, and a mattress cover operation located in Ouanaminthe, Haiti. 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, North Carolina and moved our R&D and prototyping capabilities from these facilities to our facility located in Stokesdale, North Carolina.
On April 29, 2024 (first quarter of fiscal 2025), our board of directors made a decision to (1) consolidate the company's North American mattress fabrics operations, that includes a gradual discontinuation of operations and sale of the company's manufacturing facility located in Quebec, Canada; (2) move a portion of the knitting and finishing capacity from the company's manufacturing facility located in Quebec, Canada to the company's manufacturing facility located in Stokesdale, North Carolina; (3) transition the mattress fabrics segment's weaving operation to a strategic sourcing model through the company's long standing supply partners; and (4) consolidate the company's two leased facilities related to the sewn mattress cover operation located in Ouanaminthe, Haiti, and reduce other operation expenses at this location. See Note 8 to the consolidated statements regarding our restructuring activities.
Upholstery Fabrics
The upholstery fabrics segment develops, sources, manufactures, and sells fabrics to customers in the residential, commercial, and hospitality industries, and supplies window treatment products to customers in the commercial and hospitality industries. We have upholstery fabric operations located in Shanghai, China and Burlington, NC. During the fourth quarter of fiscal 2024, we established a wholly-owned subsidiary, Culp Fabrics Vietnam Limited, with an administrative office located in Ho Chi Minh City, Vietnam, for the purpose of enhancing our strategic sourcing opportunities and to further diversify our supply chain in Asia.
During the third quarter of fiscal 2022, we commenced operation of a new leased facility in Ouanaminthe, Haiti dedicated to the production of cut and sewn upholstery kits. Due to significant decline in demand for cut and sewn upholstery kits, we terminated the agreement to lease this 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. During the first quarter of fiscal 2024, demand for upholstery cut and sew kits declined more than previously anticipated, resulting in the strategic action to discontinue production of upholstery cut and sew kits in Haiti. See Notes 8 and 9 of the consolidated financial statements for further details regarding this restructuring plan.
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 for markdowns of inventory 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 year ended May 1, 2022. This reclassification did not have an effect on previously reported net cash (used in) provided by operating activities and (decrease) increase in cash and cash equivalents.
50
Principles of Consolidation
Overall
The consolidated financial statements include the accounts of the company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The accounts of our subsidiaries located in Shanghai, China, and Ho Chi Minh City, Vietnam are consolidated as of April 30, a calendar month end, which is required by the respective governments under which they are organized. No events occurred related to the difference between our fiscal year end on the Sunday closest to April 30 and our Chinese or Vietnamese subsidiaries year end of April 30 that materially affected the company’s financial position, results of operations, or cash flows for fiscal years 2024, 2023, or 2022.
Fiscal Year
Our fiscal year is the 52 or 53-week period ending on the Sunday closest to April 30. Fiscal 2024, 2023, and 2022 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 28,
April 30,
(dollars in thousands)
2024
2023
United States
$
2,912
$
9,769
China
6,554
10,669
Canada
371
281
Haiti
86
236
Vietnam
81
—
Cayman Islands
8
9
$
10,012
$
20,964
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 credit losses regarding 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 $ 8.0 million and $ 8.5 million as of April 28, 2024, and April 30, 2023, respectively. These investments had accumulated unrealized gains totaling $ 118,000 and $ 19,000 as of April 28, 2024, and April 30, 2023, respectively. The fair value of our investments associated with our rabbi trust approximates their cost basis and reside with our U.S. operations.
Accounts Receivable and Current Expected Credit Losses
Substantially all our accounts receivable were due from manufacturers in the bedding and furniture industries. We grant credit to customers and generally do not require collateral. We record an allowance for doubtful accounts that reflects estimates of probable credit losses. As of the end of each reporting period, we assess the credit risk of our customers within our accounts receivable portfolio. Our
51
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 and 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
Total interest costs incurred were $ 11,000 and $ 17,000 during fiscal 2024 and 2022, respectively. No interest costs were incurred during fiscal 2023.
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 2024, 2023, or 2022.
Foreign Currency Adjustments
The United States dollar is the functional currency for the company’s Canadian, Chinese, and Vietnamese 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 in the period in which they occur.
A summary of our foreign currency exchange gains (losses) by geographic area follows:
(dollars in thousands)
2024
2023
2022
China
$
604
$
588
$
( 104
)
Canada
( 58
)
( 88
)
( 28
)
Vietnam
( 1
)
—
—
$
545
$
500
$
( 132
)
52
Indefinite-Lived Intangible Assets
In accordance with ASC Topic 350, Intangibles – Goodwill and Other, our business was classified into three reporting units during fiscal 2024: 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 2024, 2023, or 2022, as it relates to indefinite-lived intangible assets. See Note 6 of the consolidated financial statements for further details of our assessments of impairment, conclusions reached, and the result of our annual impairment 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 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.
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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 28, 2024, 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 warehousing costs incurred to store, move, and prepare products for shipment in the company’s various distribution facilities. Handling costs were $ 4.6 million, $ 4.2 million, and $ 4.3 million during fiscal 2024, 2023, and 2022, respectively, and are included in selling, general and administrative expenses.
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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 during fiscal 2024.
Recently Issued Accounting Pronouncements
Effective November 27, 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 Improvements to Reportable Segment Disclosures which enhances disclosure requirements to segment reporting including (i) significant segment expenses that are regularly provided to the Chief Operating Decision Maker (CODM) that are included within each measure of segment profit or loss, (ii) other segment items by reportable segment as defined by ASU 2023-07, and (iii) the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of each segment's profit or loss in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for public entities starting in annual periods beginning after December 15, 2023 (i.e., our fiscal 2025 annual report) and interim periods beginning after December 15, 2024 (i.e., first quarter of fiscal 2026 interim report). Management is currently evaluating the effects ASU 2023-07 will have on the notes to the consolidated financial statements.
Effective December 14, 2023, the FASB issued ASU 2023-09 Improvements to Income Tax Disclosures, which is an update to Topic 740, Income Taxes. The amendments in this update relate to improvements regarding the transparency of income tax disclosures by
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requiring consistent categories and greater disaggregation by jurisdiction of information included in the effective income tax rate reconciliation and for income taxes paid. Also, the amendments allow investors to better assess an entity's (i) capital allocation decisions, (ii) worldwide operations, and (iii) related tax risks, tax planning, and operational opportunities that affect the effective income tax rate and prospects for future cash flows. The other amendments in this update improve the effectiveness and comparability of disclosures relating to pretax income (or loss) and income tax expense (or benefit) and remove disclosures that are no longer considered cost beneficial or relevant. ASU 2023-09 is effective for public entities starting in annual periods beginning after December 15, 2024 (i.e., our fiscal 2026 annual report). Early adoption is permitted. The company expects that the adoption ASU 2023-09 will not have an impact on our results of operations and financial condition, but will have a material impact on the disclosures required in the notes to the consolidated financial statements, which are disclosed in Note 11.
Currently, there are no new accounting pronouncements that are expected to have a material effect on our consolidated financial statements.
2. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
April 28,
April 30,
(dollars in thousands)
2024
2023
customers
$
21,660
$
25,244
allowance for doubtful accounts
( 356
)
( 342
)
allowance for cash discounts
( 113
)
( 96
)
reserve for returns and allowances and discounts
( 53
)
( 28
)
$
21,138
$
24,778
A summary of the activity in the allowance for doubtful accounts follows:
(dollars in thousands)
2024
2023
2022
beginning balance
$
( 342
)
$
( 292
)
$
( 591
)
provision for bad debts
( 276
)
( 121
)
74
write-offs, net of recoveries
262
71
225
ending balance
$
( 356
)
$
( 342
)
$
( 292
)
As of April 28, 2024, and April 30, 2023, 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 $ 356,000 and $ 342,000 as of April 28, 2024, and April 30, 2023, respectively.
A summary of the activity in the allowance for returns and allowances and discounts follows:
(dollars in thousands)
2024
2023
2022
beginning balance
$
( 124
)
$
( 95
)
$
( 138
)
provision for returns and allowances and discounts
( 1,173
)
( 1,212
)
( 1,386
)
credits issued and discounts taken
1,131
1,183
1,429
ending balance
$
( 166
)
$
( 124
)
$
( 95
)
3. 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, sources, manufactures, and sells fabrics to customers in the residential, commercial, and hospitality industries. 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.
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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 28, 2024, or April 30, 2023.
A summary of the activity of deferred revenue follows:
(dollars in thousands)
Fiscal 2024
Fiscal 2023
Fiscal 2022
Beginning Balance
$
1,192
$
520
$
540
Revenue recognized on contract liabilities
( 3,932
)
( 4,885
)
( 3,434
)
Payments received for services not yet rendered
4,235
5,557
3,414
Ending Balance
$
1,495
$
1,192
$
520
As of April 28, 2024, deferred revenue of $ 1.5 million pertained to (i) upfront customer deposits associated with customized fabrication and installation services related to Read totaling $ 1.3 million 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 $ 167,000 . As of April 30, 2023, 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 .
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 2024:
(dollars in thousands)
Mattress
Fabrics
Upholstery
Fabrics
Total
Products transferred at a point in time
$
116,370
$
98,976
$
215,346
Services transferred over time
—
9,987
9,987
Total Net Sales
$
116,370
$
108,963
$
225,333
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
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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
4. INVENTORIES
A summary of inventories follows:
(dollars in thousands)
April 28,
2024
April 30,
2023
raw materials
$
6,214
$
7,908
work-in-process
1,854
2,602
finished goods
36,775
34,570
$
44,843
$
45,080
Measurement of Inventory to Net Realizable Value
We recorded a non-cash inventory (credit) charge of $( 1.6 ) million, $ 5.8 million, and $ 1.9 million during fiscal 2024, 2023, and 2022, respectively.
Fiscal 2024
We recorded a non-cash inventory credit of $ 1.6 million during fiscal 2024, which mostly represents adjustments for markdowns of inventory estimated based on the company's policy for aged inventory that was on hand as of April 28, 2024. This $ 1.6 million non-cash credit stems from promotional programs to reduce aged raw materials and finished goods inventory, coupled with aligning inventory purchases with consumer demand trends, and relates mostly to the mattress fabrics segment. The $ 1.6 million also includes a $ 40,000 charge associated with the upholstery fabrics segment related to markdowns of inventory associated with the discontinuation of production of cut and sewn upholstery kits at our facility located in Ouanaminthe, Haiti.
Fiscal 2023
We recorded a non-cash inventory charge o f $ 5.8 million during fiscal 2023, which represented a $ 2.9 million charge for the write down of inventory to its net realizable value associated with our mattress fabrics segment (see below section titled Mattress Fabrics Segment - Net Realizable Value for further details), a $ 2.8 million charge related to markdowns of inventory estimated based on our policy for aged inventory on hand as of April 30, 2023, and a $ 98,000 charge related to the loss on disposal and markdowns of inventory related to the exit of our cut and sew upholstery fabrics operation located in Shanghai, China.
The $ 2.8 million non-cash charge associated with the markdowns of inventory noted above resulted from a significant decrease in consumer demand for both business segments, as well as aged inventory resulting from an increase in inventory purchases to protect against supply chain disruptions and support our customers.
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 a non-cash inventory charge of $ 3.8 million recorded during the second quarter of fiscal 2023), as compared with gross margin of 15.0 % 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 believe was driven by 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 then shifted to travel, leisure, and other services; and (iv) excess inventory held by customers due to the decline in consumer demand.
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Based on this evidence, management conducted a thorough review of its 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 best estimates of product sales prices, customer demand trends, and its plans to transition to new products.
Fiscal 2022
We recorded a non-cash inventory charge of $ 1.9 million during fiscal 2022, which represents adjustments for markdowns of inventory estimated based on the company's policy for aged inventory that was on hand as of May 1, 2022. This $ 1.9 million charge stems from the COVID-19 related shutdowns that affected our upholstery fabric operations located in China during the fourth quarter of fiscal 2022, as well as aged inventory resulting from an increase in inventory purchases to protect against supply chain disruptions and support our customers.
Assessment
As of April 28, 2024, we reviewed our mattress fabrics and upholstery fabrics inventories to determine if any additional write-downs, in excess of the amount recorded based on our policy for aged inventory, were necessary. Based on our assessment, no additional write-downs of inventories to their net realizable value were recorded for the twelve months ended April 28, 2024, other than the markdowns of inventory associated with our upholstery fabrics segment restructuring activities described more fully in Note 8 of the consolidated financial statements.
Based on current unfavorable industry 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 the actual amounts or results. These differences could result in higher than expected markdowns of inventory, which could adversely affect the company’s results of operations and financial condition in the near term.
5. PROPERTY, PLANT, AND EQUIPMENT
A summary of property, plant, and equipment follows :
(dollars in thousands)
depreciable lives
(in years)
April 28,
2024
April 30,
2023
land and improvements
0 - 10
$
947
$
947
buildings and improvements
7 - 40
30,774
30,411
leasehold improvements
**
2,388
2,368
machinery and equipment
3 - 15
67,703
68,070
data processing equipment and software
3 - 7
8,597
8,241
office furniture and equipment
3 - 10
1,456
1,443
capital projects in progress
1,596
455
113,461
111,935
accumulated depreciation
( 80,279
)
( 75,824
)
$
33,182
$
36,111
** Shorter of life of lease or useful life .
6. INTANGIBLE ASSETS
A summary of intangible assets follows:
(dollars in thousands)
April 28,
2024
April 30,
2023
Tradename
$
540
$
540
Customer relationships, net
1,035
1,335
Non-compete agreement, net
301
377
$
1,876
$
2,252
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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, on the annual testing date, April 28, 2024, we performed an impairment assessment of Read's tradename. Our assessment consisted of a quantitative impairment test utilizing the relief from royalty method to determine the fair value of Read's tradename and comparing the fair value of the tradename to its respective carrying amount. Based on this quantitative test, the fair value of the trade name exceeded its carrying amount and consequently no impairment was recorded during the twelve months ending April 28, 2024.
Customer Relationships
A summary of the change in the carrying amount of our customer relationships follows:
(dollars in thousands)
2024
2023
2022
beginning balance
$
1,335
$
1,636
$
1,937
amortization expense
( 300
)
( 301
)
( 301
)
ending balance
1,035
1,335
1,636
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 28, 2024, and April 30, 2023. Accumulated amortization for these customer relationships was $ 2.1 million and $ 1.8 million as of April 28, 2024, and April 30, 2023, respectively.
The remaining amortization expense for the next five fiscal years and thereafter follows: FY 2025 - $ 301,000 ; FY 2026 - $ 301,000 ; FY 2027 - $ 279,000 ; FY 2028 - $ 52,000 ; FY 2029 - $ 51,000 ; and thereafter - $ 51,000 .
The weighted average amortization period for our customer relationships is 3.8 years as of April 28, 2024.
Non-Compete Agreement
A summary of the change in the carrying amount of our non-compete agreement follows:
(dollars in thousands)
2024
2023
2022
beginning balance
$
377
$
452
$
527
amortization expense
( 76
)
( 75
)
( 75
)
ending balance
$
301
$
377
$
452
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 28, 2024, and April 30, 2023. Accumulated amortization for this non-compete agreement was $ 1.7 million and $ 1.6 million as of April 28, 20 24, and April 30, 2023.
The remaining amortization expense for the next five years and thereafter follows: 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 4.0 years as of April 28, 2024.
Impairment of Definite Lived Assets - Mattress Fabrics Segment
As of April 28, 2024, management reviewed the long-lived assets associated with our mattress fabrics segment, which consisted of property, plant, and equipment, right of use assets, and definite-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. The mattress fabrics segment experienced a significant cumulative operating loss totaling $ 22.6 million commencing in the second quarter of fiscal 2023, and continuing through the fourth quarter of fiscal 2024. We believe this significant cumulative operating loss stemmed from a decline in consumer discretionary spending on mattress products, which we believe was
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driven by 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 has now shifted to travel, leisure, and other services; and (iv) excess inventory held by customers due to the decline in consumer demand.
Based on the above evidence, we were required to determine the recoverability of the Mattress Asset Group, which is 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 to result from its use and eventual disposition. If the carrying amount of an asset group 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 group. The carrying amount of the Mattress Asset Group totaled $ 33.7 million, which represents property, plant, and equipment of $ 31.5 million, right of use assets of $ 1.6 million, customer relationships of $ 306,000 , and a non-compete agreement of $ 301,000 . The total carrying amount of the Mattress Asset Group did not exceed the sum of its future undiscounted cash flows from its use and disposition. As a result, we determined there was no impairment associated with the Mattress Asset Group as of April 28, 2024.
Impairment of Definite Lived Assets - Read
As of April 28, 2024, 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 an 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 three fiscal years, which stem from (i) a 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 is 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 fair value of the asset group. As of April 28, 2024, the carrying amount of Read's Asset Group totaled $ 1.8 million, which represents customer relationships of $ 728,000 , right of use asset of $ 725,000 , and property, plant, and equipment of $ 390,000 . 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 there was no impairment associated with Read's Asset Group as of April 28, 2024.
7. ACCRUED EXPENSES
(dollars in thousands)
April 28,
2024
April 30,
2023
compensation and related benefits
$
4,204
$
5,800
other
2,522
2,733
$
6,726
$
8,533
8. RESTRUCTURING ACTIVITIES
Upholstery Fabrics Segment
Description of 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, and in turn moved the production of upholstery cut and sewn kits to an existing facility leased by Culp Home Fashions Haiti, Ltd. ("CHF Haiti") during the fourth quarter of fiscal 2023. Both CUF Haiti and CHF Haiti are indirectly wholly-owned
61
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.
This restructuring activity commenced during the third quarter of fiscal 2023 and was completed during the third quarter of fiscal 2024, resulting in a cumulative restructuring and restructuring related charges of $ 1.3 million of which $ 781,000 and $ 472,000 were incurred during fiscal 2024 and fiscal 2023, respectively.
See Note 9 of the consolidated financial statements for further details regarding the agreement to terminate the above mentioned lease agreement and a related note receivable.
Shanghai, China
Cut and Sew Upholstery Fabrics Operation
During the second quarter of fiscal 2023, we closed our cut and sew upholstery fabrics operation, 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. This restructuring activity was completed during the third quarter of fiscal 2023, and as a result we incurred a cumulative restructuring and restructuring related charge of $ 713,000 during the second and third quarters of fiscal 2023.
Upholstery Fabrics Finishing Operation
During the fourth quarter of fiscal 2024, we closed our upholstery fabrics finishing operation to align with current demand trends and we continue to leverage our strategic supply relationships to meet customer finishing needs in China. This restructuring activity is expected to be completed by the end of the first quarter of fiscal 2025.
Financial Information
The following summarizes our restructuring expense and restructuring related charges noted above for the twelve months ending April 28, 2024, and April 30, 2023:
(dollars in thousands)
2024
2023
Employee termination benefits
$
307
$
507
Lease termination costs
—
481
Impairment loss - leasehold improvements and equipment
329
357
Loss on disposal and markdowns of inventory
40
98
Other associated costs
—
51
Restructuring expense and restructuring related charges (1)(2)
$
676
$
1,494
(1) Of the total $ 676,000 , $ 636,000 and $ 40,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the twelve-month period ending April 28, 2024.
(2) Of the total $ 1.5 million, $ 1.4 million and $ 98,000 were recorded within restructuring expense and cost of sales, respectively, in the Consolidated Statement of Net Loss for the twelve-month period ending April 30, 2023.
The following summarizes the activity in accrued restructuring for fiscal 2024:
Employee
Lease
Other
Termination
Termination
Associated
(dollars in thousands)
Benefits
Costs
Costs
Total
Beginning of year balance
$
—
$
—
$
—
$
—
Accrual established in fiscal 2024
307
—
—
307
Expenses incurred
—
—
—
—
Payments
( 304
)
—
—
( 304
)
End of year balance (1)
$
3
$
—
$
—
$
3
(1) Accrued restructuring of $ 3,000 was reported within accrued expenses in the Consolidated Balance Sheets for the period ending April 28, 2024.
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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
$
—
$
—
$
—
$
—
Mattress Fabrics Segment and Unallocated Corporate
On April 29, 2024 (first quarter of fiscal 2025), our board of directors made a decision to (1) consolidate the company's North American mattress fabrics operations, including a gradual discontinuation of operations and sale of the company's manufacturing facility located in Quebec, Canada; (2) move a portion of the knitting and finishing capacity from the company's manufacturing facility located in Quebec, Canada to the company's manufacturing facility located in Stokesdale, North Carolina; (3) transition the mattress fabrics segment's weaving operation to a strategic sourcing model through the company's long standing supply partners; (4) consolidate the company's two leased facilities related to the sewn mattress cover operation located in Ouanaminthe, Haiti, and reduce other operating expenses at this location; as well as (5) reduce unallocated corporate expenses and shared service expenses, with targeted annualized savings of $ 1.5 million.
We expect the gradual discontinuance of operations and the closure of the facility located in Quebec, Canada will be completed by December 31, 2024. We expect the consolidation activity associated with the sewn mattress cover operation located in Haiti will be completed during the first quarter of fiscal 2025. These actions are expected to result in estimated restructuring and restructuring related costs and charges of approximately $ 8.0 million, of which approximately $ 2.5 million is expected to be cash expenditures. The costs include cash charges of approximately $ 1.1 million associated with expected ongoing operating losses and other exit and disposal expenses related to the company's manufacturing plant in Quebec, Canada; cash charges of approximately $ 1.4 million for employee termination costs; a non-cash charge of approximately $ 2.3 million associated with accelerated depreciation and losses on the sale of equipment; a non-cash charge of approximately $ 2.1 million associated with write-downs and other inventory related adjustments; and a non-cash charge of approximately $ 650,000 associated with accelerated rent amortization for a leased building in Haiti. These restructuring charges and restructuring related costs and charges exclude any expected gain on the sale of real estate associated with the closure of the Canadian facility, the amount of which is currently undetermined but which will ultimately reduce the amount of the restructuring charges incurred. Based on management's internal analysis we expect cash proceeds from the sale of real estate (net of all taxes and commissions) to exceed the amount of restructuring charges incurred. Also, management estimates that the realizable fair market value of the long-lived assets at the Canadian and Haitian facilities exceed their net book value, and for that reason, no charges for impairment of long-lived assets (other than the restructuring charges noted above) are expected to be recorded in the connection with this decision for either location.
Based on changes in business and current industry economic conditions, it is possible that the above estimates provided by management to determine the annual cost savings, restructuring and restructuring related charges, and proceeds generated from the sale of the manufacturing facility located in Quebec, Canada, could be materially different from our actual results, and therefore could adversely affect the success of this restructuring plan.
9. NOTE RECEIVABLE
In connection with the restructuring activity of our upholstery fabrics cut and sew operation located in Ouanaminthe, Haiti (see Note 8 of the consolidated financial statements for further details) , effective January 24, 2023, CUF Haiti entered into an agreement to terminate a lease of a facility (“Termination Agreement”).
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, with the initial lease term 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 the leased facility to the lessor. After CUF Haiti vacated and returned possession of the leased facility, a third party (the “Lessee”) took possession of this facility, and the Lessee agreed to pay CUF Haiti $ 2.4 million in the form of a note receivable over a period commencing on April 1, 2023, and ending on December 31, 2029, based on the terms stated in the Termination Agreement. In connection with the Termination Agreement, an affiliate of the Lessee guaranteed payment in full of all amounts due and payable to
63
CUF Haiti by the Lessee, and CUF Haiti has been fully and unconditionally discharged from all of its remaining obligations under the Original Lease.
As of the end of our third quarter of fiscal 2023, the gross carrying amount of the note receivable totaling $ 2.4 million was recorded at its fair value of $ 2.0 million, which represented the present value of future discounted cash flows based on the payment amounts and timing of such payments due from the Lessee as stated in the Termination Agreement. Consequently, since the fair value of the note receivable was less than its carrying amount, we recorded a restructuring charge of $ 434,000 during the third quarter of fiscal 2023 to reduce the note receivable’s carrying amount to its reported fair value.
We used an interest rate of 6.0 % to determine the present value of the future discounted cash flows, which was based on significant unobservable inputs and 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 facility is located in, and the Lessee and guarantor conduct business in, Haiti, a foreign country. Since management used significant unobservable inputs and assumptions to determine the fair value of this note receivable, this note receivable was classified as Level 3 within the fair value hierarchy (see Note 14 for further explanation of the fair value hierarchy).
Effective May 1, 2023, CUF Haiti formally assigned the $ 2.4 million note receivable to Culp, Inc (US. Parent).
The following table represents the remaining future principal payments as of April 28, 2024:
(dollars in thousands)
2025
$
360
2026
360
2027
360
2028
360
2029
360
Thereafter
240
Undiscounted value of note receivable
$
2,040
Less: unearned interest income
( 314
)
Present value of note receivable
$
1,726
As of April 28, 2024, note receivable totaled $ 1.7 million, of which $ 264,000 and $ 1.5 million were classified as short-term note receivable and long-term note receivable, respectively. As of April 30, 2023, note receivable totaled $ 1.9 million, of which $ 219,000 and $ 1.7 million were classified as short-term note receivable and long-term not receivable, respectively. We classified amortization of unearned interest income totaling $ 111,000 and $ 10,000 within interest income on our consolidated statements of net loss during fiscal 2024 and fiscal 2023, respectively.
10. LINES OF CREDIT
Revolving Credit Agreement – United States
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 Bank, National Association, as the lender (the “Lender”), to establish an asset-based revolving credit facility (the “ABL Facility”). The proceeds from the ABL Facility may be used to pay fees 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 and Restated Credit Agreement (the “Amended Agreement”), dated as of June 24, 2022, and the First Amendment to the Amended Agreement dated as of August 19, 2022, as amended, by and between the company and the Lender.
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. The ABL Facility contains a sub-facility that allows the company to issue
64
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 a prepayment penalty 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 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
65
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
Interest is charged under the ABL Credit Agreement at a rate (applicable interest rate of 6.81 % and 6.30 % as of April 28, 2024, and April 30, 2023, respectively) calculated using the Applicable Margin over SOFR based on the company's excess availability under the ABL Facility, as defined in the ABL Agreement.
There were $ 535,000 , and $ 275,000 of outstanding letters of credit provided by the ABL Credit Agreement as of April 28, 2024, and April 30, 2023, respectively. As of April 28, 2024, we had $ 465,000 remaining for the issuance of additional letters of credit under the ABL Credit Agreement.
There were no borrowings outstanding under the ABL Credit Agreement as of April 28, 2024 and April 30, 2023, respectively.
As of April 28, 2024, our available borrowings calculated under the provisions of the ABL Credit Agreement totaled $ 18.5 million.
Revolving Credit Agreements - China Operations
Denominated in Chinese Yuan Renminbi ("RMB")
Agricultural Bank of China
Effective on March 20, 2024, we entered into an unsecured credit agreement denominated in RMB, that provided for a line of credit up to 29 million RMB ($ 4.0 million USD as of April 28, 2024). Of this 29 million RMB line of credit, 9.6 million RMB, 9.7 million RMB, and 9.7 million RMB expires on March 7, 2025, March 8, 2025, and March 9, 2025, respectively. Interest charged under this agreement is based on the Loan Prime Rate ("LPR") in China minus 50 basis points ( 2.95 % as of April 28, 2024). There were no borrowings outstanding under this agreement as of April 28, 2024.
Also on March 20, 2024, we entered into an additional unsecured credit agreement denominated in RMB that provided for a line of credit of up to 1 million RMB, which such agreement expired on April 26, 2024 , after borrowings made during the fourth quarter of fiscal 2024 were repaid in full during the fourth quarter of fiscal 2024.
Bank of China
Also, we have an unsecured credit agreement denominated in RMB with another bank located in China that provides for a line of credit of up to 35 million RMB ($ 4.8 million USD as of April 28, 2024). 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 October 24, 2024 . Our borrowing capacity of 35 million RMB is restricted to certain consolidated net sales and consolidated profitability requirements as defined in the agreement. These requirements relate to our total consolidated Culp Inc. entity as a whole. Currently, Culp Inc. does not meet the
66
consolidated net sales and consolidated profitability requirements set forth in the agreement; and therefore, we cannot borrow under this agreement.
There were no borrowings outstanding under either of these agreement as of April 28, 2024 and April 30, 2023, respectively.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. As of April 28, 2024, we were in compliance with our financial covenants.
Interest paid during fiscal years 2024, 2023, and 2022 was $ 11,000 , $ 8,000 , and $ 10,000 , respectively.
11. INCOME TAXES
Income Tax Expense and Effective Income Tax Rate
The entire amount of income tax expense of $ 3.0 million, $ 3.1 million, and $ 2.9 million during fiscal 2024, 2023, and 2022, respectively, was allocated to (loss) income from continuing operations.
Income tax expense consists of:
(dollars in thousands)
2024
2023
2022
current
federal
$
—
—
—
state
—
1
2
foreign
2,584
3,053
2,156
uncertain income tax positions
78
78
37
2,662
3,132
2,195
deferred
federal
1,342
( 1,591
)
1,121
state
63
( 66
)
47
undistributed earnings – foreign subsidiaries
627
628
76
U.S. federal & state carryforwards and credits
( 4,734
)
( 5,162
)
( 971
)
uncertain income tax positions
—
—
( 380
)
foreign
( 240
)
( 629
)
615
valuation allowance
3,329
6,818
183
387
( 2
)
691
$
3,049
3,130
2,886
Loss before income taxes related to our foreign and U.S. operations consists of:
(dollars in thousands)
2024
2023
2022
Foreign
China
$
9,091
7,062
6,998
Canada
902
1,516
1,302
Haiti
( 2,127
)
( 3,483
)
( 980
)
Vietnam
( 22
)
—
—
Total Foreign
7,844
5,095
7,320
United States
( 18,614
)
( 33,485
)
( 7,645
)
$
( 10,770
)
( 28,390
)
( 325
)
67
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:
2024
2023
2022
U.S. federal income tax rate
21.0
%
21.0
%
21.0
%
valuation allowance
( 30.9
)
( 24.0
)
( 56.3
)
global intangible low taxed income tax (GILTI) (1)
—
—
( 540.9
)
foreign tax rate differential
( 4.7
)
( 4.0
)
( 206.2
)
income tax effects of Chinese foreign exchange gains and losses
( 3.6
)
( 0.9
)
( 20.6
)
withholding taxes associated with foreign tax jurisdictions
( 6.5
)
( 2.4
)
( 172.8
)
uncertain income tax positions
( 0.7
)
( 0.3
)
105.4
U.S. state income taxes
0.8
0.6
21.5
stock-based compensation
( 1.8
)
( 0.3
)
( 3.3
)
other (2)
( 1.9
)
( 0.7
)
( 35.8
)
consolidated effective income tax rate (3) (4) (5)
( 28.3
)%
( 11.0
)%
( 888.0
)%
(1) See the below section titled "GILTI" for further details for the GILTI tax incurred during fiscal 2022.
(2) “Other” for all periods presented represents miscellaneous adjustments that pertain to U.S. permanent differences such as meals and entertainment and income tax provision to return adjustments.
(3) Our negative consolidated effective income tax rates during fiscal 2024, 2023, and 2022, were caused by the mix of earnings between our U.S. operations and foreign subsidiaries, as our taxable income stems from our operations located in China and Canada, which have higher income tax rates than the U.S. In addition, we applied a full valuation allowance against our U.S. deferred income tax assets during fiscal 2024, 2023, and 2022, respectively. Consequently, an income tax benefit was not recognized for the pre-tax losses associated with our U.S. operations totaling $( 18.6 ) million, $( 33.5 ) million, and $( 7.6 ) million that were incurred during fiscal 2024, 2023, and 2022, respectively.
(4) During fiscal 2024, we incurred a significantly lower consolidated pre-tax loss of $( 10.8 ) million, compared with a significantly higher pre-tax loss of $( 28.4 ) million incurred during 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 fiscal 2024 compared with fiscal 2023.
(5) 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. 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, compared with fiscal 2023.
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)
2024
2023
deferred tax assets:
accounts receivable
$
195
297
inventories
1,972
3,277
compensation
2,152
2,676
liabilities and other
8
5
intangible assets and goodwill
349
395
property, plant, and equipment (1)
171
179
operating lease liability
693
781
foreign income tax credits - U.S.
783
783
loss carryforwards – U.S.
18,344
13,564
valuation allowance - U.S.
( 22,004
)
( 18,675
)
total deferred tax assets
2,663
3,282
68
deferred tax liabilities:
undistributed earnings on foreign subsidiaries
( 4,840
)
( 4,213
)
property, plant and equipment (2)
( 2,694
)
( 3,450
)
right of use assets
( 851
)
( 964
)
other
( 139
)
( 129
)
total deferred tax liabilities
( 8,524
)
( 8,756
)
Net deferred liabilities
$
( 5,861
)
( 5,474
)
(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 28, 2024, our U.S. federal net operating loss carryforwards totaled $ 69.6 million, with related future income tax benefits of $ 14.6 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 28, 2024, 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 28, 2024, our U.S. state net operating loss carryforwards totaled $ 31.7 million, with related future income tax benefits of $ 1.3 million, have expiration dates ranging from fiscal years 2025 through 2045 . 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 2024 and 2023
We do not expect to incur GILTI tax for the 2024 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. We did not incur GILTI tax for the 2023 tax year, as we met the GILTI High-Tax exception.
F iscal 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 associated with our operations located in China. 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 eight 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.
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.
69
As of April 28, 2024, 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 2025. 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.
Based on our assessments as of April 28, 2024, and April 30, 2023, valuation allowances against our U.S. net deferred income tax assets pertain to the following:
(dollars in thousands)
April 24,
2023
April 30,
2023
U.S. federal and state net deferred income tax assets
$
19,674
$
16,345
U.S. capital loss carryforward
2,330
2,330
$
22,004
$
18,675
A summary of the change in the valuation allowances against our U.S. net deferred income tax assets follows:
(dollars in thousands)
2024
2023
2022
beginning balance
$
18,675
11,857
11,674
change in valuation allowance associated with current year earnings
3,318
7,252
1,640
change in estimate during current year (1)
11
( 434
)
( 1,457
)
ending balance
$
22,004
18,675
11,857
(1) 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 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 28, 2024, 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 $ 4.8 million and $ 4.2 million as of April 28, 2024, and April 30, 2023, 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)
2024
2023
2022
beginning balance
$
1,179
1,101
1,444
increases from prior period tax positions
197
175
114
decreases from prior period tax positions
( 118
)
( 97
)
( 77
)
lapse of applicable statute of limitations
—
—
( 380
)
ending balance
$
1,258
1,179
1,101
70
As of April 28, 2024, and April 30, 2023, we had $ 1.3 million and $ 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. These unrecognized income tax benefits would favorably affect income tax expense in future periods by $ 1.3 million and $ 1.2 million as of April 28, 2024, and April 30, 2023, respectively.
We elected to classify interest and penalties as part of income tax expense. As of April 28, 2024, and April 30, 2023, the gross amount of interest and penalties due to unrecognized tax benefits was $ 281,000 and $ 239,000 , respectively.
Our gross unrecognized income tax benefit of $ 1.3 million as of April 28, 2024, 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 2020 and subsequent. Canadian provincial (Quebec) income tax returns filed by us remain subject to examination for income tax years 2020 and subsequent. Income tax returns associated with our operations located in China are subject to examination for income tax year 2019 and subsequent.
Income Taxes Paid
The following table sets forth income taxes paid (refunded) by jurisdiction:
(dollars in thousands)
2024
2023
2022
United States federal - Transition Tax
$
499
$
265
$
266
China - Income Taxes
2,317
1,831
2,036
China - Withholding Taxes Associated with Earnings
and Profits Distribution to U.S. Parent
—
—
487
Canada - Income Taxes
468
228
311
$
3,284
$
2,324
$
3,100
12. LEASES, COMMITMENTS, AND CONTINGENCIES
Leases
Balance Sheet
The right of use assets and lease liabilities associated with our operating leases as of April 28, 2024, and April 30, 2023, are as follows:
(dollars in thousands)
April 28,
2024
April 30,
2023
Right of use assets
$
6,203
$
8,191
Operating lease liability - current
2,061
2,640
Operating lease liability – noncurrent
2,422
3,612
Supplemental Cash Flow Information
(dollars in thousands)
2024
2023
2022
Operating lease liability payments
$
2,663
$
2,497
$
2,954
Right of use assets exchanged for lease liabilities
978
731
3,762
Operating lease costs were $ 3.1 million, $ 3.6 million, and $ 3.9 million during fiscal 2024, 2023, and 2022, respectively. Short-term lease costs were $ 34,000 , $ 44,000 , and $ 68,000 during fiscal 2024, 2023, and 2022, respectively. Variable lease expense was immaterial for each of fiscal 2024, 2023, and 2022.
As of April 28, 2024, the weighted average remaining lease term and discount rate for our operating leases follows:
Weighted average lease term
3.77 years
Weighted average discount rate
3.71
%
71
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
%
Other Information
Maturity of our operating lease liabilities for the next five fiscal years and thereafter follows:
(dollars in thousands)
Amount
2025
$
2,125
2026
945
2027
608
2028
225
2029
227
Thereafter
577
4,707
Less: interest
( 224
)
Present value of lease liabilities
$
4,483
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 , and $ 148,000 during fiscal 2023 and 2022, respectively. In accordance with the termination of the lease agreement, we were reimbursed $ 67,000 in fiscal 2023 for leasehold improvements we made to the leased property.
Accounts Payable – Capital Expenditures
As of April 28, 2024, and April 30, 2023, we had total amounts due regarding capital expenditures totaling $ 343,000 and $ 56,000 , respectively, which pertained to outstanding vendor invoices, none of which were financed.
Purchase Commitments - Capital Expenditures
As of April 28 2024, we had open purchase commitments to acquire equipment for our U.S. and Canadian mattress fabrics operations totaling $ 679,000 .
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.
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 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. Effective September 27, 2023, our shareholders approved an amendment and restatement of the 2015 Plan (the "Amended and Restated Plan"). The Amended and Restated Plan authorizes the issuance of an additional 960,000 shares of common stock in addition to the shares of common stock still available for issuance under the 2015 Plan. The Amended and Restated Plan also removed certain sub-limits that previously applied with respect to specific type of awards that may be issued under the plan .
As of April 28, 2024, there were 976,008 shares available for future equity-based grants under the company’s Amended and Restated Plan.
72
Time-Based Restricted Stock Awards
The following table summarizes the time-based restricted stock unit activity during fiscal years 2024, 2023, and 2022:
2024
2023
2022
Shares
Shares
Shares
outstanding at beginning of year
285,826
210,284
174,295
granted
174,753
119,687
37,991
vested (1)
( 151,652
)
( 32,799
)
—
forfeited
—
( 11,346
)
( 2,002
)
outstanding at end of year
308,927
285,826
210,284
(1) During fiscal 2024, time-based restricted stock units totaling 151,652 vested at a fair value of $ 857,000 , or $ 5.65 per share. 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 2024, 2023, and 2022:
Time-Based
(1)
Restricted
Price
Vesting
Date of Grant
Stock Awarded
Per Share
Period
January 8, 2024 (2)
14,758
$
5.61
31 months
September 28, 2023 (2)
100,068
$
5.59
34 months
September 28, 2023 (3)
59,928
$
5.59
1 year
September 6, 2022 (2)
25,114
$
4.58
2 to 3 years
August 10, 2022 (2)
78,228
$
5.06
3 years
July 22, 2021 (2)
30,835
$
14.75
3 years
(1) Price per share represents the closing price of our common stock on the date the respective award was granted.
(2) Time-based restricted stock units awarded to senior executives and key employees.
(3) Time-based restricted stock units award to outside directors.
Overall
We recorded compensation expense of $ 823,000 , $ 808,000 , and $ 893,000 within selling, general, and administrative expense for time-based restricted stock units in fiscal 2024, 2023, and 2022, respectively.
As of April 28, 2024, the remaining unrecognized compensation cost related to our time-based restricted stock units was $ 876,000 which is expected to be recognized over a weighted average vesting period of 1.6 years. As of April 28, 2024, our time-based restricted stock unit awards that were expected to vest had a fair value totaling $ 1.4 million.
Performance-Based Restricted Stock Units
Senior Executives
We grant performance-based restricted stock units to senior executives which could earn up to a certain number of shares of common stock if certain performance targets are met over a three-fiscal year performance period, as defined in the related restricted stock unit award agreements. The number of shares of common stock that are earned based on the performance targets that have been achieved may be adjusted based on a market-based total shareholder return component, as defined in the related restricted stock unit award agreements.
Our performance-based restricted stock units granted to senior executives were measured based on their fair market value on the date of grant. The fair market value per share was determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock for the performance-based component.
73
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 January 8, 2024, September 28, 2023, August 10, 2022, and July 22, 2021:
January 8,
September 28,
August 10,
July 22,
2024
2023
2022
2021
Closing price of our common stock
$
5.61
$
5.59
$
5.06
$
14.75
Expected volatility of our common stock
33.5
%
37.3
%
48.2
%
54.2
%
Expected volatility of peer companies
33.7 % - 102.6
%
35.7 % - 91.5
%
41.6 % - 105.1
%
45.7 % - 101.5
%
Risk-free interest rate
4.30
%
4.90
%
3.13
%
0.33
%
Dividend yield
0.00
%
0.00
%
0.00
%
3.00
%
Correlation coefficient of peer companies
0.01 - 0.21
0.01 - 0.21
0.05 - 0.23
0.03 - 0.35
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 28, 2024:
(3)
(4)
Performance-Based
Restricted Stock
Restricted Stock
Units Expected
Date of Grant
Units Awarded
to Vest
Price Per Share
Vesting Period
January 8, 2024 (1)
24,597
9,164
$
6.23
(5)
31 months
September 28, 2023 (1)
202,900
—
$
6.43
(6)
34 months
August 10, 2022 (1)
172,992
—
$
5.77
(7)
3 years
July 22, 2021 (1)
122,476
—
$
15.93
(8)
3 years
July 22, 2021 (2)
20,500
—
$
14.75
(9)
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 as of the date of grant.
74
(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 28, 2024.
(5) Price per share represents the fair market value per share ($ 1.11 per $1, or an increase of $ 0.62 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 ($ 5.61 ) for the performance-based component of the performance-based restricted stock units granted to senior executives on January 8, 2024.
(6) Price per share represents the fair market value per share ($ 1.15 per $1, or an increase of $ 0.84 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 ($ 5.59 ) for the performance-based component of the performance-based restricted stock units granted to senior executives on September 28, 2023.
(7) 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.
(8) Price per share represents the fair market value per share ($ 1.08 per $1, or an increase of $ 1.18 to the closing price of our common stock on the date of grant) determined using the Monte Carlo simulation model for the market-based total shareholder return component and the closing price of our common stock ($ 14.75 ) for the performance-based component of the performance-based restricted stock units granted to certain senior executives on July 22, 2021.
(9) Price per share represents the closing price of our common stock on the date of grant.
There were no performance-based restricted stock units that vested during fiscal 2024. The following table summarizes information related to our performance-based restricted stock units that vested during fiscal 2023 and 2022:
(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
(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 $ 8,000 , $ 2,000 , and $( 81,000 ) within selling, general, and administrative expense associated with our performance-based restricted stock units for fiscal years 2024, 2023, and 2022, respectively.
75
Common Stock Awards
The following table summarizes information related to our grants of common stock to our outside directors during fiscal 2024, 2023, and 2022:
Common
(1)
Stock
Price Per
Vesting
Date of Grant
Awarded
Share
Period
July 3, 2023 - Fiscal 2024
16,616
$
5.04
Immediate
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
(1) Price per share represents closing price of our common stock on the date of grant.
We recorded $ 84,000 , $ 335,000 , and $ 321,000 of compensation expense within selling, general, and administrative expense for these common stock awards for fiscal 2024, 2023, and 2022, respectively.
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 28, 2024, 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
$
6,910
N/A
N/A
$
6,910
Growth Allocation Mutual Funds
691
N/A
N/A
691
Moderate Allocation Mutual Fund
46
N/A
N/A
46
Other
358
N/A
N/A
358
76
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
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 8 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 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 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. See Note 9 of the consolidated financial statements for further details regarding this note receivable.
15. NET LOSS PER SHARE
Basic net loss per share is computed using the weighted-average number of shares outstanding during the period. Diluted net loss 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 per share are as follows:
(in thousands)
2024
2023
2022
weighted-average common shares outstanding, basic
12,432
12,283
12,242
dilutive effect of stock-based compensation
—
—
—
weighted-average common shares outstanding, diluted
12,432
12,283
12,242
Shares of unvested common stock that were not included in the computation of diluted net loss per share consist of the following:
(in thousands)
2024
2023
2022
antidilutive effect from decrease in the price per share of our
common stock
—
25
18
antidilutive effect from net loss incurred during the fiscal year
144
88
86
total unvested shares of common stock not included in
computation of diluted net loss per share
144
113
104
77
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, $ 1.2 million, and $ 1.3 million during fiscal years 2024, 2023, and 2022, 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 $ 229,000 , $ 215,000 , and $ 212,000 during fiscal years 2024, 2023, and 2022, respectively. Our nonqualified deferred compensation plan liability was $ 7.8 million and $ 8.2 million as of April 28, 2024, and April 30, 2023, 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 $ 8.0 million and $ 8.5 million as of April 28, 2024, and April 30, 2023, respectively. The investment assets of the Trust are classified as available for sale and accordingly, changes in their fair values are recorded in accumulated other comprehensive 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 to customers in the residential, commercial, and hospitality industries. 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 92 %, 91 %, and 90 % of total consolidated net sales in fiscal 2024, 2023, and 2022, respectively. International sales accounted for 32 %, 29 %, and 31 % of net sales during fiscal 2024, 2023, and 2022, respectively, and are summarized by geographic area as follows:
(dollars in thousands)
2024
2023
2022
north america (excluding USA) (1)
$
29,357
$
29,756
$
39,256
far east and asia (2)
36,334
31,339
43,015
all other areas
6,011
8,032
8,114
$
71,702
$
69,127
$
90,385
78
(1) Of this amount, $ 25.1 million, $ 24.9 million, and $ 33.5 million are attributable to shipments to Mexico in fiscal 2024, 2023, and 2022, respectively.
(2) Of this amount $ 18.3 million, $ 20.0 million, and $ 26.9 million are attributable to shipments to China in fiscal 2024, 2023, and 2022, 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 12 %, 15 %, and 13 % of consolidated net sales during fiscal 2024, 2023, and 2022, respectively. No customers within the upholstery fabrics segment accounted for greater than 10 % of the consolidated accounts receivable, net balance as of April 28, 2024, or April 30, 2023.
No customers within the mattress fabrics segment represented greater than 10 % of consolidated net sales during fiscal 2024, 2023, or fiscal 2022. No customers within the mattress fabrics segment accounted for greater than 10 % of the consolidated accounts receivable, net balance as of April 28, 2024, or April 30, 2023.
Employee Workforce Concentration
Hourly employees associated with our manufacturing facility located in Quebec, Canada (approximately 14 % of our workforce) are represented by a local unaffiliated union with a collective bargaining agreement that expires on February 1, 2026. On April 29, 2024 (first quarter of fiscal 2025), our board of directors made a decision to gradually discontinue the operations and sale of the company's manufacturing facility located in Quebec, Canada. During this gradual discontinuation of operations, hourly employees will be entitled to compensation and benefits in accordance with the collective bargaining agreement noted above.
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. Cost of sales for each segment includes costs to develop, manufacture, or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain 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.
79
Statements of operations for our business segments are as follows:
(dollars in thousands)
2024
2023
2022
net sales by segment:
mattress fabrics
$
116,370
$
110,995
$
152,159
upholstery fabrics
108,963
123,939
142,680
net sales
$
225,333
$
234,934
$
294,839
gross profit (loss):
mattress fabrics
$
6,289
$
( 6,739
)
$
16,458
upholstery fabrics
21,690
17,733
19,635
total segment gross profit
27,979
10,994
36,093
restructuring related charge (1) (3)
( 40
)
( 98
)
—
gross profit
$
27,939
$
10,896
$
36,093
selling, general, and administrative expenses by segment:
mattress fabrics
$
13,134
$
11,942
$
12,246
upholstery fabrics
15,903
15,739
14,009
unallocated corporate
9,574
10,297
9,160
selling, general, and administrative expenses
$
38,611
$
37,978
$
35,415
(loss) income from operations by segment:
mattress fabrics
$
( 6,845
)
$
( 18,681
)
$
4,212
upholstery fabrics
5,787
1,994
5,626
unallocated corporate expenses
( 9,574
)
( 10,297
)
( 9,160
)
total segment (loss) income from operations
( 10,632
)
( 26,984
)
678
restructuring related charge (1) (3)
( 40
)
( 98
)
—
restructuring expense (2) (4)
( 636
)
( 1,396
)
—
loss from operations
$
( 11,308
)
$
( 28,478
)
$
678
interest expense
( 11
)
—
( 17
)
interest income
1,174
531
373
other expense
( 625
)
( 443
)
( 1,359
)
loss before income taxes
$
( 10,770
)
$
( 28,390
)
$
( 325
)
(1) Cost of sales for fiscal 2024 includes a restructuring related charge totaling $ 40,000 , which pertained to markdowns of inventory related to the discontinuation of production of cut and sewn upholstery kits at the company's facility in Ouanaminthe, Haiti.
(2) Restructuring expense of $ 636,000 for fiscal 2024 represents impairment charges related to equipment of $ 329,000 and employee termination benefits of $ 103,000 related to the discontinuation of production of cut and sewn upholstery kits at the company's facility in Ouanaminthe, Haiti. In addition, during the fourth quarter of fiscal 2024, restructuring expense of $ 204,000 was incurred for employee termination benefits related to the closure of the upholstery fabrics finishing operation located in Shanghai, China.
(3) 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 operations located in Shanghai, China.
(4) Restructuring expense of $ 1.4 million for fiscal 2023 relates to both our restructuring activities for our cut and sew upholstery fabrics operations located in Shanghai, China, which occurred during the second quarter of fiscal 2023, and 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.
80
Balance sheet information for our business segments follow:
(dollars in thousands)
April 28,
2024
April 30,
2023
segment assets
mattress fabrics
accounts receivable
$
10,003
$
12,396
inventory
27,671
25,674
property, plant, and equipment
31,472
(1)
33,749
(2)
right of use assets
1,627
(3)
2,308
(4)
total mattress fabrics assets
70,773
74,127
upholstery fabrics
accounts receivable
11,135
12,382
inventory
17,172
19,406
property, plant, and equipment
1,125
(5)
1,671
(6)
right of use assets
1,952
(7)
2,618
(8)
total upholstery fabrics assets
31,384
36,077
total segment assets
102,157
110,204
non-segment assets
cash and cash equivalents
10,012
20,964
short-term investments – rabbi trust
903
1,404
short-term note receivable
264
219
current income taxes receivable
350
—
other current assets
3,371
3,071
long-term note receivable
1,462
1,726
deferred income taxes
518
480
property, plant, and equipment (9)
585
691
right of use assets (10)
2,624
3,265
intangible assets
1,876
2,252
long-term investments - rabbi trust
7,102
7,067
other assets
830
840
total assets
$
132,054
$
152,183
(1) The $ 31.5 million as of April 28, 2024, represents property, plant, and equipment of $ 21.5 million, $ 9.4 million, and $ 555,000 located in the U.S., Canada, and Haiti, respectively.
(2) 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.
(3) The $ 1.6 million as of April 28, 2024, represents right of use assets of $ 1.1 million and $ 545,000 located in Haiti and Canada, respectively.
(4) 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.
(5) The $ 1.1 million as of April 28, 2024, represents property, plant, and equipment of $ 1.0 million and $ 120,000 located in the U.S. and China, respectively.
(6) 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.
(7) The $ 2.0 million as of April 28, 2024, represents right of use assets of $ 1.3 million and $ 709,000 located in the U.S. and China, respectively.
(8) 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.
81
(9) The $ 585,000 as of April 28, 2024, and $ 691,000 as of April 30, 2023, 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 $ 2.6 million as of April 28, 2024, and $ 3.3 million as of April 30, 2023, represent right of use assets associated with unallocated corporate departments and corporate departments shared by both the mattress fabrics and upholstery fabrics segments located in the U.S.
Capital expenditures and depreciation expense information for our business segments follow:
(dollars in thousands)
2024
2023
2022
capital expenditures (1):
mattress fabrics
$
3,474
$
1,125
$
3,383
upholstery fabrics
271
467
1,032
unallocated corporate
255
97
1,406
total capital expenditures
$
4,000
$
1,689
$
5,821
depreciation expense
mattress fabrics
$
5,883
$
6,050
$
6,200
upholstery fabrics
638
795
794
total depreciation expense
$
6,521
$
6,845
$
6,994
(1) 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 28, 2024, 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 28, 2024, the company’s statutory surplus reserve was $ 4.0 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 $ 4.0 million, to assist with debt repayment, capital expenditures, and other expenses of the company’s business.
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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 2024 and 2023, 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 28, 2024, $ 3.2 million was available for additional repurchases of our common stock.
20. DIVIDEND PROGRAM
On June 29, 2022 (fiscal 2023), our board of directors announced the decision to suspend the company’s quarterly cash dividend. We believed that preserving capital and managing our liquidity was in the company’s best interest to support future growth and the long-term interests of our shareholders. Accordingly, we did no t make any dividend payments during fiscal 2024 or 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.
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ITEM 9. CHANGES IN AND DISA GREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
During the three years ended April 28, 2024, 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 28, 2024. 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 28, 2024.
Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statements as of and for the years ended April 28, 2024, April 30, 2023, and May 1, 2022, which are included in Item 8. This annual report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to Securities and Exchange Commission rules that permit us to provide only management’s report in this annual report.
During the quarter ended April 28, 2024, 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.
ITEM 9B. OTHE R INFORMATION
During the three months ended April 28, 2024, none of the company's directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted or terminated a "Rule 10b5-1 trading arrangement" or a "Non-Rule 10b5-1 trading arrangement" (as such terms are defined in Item 408 of Regulation S-K).
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not Applicable.
84
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,” “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” (except for the information appearing under the heading "Pay versus Performance") 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 “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 2024 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
641,784 (1)
$
—
976,008
Equity compensation plans not approved by security holders
—
—
—
Total
641,784 (1)
$
—
976,008
(1) For performance-based restricted stock unit awards, the number of shares represents the maximum number of shares with remaining performance periods that could be issued if certain performance targets are met. The performance based shares with remaining open performance periods total 332,857 of which 9,164 are expected to vest based on estimated operating performance relative to pre-established targets. 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 issuable 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).
85
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.
86
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 )
44
Consolidated Balance Sheets – April 28, 2024, and April 30, 2023
45
Consolidated Statements of Net Loss - for the years ended April 28, 2024, April 30, 2023, and May 1, 2022
46
Consolidated Statements of Comprehensive Loss - for the years ended April 28, 2024, April 30, 2023, and May 1, 2022
47
Consolidated Statements of Shareholders’ Equity – for the years ended April 28, 2024, April 30, 2023, and May 1, 2022
48
Consolidated Statements of Cash Flows – for the years ended April 28, 2024, April 30, 2023, and May 1, 2022
49
Notes to Consolidated Financial Statements
50
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.
87
3. Exhi bits
The following exhibits are attached at the end of this report or incorporated by reference herein.
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*
Second Amendment to Second Amended and Restated Credit Agreement dated as of April 8, 2024, by and among Culp, Inc., as Borrower, Read Window Products, LLC and Culp Fabrics Global, LLC, as Guarantors, and Wells Fargo Bank, National Association, as Lender.
10.4+
Form of annual incentive award agreement was filed as Exhibit 10.1 to the company’s Form 10-Q dated December 8, 2023 (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 Culp, Inc., Amended and Restated Equity Incentive Plan (revised 2023) was filed as Exhibit 10.2 to the company’s Form 10-Q dated December 8, 2023 (Commission File No. 001-12597), and is incorporated herein by reference.
10.6+
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. (*)
10.7+
Form of restricted stock unit agreement for restricted stock units granted to outside directors pursuant to the Culp, Inc., Amended and Restated Equity Incentive Plan was filed as Exhibit 10.4 to the company's Form 10-Q dated December 8, 2023 (Commission File No. 001-12597), and is incorporated herein by reference.
10.8
Written description of Non-Employee Director Compensation was filed as Exhibit 10.2 to the company’s Form 10-Q dated December 8, 2023 (Commission File No. 001-12597), and incorporated herein by reference.
10.9+
Culp, Inc. Amended and Restated Equity Incentive Plan, filed as Appendix B to the company's 2023 Proxy Statement, filed on August 24, 2023 (Commission File No. 001-12597), and incorporated herein by reference.
10.10+
Culp, Inc. 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.
10.11+
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.
10.12+
Form of change in control and noncompetition agreement. This agreement was filed as Exhibit 10.3 to the company’s Form 10-Q dated December 12, 2007 (Commission File No. 001-12597) and incorporated herein by reference.
10.13+
Amended and Restated Deferred Compensation Plan for Certain Key Employees was filed as Exhibit 10.1 to the company’s Form 10-Q dated March 7, 2014, and is incorporated herein by reference.
10.14
Cooperation Agreement, effective as of June 17, 2024, between Culp, Inc. and certain investors specified therein was filed as Exhibit 10.1 to the company's Form 8-K dated June 17, 2024, 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. 33-13310, 333-207195 and 333-274720).
24(a)*
Power of Attorney of John A. Baugh, dated July 12, 2024
24(b)*
Power of Attorney of Perry E. Davis, dated July 12, 2024
24(c)*
Power of Attorney of Sharon A. Decker, dated July 12, 2024
24(d)*
Power of Attorney of Kimberly B. Gatling, dated July 12, 2024
24(e)*
Power of Attorney of Fred A. Jackson, dated July 12, 2024
24(f)*
Power of Attorney of Alexander B. Jones, dated July 12, 2024
24(g)*
Power of Attorney of Jonathan L. Kelly, dated July 12, 2024
24(h)*
Power of Attorney of Franklin N. Saxon, dated July 12, 2024
88
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.
97*
Culp, Inc. Dodd-Frank Clawback Policy
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).
* Items marked with an asterisk are filed herewith.
+ Management contract or compensatory plan required to be filed under Item 15(c) of this report and Item 601 of Regulation S-K of the Securities and Exchange Commission.
ITEM 16. FORM 10-K SUMMARY
None.
89
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 12 th day of July 2024.
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 12 th day of July 2024.
/s/
Robert G. Culp, IV _________________________________
Sharon A. Decker* __________________________________
Robert G. Culp, IV
Sharon A. Decker
Chief Executive Officer and Director
(Director)
(principal executive officer)
Franklin N. Saxon*
Kimberly B. Gatling *
Franklin N. Saxon
Kimberly B. Gatling
(Chairman of the Board of Directors)
(Director)
Fred A. Jackson*
Alexander B. Jones*
Fred A. Jackson
Alexander B. Jones
(Lead Independent Director)
(Director)
John A. Baugh *
Jonathan L. Kelly*
John A. Baugh
Jonathan L. Kelly
(Director)
(Director)
Perry E. Davis*
/s/
Kenneth R. Bowling
Perry E. Davis
Kenneth R. Bowling
(Director)
Chief Financial Officer
(principal financial officer and principal accounting officer)
* By /s/ Kenneth R. Bowling
Kenneth R. Bowling, Attorney-in-Fact, pursuant to Powers of Attorney filed with the Securities and Exchange Commission.
90